Buying on the cheap is no crime—at least not under TFEU Art. 107
In the SARC case, the Court of Justice of the European Union has held that an advantageous licence from a public university does not necessarily constitute impermissible state aid. The case also provides important guidelines on when an undertaking may seek to annul a decision by the European Commission finding that a competitor has not received impermissible state aid under TFEU Art. 263.
In 1997–2006 the Delft University of Technology developed “Delftship” software for designing ships and loading systems. The researcher who was the project leader at UTD left the university in 2006 and established the company Delftship BV, which handles distribution of the Delftship software he had worked on at UTD, based on a licence agreement between Delftship BV and UTD. Under the licence agreement, UTD received compensation in the form of services for upgrading and expanding the software, as well as a fee equal to 5% of the annual turnover of Delftship BV from sale of the Delftship software, in exchange for which Delftship BV obtained the right to distribute the software to end users.
A Dutch competitor of Delftship BV—Scheepsbouwkundig Advies- en Rekencentrum BV, known as SARC—filed a complaint with the European Commission alleging that Delftship BV was receiving unlawful state aid from UTD, a public university. SARC claimed that the fee paid by Delftship BV under the licence agreement was below market value. After conducting a preliminary examination, the Commission issued a decision finding that the licence agreement did not constitute impermissible state aid. In the Commission’s view, considering all of the circumstances of the case—and primarily the strong bargaining position of Delftship BV—the fee corresponded to market conditions and thus UTD could be regarded as acting like a private investor.
SARC then applied to the General Court to annul the Commission’s decision under Art. 263 of the Treaty on the Functioning of the European Union. The Commission, supported by the Kingdom of the Netherlands and the Technical University of Delft, moved to dismiss the application on the grounds that SARC lacked standing to challenge the Commission’s decision.
Competitor may challenge the decision if its competitive position was significantly affected
The fourth paragraph of TFEU Art. 263 provides, “Any natural or legal person may, under the conditions laid down in the first and second paragraphs, institute proceedings against an act addressed to that person or which is of direct and individual concern to them, and against a regulatory act which is of direct concern to them and does not entail implementing measures.” In line with the established case law of the European Court of Justice, a decision on state aid addressed to a member state also directly and individually concerns the beneficiary of the aid (Plaumann & Co. v Commission, Case C-25/62). While it is easy for the member state or the beneficiary of state aid to show standing under TFEU Art. 263, it is a difficult undertaking for a competitor to show that it has standing to challenge the Commission’s decision.
To show that the act directly and individually concerned SARC, it would have to prove that the decision affected it by virtue of certain attributes which are peculiar to it or by reason of circumstances in which it is differentiated from all other persons as in the case of the addressee of the decision (Plaumann). That could be the case, for example, where the applicant’s market position is significantly affected by the aid (British Aggregates v Commission, Case C‑487/06 P). The mere fact that the decision may influence competitive relationships on the relevant market and that the applicant was in a competitive relationship with the addressee of the decision cannot suffice to show that the applicant is individually concerned by the decision. In each case, the applicant must demonstrate a significant adverse effect in the light of such criteria as the market position of the parties, the size of the market, the amount of the aid, the period for which the aid is provided, and the effect of the aid on the business of the competitor applying to annul the decision.
In the proceeding before the General Court, the applicant demonstrated that SARC and Delftship BV are competitors and offer similar products to the same clients. The applicant demonstrated the parties’ market share, provided an expert opinion showing that the amount of the aid clearly exceeded the de minimis threshold, and also showed that it had lost three clients to Delftship BV. The court nonetheless held that these efforts were insufficient to prove that the decision concerned SARC individually.
The court held that SARC had not proved that it had standing to challenge the merits of the state aid decision. Among other things, the court found that the applicant had not sufficiently proved its definition of the relevant geographic market and had not shown that the decision significantly affected its competitive position in the relevant market.
Ultimately the court held that SARC is an “interested party” for purposes of the first paragraph of TFEU Art. 108(2) and Art. 1(h) of Procedural Regulation 659/1999, and therefore it has legal standing to challenge the contested decision “to safeguard its procedural rights,” but it does not have legal standing to challenge the merits of the decision.
Under ECJ case law, if the Commission finds in a decision issued under TFEU Art. 108(3) and Art. 4(2) of Procedural Regulation 659/1999 that there is no state aid and thus it will not issue a decision commencing a formal investigation procedure, the beneficiary of the procedural guarantees set forth in TFEU Art. 108(2) may insist that those guarantees be respected only when have the possibility of disputing the decision before a Community court. Therefore, an application for annulment of the decision filed by an interested party under TFEU Art. 108(2) will be regarded as permissible only if the applicant seeks through filing of the application to safeguard its procedural rights under that provision.
In this case, SARC was denied the right to dispute the merits of the decision on state aid because it had failed to prove that the decision significantly affected its competitive position, but it was permitted to challenge the decision in order to safeguard its procedural rights.
What procedural rights are safeguarded?
For these reasons, the court limited its analysis of the objections raised by the applicant to the circumstances affecting the Commission’s issuance of the decision finding that there was no unlawful state aid and, thus, that it would not initiate a formal investigation procedure. The applicant’s legal interest in filing an application to safeguard its procedural rights arose only to the extent that the applicant could show that the Commission should have had doubts concerning the compatibility of the state aid with the internal market, leading it to initiate a formal investigation procedure (Commission v Kronoply, Case C-83/09).
The applicant alleged that there were serious doubts concerning the legality of the state aid which should have led the Commission to initiate a formal investigation procedure. SARC claimed that the Commission did not properly evaluate the advantage flowing from the alleged aid, based on Art. 10 of Procedural Regulation 659/1999. It also argued that its procedural rights were violated because it was prevented from participating properly in the preliminary procedure.
The court denied all of these allegations, finding that the Commission had not committed any errors, and the procedural rights guaranteed to SARC by EU law were fully respected during the preliminary examination.
Fight doesn’t always pay off
Following the recent amendment of Procedural Regulation 659/1999, in which the Commission stressed the value of the complaints filed with it as a source of information in discovering violation of EU rules on state aid, businesses may have raised their hopes for effectively combating unlawful state aid to competitors. The ruling in the SARC case can hardly be said to have dashed their hopes. Nonetheless, the court did signal that complaints must be based on solid evidence and knowledge of the market. The case is also important because the court succinctly summarised the existing case law on how to determine whether a party has standing to seek annulment of a decision by the European Commission under TFEU Art. 263.
Turning to the crux of the dispute—the market basis of the licence fees—the founder of Delftship BV appears to have driven a hard bargain. Further development of the Delftship software owned by the Technical University of Delft was closely tied to cooperation with the spinoff company of its researcher, Delftship BV. The company exploited this situation to negotiate a fee so low that it raised suspicions of an award of state aid worth many times more than the permissible de minimis level. It may be concluded that a price which might statistically appear to be understated could nonetheless fall within the range of market prices when other relevant considerations are factored in.
This ruling lays down important guidelines for businesses that suspect their competitors are receiving impermissible state aid, and also for those suspected of receiving aid. The case clearly outlines the issue of the legal interest required for standing to file an application for annulment of a decision by the European Commission, and also suggests to those entering into agreements with public institutions under advantageous terms that they should make a record of their negotiations and maintain evidence demonstrating that their agreements are concluded on market terms.
Wojciech Marszałkowski, State Aid Practice, Wardyński & Partners