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Software developer escalates its 15-year battle with Medscheme

Main arbitration hearing to commence in June 2022 could result in an award of up to R1bn.
Council for Medical Schemes offices. Image: Moneyweb

Software developer Neil Harvey & Associates (NHA) has escalated its 15-year legal battle with Medscheme over copyright infringement and the resulting damages it allegedly suffered by lodging a complaint against the medical aid administrator with Council for Medical Schemes (CMS).

Medscheme is owned by JSE-listed healthcare company AfroCentric Investment Corporation and insurance giant Sanlam.

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In its complaint, NHA has questioned if Medscheme is fit and proper to provide administrative services; has the necessary resources, systems, skills and capacity to render the administrative services it wishes to provide; and is financially sound.

The complaint follows arbitrator and retired Supreme Court of Appeal Judge FDJ Brand issuing an order in October 2020 in terms of which Medscheme was ordered to pay NHA R2.7 million for the 27-month period during which NHA’s Medware EMI software programme was wrongfully used by Medscheme.

NHA had claimed about R23.7 million based on the alleged infringement by Medscheme of its copyright.

NHA director Neil Harvey said NHA is now in the process of pursuing its further claims through arbitration against Medscheme for breach of contract, misappropriation of confidential information, unlawful competition and misrepresentation.

This arbitration hearing is expected to commence in 2022 and, if NHA is successful, could result in Medscheme being ordered to pay NHA up to almost R1 billion.

This massive amount was mentioned in the heads of arguments by Medscheme’s legal counsel in a high court security of cost application it brought in 2016 against NHA.

Claim could render Medscheme ‘financially unsound’

NHA’s complaint to the CMS claims that if NHA is successful in its main arbitration claim, such a charge to cash reserves “could well render Medscheme financially unsound” and impact on its ability to comply with the fit and proper requirement to render administrative services.

Hannelie Cornelius, CMS accreditation manager: administrator and managed care organisation, confirmed last week that a complaint was lodged with the Complaints Adjudication Unit against Medscheme.

However, Cornelius said the complaint was subsequently referred to the council’s compliance and investigations and accreditation units because it did not fall within the scope of the Complaints Adjudication Unit.

“The matter was evaluated by the Accreditation Unit and duly considered by the council as part of Medscheme Holdings (Pty) Ltd’s administrator and managed care organisation accreditation renewal applications.

“The concerns were noted but were found to not adversely impact the council’s assessment of Medscheme Holdings’ fitness and propriety and financial soundness at this time.

“The situation will however be monitored going forward and appropriate action [will be] taken should it be deemed necessary at that time,” she said.

AfroCentric

AfroCentric Health Group head of legal Billy Mokale said last week they submitted their accreditation renewal documents to the CMS on September 30 and have been granted approval for the next two years ending December 31 2023 for both managed care and administration accreditation.

Mokale said they could not at this stage respond to the NHA’s submission to CMS because they were not privy to the complaint but they are comfortable the complaint “is baseless and is clearly an attempt by NHA to pressure Medscheme into a settlement unfavourable to it”.

“There is nothing in the award that warrants a complaint to the CMS, or any other authority.

“The award dealt with events that happened almost two decades ago,” said Mokale.

“And we emphasise that NHA was awarded only a fraction [approximately 6%] of its total claim, including interest, and that the claims against the three former Medscheme employees were dismissed, together with NHA’s claim for punitive damages.

“Moreover, while it was found that Medscheme’s contribution to the creation of the software in question fell short of the requirement for joint authorship and ownership, its contribution was nevertheless significant. It was also found that the software was seldom used and was relatively worthless,” he said.

Mokale said Medscheme and NHA have agreed to commence the arbitration on June 1 2022, but NHA’s preference now is to commence in August 2022 and Medscheme is resisting this.

He added that Medscheme has always held a firm view, confirmed by its attorneys and senior counsel, that it has a strong case and they intend to continue opposing the remaining NHA claims.

“We remain fully confident the arbitrator will ultimately rule in our favour. It is against this background that we would not make a provision as anticipated,” he said.

‘Delusional’

Mokale added that NHA was awarded only R2.7 million in the first hearing against a potential R24 million, or approximately R50 million with NHA’s interest claim.

“The small size of the award creates no reputational risk to Medscheme and NHA did not prove any loss but was awarded only R2.7 million notional royalties for Medscheme’s minimal use of the software.

“The next case is based on assumptions that still need to be proved and it’s delusional for NHA to think that the EMI Award has a direct bearing on the strength of its ‘emulation and loss of future earnings’.

“If anything, the award demonstrates the weakness of NHA’s remaining claims.

“The possibility of settlement in any of the current reporting periods or in the near future is remote,” he said.

“No reliable estimate can therefore currently be determined of any possible liability and hence no provision has been raised. A contingent liability has however been disclosed.”

Medscheme ‘spinning’ things

Harvey said Medscheme was found guilty of stealing NHA’s software and sharing it with NHA’s competitors and therefore broke their confidentiality agreement and acted in bad faith “no matter how they try to spin it”.

“If they wanted to use EMI [software] and felt they had the rights to do so, all they needed to do was negotiate with us, as in any supplier/client relationship.

“Instead, they clandestinely tried to implement our broker solution behind our backs, and with assistance from our competitors in the industry. For years, they denied any liability, and assured their shareholders that there was no risk,” he said.

Harvey said Medscheme has taken “stealing software [copyright infringement] and put a very different spin on it”.

He said Medscheme’s defence that it had provided the specifications and assisted in developing this software and therefore considered the organisation entitled to use the software during the period in question was only concocted by Medscheme’s legal team in 2018 for the first time.

“Up and until that stage, since 2006, they had refuted all our allegations and claimed they had written their own version of EMI from scratch, independently and in Microsoft.net,” he said.

Harvey said all of this was proved to be false, with the arbitrator noting that, while Medscheme initially disputed the fact “… it later became common cause on the pleadings that the Nexus EMI is indeed an exact reproduction of its [NHA’s] Medware counterpart”.

He said the damages in the first leg of NHA’s case was always going to prove difficult to validate but believes the arbitrator got part of the order wrong.

Harvey said NHA could have appealed the arbitration order and award but decided against it on the basis it would have dragged the case out another six to eight months and “we wanted to get the main case heard after some 15 years of delays”.

“In the main case to be argued June 1 2022, the damages are much more apparent,” he said.

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