Case C-410/14, Falk Pharma – objecting to a contract supplying a public body reduced-price medicine [judgment 2016, ECLI:EU:C:2016:399]

If a public entity wishes to buy a drug but at a price below that charged by the manufacturer, and the entity advertises this in the Supplement to the EU’s Official Journal, then is any subsequent contract made by the entity governed by the EU procurement rules applicable to ‘public contracts’? Or can the entity point out that its notice and award of a contract was ‘an authorisation procedure’ which complied fully with the EU’s legal principles of non-discrimination, equality of treatment and transparency?

Facts
Inflammatory bowel disease can be treated with drugs containing Mesalazine as the active ingredient.

In Germany, DAK-Gesundheit wanted to buy Mesalazine products. However, it did not wish to pay the full price charged by the manufacturer; it was prepared to pay but 85% of that price.

DAK-Gesundheit is not a company. It is a German statutory health insurance fund. Because it is a public body, its purchasing activities are governed by EU public procurement law.

Accordingly, DAK-Gesundheit drafted a tendering notice, which was published in the August 2013 edition of the Supplement to the EU’s Official Journal. Although the notice stipulated that the contract with DAK-Gesundheit would run from August 2013, it also stated that the time limit for receiving tenders or requests to participate would run until the 3rd of August 2015.

Responding to the notice, Kohlpharma indicated they were prepared to supply DAK-Gesundheit with tablets and suppositories containing Mesalazine. In December 2013, a supply contract was drawn up and signed. However, an objection was lodged with DAK-Gesundheit in January 2014 – the objection originated from another pharmaceutical firm, Falk Pharma.

Falk Pharma complained that the contract which had been signed between Kohlpharma and DAK-Gesundheid was not legally binding. Falk Pharma was of the opinion that a fixed-price-reduction contravened a plank of German legislation that was designed to encourage competition. Furthermore, Falk Pharma also complained that the wrong legal procedure had been followed in the lead up to the contract because, in its view, DAK-Gesundheit should have followed the rules applicable to a government procurement framework.

Falk Pharma’s complaint was handled at first instance by the German Federal Public Procurement Board. The Board agreed with Falk Pharma that the contract should comply with Germany’s pro-competition legislation – consequently, the entity’s a priori decision to set a maximum price was wrong since it limited competition. However, the Board refused to declare the contract as not being legally binding. The Board took into account the fact that the entity had advertised its intention to purchase cheaper goods containing Mesalazine across the whole of the EU.

The Board’s decision satisfied neither party. Both appealed to the Oberlandsgericht in Düsseldorf (OLG Düsseldorf). In essence, Falk Pharma appealed on the basis that the factual award was simply not permitted, and so the awarding the contract to Kohlpharma was not legally binding. That argument was refuted by DAK-Gesundheit, who pointed out that the award of the contract did not fall within the scope of procurement law rules for a government procurement framework – rather, this was an ‘authorisation procedure’.

In that context, DAK-Gesundheit placed a great reliance its decisional autonomy. It pointed out that it had the power to choose what it wanted to do. Yes, it was free to award exclusivity to a particular supplier; however, it was also free not to offer any exclusivity whatsoever. Indeed, under the terms of the advert, it was clear that the entity was retaining its decisional autonomy for it remained free to contract with any, and indeed every, pharmaceutical company that showed any interest in supplying DAK-Gesundheit the Mesalazine-products at the stipulated maximum price, and to do so at any point in time.

The legal effect of DAK-Gesundheit having retained its freeedom meant that it had not made a choice. And choice was an essential ingredient to any ‘public contract’ falling within the scope of Article 1(2)(a) of Directive 2004/18/EC. Consequently, in DAK-Gesundheit’s view, the lack of ‘choice’ meant that there was no ‘public contract’. What DAK-Gesundheit was actually doing was organising an ‘authorisation procedure’, something which fell outside of the scope of the rules governing public government contracts.

Before the OLG Düsseldorf could come to a decision, it also heard legal submissions from Kohlpharma, the company which had been granted the contract to supply DAK-Gesundheit with the Mesalazine tablets and suppositories. Unsurprisingly, Kohlpharma submitted that the appeal should be dismissed. The reason was this: the CJEU’s case law indicated that contracting authorities were free to award contracts under procedures other than those applicable to government contracts if those contracting authorities believed that this was the best way for ensuring the provision of a specific public service. In this particular case, price-reductions on medicines justified the award under an authorisation procedure. Consequently, Kohlpharma took the view that the award complied with EU law.

The OLG Düsseldorf could not resolve the case, which seemed to have two components to it. First, was this a public contract falling under EU procurement law? It noted that the advert was for concluding a contract for reduced-price medicines with any interested company, and doing so under an authorisation procedure without any element of choice. Second, if this was, despite the lack of choice, a public contract, then, how should the various conditions mentioned in the notice be weighed?

The OLG Düsseldorf’s starting point was the EU’s Directive 2004/18/EC of the European Parliament and of the Council of 31 March 2004 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts.

Although the relevant provision was in a now-repealed Directive, the original provision was Article 1(2)(a), and it stated:

“Public contracts” are contracts for pecuniary interest concluded in writing between one or more economic operators and one or more contracting authorities and having as their object the execution of works, the supply of products or the provision of services within the meaning of this Directive.

Consequently, one of the characteristics of a public contract was to confer exclusivity on a company.

The OLG Düsseldorf appreciated the difficulty. DAK-Gesundheit had deliberately declined to make a choice. Nevertheless, the OLG Düsseldorf was also mindful of the threat that would arise if that argument was allowed to succeed – a threat which had been pointed out by the Federal Public Procurement Board. That is to say, if this contract were to be removed from the scope of EU procurement law, then its removal would hinge on an overly narrow interpretation of EU law; and as a matter of principle, contracting authorities should be obliged to organise a competitive procedure – this was a principle to which there should be almost no exception.

But what to do? The OLG Düsseldorf could deduce no answer from the CJEU’s case law. In Case C-206/08, Eurawasser ECLI:EU:C:2009:540, the CJEU had held:

41 In Article 18 of Directive 2004/17, the Community legislature states that the directive does not apply to service concessions which are awarded by contracting authorities carrying out activities, inter alia, in the water sector.

42 In addition, it should be recalled that, in relation to its own sphere of application, Directive 2004/18/EC of the European Parliament and of the Council of 31 March 2004 on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts (OJ 2004 L 134, p. 114), includes, in Article 1(2)(a) and (4) thereof, definitions of ‘public contracts’ and of ‘service concession’ which are substantially the same as the corresponding definitions in Article 1(2)(a) and (3)(b) of Directive 2004/17.

43 The fact that the definitions are substantially the same means that the same considerations are applicable to an interpretation of the concepts of service contract and service concession within the respective spheres of application of those two directives.

44 It follows that, if the transaction at issue in the main proceedings is categorised as a ‘service contract’ within the meaning of Directive 2004/17, such a contract must, in principle, be concluded in accordance with the procedures laid down in Articles 31 and 32 thereof. On the other hand, under Article 18 of that directive, if that transaction is categorised as a service concession, the directive is not applicable to it. In such circumstances, the awarding of the concession remains subject to the fundamental rules of the Treaty, in general, and to the principles of equal treatment and of non-discrimination on the ground of nationality, and the concomitant obligation of transparency, in particular (see, to that effect, Case C‑324/98 Telaustria and Telefonadress [2000] ECR I‑10745, paragraphs 60 to 62; Case C‑231/03 Coname [2005] ECR I‑7287, paragraphs 16 to 19; Case C‑458/03 Parking Brixen [2005] ECR I‑8585, paragraphs 46 to 49; and Case C‑324/07 Coditel Brabant [2008] ECR I‑0000, paragraph 25).

45 That is the context in which the referring court seeks to clarify the criteria which allow a distinction to be established between a service contract and a service concession.
…
74 Second, it must remain open to the contracting authorities, acting in all good faith, to ensure the supply of services by way of a concession, if they consider that to be the best method of ensuring the public service in question, even if the risk linked to such an operation is limited.

75 Moreover, it would not be reasonable to expect a public authority granting a concession to create conditions which were more competitive and involved greater financial risk than those which, on account of the rules governing the sector in question, exist in that sector.

The only point which the OLG Düsseldorf could make from these planks of CJEU reasoning was that for a service concession, it was not mandatory to make it subject to the procurement rules, providing that there was some lawful alternative.

The OLG Düsseldorf found further support for its belief by looking at the latest version of the EU’s procurement Directive 2014/24/EU. The new wording to Articles 1 and 2 stated:

Article 1 – Subject-matter and scope
…
2. 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.

Article 2 – Definitions
1. For the purposes of this Directive, the following definitions apply:
(5) “public contracts” means contracts for pecuniary interest concluded in writing between one or more economic operators and one or more contracting authorities and having as their object the execution of works, the supply of products or the provision of services;

Article 2 also had to be understood in light of Recital 4 to the Directive, which states:

The increasingly diverse forms of public action have made it necessary to define more clearly the notion of procurement itself; that clarification should not however broaden the scope of this Directive compared to that of Directive 2004/18/EC. The Union rules on public procurement are not intended to cover all forms of disbursement of public funds, but only those aimed at the acquisition of works, supplies or services for consideration by means of a public contract. It should be clarified that such acquisitions of works, supplies or services should be subject to this Directive whether they are implemented through purchase, leasing or other contractual forms.

The notion of acquisition should be understood broadly in the sense of obtaining the benefits of the works, supplies or services in question, not necessarily requiring a transfer of ownership to the contracting authorities. Furthermore, the mere financing, in particular through grants, of an activity, which is frequently linked to the obligation to reimburse the amounts received where they are not used for the purposes intended, does not usually fall within the scope of the public procurement rules. Similarly, situations where all operators fulfilling certain conditions are entitled to perform a given task, without any selectivity, such as customer choice and service voucher systems, should not be understood as being procurement but simple authorisation schemes (for instance licences for medicines or medical services).

In light of the wording of this new EU Directive, the OLG Düsseldorf thought it was possible to argue that a contracting authority which did not make a choice between companies would not be subject to the rules governing public contracts.

Moreover, the OLG Düsseldorf thought that its interpretation seemed to fit with a recent judgment of the CJEU’s Grand Chamber in Case C-271/08, Germany v Commission ECLI:EU:C:2010:426. (This was a case about public service contracts that had provided occupational old-age pensions to local authority employees. Those contracts had been awarded directly to pension providers named in a collective agreement; consequently, there had been no EU-level call for tenders.)

Although the CJEU in that case had held that the German State had failed to implement its obligations under the EU’s procurement Directive, the OLG Düsseldorf noted that the CJEU had also stated this:

73 As to those submissions, first of all, neither Article 1(b) of Directive 92/50 nor Article 1(9) of Directive 2004/18 makes a distinction between public contracts awarded by a contracting authority for the purposes of fulfilling its task of meeting needs in the general interest and those which are unrelated to that task. The fact that no such distinction is made is explained by the aim of those directives to avoid the risk of preference being given to national tenderers or applicants whenever a contract is awarded by the contracting authorities (see, by analogy, Case C-44/96 Mannesmann Anlagenbau Austria and Others [1998] ECR I-73, paragraphs 32 and 33).

Consequently, the OLG Düsseldorf understood this to mean that EU procurement law now made no distinction as to whether an entity acted in the public interest, or was simply discharging a task incumbent upon it. The OLG Düsseldorf also understood the paragraph to mean that the element of choice was an indirect characteristic of a public service contract, and that the fact that the entity had left a choice to third parties could not prevent the contract from qualifying as a public contract. Nevertheless, doubt remained.

In light of this, the OLG Düsseldorf felt that it was appropriate to ask the CJEU whether the concept of a ‘public contract’ under Article 1(2)(a) of Directive 2004/18/EC still applied if a contracting authority carried out an authorisation procedure in which it awarded the contract without selecting one or more economic operators (‘openhouse model’)?

The OLG Düsseldorf carried on articulating its thoughts. Assuming that the choice of one or more firms was sufficient to bring it within the scope of the Directive, then the question arose as to whether the contracting entity might still legitimately decline to make a choice between one or more firms by virtue of the fact that it had organised an authorisation procedure and had stipulated various conditions in the notice.

On this point, the OLG Düsseldorf thought that this might be sufficient – providing that the contracting entity’s authorisation procedure complied with the EU’s legal principles of transparency, non-discrimination and equal treatment. And in that respect, the OLG Düsseldorf could see nothing untoward in DAK-Gesundheit’s procedure and notice. It was clear that the entity could conclude a contract with any company during the period. No companies were excluded. Moreover, those companies which arrived at the start of the contracting period exercised no influence on any of the terms which might be negotiated with other companies that contracted to supply the contracting entity later on in time but prior to the end of the procurement period. Nevertheless, the OLG Düsseldorf decided to ask a question about this too.

Questions Referred
According to the Curia website, the OLG Düsseldorf has asked:

1. Does the concept of a ‘public contract’ under Article 1(2)(a) of Directive 2004/18/EC no longer apply if a contracting authority carries out an authorisation procedure in which it awards the contract without selecting one or more economic operators (‘openhouse model’)?

2. If the answer to question 1 is that the selection of one or more economic operators is a characteristic of a public contract, the following question arises: is the characteristic of the selection of economic operators within the meaning of Article 1(2)(a) of Directive 2004/18/EC to be interpreted, in the light of Article 2 of that directive, as meaning that contracting authorities may refrain from selecting one or more economic operators by way of an authorisation procedure only if the following conditions are satisfied:
– the carrying out of an authorisation procedure is published at European level,
– clear rules concerning the conclusion of the contract and acceding to the contract are set,
– the terms of the contract are set in advance in such a way that no economic operator is able to influence the content of the contract,
– economic operators are granted the right to accede to the contract at any time;
– the contracts concluded are published at European level?