Applying the Market Economy Investor Principle to softaware licensing agreements

On 12.6.2014, the General Court (“GC”) ruled on an action for annulment of a Commission decision in which it had found that a software licensing agreement between the Dutch Technische Universiteit Delft (“TUD”) and the company Delftship BV (“DS”) involved no aid. In Case T-488/11, the GC adhered to the Commission’s findings of 2011 and dismissed the complaint lodged by Sarc,a Dutch company developing and marketing software for ship design, and DS’s competitor.

According to Sarc, the software licensing agreement concerning the exploitation by DS of the source code of the software for ship design called “Delftship”, which had been created and developed by an engineer and a TUD lecturer who founded DS after leaving their posts at TUD, was entered on favourable conditions amounting to aid. On 10.5.2011, after a preliminary examination, in Decision C(2011) 642 final relating to the State Aid Proceedings NN 68/2010, the Commission declared that the said agreement did not constitute aid as it did not grant DS an advantage within the meaning of Article 107(1) TFEU. In particular, TUD complied with the MEIP.

As the Commission observed, the Delftship software had been developed by TUD between 1997 and October 2006 and it had been used by the students and employees of TUD for teaching and research purposes. In June 2006, the engineer who had developed that software announced that he was leaving TUD. TUD considered that it did not have the means to continue developing that software on its own. Thus, it began to negotiate a licence agreement with the future founders of DS. On 31.10.2006, the software’s source code was frozen. On 1.11.2006, the engineer who had developed the software left TUD. On 22.1.2007, TUD and DS concluded a licence agreement for the general, exclusive and non-transferable exploitation of the Delftship software source code. Under that agreement, DS was required, inter alia, to develop the software, to provide TUD with updated versions free of cost and to pay TUD an annual royalty equivalent to 5% of the annual turnover generated by the sale of sub-licences for the use of the software.

As the Commission established, the provisions laid down in the Community framework for State aid for research and development and innovation of 2006, (the RDI Framework), were not of direct application in the present case. Having assessed the allegedly favourable conditions on which the licence agreement was entered, the Commission noted that the different stages of the negotiations which led to its conclusion showed that TUD had managed to improve its contractual position. It had taken several factors into consideration, inter alia, the experience of the engineer who developed the Delftship software. In the Commission’s view, the rate of the royalties paid under the licence agreement was a market price. In this respect, the three valuations provided by Sarc were not conclusive. They reached different conclusions regarding the value of the software and were unfounded.

Having considered and clarified certain issues concerning admissibility and procedural rights of the interested parties, the GC ruled on the substance and  confirmed the findings of the Commission. In particular, the Commission was entitled to conclude from its assessment of the conduct and outcome of negotiations between the parties that the agreement was entered on market terms. Thus, TUD met the MEIP. This ruled out the presence of aid.

The Delftship software is an interesting example of applying the MEIP to an agreement between a public educational institution and a private undertaking whose object was compensation for intellectual property rights. In this respect, one may draw special attention to the problem of absence of a tender procedure or an independent expert valuation prior to the conclusion of the said agreement. As rightly noted by Sarc, both methods of establishing the market price are provided in the XXIII Report on the Competition Policy of 1993, the Communication on State aid elements in sales of land and buildings by public authorities of 1997 and the RDI Framework of 2006. As the GC ruled, however, those methods were not binding upon the Commission in the present case.

In this respect, one should recall that, as provided in Seydaland of 2010, absence of a tender procedure and an ex ante expert evaluation does not automatically amount to aid. Although one may entertain doubts as to whether the agreement was aid-free given the fact that it was subject to exclusive negotiations between TUD and DS, the Commission rightly concluded that given the skills acquired by the founders of DS in the development of the Delftship software, DS was best qualified to continue developing that software and to adapt it to TUD’s needs. Importantly, the royalty rates paid by DS were market-oriented, which ruled out the presence of aid.

As one may note, the Delftship software to some extent resembles Konsum Nord of 2011 as regards the issue of only one suitable or qualified private contractor. In that case, the sale of land owned by the Municipality of Åre to Konsum was a part of larger property transaction envisaged in Åre’s master development plan. This transaction involved the sale of land owned by Konsum to Åre. Both cases are thus an example of a rather atypical Private Vendor Test, a subtype of the MEIP.