Innovation partnerships under Reg. 31 Public Contracts Regulations 2015

Reg.31 of the Public Contracts Regulations 2015 (PCR2015) introduces the innovation partnership as a direct transposition of Art 31 of Directive 2014/24. It configures it as a multi-step process, both during the award phase [reg.31(18) PCR2015] and for the implementation of the innovation contract [reg.31(10) PCR2015]. See Pedro's technical remarks, explaining why this procedure is a 'Trojan horse', see here.

At this second stage, ie during the implementation of the innovation contract, it is a distinctive feature that the contracting authority can reserve for itself the right to terminate the innovation partnership at the end of each of the successive phases of the research and innovation process, which it should do on the basis of specific intermediate targets [reg.31(12) PCR2015]. This is bound to trigger interpretative difficulties concerning the general termination rules under reg.73 PCR2015, as it seems that innovation partnerships can be terminated without breach of contract on the side of the innovation partner, provided certain intermediate targets are not met, or if the contracting authority is not satisfied with the progress of the project. This will, no doubt, trigger litigation, particularly depending on the stage at which the partnership is terminated, or the possibility (or not) of the innovation partner to continue innovating on its own [all of which are contractual issues not covered by the PCR2015 or Dir 2014/24].

In terms of process, the innovation partnership procedure is a hybrid of the competitive procedure with negotiation and the competitive dialogue available when the contracting authority identifies the need for an innovative product, service or works that cannot be met by purchasing products, services or works already available on the market [reg.31(2)(a) PCR2015], and the main difference with those procedures is that the purpose of the innovation partnership must be "the development of an innovative product, service or works and the subsequent purchase of the resulting supplies, services or works, provided that they correspond to the performance levels and maximum costs agreed between the contracting authority and the participants" [reg.31(9) PCR2015]. Such development can be carried out by one partner, but the contracting authority can also decide to conclude an innovation partnership with several partners conducting separate research and development activities [reg.31(4) PCR2015].

In my personal view, this is a procedure designed for science fiction and its legal set-up masks the existence of a significant number of risks that contracting authorities should weigh before launching an innovation partnership. Moreover, it can create significant disruption of the innovation-related State aid rules, as recently recast in the 2014 Framework for State aid for research and development and innovation. 

The first reservation I have about the use of the innovation partnerships is that contracting authorities may not be in a good situation to assess the "need for an innovative product, service or works that cannot be met by purchasing products, services or works already available on the market" [reg.31(2)(a) PCR2015, emphasis added], either on their own or as a result of preliminary market consultations (carried out under reg.40 PCR2015, or otherwise).  Contracting authorities will in very limited circumstances have identified a need that has not been previously identified by the market at all. Moreover, it will be very rare that such a need cannot be satisfied by an adaptation of existing products or services, in which case the proper procedure would be a competitive procedure with negotiation or a competitive dialogue [reg.26(4)(a)(i) PCR2015], even if they require design or innovative solutions [reg.26(4)(a)(ii) PCR2015].

Moreover, if contracting authorities set out the project as an innovation partnership, they may fall into a self-selection or a confirmation bias. Given the requirement that "Only those economic operators invited by the contracting authority following its assessment of the requested information may submit research and innovation projects aimed at meeting the needs identified by the contracting authority that cannot be met by existing solution", the only offers that the contracting authority can expect to receive are those of economic operators that honestly think there is no existing solution to their needs (even if there is one) (self-selection bias), or of economic operators willing to play along and confirm to the contracting authority that it is right in its assessment of "inexistence" of a solution, and then offer an actually existing solution--either faking or duplicating the "innovation" process (confirmation bias). 

This would, in the end, facilitate the creation of situations in which the contracting authority sets out an innovation partnership procedure on an improper assessment of the market and any economic operator that is aware of an actually existing solution for the needs of the contracting authority only has two options. Either it judicially challenges the procedure (or does it informally directly with the contracting authority, but one can imagine how badly that conversation would go most of the times), so that a tender for a contract under a different procedure can take place; or it plays along and praises the contracting authority for its market savviness. As the story of the Emperor's New Clothes has been telling us for quite a long time, the likely result is quite obvious.

My second reservation has to do with the risks that the contracting authority may assume in relation to third party intellectual property, as reg.31(22) PCR2015 simply indicates that the contracting authority shall define the arrangements applicable to intellectual property rights in the procurement documents. This is a neutral formulation that does not prevent the contracting authority to obtain exclusive, shared or no IP rights on the innovation. However, even in the last scenario, the contracting authority may be exposed to the negative consequences of IP litigation, if nothing else, in case the innovation partnership had to be suspended or discontinued due to third party claims. Given the relevance of IP litigation in innovation-intensive markets, it is hard to see why would a contracting authority be willing to assume risks in this area. More generally, it is hard to see how would entering into an innovation partnership actually pursue a public interest related to the procurement function of a contracting authority.

Finally, to keep it relatively brief, I have reservations concerning the coordination of the tendering of innovation partnerships with the 2014 Framework for State aid for research and development and innovation. That Framework considers that there is no State aid prohibited by Art 107 TFEU in two cases: 
(a) "as long as an open tender procedure for the public procurement is carried out in accordance with the applicable directives" [para 32]; or
(b) where any other arrangement carried out by the contracting authority, including pre-commercial procurement, meets a series of conditions, amongst which "the procurement does not give any of the participant providers any preferential treatment in the supply of commercial volumes of the final products or services to a public purchaser in the Member State concerned" [para 33(c)], "without prejudice to procedures that cover both the development and the subsequent purchase of unique or specialised products or services" [fn 29]. Additional requirements concerning the IP rights (mentioned above) are applicable, as one of the following two conditions needs to be fulfilled [para 33(d)]: either (i) all results which do not give rise to IPR are widely disseminated, for example through publication, teaching or contribution to standardisation bodies in a way that allows other undertakings to reproduce them, and any IPR are fully allocated to the public purchaser, or (ii) any service provider to which results giving rise to IPR are allocated is required to grant the public purchaser unlimited access to those results free of charge, and to grant access to third parties, for example by way of non-exclusive licenses, under market conditions.
In my view, it is difficult to assume that an innovation partnership can be immediately fit into either (a) because it is not based on the rules of the open procedure, or (b) because it does create a preferential treatment for the supply of the results of the innovation, which may not necessarily remain unique or specialised products or services when it comes to their commercialization, particularly if the attribution of IP rights is to the contracting authority, or widely available through non-exclusive licenses, under market conditions

In that case, given the lack of immediate compatibility with the EU State aid rules under the 2014 R&D&I framework, the award of the innovation partnership can still go ahead, as Member States may rely on an individual assessment of the terms of the contract between the public purchaser and the undertaking, but that is without prejudice to the general obligation to notify R&D&I aid pursuant to Art 108(3) TFEU (which would paralise the project until the Commission clears the State aid).

Overall, then, I doubt that contracting authorities are in a good position to identify when an innovation partnership is justified or, even then, that they are in a situation where the pursuit of public interests (linked to the public procurement function) justifies the assumption of potentially significant IP and State aid risks. Consequently, I would not favor a significant uptake of the innovation partnership. If investment in R&D&I is to be pursued, it would be best channeled through regular awards of financial support as clear cut State aid.