The end of procurement as we knew it? CJEU consolidates Falk Pharma approach to definition of procurement in Tirkkonen (C-9/17)


In its Judgment of 1 March 2018 in Tirkkonen, C-9/17, EU:C:2018:142, the Court of Justice of the European Union (CJEU) had to assess whether a scheme with the following characteristics had to be classed as a framework agreement and thus subjected to the EU procurement rules (at the relevant time, Directive 2004/18/EC, now repealed by Directive 2014/24/EU).

The scheme was as follows: the Finnish Agency for Rural Affairs (contracting authority, or Agency) had to manage the provision of agricultural advisory services to farmers and land managers having entered into an environmental agreement concerning the payment of environmental compensation payments. The Agency designed a draft contract for the provision of agricultural advisory services that potential suppliers had to adhere to as a condition for their participation in the scheme as service providers. The draft contract foresaw an hourly rate for the retribution of the services, which was to be covered by the Agency, with the beneficiary farmer or land manager paying the applicable VAT. The Agency would create a pool of potential suppliers amongst those qualified that had expressed interest and passed an examination. Once this pool was created, no other providers would be able to join the scheme for the period 2015-2020. Farmers and land owners require the services of any of the advisors included in the scheme.

In deciding the case, the CJEU reiterated that 'the choice of a tender and, thus, of a successful tenderer, is intrinsically linked to the regulation of public contracts by [Directive 2004/18] and, consequently, to the concept of "public contract" within the meaning of Article 1(2) of that directive'. Further, the CJEU extracted the implication 'that the fact that the contracting authority does not designate an economic operator to whom contractual exclusivity is to be awarded means that there is no need to control, through the detailed rules of Directive 2004/18, the action of that contracting authority so as to prevent it from awarding a contract in favour of national operators' (C-9/17, paras 30-31). By stressing that procurement requires the contracting authority to choose the economic operator meant to provide the relevant supplies, services or works, the CJEU concluded that, in the case at hand, 'a farm advisory scheme ... through which a public entity accepts all the economic operators who meet the suitability requirements set out in the invitation to tender and who pass the examination referred to in that invitation to tender, even if no new operator can be admitted during the limited validity period of that scheme, does not constitute a public contract within the meaning of that directive' (C-9/17, para 41).

In formulating this position, the CJEU largely followed the approach suggested by AG Campos Sanchez-Bordona (criticised here) and consolidated the restrictive approach to the definition of procurement the CJEU itself had first formulated in Falk Pharma (C-410/14, EU:C:2016:399; also criticised here). In doing so, the CJEU has further jeopardised the effectiveness of EU public procurement law beyond the initial dent made by Falk Pharma. Tirkkonen concerned a factual situation clearly subsumable within the concept of a framework agreement that involved exclusion of potential competing providers of services for a period of 5 years--whereas Falk Pharma concerned an open-ended system where entry by new providers was possible, which made its classification within the concept of dynamic purchasing system perhaps less straightforward (although not really). This makes Tirkkonen a Judgment even more troubling than Falk Pharma. Given that the CJEU relied on Directive 2014/24 in Falk Pharma, even if Tirkkonen does not mention it in its operative part, it seems that this restrictive approach is now clearly consolidated for the foreseeable future and that it will impose a restrictive approach to the concept of procurement in the future. For the reasons discussed below, I find this development regrettable.

Excessively narrow concept of procurement--Choice obsession

The CJEU has not placed center-stage the requirement for the contracting authority to choose 'tender and, thus, ... a successful tenderer ... to whom contractual exclusivity is to be awarded' (presumably, solely, or within a framework agreement), but rather idolatrised it and put it in a high pedestal from which it can only fall in the future.

The CJEU has forced this position to the extreme of potentially creating further confusion about the distinction between selection and award criteria concerning professional qualifications and expertise of the members of staff involved in the future provision of services--thus potentially reigniting the discussion of the interaction between Lianakis and Ambisig (see here). This emerges from the exceedingly formal reasoning followed by the CJEU in Tirkkonen, where the CJEU was at pains to avoid classifying the

... it is apparent ... that the Agency intends to set up a large pool of advisers who must fulfil a number of conditions. However, in so far as the Agency admits all the candidates who satisfy those requirements, it is clear ... that it makes no selection among the admissible tenders and that it confines itself to ensuring that qualitative criteria are respected.

... the fact that, unlike the context that gave rise to ... Falk Pharma ... a farm advisory scheme ... is not permanently open to interested economic operators is irrelevant. In the present case, the decisive factor is that the contracting authority has not referred to any award criteria for the purpose of comparing and classifying admissible tenders. In the absence of that factor, which is, as is apparent from paragraph 38 of ... Falk Pharma ..., intrinsically linked to the regulation of public contracts, a farm advisory scheme ... cannot constitute a public contract within the meaning of Article 1(2)(a) of Directive 2004/18.

Furthermore, ... even if the verification of the tenderers’ suitability and the award of the contract are carried out simultaneously, those two operations must be regarded as two different operations governed by different rules ...

Accordingly, criteria that are not aimed at identifying the tender which is economically the most advantageous, but are instead essentially linked to the evaluation of the tenderers’ suitability to perform the contract in question, cannot be regarded as ‘award criteria’. Criteria relating mainly to the experience, qualifications and means to ensure the proper performance of the contract concerned were considered to relate to the suitability of tenderers to perform that contract and not as ‘award criteria’, even though the contracting authority had classified them as such ...

Finally, that conclusion is in no way affected by the solution adopted in ... Ambisig ..., in which the Court pointed out, in essence, that the skills and experience of the members of the team assigned to performing the public contract may be included as award criteria in the contract notice or in the tender specifications, in so far as the quality of the performance of a contract may depend decisively on the ‘professional merit’ of the people entrusted with its performance, which is made up of their professional experience and background, particularly where the contract covers the provision of services of an intellectual nature and relates to training and advisory services.

That assessment must, however, be understood ... in the light of the contracting authority’s choice of the tender which it intended to accept from several admissible tenders. In so doing, unlike the case at issue in the main proceedings, the contracting authority, in ... Ambisig ... made a real comparison of the admissible tenders in order to identify the most economically advantageous tender. In the latter case, the experience of the proposed technical team was an intrinsic feature of the tender and was not merely a criterion for assessing the tenderers’ suitability.

It follows from the foregoing considerations that the requirements set out in the invitation to tender published by the Agency cannot constitute award criteria within the meaning of Directive 2004/18 (C-9/17, paras 33, 35-40, references omitted and emphases added).

The CJEU certainly takes an extremely formal view here, in particular because the nature of the scheme was such that potential suppliers were to offer homogeneous or equally economically advantageous tenders, given that the Agency had predefined the parameters of the provision of the services. In that regard, the contracting authority did not 'confine itself to ensuring that qualitative criteria were respected', but rather established all applicable requirements in such a way that tenderers were faced with a 'take it or leave it' set of conditions for their offers. It can thus be argued that in this case the involvement of the contracting authority was even more intense than in the context of previous cases, such as Ambisig, in that the contracting authority had even more control of the content of the future contracts.

As I already mentioned when criticising the AG Opinion (see here), this approach misunderstands how framework agreements work. Both frameworks that involve mini-competitions, where the conclusion of the framework agreement does not imply any specific choice of tender because its conditions are subject to the result of the mini-competition prior to call-off (see Art 32(4)II second indent, and now Art 33(4)(b) and (c) Dir 2014/24); as well as frameworks that already set all conditions for future call-offs without any further mini-competition, where all conditions of what constitutes the most economically advantageous tender are set at the point of concluding the framework agreement (see Art 32(4)II first indent, and now Art 33(4)(a) Dir 2014/24). Functionally, the choice-centric reasoning of the CJEU manages to be at odds with both types of framework agreements, which could be seen as incompatibly covered by a Tirkkonen-compliant interpretation of the relevant rules.

Excessively narrow goals of EU procurement law

From a broader perspective, the CJEU Judgment in Tirkkonen can also be criticised by adopting a very narrow understanding of the goals of EU public procurement law strictly based on the prevention of discrimination on the basis of nationality. This is at odds with the significant case law that stresses the importance of competition considerations in procurement.

Since its emergence in CJEU case law over twenty-five years ago (see Commission v Denmark (Bridge over the Storebaelt), C-243/89, EU:C:1993:257, para 33), the principle of competition has progressively acquired central relevance in the field of public procurement. This evolution has generally been framed by the Court as a clarification of the main goal of the successive generations of EU public procurement rules. In one of its latest formulations, the CJEU has emphasised that ‘the main objective of the rules of EU law in the field of public contracts [is] the free movement of goods and services and the opening-up of undistorted competition in all the Member States’ (see Undis Servizi, C-553/15, EU:C:2016:935, para 28). The CJEU has also recently stressed that ‘the EU rules on public procurement were adopted in pursuance of the establishment of a single market, the purpose of which is to ensure freedom of movement and eliminate restrictions on competition’ (Lloyd's of London, C-144/17, EU:C:2018:78, para 33).

Therefore, from a systemic perspective, limited doubt can be cast on the competition-orientatedness of the EU public procurement rules [see eg C Bovis, ‘The Regulation of Public Procurement as a Key Element of European Economic Law’ (1998) 4(2) European Law Review 220; R Caranta, I contratti pubblici, 2nd edn (Turin, Giappichelli, 2012) 20; for extended discussion, see A Sanchez-Graells, Public procurement and the EU competition rules, 2nd edn (Oxford, Hart, 2015)]. And yet, in Tirkkonen the CJEU is inconsistent in recognising the importance of the principle of competition in drawing the boundaries of EU public procurement law. Its goal is not solely to prevent discrimination on the basis of nationality, or otherwise, but to ensure that contracting authorities benefit from the outcomes that undistorted competition for public contracts generates. In that regard, it seems clear that a recognition of the broader competition goal of EU public procurement law would have required the CJEU to assess whether the decision-making process underlying the Tirkkonen case was potentially unduly restrictive of competition--which it was, given the harshness of the exclusion decision--which would have forced the Court to recognise the relevance of applying EU public procurement law to curve such type of publicly-created distortions of competition [for a proposal on how to operationalise such a test, see A Sanchez-Graells, 'Some Reflections on the 'Artificial Narrowing of Competition' as a Check on Executive Discretion in Public Procurement', in S Bogojević, X Groussot & J Hettne (eds), Discretion in EU Public Procurement Law, IECL Series (Oxford, Hart, forthcoming)].

Excessive leeway for 'strategic design' going forward -- Need to reinvent the wheel?

The Tirkkonen case is not solely problematic from a conceptual and a normative perspective, as discussed above, but also from a practical standpoint. As already mentioned when criticising the AG Opinion, on the whole, as a result of the cumulative effect of Tirkkonen and its expansion of the Falk Pharma doctrine, Member States willing to avoid compliance with EU public procurement rules could now easily do so by creating systems of ‘user/beneficiary choice’ whereby contracting authorities create the entire 'choice architecture' and the underlying contractual mechanisms, but defer the choice of the specific provider to the user (patient, in Falk Pharma, aid beneficiary, in Tirkkonen). This could be quite problematic particularly in the context of services and supply contracts, where the existence of end users detached from the contracting authority can enable this type of mechanisms.

In the extreme, if central purchasing bodies created this type of mechanisms for use by individual decision-makers (eg civil servants or public employees), the atomisation of procurement that would ensue could well result in a de-regulation of the procurement function. Procurement rules would not apply to the CPB because it would not ‘choose definitely’ the specific supplier or provider, and they may not apply to the decision to call-off that does exercise that choice if the value of the call-offs is small enough—which would then trigger litigation around the legality or less of the atomisation of the procurement decision on the last stage, for which analysis the concept of ‘separate operational units’ in Art 5(2) of Directive 2014/24/EU (see also recital (20)) would become highly relevant; see K-M Halonen, 'Characteristics of Separate Operational Units – A Study on Aggregation Rules under Public Procurement Law' (2017) report for the Competition Authority; see here. There is thus a functional need to keep proper checks and balances at the level of creation of the mechanism.

I was already concerned that Falk Pharma was eroding the scope and effectiveness of the EU public procurement rules, but Tirkkonen could magnify such undesirable effect. Moreover, this would simply displace the problem towards general EU free movement law, which is not a sensible approach in view of the more developed criteria and rules in the EU public procurement framework. There may now be a need to reinvent the wheel and 'export' to general internal market law the more sophisticated mechanisms developed in the area of EU public procurement law, which seems like a significant waste of effort. It may well be that all of this takes us full circle, but it will certainly take time and the legal uncertainty involved in the process cannot be productive.

Some may argue that this is the spillover of the CJEU's increasing deference to the Member States in the area of procurement. This is certainly something that requires some further thought. Based on conversartions with some colleagues, maybe we will manage to organise a conference in this topic in the next couple of years. Watch this space.


Another wrong decision on what is subjected to (EU) public procurement rules (QSRC v NHSE, [2015] EWHC 3752)

I was at the South West Administrative Lawyers Association (SWALA) meeeting yesterday and this gave me an opportunity to catch up with colleagues practising procurement before English courts, who are always an excellent source for updates regarding a body of (growing) national case law that is not always easy to find, despite the excellent BAILII.

Talking to Emily Heard about the Falk Pharma case (see here), she mentioned that there was a recent English case that could be of interest from the perspective of 'what is prourement' or 'what should be subjected to the (EU) procurement rules'. She was right, and the case of QSRC Ltd ("Qsrc"), R (on the application of) v National Health Service Commissioning Board ("NHS England") & Anor [2015] EWHC 3752 (Admin) (21 December 2015) deserves some comments. Of course, the opinion below is solely my own.

In QSRC v NHSE, the procurement dispute arose from the decision by the relevant contracting authority not to enter into a contract for the provision of specialised medical services (gamma knife treatment, a particular type of radiosurgical treatment) with QSRC while extending previous contracts for the provision of those services with existing suppliers.

The factual background of the case is very complex due to the fact that the initial decision not to enter into such contract took place towards the end of 2012, at the time when NHS procurement was being reformed in preparation for the entry into force of the National Health Service (Procurement, Patient Choice and Competition) (No 2) Regulations 2013.

However, as I read the facts and for analytical purposes, the relevant issues were that the relevant contracting authority, by deciding to extend the contracts with pre-existing suppliers and not tendering more fully (on the justification that such fuller procurement would take place in the near future once the new system was operational) incurred in the direct award of (implicit) public contracts to the pre-existing providers. Moreover, that by rejecting to enter into a contract with QSRC as well, it treated potential providers unequally.

Then, the main dispute for the purposes of our discussion was to determine whether, by not running a tender for the provision of the interim services, the relevant contracting authority had breached the then applicable Public Contracts Regulations 2006 (which transposed Directive 2004/18, and have since been replaced by the Public Contracts Regulations 2015 in transposition of Directive 2014/24). Linked to that, it was also contentious whether by not entering into a direct award with QSRC as well, the contracting authority breached its obligations under reg.3(2) NHS Procurement (No 2) 2013 Regs to act transparently and proportionately, and not to discriminate between providers.

Again, the claim is complicated due to the overlap betwen the NHS Procurement (No 2) 2013 Regs and the PCR2006 (and currently the PCR2015), but the relevant issue is that compliance with PCR2006 (and now PCR2015) is mandatory to the extent that they are applicable to the procurement of goods and services for the purposes of the NHS, which is otherwise (or additionally) regulated by the NHS Procurement (No 2) 2013 Regs.

The further complication is that the position of the parties is slightly odd. The Claimant was not interested in relying on the PCR2006 because it would imply that its claim was out of time and should thus be rejected without substantive analysis. Conversely, the Defendant wanted to insist on its (alleged) breach under PCR2006, so as to time bar the action.

Thus, in short, the High Court (Foskett J) had to determine whether there had been a breach of the PCR2006 in the decision not to run a tender for the provision of interim services, which would oddly have resulted in an end of the analysis due to time limitation rules (which could explain the outcome of the analysis...).

The relevant paragraph is [115], where it is established that:

The issue, therefore, is whether, as the Defendant contends, the decision made not to contract with the Claimant was "governed by the Public Contracts Regulations 2006" or whether, as the Claimant contends, it was not. [The Defendant] submitted that the essence of the claim is that the Defendant should have procured ... services from the Claimant instead of merely from Barts and the Cromwell ... and contends that "the refusal to do so is a decision the legality of which may be affected by duties owed to [the Claimant] under" the 2006 Regulations. It seems to me that the issue is not whether the decision "may be affected" by the Regulations, but whether they are governed by them. [The Claimant] submits that they are not so governed, but they are governed by the 2013 Regulations. He accepts that in some respects there may be a degree of overlap, but argues this was not a situation where the "contracting authority" was seeking offers in relation to a proposed public supply contract (see Regulation 5) and, accordingly, the Regulations did not apply. Indeed he emphasises that no offers have yet been sought. He submits that no decision was taken under the 2006 Regulations which is or was capable of challenge pursuant to its terms (first emphasis in the original, second emphasis added).

Foskett J concluded that the Claimant's 'submissions [were] correct in the circumstances of this case'. It would then seem that the decision to consider the PCR2006 as not applicable is heavily influenced by the willingness of the Court to engage in a substantive assessment of the situation and to circumvent the time bar that would derive from the opposite conclusion. However, the argument simply does not hold even a mild degree of scrutiny.

In simple terms, the argument is that procurement rules apply when contracting authorities actually seek offers from potential providers, but not when they 'merely' (or potentially) ought to seek those offers. This would immediately exclude all cases of direct award of contracts that should have been tendered from review due to a breach of the applicable procurement rules. This is simply flagrantly in conflict with the purposes not only of the substantive EU Directives (2004/18 and 2014/24) as transposed byt he PCR2006 and now the PCR2015, but in radical opposition to the aims and mandates of the Remedies Directive (Dir 89/665/EEC, as amended by Dir 2007/66)--seeing that it goes at great lengths to stress that the direct award of contracts is the most egregious violation of (EU) public procurement rules and therefore triggers the strictness of sanctions: ineffectiveness [Art 2d(1)(a)].

Consequently, regardless of the outcome of the QSRC v NHSE case, which is not relevant now, the reasons for the decision to consider the direct award of the interim services contract not within the scope of the PCR2006 (and probably exempted but from minimum formal requirements due to the nature of the services as Annex II B services), must be criticised as plainly incorrect. It is wrong to enter into a logical argument that results in a circular test whereby compliance with the (EU) public procurement rules is only required if the contracting authority actually decides to engage in a procurement exercise, without assessing whether it had such an obligation to do so precisely under those rules. Or, even in simpler terms, it is wrong to accept that a decision not to comply with the applicable (EU) procurement rules shields the contracting authority from challenges on the basis of the infringed rules.

More generally, then and going back to the link with Falk Pharma, it seems that the proper understanding of what procurement is and when the (EU) public procurement rules should apply to market interactions by the public buyer is not yet satisfactorily settled, which is odd in a discipline that has been around for almost 45 years at EU level and for centuries in some of its Member States (acknowledgedly, not in the UK). More work should be done in this area, and I will try to rope in some of the colleagues participating in Procurement Week 2016 in such a project. Watch this space.

ECJ gets first principles of EU public procurement law wrong, as demonstrated by the regulation of dynamic purchasing systems (C-410/14)

In its Judgment of 2 June 2016 in Falk Pharma, C-410/14, EU:C:2016:399, the European Court of Justice (ECJ) had to revisit the very concepts of procurement and of public contract for the purposes of the interpretation and application of EU public procurement law. The ECJ decided to approach the issue from a 'first principles' perspective and to work deductively on the basis of the general principles and main aims of EU public procurement in order to delineate the contours of what a public contract is. In my opinion, the result of this process is faulty and needs to be criticised because the ECJ only looked at part of the general principles and aims of EU public procurement law and, more importantly, by avoiding a systematic analysis and ignoring the regulation of dynamic purchasing systems, reached a solution that creates internal inconsistency within the system of EU public procurement regulation.

The dispute in the Falk Pharma case

In the case at hand, the ECJ was requested to interpret whether a so-called 'authorisation system' implemented by German authorities in relation with the acquisition of pharmaceutical products was covered by the EU public procurement rules or not. In simple terms, under the relevant part of German social security law concerned with statutory health insurance, 'in the case of the supply of a medicinal product which has been prescribed by indicating its active ingredient and whose replacement by a medicinal product with an equivalent active ingredient is not excluded by the prescribing doctor, pharmacists must replace the medicinal product prescribed with another medicinal product with an equivalent active ingredient in respect of which a rebate contract has been concluded' (C-410/14, para 11). Or, in other words, when operating under the statutory health insurance scheme, German pharmacists are under an obligation to dispense generics for which a rebate scheme is in place unless the prescribing doctor has insisted on a specific branded product.

In order to establish such a rebate system for a given anti-inflammatory drug used to treat inflammatory bowel disease (mesalazine), in the Falk Pharma case, the relevant authorities 'published in the supplement to the Official Journal of the European Union a notice concerning an "authorisation procedure" for the conclusion of rebate contracts ... concerning medicinal products whose active ingredient is mesalazine. The rebate rate was fixed at 15% of the ‘ex-factory’ price and the period covered ran from 1 October 2013 to 30 September 2015' (para 13). It should be noted that the 'procedure provided for the authorisation of all interested undertakings meeting the authorisation criteria and for the conclusion with each of those undertakings of identical contracts whose terms were fixed and non-negotiable. Furthermore, any other undertaking fulfilling those criteria also had the opportunity of acceding on the same terms to the rebate contract scheme during the contract period' (para 14). The German authorities considered that this scheme was not covered by the EU public procurement rules (para 15).

As a result of the procedure, the German authorities entered into only one rebate contract with Kohlpharma. A competing interested undertaking challenged the setting up of the rebate scheme on the basis that the so-called 'authorisation procedure' was actually a public contract and, consequently, should have been advertised and awarded in compliance with the applicable EU rules (at the time, Directive 2004/18). The referring court explained how German courts were divided on this issue. 'For certain courts a public contract is a contract which gives the chosen operator exclusivity, so that a contract which is concluded with all the operators who wish to conclude such a contract does not constitute a public contract. Other courts take the view that all contracts concluded by a contracting authority are public contracts and that the choice of one of the tenderers, and therefore the grant of exclusivity, is an obligation of a contracting authority' (para 22).

After an elaborate discussion on the arguments both for and against the consideration of these schemes as public contracts (paras 23-30), the basic question posed to the ECJ is to determine 'whether Art 1(2)(a) Dir 2004/18 must be interpreted as meaning that a contract scheme ... through which a public entity intends to acquire goods on the market by contracting throughout the period of validity of that scheme with any economic operator who undertakes to provide the goods concerned on fixed terms, without choosing between the interested operators, and allows those operators to accede to that scheme throughout its period of validity, must be classified as a public contract within the meaning of that directive' (para 32).

The ECJ's position in the Falk Pharma case

The ECJ's first reaction is to stress that '[a]dmittedly, ... such a scheme leads to the conclusion of contracts for a pecuniary interest between a public entity, which could be a contracting authority within the meaning of Directive 2004/18, and economic operators whose objective is to supply goods, which corresponds to the definition of "public contracts" laid down in Article 1(2)(a) of that directive' (para 33). In my view, the analysis should have ended here and the ECJ should have limited itself to declare the authorisation scheme covered by EU public procurement rules (more details on the reasons why, below).

However, in order to answer more fully this seemingly simple question, the ECJ decided to go back to the very basics and interrogate Dir 2004/18 for its general aims and goals. In that regard, and after repeating some standard arguments on the EU procurement rules' goal to avoid favouritism in the award of public contracts (paras 34-36), the ECJ establishes the most controversial part of the Falk Pharma Judgment by finding that:

37 ... where a public entity seeks to conclude supply contracts with all the economic operators wishing to supply the goods concerned in accordance with the conditions specified by that entity, the fact that the contracting authority does not designate an economic operator to whom contractual exclusivity is to be awarded means that there is no need to control, through the detailed rules of Directive 2004/18, the action of that contracting authority so as to prevent it from awarding a contract in favour of national operators.
38      It is therefore apparent that the choice of a tender and, thus, of a successful tenderer, is intrinsically linked to the regulation of public contracts by that directive and, consequently, to the concept of ‘public contract’ within the meaning of Article 1(2) of that directive (C-410/14, paras 37 & 38, emphasis added).

I find both points faulty for the reasons explored below. Moreover, I find this position very worrying because of the sweeping implications it has for the definition of public contract and because this understanding of public procurement as an activity necessarily requiring the choice of a successful tenderer will carry over to the interpretation and enforcement of Directive  2014/24 because, according to the ECJ:

40 ... that principle is expressly set out in the definition of the concept of ‘procurement’, now set out in Article 1(2) of Directive 2014/24, in respect of which one aspect is the choice by the contracting authority of the economic operator from whom it will acquire by means of a public contract the works, supplies or services which are the subject matter of that contract (C-410/14, para 40, emphasis added).

What the ECJ got wrong

The absence of risk of protectionism or competitive restriction

Regarding the finding of the ECJ in para 37 of Falk Pharma that there is no need to control the conclusion of this type of contractual mechanisms under the specific rules of the EU public procurement directives because there is no risk of award those contracts in favour of national operators, I submit that the ECJ failed to understand the mechanics of the supply chain involved in the so-called 'authorisation scheme' or 'rebate contracts' and that this led to an improper assessment of the risk of favouritism or protectionism of certain economic operators. Moreover, I also submit that, in any case, this is not the correct logic to follow and that a competition-based assessment should lead to a different conclusion.

These rebate contracts only make sense for entities active in Germany and with working distribution mechanisms whereby their medicine is made available to German pharmacies. The mechanics of the rebate are quite obvious in requiring two pre-conditions for the actual delivery of the medicine by a specific provider. One, it is necessary for the provider to conclude the required rebate contract with the authorities managing the statutory health insurance system. Two, it is necessary for the provider to have its products available in German pharmacies. Even then, there is no guarantee to end up selling the product if a competing supplier has a rebate scheme in place, has its products available at the pharmacy and has a lower selling price because, despite being obliged to grant the same rebate (in the case, 15%) it has a lower ex-factory price (for details on this, see the recent report on pharmaceutical product pricing).

Therefore, in my view and to the extent to which it is possible to grasp the economic reality behind the case on the basis of the pyrrhic information available in the Falk Pharma Judgment, the creation of this rebate scheme still clearly has potential 'protectionistic' effects in that it favours pharmaceutical companies already established and active in Germany over potential suppliers that would need to enter the pharmacy distribution channels in order to take part in the 'authorisation scheme'. Thus, in my view, even from the perpective of limiting EU public procurement rules to an anti-protectionism goal, the ECJ would have gotten the assessment wrong by remaining at a level of generality that masks the fact that the scheme formally open to any willing supplier is actually skewed in favour of pharmaceutical companies already active in Germany--which, in terms of the ECJ's analysis, are more likely to be domestic companies.

But, beyond this, I think that the ECJ's assessment was also affected by tunnel vision and failed to evaluate the situation from the perspective of the pro-competitive orientation of the EU public procurement rules, despite the referring court's stress on the fact that 'EU law on public contracts has always been characterised by an element of competition' (para 25). From this functional perspective, it is criticisable that the ECJ decided to exclude the 'authorisation scheme' from the scope of application of the EU public procurement directives on the basis that it does not constitute a public contract, while at the same time going back to the obscure requirement that its award is based on a procedure that 'in so far as its subject matter is of certain cross-border interest, is subject to the fundamental rules of the [TFEU], in particular the principles of equal treatment and of non-discrimination between economic operators and the consequent obligation of transparency, that obligation requiring that there be adequate publicity. In that regard, Member States have some latitude in a situation such as that at issue in the main proceedings for the purpose of adopting measures intended to ensure observance of the principles of equal treatment and the obligation of transparency' (para 44).

This only creates legal uncertainty and potentially limits competition for the contract. It would have been preferable for the ECJ to actually look at the entirety of the goals of the EU public procurement rules and, it being clear that the 'authorisation scheme' 'leads to the conclusion of contracts for a pecuniary interest between a public entity ... and economic operators whose objective is to supply goods' (para 33), subject it to compliance with the specific rules of the EU public procurement directives (concerning dynamic purchasing systems, as elaborated below), if nothing else for the purpose of ensuring competition for these contracts.

The need to make a final choice as an essential element of procurement procedures

Furthermore, the ECJ's finding in para 38 of the Falk Pharma Judgment, that 'one aspect [of the concept of procurement] is the choice by the contracting authority of the economic operator from whom it will acquire by means of a public contract the works, supplies or services', should also be criticised. First, because too strict an interpretation of this element of choice of the specific contractor, supplier or service provider (ab initio or from the start of the contractual relationship) by the contracting authority can result in ridiculous results, e.g. where end users are given choice between alternative suppliers, be it within framework agreements or dynamic purchasing systems, or where the contracting authority draws from contractual systems set up by third parties (such as central purchasing bodies, or through other types of collaborative procurement). In many a case, the contracting authority that sets up the general contractual scheme does not necessarily end up choosing the provider itself or in a direct manner. But this should not exclude the applicability of the EU public procurement rules.

Secondly, reliance on the specific wording of Art 1(2) Dir 2014/24 should also be criticised because the ECJ seems to read too much into the definition of procurement created ex novo in this instrument. Remarkably, when the European Commission proposed the text of the new Directive in 2011, it defined procurement in a broader and functional manner by indicating that: 'Procurement within the meaning of this Directive is the purchase or other forms of acquisition of works, supplies or services by one or more contracting authorities from economic operators chosen by those contracting authorities, whether or not the works, supplies or services are intended for a public purpose'. The justification given by the Commission for this introduction was that '[t]he basic concept of "procurement" ... has been newly introduced in order to better determine the scope and purpose of procurement law and to facilitate the application of the thresholds'. However, there is no further explanation of the purpose of this definition.

The final text of Art 1(2) of Dir 2014/24 deviates from the proposal by establishing that 'Procurement within the meaning of this Directive is the acquisition by means of a public contract of works, supplies or services by one or more contracting authorities from economic operators chosen by those contracting authorities, whether or not the works, supplies or services are intended for a public purpose' (the emphasis indicates the differences). This change of drafting originates from the second compromise text of the Council (see here), and the debate seems to only have revolved around the need for a public contract to exist in order to trigger the application of the Directive. To the best to my knowledge, the element of choice of economic operator was not controversial and did not attract any relevant attention in the legislative process--as evidenced, for instance, by the fact that the provision is not dealt with in any detail in relevant scholarship: Constant De Koninck, Thierry Ronse and William Timmermans, European Public Procurement Law. The Public Sector Procurement Directive 2014/24/EU Explained through 30 Years of Case Law by the Court of Justice of the European Union, 2nd edn  (Wolters Kluwer Law & Business, 2015). 

As clearly criticised by Caranta, 'the new definition provided in Article 1(2) of Directive 2014/24 still [leaves] wide margins of ambiguity' and, further, '[t]he legislative drafting technique here leaves much to be desired. The two provisions might easily have been merged, and the distinction between “procurement” and “public contract” is simply lost in most of the other language versions. Moreover, “public contract” is clearly the genus, with “procurement” being the species. The genus should have been defined first, with the specification elements (in writing, acquisition, pecuniary interest, and so on) added at a later stage' [see R Caranta, 'The changes to the public contract directives and the story they tell about how EU law works' (2015) 52(2) Common Market Law Review 391-459, emphasis added]. As Caranta points out, the definition seems to only bring about a change in terms of stressing the requirement for an 'acquisition' to take place (for the reasons he explains), which in the Falk Pharma case is uncontroversial.

Overall, then, I cannot understand why the ECJ got so hung up on the specific wording of Art 1(2) Dir 2014/24 and why it gave such relevance to the need to choose a supplier for procurement to exist. From a functional perspective, it would seem superior to interpret procurement as any contractual mechanism whereby the contracting authority determines which suppliers can supply and under which conditions, regardless of whether there is any element of exclusivity or whether any potential supplier is excluded from the scheme. This functional approach certainly bodes better with the regulation of undisputed (if not too regularly used) EU public procurement mechanisms such as the dynamic purchasing system, which was simply ignored by the ECJ.

How the ECJ ignored the regulation of dynamic purchasing systems

Indeed, beyond the general criticisms above, the Falk Pharma Judgment must also be criticised because the ECJ enters into a very limited systematic analysis of the EU public procurement architecture that ignores the regulation of dynamic purchasing systems, both in Dir 2004/18 and Dir 2014/24. Indeed, the ECJ simply considered that

41 ... it should be noted that the special feature of a contractual scheme, such as that at issue in the main proceedings, namely its permanent availability for the duration of its validity to interested operators and, therefore, its not being limited to a preliminary period in the course of which undertakings are invited to express their interest to the public entity concerned, suffices to distinguish that scheme from a framework agreement. In accordance with Article 32(2), second paragraph, of Directive 2004/18, contracts based on a framework agreement can only be awarded to economic operators who are originally parties to that framework agreement (C-410/14, para 41, emphasis added).

That is true. But the ECJ's analysis flagrantly failed to assess the compatibility of those general features (ie permanent availability of the possibility to opt in to interested operators, despite not having expressed initial interest) with the regulation of dynamic purchasing systems under Art 33 Dir 2004/18, which are precisely this type of contractual arrangement. Granted, the specific rules on the running of the dynamic purchasing system would have required some further assessment and the fact that pharmacists draw from the electronic catalogue resulting from the rebate agreements could have created some difficulties regarding the specific mechanics of the dynamic purchasing systems envisaged in Dir 2004/18 regarding the need for indicative tenders and the mini-competitions for each award (not so much under the revised rules of Art 34 Dir 2014/24, especially if coupled with the rules on electronic catalogues in Art 36 Dir 2014/24), but that should not have excluded from the scope of application of EU public procurement rules (both under Dir 2004/18 and, more importantly, Dir 2014/24) any type of contractual scheme permanently open to economic operators willing to supply for the entirety of its duration. In my view, this is bound to result in a major systematic incongruence--why call something a dynamic purchasing system and comply with EU public procurement rules if you can call it 'authorisation process' or any other creative name and do away those requirements? Definitely not a desirable outcome from the perspective of regulatory consistency.

Final thoughts

For all the reasons explored above, I think that the Falk Pharma Judgment is an undesirable development of EU public procurement law. Moreover, I am puzzled by the absence of an Advocate General Opinion. Given the fundamental relevance of the concept of public contract, and now of procurement itself, for the application of this regulatory system, the worse thing to do is to carry out analyses based on linguistics without exploring the systematic and functional implications of definitional issues. In my view, this is an issue worth resending to the CJEU for clarification at the earliest possible opportunity as soon as any slightly different "authorisation scheme" or "alternative acquisition mechanism" is tendered in any of the Member States, so that the full ECJ and, if possible, on the back of a strong Advocate General Opinion, has the opportunity to fix this--or, on the contrary, continues a dangerous path of recognition (and legitimacy) of "non-procurement acquisition systems" subjected to the basic principles of the EU Treaties and the requirements derived from the internal market fundamental freedoms, but not to the EU public procurement rules, which would extend the difficulties traditionally linked to below-thresholds and not-covered contracts to a whole new dimension of acquisition contractual mechanisms, and which I would certainly find undesirable.