Worldwide: Global Procurement Quarterly - Winter 2015

PROTECTION OF SECURITY RELEVANT INFORMATION VS. ENHANCEMENT OF GLOBAL COMPETITION – GERMANY'S "NO SPY DECREE" FOR PUBLIC TENDERS UNDER CONTINUOUS SCRUTINY

By Felix Helmstädter, Christoph Nüßing, and Susan Borschel

Introduction

In Spring 2014, the German Federal Ministry of the Interior ("BMI") issued a decree directed to its awarding authority that quickly became known as the "No Spy Decree." The Decree is intended to prevent vendors from disclosing, to the benefit of foreign security agencies or intelligence bodies, security-relevant information gathered when carrying out contracts concluded with German public authorities. Nevertheless, the Decree could impede competition because the measures required to prevent disclosure of security-relevant information will be difficult to meet for non-domestic bidders and for German bidders that are wholly owned, or controlled, by a foreign parent or that have other affiliated companies incorporated under a foreign jurisdiction.

The Decree, and respective administrative orders that are issued at the regional level, provide requirements that public authorities are required to incorporate into solicitation conditions for all security-relevant contracts. As a result, companies that are required to provide access, or disclose information, to foreign intelligence agencies cannot participate in or can be excluded from ongoing procurement procedures. Furthermore, those companies could lose contracts that have been signed and include language from the Decree. Due to the Decree's intrinsic interference with the general principles of non-discrimination and competitiveness, unspecified language used, and its substantial impact on the ability to participate in contract tender proceedings, the Decree is still the subject of strong criticism and a challenge for bidders that are part of a group of multinational companies.

Scope

The No Spy Decree was issued by the German Federal Ministry of the Interior, amongst others, as a reaction to information leaked in 2013 indicating that foreign governments were employing various surveillance measures with regard to German politicians and German government officials. The surveillance measures resulted in the foreign governments' collection of security-relevant data.

The Decree only applies to service and works contracts that have a security-relevant scope or require the service provider to access confidential information. Additional guidelines published by BMI in August 2014 clarify that the application of the Decree to a contract must be assessed in each individual procurement. Although it may be obvious that most information technology (IT) and telecommunications contracts are security-relevant, other projects, including construction or specific consultancy contracts, may also involve security-relevant information and may be subject to the Decree. For example, consultancy contracts may necessitate access to security-relevant information because consultants will be required to establish and maintain a close relationship with German Government officials and public officers.

Instruments and sanctions

In cases where the awarding authority considers a contract to be of specific security-relevance, the authority must oblige bidders to certify that they (i) are able to maintain the secrecy of confidential information disclosed to them under the contract and (ii) are not obligated to disclose, or provide access to, such confidential information to foreign intelligence agencies (non-disclosure certification requirement).

Bidders that do not sign the certification or that cannot prove that they are not and will not become subject to an obligation to disclose the confidential information must be excluded from consideration for a contract in the applicable tender. In addition, the contracts that are subject to the Decree include language requiring each respective company that received the contract award to inform the contracting entity of any changes to its ability to maintain confidentiality. In such a scenario, the contracting authority is allowed to terminate the relevant contract. Exclusion from the tender procedure or termination of a company's existing contract are justified as soon as the authority can prove that the vendor is obliged to disclose confidential information in accordance with the company's duty under foreign law.

In addition to being excluded from the tender procedure and having its contract terminated, a company's noncompliance with the Decree may be considered fraud in situations where the company intentionally submitted false declarations. Furthermore, the awarding authority or a bidder who lost the competitive tender could claim civil damages as a result of another company's non-compliance with the Decree.

Re-interpretation following court decision

Only two months after its issuance, the Decree was brought before a court in a bid protest proceeding. A bidder who lost a competitive tender to a German subsidiary of a U.S. company applied for a decision by the Federal German Government's Procurement Chamber. The applicant argued that the winning bidder did not comply with the No Spy Decree and that the awarding authority had to take this non-compliance into account when evaluating the winning bidder's qualifications under the eligibility test, which has to be considered by the authorities awarding a contract.

The chamber rejected the application stating – inter alia – that, when evaluating a bidder's qualifications with regard to its eligibility, authorities are only allowed to consider personal or company-related aspects that the bidder can actually influence. This is not the case with regard to the factors relevant for compliance with the No Spy Decree. The Decree's requirements relate to obligations set by, and facts that arise from, foreign governments and therefore cannot be influenced by the bidders. The chamber stressed, however, that the additional confidentiality requirements would comply with German public procurement law if they are applied as specific contractual obligations rather than conditions that the bidders have to meet (cf. Vergabekammer Bund, Decision of June 24, 2014, case no. VK 2-39/14).

As a result of the decision issued by the Procurement Chamber, in its August 2014 guidelines, BMI adjusted its understanding of how the Decree's rerequirements should be and implemented into tender proceedings. Despite the decision and resultant adjustment to the BMI guidelines, the substance of the Decree was not modified and still has to be applied by public authorities.

Obligations to disclose information

The No Spy Decree uses neutral language, and its requirements are designed to apply to domestic and nondomestic bidders equally. In practice, however, certain jurisdictions provide for a very broad set of instruments, enabling intelligence agencies to oblige companies to disclose information, even if the information is kept by an affiliated parent or subsidiary company based in Germany. In particular, under certain circumstances, U.S. companies can be ordered to disclose confidential information, even in cases where the information is stored outside of the United States and even for non-U.S. targets. For example, in certain circumstances, U.S. parent companies of German subsidiaries might be required, by the U.S. Federal Government, to force disclosure of confidential information held by their subsidiaries.

Counter-measures

While it is reported that the BMI is already assessing potential amendments to the No Spy Decree, it continues to be mandatory and must be taken into account by awarding authorities. There is currently no "best practice" approach that ensures legal compliance with the Decree. In any event, non-domestic companies that are subject to disclosure obligations to foreign government authorities will not be able to participate in opportunities and tenders subject to the Decree.

Nevertheless, according to the revised guidelines issued by BMI, structural measures may enable bidders to comply with the additional requirements. Therefore, participation by a company incorporated under German law could aid in the compliance with the Decree if the company takes additional measures to prevent disclosure of information to affiliated companies, such as a parent, affiliate, or subsidiary. Companies can also implement technical measures, including strengthening encryption, to inhibit any transmission of confidential information to the affiliated company.

To further restrict the flow of information between a German-based company and any U.S. affiliates, corporate bylaws can be used to prohibit disclosure of confidential information and prevent the U.S. affiliate from obtaining information from its German counterpart. From a German corporate law perspective, certain corporate forms could specifically serve the objective of prohibiting a German company from sharing information to a non-domestic parent company, which should be taken into consideration when assessing how to best comply with the No Spy Decree.

Conclusion

At least for now, all bidders have to cope with the content of the current version of the No Spy Decree that is being used in German procurement procedures for security-relevant contracts. Companies that are struggling to comply with the Decree can implement corporate structural measures. Restructuring measures should be carefully assessed and implemented, however, in order to truly lower the risk of violating the standards set by the Decree. A company should also consider, in each tender procedure, whether it could successfully challenge any tender requirement that is disproportionately restrictive and anti-competitive.

RWIND TENDERER TEST: OBJECTIVE OR SUBJECTIVE?

By Alistair Maughan and Sarah Wells

Most European legal systems have evolved a concept of a "reasonable man," used as a benchmark to assess reasonable behaviour in contractual or legal disputes. Famously, in English law, this standard is embodied in "the man on the Clapham omnibus," harking back to a Victorian era everyman.

But what standard of hypothetical moderate behaviour applies across Europe in the procurement context? Step forward, the "reasonably well-informed and diligent" ("RWIND") tenderer. The most senior UK court has now clarified that, what a RWIND tenderer ought to have understood about a public tender, and the authority's intent, is more important than what an actual tenderer did understand.

RWIND tenderer test

The RWIND tenderer test has been developed by courts in the EU to establish the standard of clarity required to satisfy the principle of transparency in EU procurement procedures.

There are a number of fundamental principles of EU law, including freedom of movement of goods, freedom to provide services and freedom of establishment. Further principles then derive from these, such as equal treatment, proportionality and transparency. The longstanding main EU procurement directive (Directive 2004/18/EC on the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts (currently in the process of being replaced by Directive 2014/24/EU; see http://media.mofo.com/files/Uploads/Images/140304-Global-Procurement-Quarterly.pdf)) makes it clear that, when awarding contracts, these principles should be followed, including ensuring "the necessary transparency to enable all tenderers to be reasonably informed of the criteria and arrangements which will be applied to identify the most economically advantageous tender."

The RWIND test itself, which effectively articulates these principles, was first referred to in an Irish Supreme Court case from 2001 – SIAC Construction Ltd v County Council of the County of Mayo, where, when there was a disagreement between the parties in interpreting the tender documents, the court stated that "the award criteria must be formulated in the contract documents or the contract notice, in such a way as to allow all reasonably well-informed and normally diligent tenderers to interpret them in the same way."

The RWIND principle was subsequently discussed in a number of cases but, until recently, it had not been formally decided whether this was an objective standard.

Healthcare at Home v the Common Services Agency

This case began in the UK in February 2010 when the Common Services Agency ("CSA") invited tenders for a framework agreement relating to services for dispensing and delivering a particular cancer drug. Healthcare at Home Limited ("HHA") was one of these tenderers but, in May 2010, was informed it had been unsuccessful and a competitor, BUPA, had been the successful tenderer. HHA alleged that the tender documents issued by the authority, CSA, had lacked clarity in relation to certain award sub-criteria, and that the reasons for rejection of HHA were unclear and lacking in details. Thus, HHA alleged that the CSA was in breach of the Public Contracts (Scotland) Regulations 2006.

After several appeals, the case reached the UK Supreme Court. One of the issues considered by the Supreme Court was whether the CSA had given HHA adequate reasons for rejection, but the primary issue at stake was whether the prior court (the Scottish Inner House) had been correct to base its decision on what a hypothetical RWIND tenderer would have done, rather than referencing witness evidence as to what an actual tenderer did or thought.

Supreme Court ruling

The Supreme Court held that the Inner House had been correct. Just as with the man on the Clapham omnibus, "the court decides what that person would think by making its own evaluation against the background circumstances. It does not hear evidence from a person offered up as a candidate for the role of reasonable tenderer. In a disputed case, the court will, no doubt, need to have explained to it certain technical terms and will have to be informed of some of the particular circumstances of the terms or industry in question, which should have been known to informed tenderers. However, evidence as to what the tenderers themselves thought the criteria required is, essentially, irrelevant."

In reaching its conclusion, the Supreme Court reviewed a number of EU cases in support of its decision that the RWIND tenderer test was clearly an objective one. This included the German case Lämmerzahl GmbH v Freie Hansestadt Bremen in which the Court of Justice of the European Union had to determine when a time limit for bringing proceedings began. In that case, the Advocate- General explicitly stated that the "court already applies an objective standard" in relation to the RWIND tenderer test, stressing that to do otherwise would go against legal certainty. A further case, EVN AG v Austria, highlighted that, to the extent a factual assessment is required, it is for the national court to determine, taking account of all the circumstances of the case – i.e., without requiring evidence as to the interpretation placed on the documents by actual or potential tenderers.

Conclusion

The UK Supreme Court decision has confirmed that the RWIND tenderer test is an objective legal standard to be applied in EU procurement decision-making by reference to a hypothetical tenderer. Courts across the EU will therefore be required to consider the facts of procurement complaints objectively, taking into account all the circumstances of the case. Witness evidence as to how and why a particular tenderer's interpretation differed from that of the contracting authority, although perhaps influential, will not therefore be determinative.

To read this Newsletter in full, please click here.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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