Software company's complaints about unlawful state aid to rival through licensing terms thrown out by CJEU

Out-Law News | 17 Jun 2014 | 2:45 pm | 3 min. read

A software company has unsuccessfully claimed that "advantageous conditions" a rival allegedly enjoyed through a software licensing agreement with a university amounted to unlawful state aid.

The Court of Justice of the EU (CJEU) rejected claims raised by Dutch ship design software provider Sarc that the European Commission had mishandled its complaint about a software licensing deal between its rival Delftship and the University of Technology in Delft (UTD) in the Netherlands.

The CJEU rejected a number of complaints made by Sarc, including in relation to the fact Delftship had failed to formally tender for a software provider and that there was no valuation estimated of the software being provided by TUD.

Sarc claimed that Delftship enjoyed "advantageous conditions" under the licence agreement and that the agreement qualified as state aid and that the aid had been unlawfully provided. A lecturer from the Delft University of Technology developed the software and founded Delftship after leaving the institution. Delftship has certain rights to exploit the source code of the software under the licence agreement with TUD.

To ensure fair competition across the entire trading bloc, EU rules place a general ban on member states giving advantages or incentives, whether in the form of tax relief, grants or other forms of state aid, to commercial companies. However, state aid can be justified for general economic development reasons.

Member states must generally apply to the Commission for clearance on a case by case basis before they can offer funding or incentives which amount to state aid, although some types of aid may fall within permitted exemptions or be sufficiently small to fall below a de minimis threshold under which aid is automatically exempted from the rules. Member states can be required to recover illegal aid from companies which have received public support in breach of the state aid rules.

TUD licensed Delftship the right to exploit the ship design software in return for Delftship developing the software, provide free updates to TUD and pay an annual royalty worth 5% of the annual turnover Delftship generated by sub-licensing use of the software to others.

Sarc said that the royalty rate set by TUD was less than market value and that it had the impact of affecting its own competitive position. In particular, Sarc claimed that its competitive position in the Netherlands ship software market had been negatively affected by the licensing deal struck between TUD and Delftship.

Sarc was a direct competitor of Delftship with an 80% market share in the Netherlands and claimed to have lost three customers following the TUD and Delftship licensing agreement. It had valued the licensing deal as being worth greater the de minimis threshold for state aid referrals and argued that this highlighted that the affect on its business was significant.

However, the CJEU said that all those factors were insufficient to show that Sarc had been "significantly affected in the relevant market" by the licensing agreement reached between TUD and Delftship.

The Court questioned Sarc's valuations of the agreement and cited the Commission's view that the relevant market to judge the impact of the deal on Sarc was the global software market and not just the Netherlands. It said Sarc had provided no evidence to show that the loss of customers it suffered could be directly linked to the licensing agreement struck by TUD and Delftship and further found that it is not the "amount of aid" that businesses receive from public bodies that determine the effect of that aid on competition but "the magnitude of the prejudice to its competitive position" that is the relevant assessment to make.

Sarc had further complained that Delftship had been able to licence its software at a lower rate than it could as a result of the deal it had struck with TUD and that this had impacted on its own revenues.

However, the CJEU rejected all of Sarc's complaints on the basis that it had not shown that its competitive position had been significantly affected by the licensing agreement. Its appeal therefore lacked legal standing, it ruled.

The CJEU further found that Sarc had failed to show that the TUD should have applied a similar royalty rate to those charged by US and British universities for use of software they develop. Those institutions sometimes charge up to 55% of revenues made from use of their software in way of royalties.

The CJEU concluded that there was not enough evidence to show that the Commission should have had doubts, when assessing the software licensing agreement between TUD and Delftship, that those arrangements were advantageous to Delftship and constituted state aid and therefore required further investigation.