Rules for awarding an IT contract when the supplier owns the source code

In 1992, the Czech tax authority awarded a contract to IBM World Trade Europe/Middle East/Africa Corporation (IBM), under which IBM was to develop and operate an IT information system. Under the contract, IBM obtained the copyright to the source code of the information system. IBM was thus also regarded as the holder of exclusive rights to the source code.

In 2016, the tax authority awarded a contract for the maintenance of the information system directly to IBM, without prior publication of a contract notice. The award was justified on the grounds that IBM owned the copyright to the source code, which meant that the system could only be maintained by IBM, as only IBM had the necessary access to the source code. The tax authority argued that IBM’s exclusive rights to the source code arose when the contract was concluded in 1992, when IBM was the only suitable supplier. The tax authority had tried to free itself from its dependence on IBM, but the company refused to transfer the copyright. Awarding the contract without prior publication was necessary to ensure the continued functioning of the system and the performance of the tax authorities’ tasks, as a new system would not be economically justifiable.

The Czech competition authority, however, rejected this justification and found that it could not be proven that the maintenance could only be carried out by IBM. The competition authority argued that the tax authority had infringed the procurement rules by awarding the contract directly, as the condition was not met, cf. Article 31(1)(b). The competition authority also argued that the need for maintenance was foreseeable and that the tax authority had failed to ensure competition for the contract by not putting it out to tender.

The question of whether the contracting authority had itself created a situation in which the contract could only be awarded to one particular supplier was referred to the Court of Justice. The Court therefore had to decide whether the protection of IBM’s exclusive rights could be attributed to the tax authority’s actions, and then whether this could justify a direct award of the contract to IBM.

The Court of Justice first held that the procurement directive in force at the time – Directive 2004/18 – applied to the assessment of the case.

The Court concluded that it is for the contracting authority to prove that:

• The conditions for using the negotiated procedure without prior publication are met.
• The situation of exclusivity cannot be attributed to the contracting authority.

The condition in point ii) – that it is for the contracting authority to prove that the situation of exclusivity cannot be attributed to it – does not, however, derive from the directive in force at the time. Instead, this obligation derives from the current procurement directive (2014/24).

The Court thus concluded that the negotiated procedure without prior publication cannot be justified solely by the technical particularities of software used in the national administration. The contracting authority must also be able to document that thorough investigations have been carried out to identify alternative suppliers that can offer suitable software. Without such an investigation, there can be no exemption from the obligation to tender.

In the case at hand, the tax authority had not done everything that could reasonably be expected to avoid using the negotiated procedure without prior publication and to use a more competitive procedure instead. The fact that the tax authority claims to have tried, without success, to end IBM’s situation of exclusivity did not change the outcome of the case. On the contrary, the Court found that between 2004 and 2016 the tax authority had had the opportunity to carry out a procurement procedure for a new system.

In summary, a contracting authority cannot justify using the negotiated procedure without prior publication by reference to the protection of exclusive rights if it has itself created or maintained that situation.