Public procurement and [AI] source code transparency, a (downstream) competition issue (re C-796/18)

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Two years ago, in its Judgment of 28 May 2020 in case C-796/18, Informatikgesellschaft für Software-Entwicklung, EU:C:2020:395 (the ‘ISE case’), the Court of Justice of the European Union (CJEU) answered a preliminary ruling that can have very significant impacts in the artificial intelligence (AI) space, despite it being concerned with ‘old school’ software. More generally, the ISE case set the requirements to ensure that a contracting authority does not artificially distort competition for public contracts concerning (downstream) software services generally, and I argue AI services in particular.

The case risks going unnoticed because it concerned a relatively under-discussed form of self-organisation by the public administration that is exempted from the procurement rules (i.e. public-public cooperation; on that dimension of the case, see W Janssen, ‘Article 12’ in R Caranta and A Sanchez-Graells, European Public Procurement. Commentary on Directive 2014/24/EU (EE 2021) 12.57 and ff). It is thus worth revisiting the case and considering how it squares with regulatory developments concerning the procurement of AI, such as the development of standard clauses under the auspices of the European Commission.

The relevant part of the ISE case

In the ISE case, one of the issues at stake concerned whether a contracting authority would be putting an economic operator (i.e. the software developer) in a position of advantage vis-à-vis its competitors by accepting the transfer of software free of charge from another contracting authority, conditional on undertaking to further develop that software and to share (also free of charge) those developments of the software with the entity from which it had received it.

The argument would be that by simply accepting the software, the receiving contracting authority would be advantaging the software publisher because ‘in practice, the contracts for the adaptation, maintenance and development of the base software are reserved exclusively for the software publisher since its development requires not only the source code for the software but also other knowledge relating to the development of the source code’ (C-796/18, para 73).

This is an important issue because it primarily concerns how to deal with incumbency (and IP) advantages in software-related procurement. The CJEU, in the context of the exemption for public-public cooperation regulated in Article 12 of Directive 2014/24/EU, established that

in order to ensure compliance with the principles of public procurement set out in Article 18 of Directive 2014/24 … first [the collaborating contracting authorities must] have the source code for the … software, second, that, in the event that they organise a public procurement procedure for the maintenance, adaptation or development of that software, those contracting authorities communicate that source code to potential candidates and tenderers and, third, that access to that source code is in itself a sufficient guarantee that economic operators interested in the award of the contract in question are treated in a transparent manner, equally and without discrimination (para 75).

Functionally, in my opinion, there is no reason to limit that three-pronged test to the specific context of public-public cooperation and, in my view, the CJEU position is generalisable as the relevant test to ensure that there is no artificial narrowing of competition in the tendering of software contracts due to incumbency advantage.

Implications of the ISE case

What this means is that, functionally, contracting authorities are under an obligation to ensure that they have access and dissemination rights over the source code, at the very least for the purposes of re-tendering the contract, or tendering ancillary contracts. More generally, they also need to have a sufficient understanding of the software — or technical documentation enabling that knowledge — so that they can share it with potential tenderers and in that manner ensure that competition is not artificially distorted.

All of this is of high relevance and importance in the context of emerging practices of AI procurement. The debates around AI transparency are in large part driven by issues of commercial opacity/protection of business secrets, in particular of the source code, which both makes it difficult to justify the deployment of the AI in the public sector (for, let’s call them, due process and governance reasons demanding explainability) and also to manage its procurement and its propagation within the public sector (e.g. as a result of initiatives such as ‘buy once, use many times’ or collaborative and joint approaches to the procurement of AI, which are seen as strategically significant).

While there is a movement towards requiring source code transparency (e.g. but not necessarily by using open source solutions), this is not at all mainstreamed in policy-making. For example, the pilot UK algorithmic transparency standard does not mention source code. Short of future rules demanding source code transparency, which seem unlikely (see e.g. the approach in the proposed EU AI Act, Art 70), this issue will remain one for contractual regulation and negotiations. And contracts are likely to follow the approach of the general rules.

For example, in the proposal for standard contractual clauses for the procurement of AI by public organisations being developed under the auspices of the European Commission and on the basis of the experience of the City of Amsterdam, access to source code is presented as an optional contractual requirement on transparency (Art 6):

<optional> Without prejudice to Article 4, the obligations referred to in article 6.2 and article 6.3 [on assistance to explain an AI-generated decision] include the source code of the AI System, the technical specifications used in developing the AI System, the Data Sets, technical information on how the Data Sets used in developing the AI System were obtained and edited, information on the method of development used and the development process undertaken, substantiation of the choice for a particular model and its parameters, and information on the performance of the AI System.

For the reasons above, I would argue that a clause such as that one is not at all voluntary, but a basic requirement in the procurement of AI if the contracting authority is to be able to legally discharge its obligations under EU public procurement law going forward. And given the uncertainty on the future development, integration or replacement of AI solutions at the time of procuring them, this seems an unavoidable issue in all cases of AI procurement.

Let’s see if the CJEU is confronted with a similar issue, or the need to ascertain the value of access to data as ‘pecuniary interest’ (which I think, on the basis of a different part of the ISE case, is clearly to be answered in the positive) any time soon.

Mixed views on General Court decision concerning claim of 'artificial narrowing of competition' through too strict procurement selection requirements (T-668/15)

In its Judgment of 10 November 2017 in Jema Energy v Entreprise, T-668/15, EU:T:2017:796 (only available in Spanish and French), the General Court of the Court of Justice of the European Union (GC) engaged with a claim that, by setting exceedingly demanding qualitative selection criteria, the contracting authority had artificially narrowed down competition. I find this case very interesting because I expect this type of argument to be increasingly used in procurement challenges as a result of the consolidation of the principle of competition in Article 18(1) of Directive 2014/24/EU [for my interpretation, see A Sanchez-Graells, Public Procurement and the EU Competition Rules, 2nd edn (Oxford, Hart, 2015) ch 5]. Even if Jema Energy v Entreprise was decided on the basis of the Implementing Rules of the Financial Regulation applicable to procurement by Fusion for Energy, given that the GC explicitly considered Art 18(1) Dir 2014/24/EU, I think that the Judgment offers valuable pointers as to how the case law may develop in this area.

The case at hand concerned a tender for the design, manufacture, supply and installation of electrical equipment where the contracting authority established qualitative selection criteria concerned with previous experience that required tenderers to demonstrate previous delivery of specific types of equipment in the 5 years prior to the tender. A tenderer requested repeated clarifications on the requirements and prompted the contracting authority to change the requirements. The contracting authority replied that it did not appreciate the presence of objective circumstances requiring such changed. Eventually, the tenderer was rejected for not meeting the requirements and the decision was challenged. One of the grounds for the challenge was based on a breach of the principle of proportionality and on the 'artificial narrowing of competition'. I will concentrate on this ground of appeal (paras 67-109 of the Judgment).

It is interesting that the third ground of appeal treated separately claims on the basis of the principle of proportionality (supported by reference to the Commission's Guidance for practitioners on the avoidance of the most common errors in projects funded by the European Structural and Investment Funds) and on the artificial narrowing of competition (which was build by reference to Art 18 Dir 2014/24/EU). After making reference to the broad discretion of contracting authorities in the design of the tender procedure, including the choice of qualitative selection criteria and their form of assessment, and the subjection of the exercise of that discretion to compliance with general principles of EU law (paras 73-74), the GC assessed each claim separately.

The proportionality analysis is very formal and mostly relies on the lack of supporting evidence for some of the technical claims against the proportionality of the qualitative selection criteria. It is also disappointing that the GC decided not to engage with the arguments based on the functional criteria included in the Commission's guidance for ESI-funded procurement on the basis that this specific project did not concern those funds, which misses the opportunity of both identifying whether the guide includes best practice recommendations and, if so, to rely on them for the development of more detailed case law on the application of the principle of proportionality to discretionary decisions of the contracting authority. Granted, such engagement may not have been necessary to decide the case at hand, but this flat-out rejection of the substantive argument comes to diminish the value of soft law efforts oriented to the creation of best practice standards--which is the only type of guidance the Commission seems willing to adopt these days.

Going back to the case... the GC's analysis of the claim of artificial narrowing down of competition is very interesting because, even if the GC equally rejected to engage in a direct consideration of Art 18(1) Dir 2014/24/EU on the basis that it was not applicable ratione temporis (86-88), and given that this prompted the claimant to request for the argument to be assessed on the basis of Directive 2004/18/EC, the GC was willing to establish that

It should be noted that Directive 2004/18 did not contain a provision similar to Article 18, paragraph 1, second paragraph, of Directive 2014/24 [prohibiting a contracting authority from designing the tender with the intention of artificially narrowing competition by unduly favoring or disadvantaging certain undertakings]. Indeed, Article 2 of Directive 2004/18 referred, as does Article 18 of Directive 2014/24, to the principles of awarding contracts, namely the principles of equal treatment, non-discrimination and transparency, without explicitly referring to the prohibition of artificially restricting competition. However, Article 2 of Directive 2004/18 must be interpreted in the light of the recitals in the preamble thereto, and in particular in recital 2, which provides for effective competition in public contracts, as well as in light of the case-law according to which effective competition and the opening to undistorted competition are essential objectives of Directive 2004/18 and in particular of its Article 2, for which attainment Union law applies in particular the principle of equal treatment between tenderers or candidates and the obligation of transparency that results from it (see, in this regard, the judgment of 17 March 2011, Strong Segurança, C-95/10, EU:C:2011:161, paragraph 37, see also, in in this sense, the judgments of March 29, 2012, SAG ELV Slovensko and others, C-599/10, EU:C:2012:191, paragraph 25 and the case law cited therein, and of October 10, 2013, Manova, C- 336/12, EU:C:2013:647, paragraph 28 (T-668/15, para 91, emphasis added, own translation from Spanish).

This starting position allowed the GC to carry on with the assessment of whether (even if proportionate) very demanding qualitative selection criteria could be in breach of the EU procurement rules due to the ensuing artificial narrowing of competition. In particular, the analysis concentrated on the requirements derived from general principles of EU law and, in that regard, the GC further considered that

... the principle of equal treatment between tenderers, which aims to encourage the development of healthy and effective competition between undertakings participating in a public tender, requires that all bidders have the same opportunities in formulating the terms of their offers and implies that they are subject to the same conditions for all competitors.

In addition, the courts of the Union have stated that one of the objectives of the Union rules on public contracts is to open them up to the widest possible competition and that it is in the interest of Union law to ensure the broadest participation possible of bidders in a tendering procedure. It should be added, in this respect, that such an opening to the widest possible competition is contemplated not only in relation to the Union interest in the free movement of goods and services, but also in the self-interest of the contracting authority involved, which will thus have greater choice in terms of the most advantageous offer and the best adapted to the needs of the public entity concerned (judgment of 10 November 2015, GSA and SGI / Parliament, T-321/15, unpublished, EU:T:2015:834, paragraph 58, see also, in this regard, the judgments of December 23, 2009, CoNISMA, C-305/08, EU:C:2009:807, paragraph 37 and case law cited, and of June 18, 2015, Martin Meat, C-586/13, EU:C:2015:405).

It follows that an obligation for the contracting authority not to artificially restrict competition can be deduced from the general principles of law to which the [contracting authority] is subject, and especially from the principle of equal treatment (T-668/15, paras 101-103, emphasis added, own translation from Spanish).

I find this point of departure extremely interesting and I think it comes to confirm my long-held view that the 2004 procurement rules already included an embedded principle of competition, which the rest of the general principles seek to give effectiveness to [see A Sanchez-Graells, Public Procurement and the EU Competition Rules, 1st edn [Oxford, Hart, 2011] ch 5]. I also think that it provides the right framework for the assessment of the competition implications of the requirement of demanding qualitative selection criteria.

However, in the operationalisation of the test to check whether such obligation not to artificially narrow down competition had been respected, I find some fault in the approach followed by the GC in Jema Energy v Entreprise because it is limited to the specific requirements of the principles of proportionality, transparency and non-discrimination, without any sign of competition-orientedness. In that regard, I find it disappointing that the GC decided that, in the case at hand, the selection criteria were not contrary to the obligation not to artificially narrow competition because: (i) the demanding criteria were objectively justified and did not favour or disadvantage any undertaking or impair the ability of the contracting authority to choose the most advantageous offer (para 105); (ii) they had been subjected to proper transparency requirements (para 106); (iii) the time period of allowed references on previous experience had been extended from the minimum 3 years to 5 years prior to the tender (para 107); and (iv) the fact that 3 out of 5 tenderers were able to meet the selection criteria is a sign that competition was not restricted (para 108).

I think that the tests applied by the GC do not add any meaningful competition check. First, because proportionate is different than competition-neutral. Second, because transparency is irrelevant (whereas its lack may be relevant). Third, because extending time periods is also irrelevant if the material content of the requirement is limiting competition. And fourth, because finding that competition was not restricted because a majority of tenderers that expressed interest managed to qualify falls in the trap of tender-specific reasoning and ignores the possibility that many undertakings were dissuaded from participating in view of the (potentially) exceedingly demanding qualitative selection requirements.

Thus, my view of the GC Jema Energy v Entreprise Judgment is mixed. On the one hand, I think it is good news that the existence of the principle of competition and the ensuing prohibition of artificially narrowing competition constitute an uncontroversial grounds for the review of procurement decisions--even where Art 18(1) Dir 2014/24/EU does not apply, as a consequence of the competition-orientedness of the applicable general principles. However, it is also clear to me that more work is necessary for this test to be developed in a way that adds to the standard analysis under those general principles, so that the obligation is not rendered moot. This is something I am currently working on, and which I will build on the basis of the preliminary ideas I presented at Oxford recently. I will keep readers of the blog posted.