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Procurement

Key takeaways for system vendors from the Japan Fair Trade Commission’s survey report on procurement of information systems by government offices

I. Introduction 

On 8 February 2022, the Japan Fair Trade Commission (“JFTC”) published its “survey report on procurement of information systems by government offices” (“Report”)1 .

The report was prepared on the basis of a fact-finding survey conducted by the JFTC and with reference to discussions held at the “Opinion exchange meeting on procurement of information systems,” which was also convened by the JFTC. In the context of a government-wide initiative to “promote the digitalisation of public administration,” the JFTC initiated the fact-finding survey to understand the actual status of information system procurement by national and local authorities in Japan, with a particular focus on avoiding ‘vendor lock-in2 .’ As such, although the Report is derived from the fact-finding survey of information systems in the public sector, it also presents some ideas under the Japanese Anti-Monopoly Act (“AMA,” Japanese competition law) that can be useful for transactions involving information systems in the private sector as well. This newsletter3 summarises the main points of the Report and examines the points to bear in mind, from the perspective of competition law compliance, in transactions relating to information systems procurement whether in the public or private sector.

II. Summary of the Report – five categories of behaviour

The Report analysed five types of conduct in the context of the AMA and noted a number of points to be considered by system vendors to ensure compliance with the AMA. Table 1 below provides a summary of the Report findings and recommendations. As stated above, although the JFTC’s fact-finding survey focussed on avoiding ‘vendor lockin,’ ‘vendor lock-in’ itself is not immediately regarded as problematic under the AMA; instead, the Report states that an infringement of the AMA could occur when an instance of specific conduct (such as the following) occurs and causes an anti-competitive effect in the market.

Table 1: Five categories of behaviour and points for vendors for compliance with the AMA 

III. Comment

The JFTC’s fact-finding survey asked public authorities in Japan whether they had experienced first-hand or had observed any of the five categories of conduct listed in the Report. The results showed that the percentage of positive responses was quite low (between 0.5% and 3.9%), which suggests that such behaviour is not widely practiced in Japan’s public sector. Nevertheless, in light of the concepts and theories presented in the Report and recent enforcement actions and trends of the JFTC, we believe there are some key takeaways to be discussed (in addition to the points to be noted by vendors for compliance in right column of Table 1 above). 

(i) Inclusion of functions by vendor that only it can provide when specifications are being prepared

When drawing up specifications, especially in the case of the initial development (i.e., development from scratch), the ordering party may ask potential vendors for their opinion and advice. The vendor’s sales personnel might occasionally have an incentive to include the company’s unique proprietary specifications or functions in the specifications so that they are awarded the order. Even under such a scenario, assuming that the vendor did not engage in any unfair conduct, the mere fact that the bid specifications included specifications and functions that were proprietary to a particular vendor does not automatically give rise to an infringement of the AMA.

In this respect, the Report, referring to the well-known Paramount Bed case5 in Japan, clarifies that the allegation of exclusionary private monopolisation (exclusionary conduct) may be established if all the following elements are found to be present6 :

(a) Providing inaccurate information to enable bidding based on specifications that can only be handled itself;

(b) Raising rival’s costs and making it difficult for them to participate in the bidding process by incorporating its own specifications; and

(c) Having the ordering party conduct a bid against its procuring policy.

In case of the procurement of systems, if element (a) above is satisfied, then element (c) is also likely to be satisfied. This type of conduct, especially when all of the above elements (a) to (c) are satisfied, would be most likely to be considered as an infringement of the AMA among the five categories of conduct identified in the Report, and therefore deserves special attention.

(ii) Coordination between vendors and consultant for vendors

Coordination of a bid where competing vendors jointly decide the outcome of the bidding process is a typical violation of the AMA (i.e., cartel activity). However, as pointed out in the Report, the scope of the entities that can be implicated in the coordination of a bid is not limited to only the vendors. For example, if a consultant, which provides support services to a vendor, behaves in a way that facilitates the coordination of a bid between vendors or makes it difficult for other vendors to effectively bid by including specifications that can only be met by one particular vendor, that consultant may also be in violation of the AMA, as a party to cartel or private monopolisation.

In recent years, among the cases in which the JFTC has taken formal enforcement action, there have been several private monopolisation cases7 and cartel cases89 involving companies that provide support services for vendors. In particular, in contrast to previous approaches to enforcement, it no longer seems unusual for the JFTC to broaden the scope of the companies who they have found to have violated the AMA; for example, by including companies at a different level of trade (i.e., not only identifying vendors at the same level asthe violating vendors) on a cease and desist order.

In view of the above, not only system vendors but consulting companies, which provide support services to system vendors, should understand and take note of this point as it is set forth in the Report.

IV. Concluding remarks

The Report was based on a fact-finding survey published as part of the JFTC’s advocacy activities, not as part of any specific case investigation. In addition, it should be noted that the categories of conduct that have been identified and examined in the Report, as well as the approaches and theories mentioned, are not particularly new and are relatively orthodox.

However, as mentioned at the outset, the approaches and theories of the AMA presented in the Report should not be viewed as limited to only system procurement in the public sector, but recognised as also applicable to a wide range of information system procurement transactions in the private sector. In addition, for many of the categories of conduct, in relation to which the approaches under the AMA have been presented in the Report, the JFTC has some enforcement experience which can be used as a reference point or precedent for specific investigations in the future. It is therefore important for vendors and other companies involved in supporting the bid process to understand the approaches and ideas in the Report, as well as the categories of conduct examined, and to revisit their compliance with the Japanese AMA once again. 

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