CJEU decision could re-open competition for follow-up IT services

The decision by the Court of Justice of the EU (CJEU), in a case involving the General Finance Directorate of the Czech Republic, in a useful reminder of contracting authorities’ obligations, both in the context of the initial procurement of an IT system and in the subsequent award of any follow-up services – for example for support, maintenance or customisation.

Following the decision, contracting authorities should take steps when procuring software – possibly including system services – for the first time to contractually ensure that other service providers will not be cut off from competition when any follow-up contract is awarded due to conflicting licensing rights of the software manufacturer.

If this is not possible, the contracting authority must consider the procurement of new software when determining its procurement requirements within the framework of the follow-up order. If there are serious reasons of a technical, economic, functional and safety-relevant nature against appointing a different follow-up service provider, and in favour of only awarding the system services directly to the manufacturer of the existing system, these must be documented in detail. Even then, according to current CJEU case law, there is some risk that this direct award will be successfully challenged.

Facts of the case

In 1992 –before the Czech Republic's accession to the EU – the Czech Ministry of Finance, as it then was, contracted with IBM for an information system for the Czech tax administration. Under the terms of that agreement, IBM was the sole owner of the licensing rights for the IT system.

In 2016 the General Finance Directorate, as the successor to the Ministry of Finance, awarded a contract for the maintenance of this system to IBM by way of direct award, instead of going through a full tender process. As justification, the awarding authority stated that recourse to a negotiated procedure without competitive bidding was incompatible with the "technical continuity between the information system in question and its maintenance after the warranty period, as well as with the protection of IBM's exclusive copyrights [...] ('the situation of exclusivity') on the source code of that system”. The awarding authority tried to free itself from its "dependency" on IBM, but the company refused to transfer the copyright exploitation rights to the source code. In the opinion of the awarding authority, the award of a public contract for the replacement of the existing IT system and the provision of a completely new IT system for the tax administration did not make financial sense.

In response to the Competition Office's objection, the national courts found that the contracting authority had awarded the contract in breach of its obligation to call for tenders. The court of last instance stayed the proceedings and referred the dispute to the CJEU for a preliminary ruling:

'In order to assess whether the substantive condition for the application of the negotiated procedure without publication of a contract notice is satisfied, that is to say, whether the contracting authority has not, by its own conduct, created a situation of exclusivity under Article 31(1)(b) of Directive 2004/18, must account be taken of the legal and factual circumstances in which the contract for the initial service was concluded;  on which the public follow-up contracts are based?"

The CJEU based its assessment on the provisions of the 2004 Public Procurement Directive (‘the 2004 Directive’), which has since been repealed.

According to the CJEU, the provision in the 2004 Directive on the admissibility of a negotiated procedure without competitive participation is an exceptional provision – since it restricts competition – and its requirements must therefore be interpreted narrowly. Two additional conditions must be met:

• there must be technical/artistic reasons or reasons for the protection of exclusive rights in connection with the subject matter of the contract; and
• for those reasons, it must be strictly necessary to award the contract to a specific economic operator.

The CJEU first had to consider whether the exclusivity situation is attributable to the contracting authority. Unlike article 31(1)(c) of the 2004 Directive – the derogation in respect of an award of urgent services – the derogation in article 31(1)(b), at issue in this case, does not provide for such a requirement. However, in the opinion of the CJEU, this is not in itself decisive. To rely solely on the different wording of the two derogations would be to disregard the main objective of the EU rules on public procurement – namely, to open up to competition in all member states. Against that background, the contracting authority is also required to do everything that can reasonably be expected of it to avoid the application of the derogations for direct awards and to have recourse to a competitive procedure. In order to assess the question of whether the creation or maintenance of a situation of exclusivity is attributable to the contracting authority as a justification for a direct award, it is necessary to take into account both the conduct of the contracting authority when concluding the earlier contract and its subsequent conduct – that is, after the conclusion of the contract until the selection of the procedure for awarding the follow-up contract.

The CJEU left it to the national court to assess whether the General Finance Directorate had brought about the dependence on the manufacturer in this case; as well as whether its efforts to break away from this dependence were sufficient and whether the award of the maintenance contract outside competition was therefore permissible in exceptional cases. Nevertheless, a clear inference can be drawn from the CJEU’s finding that the contracting authority "had actual and economically justifiable means to end the exclusivity situation during the said period before deciding to have recourse to the negotiated procedure without prior publication of a contract notice".

Wider relevance to IT procurement

The CJEU's decision has considerable relevance for German – and wider EU – procurement practice in the downstream market for IT services, such as development, maintenance and support.

On a strict reading, the CJEU's findings could mean that when awarding IT contracts in the future – particularly when procuring software including system services – public contracting authorities will have to ensure that the contractor grants a potential successor service the rights of use required for any follow-up contracts or provides insight into the source code. If the contracting authority does not succeed in doing so, a strict understanding of the CJEU’s ruling would require it to procure the IT system or the software, including any associated system services, anew in a competitive procedure after the end of the original contract – regardless of the additional costs associated with the conversion.

It remains to be seen whether the Czech court, which now has to decide on the contracting authority's contribution to causation, will apply such a strict understanding or whether it will consider the efforts of the awarding authority to acquire the licences to be a sufficient justification for the direct award.

The CJEU's decision was based on the 2004 Directive, which has since been replaced by the 2014 Public Procurement Directive (‘2014 Directive’). Nevertheless, a similar provision to that found in article 31(1)(b) of the 2004 Directive can be found in article 32 (2) (b) of the 2014 Directive, with an additional qualification that the derogations only apply "if there is no reasonable alternative or alternative solution and the lack of competition is not the result of an artificial restriction of the procurement parameters“. The aim of this new regulation is to counteract an abusive restriction of competition caused by the contracting authority to a specific product or manufacturer. In addition, recital 50 of the 2014 Directive explicitly states that recourse to the negotiated procedure without prior publication is only justified if "the exclusivity situation was not brought about by the contracting authority itself with a view to the upcoming award procedure".

Likely treatment before the German courts

It remains to be seen whether the CJEU’s approach in this case will significantly influence case law in Germany or whether it will merely bring about a clarification of the treatment of contracts for IT follow-up services granted under the previous regime.

In a series of decisions prior to the introduction of the post-2014 Directive regime, the German Public Procurement Tribunals considered the direct award of connection services in the telecommunications sector – expanding the functionality of the existing system – to be permissible on system security grounds, as well as to minimise potential risks, malfunctions and compatibility problems. In 2013, the Düsseldorf Higher Regional Court even justified a direct award on the basis of the high cost of a change in system service provider. The CJEU’s emphasis on the contracting authority’s responsibility for the exclusivity situation was not incorporated into these cases.

Since the transformation of Germany’s public procurement law, including the adoption of the "abuse corrective" in § 14 (6) VgV, these cases are no longer likely to be valid – or would at least be subject to a stricter standard. One focus of current case law practice is on examining whether the client has made the choice of the specific IT service within the limits of its right to determine the performance and whether the lack of alternatives to the selected IT service has been determined on the basis of a thorough market survey. There is usually no explicit examination of whether the client has itself brought about or maintained the exclusivity situation.

In light of the CJEU’s decision in the Czech case, national procurement panels in Germany must now consider whether the contracting authority is responsible for the initial emergence of, or maintenance of, exclusivity.

IT follow-up contract awards in Germany more broadly

The advancing digitisation of Germany poses another dilemma for public procurers: Is it allowed to procure the required IT solution without a tender by way of public-public cooperation or as open source software (OSS), and what effect does this have on any subsequent award of follow-up services?

Two relatively recent German cases consider this point.

IGNIS Plus

This case, which came before the Düsseldorf Higher Regional Court and was referred to the CJEU in 2020, was based on a cooperation agreement entered into by The City of Cologne and the State of Berlin for the free permanent provision and use of IGNIS Plus software. The original service was again awarded without a competitive procedure, but this time on the basis of the privilege under section 108 (6) GWB for public-public cooperation. The CJEU, to which a question was referred regarding the prerequisites for public-public cooperation without a call for tenders, confirmed the lack of an obligation to tender, provided that private economic operators do not gain any advantage from the cooperation  - the so-called prohibition of preferential treatment.

According to the standard of review specified by the CJEU, the Düsseldorf Higher Regional Court had to examine whether the cooperation partners had access to the software source code and were willing to make it available to interested parties in the downstream market for any maintenance, adaptation or further development. Provision of the source code had to be sufficient to ensure that companies interested in derivative contracts for maintenance, adaptation or further development of the software were treated transparently, equally and non-discriminatory.

The CJEU and the national court required that any technical unique selling points or exclusivity situations must be eliminated by the contracting authority and that the connection services must be awarded on a competitive basis – in line with the CJEU’s decision in the Czech case.

OSS

In a later case, which came before the Düsseldorf Higher Regional Court in 2022, the client initially procured an OSS free of charge – and thus without a tender – which was expanded and adapted to the client's needs in the following years. In 2021, the contracting authority awarded the maintenance services to a specific company by way of direct award, citing technical reasons.

The Düsseldorf Higher Regional Court found that the client had decided in an unobjectionable manner to award only the maintenance services related to the existing OS solution. In the opinion of the Public Procurement Senate, the contracting authority did not have to consider replacing the software system in order to increase the number of possible applicants. The direct award of the maintenance contract did not constitute a circumvention of public procurement law by taking over free software in order to then conclude a maintenance contract with the manufacturing company with reference to the unique selling point. This is mainly because it is an OSS in which the source code is generally accessible and thus maintenance work by other companies is theoretically possible.

A special feature of the case was that due to the high complexity of the source code, consisting of several million program lines, the maintenance order could not be fulfilled by any IT service provider – even if it was not reserved for a specific service provider. Against this background, the application for review against the direct award was rejected as inadmissible because the specific applicant had not sufficiently demonstrated that it had the necessary capacities to perform the contract, and therefore its interest in the contract could not be established. Nevertheless, it cannot be ruled out that this award would have been declared invalid if it had been challenged by a high-performing economic operator [as in the Luca series of cases]. On the contrary: especially in the procurement of maintenance, support and development services related to an existing OSS, there is no unique technical position or any exclusive rights that could justify a direct award due to the open source code.