AG proposes extension of Falk Pharma doctrine to framework agreements, for wrong reasons (C-9/17)


In his Opinion of 13 December 2017 in Tirkkonen, C-9/17, EU:C:2017:962 (not available in English), Advocate General Campos Sanchez-Bordona has proposed the application to a framework agreement for the provision to farmers of advisory services funded by the European Agricultural Fund for Rural Development (FEADER) of the Falk Pharma doctrine (ie that the absence of a choice in concreto of the awardee of a contract by the contracting/funding authority excludes the applicability of the EU public procurement rules; see Judgment of 2 June 2016 in Falk Pharma, C-410/14, EU:C:2016:399, and here).

In his view, the fact that individual farmers—and not the competent authority administering the FEADER funds—could choose the specific rural advisor that would provide them the services carved the framework agreement out of the scope of application of the EU (and domestic) public procurement rules—which were therefore not applicable to the tender of the framework agreement in the first place.

In my view, the Tirkkonen Opinion engages in an unjustifiably expansive interpretation of the Falk Pharma Judgment that both ignores some of the basic elements in the functioning of framework agreements, and takes that Judgment’s functionally-erroneous interpretation of the concept of procurement one step too far. If the Tirkkonen Opinion was followed, in combination with Falk Pharma, it would create a significant risk of ineffectiveness of the EU public procurement rules for aggregate and dynamic contracting mechanisms. Therefore, in this post, I present my reasons for a plea to the Court of Justice of the European Union (ECJ) not to follow AG Campos in this occasion, as I think his approach is problematic, both from a positive and a normative perspective.

Tirkkonen – a bad case raising the wrong issues

Why ignore explicit requirements in secondary EU law?

The way the preliminary reference in Tirkkonen reached the ECJ evidences that this is a bad set of circumstances on which to develop the case law on the scope of application of the EU public procurement rules. In the case at hand, the Finnish Agency for Rural Space (Maaseutuvirasto) tendered a framework contract for the provision of advisory services to farmers. Given the (expected) high volume of demand for advisory services, the framework was intended to include as many qualified rural advisors as possible, subject to their passing of an exam to ensure their knowledge and competence (AGO, C-9/17, para 19). Rural advisors admitted to the framework agreement could then be chosen by individual farmers (who should in principle chose the closest advisor, although some exceptions applied), and their services would be remunerated on the basis of hourly rates paid by Maaseutuvirasto, with the beneficiary farmer covering applicable VAT charges (AGO, C-9/17, para 18). It is not explicitly stated in AG Campos' Opinion, but it is worth stressing that the Maaseutuvirasto had set the hourly rate payable to rural advisors, and that the award (ie admission to the framework contract) was to be decided solely on quality (ie competency to provide the service) (see here for details (in Finnish), and thanks to K-M Halonen for help with the translation). The suppression of price competition will be relevant for the assessment below.

The advisory services organised by Maaseutuvirasto were ultimately funded by FEADER for the period 2014-2020 and, under the relevant rules (Reg 1305/2013/EU, Art 15(3), and Impl Reg 808/2014/EU, Art 7), the selection by the Finnish (and all other national) competent authority of the providers of those advisory services was explicitly subjected to European and domestic public procurement rules, which required for the selection to be made: ‘through calls for tenders. The selection procedure shall be governed by public procurement law and shall be open to both public and private bodies’ (Art 15(3) Reg 1305/2013/EU). It was reiterated that the 'calls for tenders referred to in Article 15(3) of Regulation (EU) No 1305/2013 shall follow the applicable Union and national public procurement rules' (Art 7 Impl Reg 808/2014/EU). The Finnish government had no doubt that EU and domestic procurement rules applied, and thus tendered the contract as described above.

Therefore, against this background, a preliminary reference enquiring about the potential non-applicability of the procurement rules to the tender of the framework agreement despite the explicit requirements in special (in the sense of lex specialis) secondary EU legislation is beyond bizarre (see below). However, AG Campos does not see a problem here, and considers that

… that reference to procurement law must be interpreted in the sense that the procedure for the selection of rural advisors must comply with the principles (of non-discrimination, equal treatment and transparency) that govern that sector of the legal order. It does not portray, in my view, a requirement that implies subjection to each and all of the provisions of the EU Directives on public sector procurement (AGO, C-9/17, para 34, own translation from Spanish).

I disagree with this assessment, which is not based on any specific reasons, and which violates the natural reading of Reg 1305/2013/EU and Impl Reg 808/2014/EU. Moreover, it comes to reduce the value of the explicit reference to procurement law in those provisions, and to collapse it into the general principles that are common with general internal market law and, more importantly, the eponymous general principles of EU law—which would be applicable anyway to all activities implementing the relevant instruments of secondary EU law. Therefore, AG Campos’ position not solely deviates from the natural reading of the provisions, but also runs contrary to the functional reasons for the inclusion of the explicit reference to procurement rules (ie to go beyond the general requirements of the always applicable primary EU law). Thus, already on the weakness of the reasons for a deviation from the literal and functional interpretation of those provisions of secondary EU law, I think that the ECJ should largely ignore AG Campos’ Opinion and simply answer the question by confirming the applicability of the EU (and domestic) procurement rules on the basis of the explicit requirements in Reg 1305/2013/EU and Impl Reg 808/2014/EU.

Why not simply state that Finnish procurement law was wrong?

Beyond that first clear-cut solution, which I think highly unlikely the ECJ will adopt, the Court will have to explore the general (as in lex generalis) reasons that still justify the applicability of the EU and (domestic) procurement rules to the case—also contrary to AG Campos’ Opinion. To that end, it is still necessary to understand why the preliminary question was sent to the ECJ—which is explained by a misconstruction of the EU public procurement rules and, in particular, by the harsh consequences of an exceedingly restrictive approach to documentary clarification in the domestic Finnish procurement rules that violates the Manova-Slovensko line of case law (see here, here and here).

In that regard, it is worth noting that the preliminary reference derived from the fact that, in the context of the tender for the framework agreement, Ms Tirkkonen failed to properly complete all required documentation—ie she had failed to indicate whether she accepted or rejected the tender conditions attached to the draft framework agreement (AGO, C-9/17, para 20). She was thus excluded from the framework agreement. Her complaint is fundamentally grounded on the fact that she should have been given the opportunity to clarify whether she accepted the conditions or not prior to her exclusion from the framework agreement.

It is a settled legal fact of the case that, under Finnish law, the omission of that indication of acceptance of the general conditions would only be susceptible if the clarification or correction of the tender was not controlled by public procurement law (which excluded such possibility of clarification), and was rather subjected to general administrative law governing the relationships between citizens and the public administration (AGO, C-9/17, para 3).

Therefore, the harshness of the Finnish procurement rules is behind the interest of the claimant in excluding the tender from the scope of application of domestic procurement rules—which can only be done by seeking a carve-out from the concept of procurement under the EU rules. And, more importantly, the Finnish approach is in contravention of EU law—oddly, as confirmed by AG Campos himself: ‘if Directive 2004/18 was applicable, it would result that the contracting authority would be able to accept, in the context of public procurement, the correction of formal shortcomings that do not imply the submission of a new offer, or substantially altered the terms of the initial offer. On this point, I refer to my Opinion in case MA.T.I. SUD y DUEMMESGR (C-523/16 y C-536/16, EU:C:2017:868)’ (AGO, C-9/17, para 23, fn 7, own translation from Spanish; for discussion of MA.T.I. Sud, see here).

Consequently, the second clear-cut solution for the ECJ is to (i) pick up on the incorrect interpretation of EU public procurement law that underpins the preliminary reference, (ii) reformulate the question and consider that it asked whether the exclusion from the framework agreement due to the formal shortcoming in the documentation and without the possibility to correct it was required or allowed by EU procurement law, (iii) reiterate the Manova-Slovensko case law, and (iv) leave it for the national court to decide on the legality of the exclusion (with a clear hint that exclusion in this case was not justified, due to the logical assumption that would-be rural advisors understood that accepting the general conditions of the draft contract was a requirement for entering into specific contracts, and that confirming such acceptance does not constitute a new offer or substantial modification of the initial offer).

For some reason, however, I am also not optimistic that the ECJ will adopt this second solution and pass on the opportunity to clarify its Falk Pharma case law. Should the ECJ engage with the question and the issues raised by AG Campos, and for the reasons below, I think that the ECJ should provide clarification of Falk Pharma in the opposite direction to that adopted by the Tirkkonen Opinion.

Tirkkonen Opinion ignores how framework agreements work

Once the argument concentrates on the definition of procurement under Article 1(2)(a) of Directive 2004/18/EC, AG Campos summarises the Falk Pharma doctrine as establishing 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 (AGO, C-9/17, para 37, own translation from Spanish, with reference to Falk Pharma, para 38).

And that

… in the public contracts subjected to Directive 2004/18 a final awardee must exist, which is preferred to the rest of its competitors on the basis of the characteristics of its offer. And this key element is applicable ‘for every contract, framework agreement, and every establishment of a dynamic purchasing system’, for which ‘the contracting authorities are to draw up a written report which is to include the name of the successful tenderer and the reasons why his tender was selected (AGO, C-9/17, para 38, own translation from Spanish, with reference to Falk Pharma, para 39).

This leads AG Campos to argue that, in the framework tendered in Tirkkonen, ‘it is not possible to identify the existence of award criteria of the advisory services contracts, but solely of criteria for the selection of economic operators with capability to offer those services (sic)’ (AGO, C-9/17, para 39, own translation from Spanish and emphasis added). AG Campos continues with a discussion of the distinction between selection and award criteria as per Ambisig (C-601/13, EU:C:2015:204, paras 40 and ff, see here), which I consider irrelevant—for the crucial point is that, in multi-supplier framework agreements (as well as in dynamic purchasing systems, as discussed here), the inclusion in the framework does not (ever) imply the choice of the ‘winner’ of the (call-off) contracts but, conversely, exclusion from the framework does prevent the excluded economic operators from providing the service.

In my view, this is the relevant aspect, for the inclusion in the framework is not simply an identification of the capable or qualified economic operators, but the limitation to those included in the framework of the possibility of entering into specific contracts in the terms set in the framework. AG Campos’ maximalistic position would lead to the inescapable logical conclusion that framework agreements are not public contracts for the purposes of EU public procurement law, despite being explicitly regulated, quod non.

The flawed logic of the premise established by AG Campos in para 39 of his Opinion makes the rest of his reasoning crumble. In my view, this defect affects his reasoning that

… what is determinative, in relation to the contracts subject to Directive 2004/18, is not the checking of the economic operators’ capability to provide the advisory service (qualitative selection criterion), but the comparison of the offers of the competing tenderers, once considered capable, with a view to finally chose that or those which will be entrusted with such provision (award criterion) (AGO, C-9/17, para 44, own translation from Spanish).

And that

… the selection that matters, for the purposes of the concept of public contract in Directive 2004/18, is that which results from the comparison between the capabilities and merits of the offers of the different candidates. That is, what is decisive is the final award, comparatively or by contrast, to the best offer, not the initial selection by reference to a threshold meeting which does not imply competition between the candidates (AGO, C-9/17, para 45, own translation from Spanish).

Ultimately, following this same reasoning, AG Campos takes issue with the fact that there was no competition between the candidates that expressed interest in being included in the framework agreement because the contracting authority ‘did not restrict ab initio the number of potential providers of the services, nor did it carry out a comparison of the offers between them, or chose in a definitive manner one or several of them, on the basis of a comparative evaluation of their respective contents, to the exclusion of the rest’ (AGO, C-9/17, para 48, own translation from Spanish).

However, this triggers two issues. First, under Dir 2004/18/EC, there was no obligation to establish a maximum number of economic operators to be admitted to a framework agreement. Art 32(4) Dir 2004/18/EC solely established a minimum of three for multi-supplier framework agreements, but did not require a maximum number. Second, it is in the nature of framework agreements—particularly those involving mini-competitions, as per Art 32(4)II Dir 2004/18/EC—that the contracting authority, at the point of deciding which economic operators are included in the framework, does not ‘chose in a definitive manner one or several [offers], on the basis of a comparative evaluation of their respective contents, to the exclusion of the rest’ for the purposes of the award of the relevant call-off contracts—which is the situation comparable to Tirkkonen. In particular, it is possible that an economic operator included in a framework agreement is never awarded a call-off, especially if there are mini-competitions, which in my view deactivates the functional reasoning of AG Campos.

In my view, AG Campos also misinterprets the implications of the fact that the framework agreement in Tirkkonen was closed to the economic operators not initially admitted to it, in relation to the ECJ’s Judgment in Falk Pharma. In that regard, it is relevant that the argument was made that the closed nature of the framework agreement distinguishes it from the open-ended mechanism discussed in Falk Pharma, which AG Campos rejects in the following terms:

It is true that, strictly, by limiting the contracting system, during its term, to the economic operators initially admitted by the Agency [Maaseutuvirasto] (which prevents access by new advisors) a certain quantitative restriction is being imposed. However, this is but a consequence of the pure and rigorous temporary limitation of the system of funding for advisory services, which is parallel to the program of rural development for continental Finland 2014-2020 (sic).

For the rest, the reference by the Court of Justice in Falk Pharma to the permanent openness of the contracting system to new tenderers was not, in my view, the ratio decidendi of that case, but rather a statement made ad abundantia. What was determinative in that occasion was that the contracting authority had not awarded, in exclusive, the contract to one of the tenderers [Falk Pharma, para 38].

In this case, just like in the Falk Pharma case, there has not been any element of true competition between the candidates, to evaluate which of their offers is the best and displaces, simultaneously, the remaining other (AGO, C-9/17, paras 51-53, own translation from Spanish)

The reasoning in these paragraphs is strongly skewed towards a very narrow understanding of procurement as implying the award of contracts solely to a winning tenderer, which is not the way framework agreements (and dynamic purchasing systems) operate. I cannot share the analysis in any of these steps of the reasoning.

Firstly, I think that a temporary justification for the irrelevance of the selective nature of a framework agreement is a logical non sequitur. The fact that the funding is limited to the period 2014-2020 can be used to justify the creation of a framework of six years’ duration, but it can have no bearing on the fact that a restriction of the potential suppliers derives from the framework agreement itself. The Maaseutuvirasto could have chosen a fully open licensing system, which would then have avoided the situation of excluding would-be rural advisors as a result of the one-off chance of being accepted into the system (which is a structural result of the framework agreement).

Secondly, in Falk Pharma, the ECJ did not simply consider the lack of choice of a specific supplier and consider the open-ended nature of the ‘authorisation procedure’ ad abundantia, but rather made this a crucial aspect of the analysis, by establishing it as a defining characteristic of the mechanism (see C-410/14, para 14). This is particularly clear on the explicit distinction the ECJ made with framework agreements when it stressed that

it should be noted that the special feature of a contractual scheme, such as that at issue in [Falk Pharma], 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 (C-410/14, para 41, emphasis added).

Finally, the third point on absence of competition is also problematic. Taken to its logical extreme, this would mean that contracting authorities could avoid compliance with procurement rules where they set ‘take it or leave it’ conditions for the provision of services or supplies. This makes no sense because, particularly where there is scarcity in the number of awards (in this case, a limit of total available funding, as well as the restriction in the number of potential awardees that results from the closing of the framework agreement at the initial stage of the 2014-2020 period), there is always implicitly an element of competition (ie to tender or not, and tendering results in a constraint on the overall number/value of awards available to the other competitors) and the fact that the contracting authority limits the dimensions in which the tenderers compete (in Tirkkonen, and implicitly, their geographical coverage) should not exclude this from compliance with procurement rules.

For all the reasons above, I think the Tirkkonen Opinion misconstrues the relevance of the openness of the system in Falk Pharma, and the explicit distinction made by the ECJ between that system and framework agreements. Moreover, the Opinion gives excessive weight to the need to compare tenders or offers (and the choice of one, and almost only one, to the exclusion of all others) for (covered) procurement to take place. In particular, it misrepresents some of the particular features of framework agreements and opens the door to their de-regulation where contracting authorities set ‘take it or leave it’ conditions (eg, in this case, provision of services at rates established by the contracting/funding authority) and then delegate or decentralise decisions on call-offs, even if they provide general guidelines on the way they should take place. For the reasons set out below, I think the Opinion is not only inaccurate from a positive legal analysis perspective (as discussed so far), but also from a normative perspective.

The undesirable combined effect of Falk Pharma and Tirkkonen

Should the ECJ follow the Tirkkonen Opinion, and as a result of the cumulative effect of the resulting expanded Falk Pharma doctrine, Member States willing to avoid compliance with EU public procurement rules could easily do so by creating systems of ‘user/beneficiary choice’. 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 always 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.

On the whole, 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. Thus, also from a normative perspective, I would plea to the ECJ not to adopt the same approach of AG Campos on this occasion.

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.

#CJEU shows excessive deference towards #socialpolicy in #publicprocurement: #socialhousing schemes may not be public contracts (C-197/11)

In its Judgment of 8 May 2013 in Joined Cases C-197/11 & C-203/11 Libert and Others, the Court of Justice of the European Union has quashed the Belgian 'Living in Your Own Region' scheme, whereby the acquisition of land and property in certain parts of the country was restricted on grounds of social policy. Moreover, when a building or land subdivision authorisation was granted, Belgian law imposed 'social obligations' on economic operators, such as subdividers and developers, so that they had to either pay a contribution to the commune (in cash or in kind), or discharge such obligation through certain sale and lease schemes, or any combination thereof. Interestingly, the CJEU has found that this latter part of the 'authorisation + social obligation' scheme, which potentially implies mandatory sales of property to public entities, may not fall under the scope of Directive 2004/18 on public procurement.

In the first part of its Libert Judgment, the CJEU has followed its prior approach against restrictive development schemes in Konle (C-302/97), and has quashed a decree of the Flemish Region of 27 March 2009 on land and real estate policy that linked the transfer of immovable property in certain Flemish communes to the condition that there existed a 'sufficient connection' between the prospective buyer or tenant and the relevant commune--ie that provided for a prior authorisation procedure to determine whether there was such a ‘sufficient connection’ (based on previous residence or on professional, family, social or economic connections with the commune in question) and, in reality, amounted to prohibiting certain persons from purchasing or leasing for more than nine years land or the buildings thereon (see CJEU press release).

It is interesting to see that the Belgian Government had tried to justify the scheme on social policy grounds and, particularly, by the objective of responding to the housing needs of the less affluent local population in the target communes. However, the CJEU has decided to quash the scheme for its lack of proportionality. The Court has rightly considered that none of the conditions used to assess the existence of a 'sufficient connection' directly reflected the socio-economic aspects relating to the objective of protecting exclusively the less affluent local population on the property market--since they could be met not only by the less affluent local population but also by other people with sufficient resources who, consequently, had no specific need for social protection on the property market. Moreover, such social goal could be achieved through other, less interventionist measures, such as housing subsidies specifically designed to assist the less affluent. So far, the case does not depart from what could be expected from the CJEU.

In its second part of the Libert Judgment, the CJEU considered that the mandatory discharge of social contributions by developers and subdividers can be a justified restriction of the fundamental freedoms involved (mainly, free circulation of capital). The Court considered that such a restriction, in so far as its purpose is to guarantee sufficient housing for the low-income or otherwise disadvantaged sections of the local population, may be justified by requirements relating to social housing policy in a Member State as an overriding reason in the public interest (and left it for the referring court to assess whether such an obligation satisfies the principle of proportionality, that is to say, whether it is necessary and appropriate to attain the objective pursued). Again, the CJEU has followed an approach that was to be expected.

The CJEU then engages in an assessment of a part of the social housing scheme that implies tax incentives and subsidy mechanisms for developers from a State aid perspective. However, the CJEU has very limited information and limits itself to refresh the conditions for the exemption of aid, with an express reference to the old 2005 SGEI Decision--now substituted by the 2011/12 'Almunia Package' [for commentary, see Sánchez Graells, 'The Commission’s Modernization Agenda for Procurement and SGEI' in Szyszczak & van de Gronden (eds.), Financing SGEIs: State Aid Reform and Modernisation (TMC Asser Press/Springer Series Legal Issues of Services of General Interest, 2012)]. 

The key issue in this area clearly seems to be how to determine the remit of the 'public service'/ 'social service' obligation, and to find a valid benchmark to ensure that there is no excessive remuneration. In this regard, it is worth stressing that, following Altmark (C-280/00), the Commission is increasingly relying on the conduct of public procurement procedures to exclude the existence of an undue economic advantage for the provide of the 'public service'/ 'social service'. Consequently, the following part of the case becomes all the more relevant.

In that regard, it is key to stress that, in the final part of Libert, the CJEU has addressed whether this authorisation scheme fell within the remit of the EU public procurement rules. The CJEU was asked the following question:
'Should the concept of “public works contracts” in Article 1(2)(b) of Directive 2004/18… be interpreted to mean that it is applicable to a scheme whereby, when a building or land subdivision authorisation is granted in respect of a project of a certain minimum size, it is linked by operation of law to a “social obligation” entailing the development of social housing units, amounting to a certain percentage of the project, which are subsequently to be sold at capped prices to a public institution, or with substitution by it?'
In its (partial) reply to this question, the CJEU heavily relies on the (in)existence of an express written agreement, and considers that
109 [...] it should be borne in mind that, in accordance with Article 1(2)(b) of Directive 2004/18, read in conjunction with Article 1(2)(a) thereof, public works contracts result where four criteria are fulfilled, that is to say, they are contracts for pecuniary interest, concluded in writing, between an economic operator and a contracting authority, which must have as their object either the execution, or both the design and execution, of works related to one of the activities within the meaning of Annex I to that directive or a work, or the realisation, by whatever means, of a work corresponding to the requirements specified by the contracting authority. [...]
111 So far as concerns, in particular, the existence of a contract concluded in writing, it follows from the order for reference that the Constitutional Court is uncertain as to whether that criterion has been met in the present case, inasmuch as the social obligation entailing the development of social housing units is imposed in the absence of an agreement concluded between the housing authorities and the economic operator concerned. According to the order for reference, the social obligation is imposed directly on subdividers and developers by the Flemish Decree and is applicable to them merely because they own the land in relation to which they have applied for the grant of a building or land subdivision authorisation. 
112 In that regard, it should be borne in mind that, in order to establish that some kind of contractual relationship existed between an entity which could be regarded as a contracting authority and a subdivider or developer, the case-law of the Court requires [...] a development agreement to be concluded between the housing authorities and the economic operator in question for the purpose of determining the work to be undertaken by the economic operator and the terms and conditions relating thereto
113 Where such an agreement has been concluded, the fact that the development of social housing units is a requirement imposed directly by national legislation and that the party contracting with the authorities is necessarily the owner of the building land in question does not preclude the existence of a contractual relationship between the authorities and the developer in question (see, to that effect, Case C‑399/98 Ordine degli Architetti and Others [2001] ECR I‑5409, paragraphs 69 and 71). 
114 However, although it is true that Article 4.1.22, first subparagraph, of the Flemish Decree expressly requires an administration agreement to be concluded between the subdivider or developer and the social housing organisation, it is apparent from the order for reference that that agreement does not, in principle, regulate the relationship between the contracting authority and the economic operator concerned. In addition, such an agreement does not appear to concern the development of social housing units, but only the next stage which entails placing them on the market
115 It is therefore for the referring court to determine, in the light of all the applicable legislation and the relevant circumstances of the case in the main proceedings, whether the development of social housing units at issue in the main proceedings is within the framework of a contractual relationship between a contracting authority and an economic operator and whether the criteria referred to in paragraph 109 above have been met. (C-197/11 at paras 109 to 115, emphasis added).
In my opinion, the CJEU leaves the door excessively open to a finding that the scheme is not covered by Directive 2004/18 due to the lack of a 'proper' or 'sufficient' contract. In my view, for the purposes of controlling the award of the rights to divide land, develop property, and then sell it to a public institution in the social housing market, the CJEU should have adopted a more functional approach and indicated that the submission of an authorization followed by its approval (by means of an administration agreement) suffices for the establishment of a contractual relationship between the authority and the developer or subdivider, which would then automatically include the 'social obligation'. 

Otherwise, there seems to be excessive room for strategic behaviour on the part of contracting authorities to avoid compliance with public procurement rules through 'unstructured' documentation of their planning decisions and their economic relationships with developers. Given that only those developers that obtain authorisation will be able to develop and then sell property to public institutions under the 'social housing' scheme, it seems clear that the award of the authorisation implies an economic exchange (or that they are concluded for a pecuniary interest, even if it is deferred) and that the authority will (indirectly, at least) benefit from the development in the execution of its social housing policy. Therefore, the CJEU seems to have adopted a (mild) formalist approach that shows deference towards the implementation of social policies via (quasi)procurement schemes.

The only (implied) safeguard to this approach would be that the CJEU assumed that there would be a procurement procedure when the developments are complete and the property is 'sold at capped prices to a public institution, or with substitution by it', ie in the 'next stage which entails placing them on the market' (para 114). However, that seems highly unlikely, given that the administrative agreement entered into with the developer at the time of granting the authorisation seems to cover that--and, in any case, the contracting authority would probably try to rely on aspects of 'exclusivity' due to the location of the property, or excuse the purchase as a legal obligation, in order to avoid procurement procedures at that stage.

Moreover, in my opinion, the CJEU goes out of its way to provide the referring court with several additional reasons why, even in the presence of a written contract, the scheme may not be covered by Directive 2004/18. As the Court stresses, the scheme may well be below the relevant thresholds (which is a fair remark), or be exempted as part of an in-house scheme or a public-public cooperation scheme (see the European Commission's guidance for further details). These latter considerations are unwarranted by the question referred to the CJEU, which shows no element of collaboration between contracting authorities.  Indeed, the CJEU notes that:
116 [...] on the one hand, the application of Directive 2004/18 to public works contracts is nevertheless subject to the condition that the estimated value of the contract reaches the threshold set out in Article 7(c) of that directive and that, on the other, there are, as is apparent from the settled case-law of the Court, two types of contracts entered into by a public entity that do not fall within the scope of EU public procurement law
117 The first type of contracts are those concluded by a public entity with a person who is legally distinct from that entity [under the in-house exemption] where, at the same time, that entity exercises over the person concerned a control which is similar to that which it exercises over its own departments and where that person carries out the essential part of its activities with the entity or entities which control it (see Case C‑159/11 Ordine degli Ingegneri della Provincia di Lecce and Others [2012] ECR I‑0000, paragraph 32 and the case-law cited). 
118 The second type of contracts are those which establish cooperation between public entities with the aim of ensuring that a public task that they all have to perform is carried out. In those circumstances, the EU rules on public procurement are not applicable in so far as, in addition, such contracts are concluded exclusively by public entities, without the participation of a private party, no private provider of services is placed in a position of advantage vis-à-vis competitors and implementation of that cooperation is governed solely by considerations and requirements relating to the pursuit of objectives in the public interest (see Ordine degli Ingegneri della Provincia di Lecce and Others, paragraphs 34 and 35). (C-197/11 at paras 105 to 119).
 The Court concludes with a tautology:
In the light of all the foregoing considerations, the answer to the eleventh question in Case C‑203/11 is that the development of social housing units which are subsequently to be sold at capped prices to a public social housing institution, or with substitution of that institution for the service provider which developed those units, is covered by the concept of ‘public works contract’ contained in Article 1(2)(b) of Directive 2004/18 where the criteria set out in that provision have been met, a matter which falls to be determined by the referring court (C-197/11 at para 119, emphasis added).
In my opinion, the answer provided by the CJEU to this last question in the Libert case is at the same time too vague and too lenient with the social housing scheme under consideration, and opens a door to a dangerous path of limited or non-application of public procurement rules in relevant areas of social policy and social services, such as social housing. In that regard, it will be important to see how this (emerging?) trend of case law gets squared with the foreseeable future rules applicable to the procurement of social services of general interested, such as those included in the 2011 Proposal for a new Public Procurement Directive (art 74 to 76). 

Definitely, both avenues of development of public procurement law point towards a light-touch regulation of social services / social policy-related procurement, but I am not sure that they are moving in the same direction, since the CJEU seems to be keen to exclude (certain) 'social' contracts from procurement rules, whereas the Commission would like to keep some (restricted) control over them. It will be highly relevant to see how this area develops in the near future, since legal uncertainty is bound to be coupled with intense executive action.