ISNI to Oppose GE/Innoserve Settlement

If I recall my American history correctly, one of our founding fathers said of the colonies before the revolution something to the effect that we should all hang together or else we will surely hang separately. Unwittingly that founding father was also stating the basis for modern-day trade associations, which provide the strength in numbers to accomplish things that individual members either cannot or do not want to do.

One thing that nearly all, if not all, of the independent service organizations do not want to do is to challenge giant General Electric Medical Systems in any way, shape or form. For many years, I have heard numerous ISOs complain privately about GEMS, but these same ISOs have made it clear that they do not have the desire or the resources to do so publicly. Some have frankly stated a fear of antagonizing GEMS.

In the last significant legal dispute that I know of between an ISO and GEMS, the ISO was R Squared which, ironically, was later acquired by Innoserv, which is now in the process of being acquired by GEMS. That case years ago resulted in a settlement by which GEMS began licensing its basic diagnostics, something which, it might be argued, GEMS should have been doing anyway in accordance with FDA Regulations, specifically 21 Code of Federal Regulations Section 1020.30(g).

Since that settlement, I am aware of no significant legal action by an ISO against GEMS even though GEMS had been very aggressive in extending its dominant position in the market. Such extensions include, in part, the following transactions:

• August 1994: strategic alliance with Advanced NMR Systems, Inc. regarding very high field magnetic resonance systems.
• June 1995: five-year agreement with Columbia/HCA Healthcare Corp. covering the service of all diagnostic imaging equipment in the hospital chain, which at that time consisted of 320 hospitals.
• February 1996: acquisition of National Medical Diagnostics, Inc., which at the time of acquisition provided medical equipment maintenance services to 220 hospitals in 23 states.
• August 1996: acquisition of Specialty Underwriters, a seller of maintenance insurance to the healthcare industry, and Maintenance Management, which provides service for medical equipment.
• August 1997: invests $5.1 million in Advanced NMR Systems, Inc., an extension of the August 1994 alliance described above.
• December 1997: five-year marketing pact with INPHACT, a provider of on-line radiology services for radiologists.

With each of these transactions, none of which were opposed by either the U.S. Government or an ISO, GEMS got stronger both absolutely and also relative to its much smaller ISO competitors. Innoserv, with revenues of $37 million a year, was one of the most significant because it was one of the few ISOs with a national reach. That a $37 million a year company was considered a significant competitor of a $4.5 billion a year company is in itself a telling fact. A $37 million competitor has a lot of catching up to do when its rival is over 120 times bigger than it!

Nonetheless, an ISO like Innoserv does provide customers with an alternative. This alternative keeps GEMS from having a 100% monopoly and also helps to keep prices down to a certain extent.

Eliminating that little spark of competition was, in my opinion, GEMS' motivation for acquiring Innoserv for the princely sum of $16 million. What else could a $4.5 billion company need from a $37 million a year company? This acquisition makes no sense except to eliminate one of the last vestiges of national competition for the service of GEMS imaging equipment.

The U.S. Government seemingly perceived the anticompetitiveness of the agreement because it brought suit against the acquisition on July 14, 1998. I use the word "seemingly" because on the very same day the U.S. Government and G.E. settled the case. The basis for the settlement was that G.E. would sell Innoserv's advanced diagnostics known as PREVU.

In my opinion, this settlement is totally inadequate for reasons that will be discussed in my next article. Whether a settlement is totally inadequate, however, is irrelevant unless someone challenges it. The only likely candidates as challengers were the ISOs because the other likely candidate -- the U.S. Government -- was one of the settling parties.

I use the word "likely" advisedly, however, because no ISO has stood up to G.E. in recent years. The only likely candidate, therefore, was the ISO trade association, Independent Service Network International (ISNI).

ISNI, of which I am the general counsel, has had experience as the legal voice of ISOs. It wrote a successful friend-of-the-court brief for the famous Kodak case, in which the Supreme Court mentioned ISNI in its opinion; it is opposing the termination of the IBM consent decree; and has participated in a number of other legal proceedings. Regarding GE, ISNI could speak for all of its two-hundred members (except Innoserv, of course) without singling out any of them.

The medium through which it can speak is provided by something called the Tunney Act. It was passed in the early 1970s when Congress felt that the Nixon Administration might be making too-favorable settlements with some companies in antitrust cases. The act, therefore, curtailed the Government's discretion to make such settlements.

The act did this by first requiring the Government to publish a so-called "competitive impact statement" in the Federal Register. The settlement has to include the following information:

1. The nature and purpose of the proceeding;
2. a description of the practices giving rise to the alleged violation of the antitrust laws;
3. an explanation of the proposed settlement;
4. all remedies available to private plaintiffs in the event that the settlement is allowed by the court;
5. a description of the procedures for modification of the settlement; and
6. a description of the alternatives to the settlement considered by the Government.

For sixty days after this publication, members of the public may submit comments on the settlement, and the Government may respond to these comments. These comments and responses are also published in the Federal Register.

Based on the above, the Court determines whether it needs more information in the form of further testimony, appointment of a special mater, and/or allowing other parties to participate in the proceedings. Before the settlement is allowed, the court must determine that the entry of the settlement is in the public interest. To make this determination, the court considers the competitive impact of the settlement and the impact of the settlement on the public and on the individuals who are specifically injured by the allegedly anticompetitive conduct.

By September 24, 1998, the ISNI will have submitted its comments on this settlement. The substance of those comments, which will oppose the settlement, will be the subject of my next article.