The public procurement directives allow direct award in exceptional cases. Such cases include unforeseen urgency and situations where the contact due to exclusive rights can only be awarded to one specific enterprise. Where direct award is being justified in urgency, it is explicitly prescribed that the urgency should not have been caused by any failure on the part of the public buyer. A similar wording is not included in the case of exclusive rights. The relevance of this difference was one issue being dealt with in a recent preliminary ruling (C-578/23) from the EU Court of Justice (CJEU).
The case at hand concerns the situation where procuring entities enter into contracts with IT companies for an ICT-system. Such entities become locked-in when exclusive rights of the IT company prevents contracting of other companies down the line to do maintenance on the system. This happens when detailed knowledge about how the system works is available only to the IT-company. So, procuring entities are locked -in when IT-companies refuse to issue user licences. The entities are in such cases forced to contract the IT-company also for all further maintenance.
The facts of the case are relatively simple: The Czechian Ministry of Finance procured from IBM an IT system for tax administration. Years later in 2016 and following expiry of the guarantee period a contract for the administration of the system was again awarded to IBM. Czechia had in the meantime become member of the EU in 2004 and thus subject to the public procurement directives and the limits imposed on the use of direct contracting. A main reason for this approach was according to the Ministry that IBM had refused to assign a license for the source code necessary for managing the IT system. The copyright as a whole remained in other words with IBM and for this reason the Ministry considered the use of direct contracting justified when awarding the maintenance contract in 2016.
However, this was disputed by the Czechian competition authorities who argued that the use of direct award would not be lawful if the copyright obstacle to competitive award procedures was due to the decisions of the Ministry. It should according to them from the outset have been clear to the Ministry, that the IT system would need continuous maintenance and that the initial award to IBM would lock-in the Ministry and prevent future independent tendering of the maintenance job.
The fact that the initial contract with IBM was awarded before Czech EU membership was not relevant according to the competition authorities. The direct contrating in 2016 must in their opinion be assessed on the basis of the legislation in force at that time, i.e. the EU directives implemented in Czech legislation. The point was made that there had been ample time between the two contracts to remedy the situation and therefore no reason for extending the exclusivity for IBM.
Subsequently the matter ended up in national courts and finally at the EU Court of Justice as a request for preliminary ruling. The Court was asked firstly whether it is an additional condition for direct contracting that the situation of exclusivity cannot be blamed on the contracting entity. Secondly, the referring Czech court wished to know whether it was the factual/legal circumstances at the time of the initial contract or at the time of the management contract that would be relevant for assessing the lawfulness of the direct contracting.
Regarding this latter question the Court clarified that Czechia was obliged to apply the EU directives as of exactly the point in time of membership. This also includes cases where a new contract could be seen as a continuation of a previous contract concluded before EU membership. Procuring entities are following EU membership required to ensure that their acts and decisions do not create situations of exclusivity to legitimise direct contracting.
As regards the first question, the Court was essentially asked whether the use of direct award should be conditioned on more than what the directive already explicitly requires, namely the absolute relevance and necessity of the exclusivity. Should it also be required that the procuring entity proves that the situation of exclusivity is “not attributable to it”, as the formulation goes?
Two main points are made in this respect. The Court is first of all observing that the difference in the wording of the directive texts, i.e. that shortcomings on the part of the public party appears only to be relevant in cases of urgency, is in fact not relevant. Such differences might normally be of importance in legislative interpretation.
This is less so in the case of EU law where the principle of effectiveness established by CJEU case law puts emphasis on the interpretation that optimally promotes EU principles and objectives. Thus, the point was made that “…. to take account exclusively of the difference in the wording of Article 31(1)(b) and Article 31(1)(c) of Directive 2004/18 could lead to a failure to comply with, first, the need to interpret Article 31 of that directive strictly and, second, the main objective of the rules of EU law in the field of public contracts, namely the free movement of goods and services and the opening up of public contracts to competition in all the Member States.”
So, when is the procuring entity to blame for the situation of exclusivity? On this point the Court provides various guidance for national courts. Failure of procuring entities is on the one hand not limited to cases where the procuring entity is intentionally avoiding competitive procedures. Direct contracting can on the other hand not be justified merely by the procuring entity trying in vain to acquire copyright license from IBM. The closest to a conclusion from the Court is that procuring entities can show that concrete efforts have been made to explore alternatives and avoid the situation of exclusivity. In other words that any possibility for using competitive procedures has been positively examined and excluded, including the option of entirely replacing the ICJ system. The Court states in particular that direct contacting would not be justifiable where the procuring entity had “ real and reasonable means from an economic point of view” to put an end to the situation of exclusivity.
To sum up, in answer to the questions from the referring Czech court, the Court ruled that a contracting entity may not invoke the protection of exclusive rights where the reason for such protection is attributable to it. Whether this is the case must be assessed not just by taking account of the factual and legal circumstances at the time of the initial contract. Perhaps more importantly is what happened during the period between that contract and the direct award of the managing contract.
Comment: The ruling cannot be taken to mean that difference in wording between the urgency case and exclusivity case is coincidental. There are good reasons for the difference. It is likely that situations of urgency in many cases are results of delays caused by the public buyer. Hence, it is important to exclude “self-inflicted urgency” as a pretext for direct contracting in urgency cases. Situations of exclusivity would in an entirely different manner be beyond the control of the public buyer and with no errors on his part. The fact that the difference in wording does not matter serves to demonstrate the force of the principle of effectiveness in the application of EU law.
Whether direct contracting concretely was justifiable is left for the referring Czech court to decide based on the guidance from the Court. The Court is setting the bar fairly high and this is not surprising given that direct contracting must be the exemption and for the procuring entity to justify.
In what could be called the market for product maintenance the exclusive rights have a particular restrictive effect on competition in the case of ICT systems. Unlike other products, the maintenance of ICT requires the use of copyrighted items that are virtually in-built, not least the source code. The exclusivity/competition dilemma is therefore particularly critical in these cases.
It is perhaps for this reason that the Court refers to an EU initiative from 2013 which is part of the so-called EU Digital Agenda for Europe where one specific policy aim is to promote the use of open ICT standards when defining procurement requirements. The use of standards effectively makes essential knowledge about a system available to anyone. Surveys had showed, however, that many procuring entities would have difficulties applying such standards, due to lack of expertise to decide which standards were relevant and appropriate for particular ICT needs.
An EU Guide for the procurement of standards-based ICT has for these reasons been issued .[1] The Guide provides various examples of good practices and resources for procuring entities to use. It is on the other hand also made clear that prompting increased use of standards needs to include markets as well and requires broader policy initiatives on regional and national levels. It cannot be accomplished by individual procuring entities alone.
[1] See https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52013DC0455