Competition Law Constraints on Research in Germany, the Netherlands and England

In Chap. 4 we have seen that the research systems of Germany, the Netherlands and the UK differ in a variety of ways. The UK is a devolved state with four separate countries. England, which has been the focus of attention, is organised in a centralised and top-down fashion with strong elements of a liberal market economy. The UK’s research spending has been relatively stable and below 1.75 % of its GDP over the last ten years. The private sector provides less than 50 % of all research funding which, nevertheless, makes the sector the largest funder. Whilst the public sector is the second largest funder, as in the other two systems, the UK relies to a larger extent on foreign funding. HEIs are by far the most important public research organisations in regards to which England is, in comparison with the other two countries, most progressed on the path towards commercialisation.

The Netherlands are a centrally governed, yet consociational system. Research spending has gone down from 2004-2008, but steadily increased since and is now around 2 % of its GDP. The private sector is the largest research funder and conductor, followed by the public sector which contributes around a third of all research funding. Foreign and third sector spending plays a smaller role than in England, though together they still amount to around 15 %. While publicly funded research is mainly conducted by the 14 universities, there are also a variety of other research organisations including many collaborative organisations. The Netherlands have equally begun to introduce steps towards a more commercial system, but, as some interviewees expressed, they are some years behind England in this endeavour.

Research in Germany is characterised by a strong constitutional protection of academic freedom. As a federal republic, the states as well as the federal level play a role in devising research polices and providing research funding. Research spending is comparably high and has increased consistently over the last decade nearly meeting the 3 % target of the Europe 2020 Strategy. With about two thirds of funding coming from the private sector, the private sector is by far the biggest contributor of funding most of which is, however, also used for research conducted by the private sector. Publicly funded research is undertaken in four major non- HEI research organisations with clearly defined tasks and in HEIs. While these are still significantly publicly funded, first steps towards commodification have recently been introduced.

In Germany and the Netherlands, a large amount of public funding for HEIs is still provided generically without recourse to competitive factors such as performance or focus on government priorities. As generic HEI funding is a state competence in the former it differs between states to what extent performance indicators are used. In the Netherlands, consecutive governments have tried to make generic research funding allocation more reliant on performance indicators which, however, has continually met with resistance by the universities. In England generic funding allocation is conducted competitively on the basis of the REF (Research Excellence Framework) which systematically measures research quality, impact and environment. In all three systems non-generic funding (public as well as non-public) has increasingly gained in importance. While all three countries offer open public competitive funding, themed calls and priority areas have started to play a significant role and non-public funding is dependent on the intentions of the funder. The increase of such funding methods might thus pose a threat for purely curiosity driven research and academic freedom. Due to increasing non-public funding and requirements in the EU Framework Programme 7,[1] all three countries have begun to introduce full costing methods. While this is well developed in England where TRAC fEC[2] has been systematically introduced, the introduction has taken place later in the Netherlands and every university has found its own system. In Germany many universities still do not seem have real full cost methodologies and are using overhead rates instead. Despite the differences regarding the introduction of full cost methods, universities in all three systems seem to struggle to actually receive funding at full cost levels from many funders.

As reported in Chap. 5, the attitudes of the interviewed experts (officers working on funding, policy and legal aspects of HEI research) towards the current state of the research systems in the three countries differed. While the interviewees in England generally seemed to be sympathetic to the idea that publicly funded research needs to be justified as to its use for society, it was expressed that current policy with shrinking public funding, its focus on impact and priority areas and concentration of funding might be taking this too far and that especially academics perceived this as creating unnecessary administrative hurdles and causing tensions with academic freedom. The interviewees in the Netherlands equally felt that public funding was shrinking and increasingly concentrated on certain areas and research with impact. This was regarded as causing tensions with academic freedom and limit basic research unduly. Interviewees in Germany generally saw the research funding situation more positively, as investments are high. However, some regarded the increasing importance of steering calls as problematic when it comes to academic freedom and it was felt that universities are suffering from a mission overload which could ultimately lead to less innovation, the extinction of certain subjects and a separation between teaching and research, despite these developments contradicting strongly how universities are traditionally conceived in the country. Many also felt that the growing importance of non-generic funding combined with the fact that such funding is mostly not provided at full costs levels, financially punishes successful institutions. In all three countries it was expected that the tendency towards more economic approaches in research funding would continue.

The awareness of competition law as a potential constraint for HEIs also differed in the three countries under scrutiny (Chap. 5 Sects. 5.3.1, 5.4.1 and 5.5.1 respectively). While the awareness of the interviewees in Germany seemed to focus on the necessity to implement full costing methodologies according to the previous Research Framework,[3] the Dutch interviewees and the relevant legislation (Chap. 4 Sect. presented a broader awareness of potential competition law issues. The English interviewees, on the other hand, seemed less aware of competition law themselves, but the policies followed seemed to have taken many aspects of potential issues into consideration. This seems to correspond with the fact that England has a more commercialised top down system which might have required certain adaptations earlier while not necessarily communicating the reasons to staff in research offices. The Netherlands, being a consociational system with a medium degree of commodification, are increasingly considering competition law involving these legal aspects into the research offices. Germany, which only took first steps towards commercialisation of HEI research, is only coming to grips with the competition law implications. Thus far this is limited to the most pressing concern of full cost calculation of which the research officers were, however, very aware, drawing the distinction between economic and non-economic activities independently.

From a competition law perspective research conducted freely financed from generic public funding in all three systems would probably not fall under EU competition law as it constitutes ‘independent R&D for more knowledge and better understanding’ and it is difficult to imagine how this could be replicated under market conditions. Competitive public calls equally would probably not amount to an economic activity if they are completely open or just establishing a broad area of research. According to the interviewees, this appears to be the case for most public calls. However, there also appear to be calls in all systems which are very specific, essentially prescribing a service for which a provider is sought and which could be commissioned under market conditions. The latter could amount to economic activity and partly such research is also officially procured. A similar distinction would need to be drawn for third sector funding or private philanthropical contributions.

The forms of private sector collaboration are quite similar in the three systems. Some research funded by the private sector, such as contract research or renting out infrastructures, would have to be regarded as economic in nature. With other forms of private sector collaboration such as research co-operations, private funding of academic staff or Ph.D. researchers the lines are less clear cut and the distinction would have to be made on a case by case basis by asking if the research is amounting to a service which could be conducted under market conditions rather than as what it is labelled.[4] As regards the knowledge exploitation, the Commission in the Research Framework (para 19(b)) states that it will consider this as non-economic if handled by, with or on behalf of a research organisation (here HEI) and all income is reinvested. As we have seen in Chap. 3 (Sect. the combined reading of para 19(b) and the definition of ‘knowledge transfer’ in para 15(v) is somewhat confusing and could potentially be understood as taking a vast amount of knowledge exchange out of the scope of competition law. As has been argued,[5] case law, other Commission documents[6] and the general conception of competition would indicate a narrower reading, however, including as noneconomic activities only transferred knowledge that has resulted from non-economic research, is exploited non-exclusively by with or on behalf of the research organisation and the profits of which are reinvested. Thus this would in particular mean that the exploitation of IPRs, including by own spin-offs, resulting from non-economic research would be non-economic in nature under these conditions, while a consultancy contract conducted on request of an undertaking is not. In any case, exploitation that is not conducted by, with or on behalf of the HEI and where profits are not entirely reinvested, for example, in cases where venture capital firms are brought on-board, is economic in nature.

Whilst the advanced full costing systems in England and the Netherlands themselves do not pose competition law issues, the overhead rates used in Germany could potentially cause constraints, if they did not separate accounts and capture the actual full costs and thus left room for state aid through cross-subsidy and for predatory pricing. Furthermore, exchange about costing systems, depending on what information is being exchanged or commonly set rates, might be regarded as price fixing. More importantly, universities in all three systems do not necessarily appear to be charging full costs plus profit in areas of economic activity which (in the absence of market prices for that activity) could constitute state aid. The new Research Framework, alternatively, allows to charge the maximum economic benefit achievable which at least covers marginal costs. This may cover some of these cases. However, even then it is required that research organisations negotiate at arm length and make an effort to gain the maximum economic benefit rather than just submitting to the funders demands as appears to be partly the case. In particular, it was often mentioned that academics would too easily submit to such demands by companies as they are not necessarily aware of the implications. It has also been mentioned in England that some universities[7] would consciously try to undercut prices to gain research contracts to the detriment of others (universities or other research providers) which are unable or unwilling to do so which thus could be regarded as predatory pricing if the universities are dominant.

While the exclusion of partners from economic forms of collaboration might be regarded as anti-competitive, there were generally no signs of this in the three systems except for ethical considerations or funders rules. In Germany, there seemed to be rather extensive governmental consultation of stakeholders when it comes to determining research agendas which one might wonder if could be anti-competitive. In the other two countries lobbying research funders or policy makers also seemed to take place, but to a less organised extent. The universities in all three countries do not seem to impose any economically unjustified contract conditions on partners, except perhaps for the requirement to allow publication. The latter, if it was to be regarded as anti-competitive at all, could probably be exempted, in particular since EU research policy (e.g. in the Research Framework) regularly requires wide dissemination. As regards IPR exploitation the universities in all three systems generally do not seem to act anti-competitively. Occasionally, conditions such as anti-shelving clauses or the limitation of sublicensing could be regarded as unduly limiting the companies behaviour and thus as anti-competitive or subsidies to companies willing to exploit university IPRs might be regarded as state aid. However, it might be assumed that at least the former could potentially be exempted, if one considers the general aim of research policy at national and EU levels to actually bring research to the users. When it comes to the exploitation of IPRs generated as part of a co-operation, the Research Framework determines that compensation at market price levels has to be paid for all IPRs which are retained by the private sector partner[8] which generally seems to be the case in the universities under scrutiny.

In England one interviewee mentioned that the topic of an envisaged cooperation was to increase the market share of a certain company. In this respect one might wonder if the topic as such makes this co-operation anti-competitive, as it could be regarded as selectively conveying an advantage on an undertaking from state resources at least if there was no compensation. In Germany and the Netherlands, on the other hand, there were signs for potential market division. While division of the subject market in Germany might not actually amount to an agreement or concerted practice under Article 101(1) TFEU, market division seems rather common in the Netherlands and is officially supported by the government which might become problematic. Problems might occur in all systems if the Altmark criteria or the rules laid down in the Research Framework are not adhered to when the state is commissioning economic research. As the eligibility criteria appear to differ between calls and funders, this would need to be assessed on a case by case basis. Finally, if advantages are being given to companies through staff knowledge, in particular IPR creation, favourable contract conditions given to staff owning companies or Ph.D. students essentially conducting a study for the private sector, this could potentially be regarded as anti-competitive, if economic in nature. In Germany protection against this appeared to be highest by, in particular, prescribing that any IPRs created in such a relationship would belong to the universities, whilst in England especially certain externally funded Ph.D. studies seemed questionable. Overall, there are thus areas in the three systems where spillover from EU competition and state aid law may occur.

In cases of potential infringements, there is still the possibility of exemption according to Articles 101(3), 107(2) and (3) and 106(2) TFEU and the relevant secondary legislation. The assessment of this would have to be made on a case by case basis. As regards potential infringements of Article 101(1) TFEU, especially the Technology Transfer, Research and Development and Specialisation Block Exemption Regulation can be considered, if the market share thresholds are not met and the infringements do not fall under the excluded hardcore restrictions. When it comes to potential infringements of state aid law, generally, many smaller projects in Germany and the Netherlands and most projects in England (as the funding levels are lower), might be able to benefit from exemptions/exclusions such as the de minimis rules, the GBER[9] or the SGEI Decision.[10] However, in the case of the general[11] or SGEI de minimis rule,[12] the aid to one undertaking must not accumulate above the thresholds of €200,000 and €500,000 respectively over any period of three fiscal years. As regards the GBER the relevant conditions have to be fulfilled; in particular the corresponding aid intensities have to be adhered to and rules on transparency followed. The latter might make it unlikely that hidden aid through inappropriate costing can be exempted. For an exemption of aid under the SGEI Decision and the SGEI de minimis rule as well as for an exemption under Article 106(2) TFEU generally, the projects would have to be classified as providing SGEIs. For this, in addition to a general interest, there would need to be an entrustment act. While there is legislation making research a statutory task in Germany and the Netherlands, this legislation might be too general to fulfil the requirements for entrustment acts set out by the Commission.[13] In all three countries, entrustment acts might be seen in the actual call or agreement if the funder is a public sector institution. However, overall, the exemptions might not capture every situation and, in any case, might make the conduct of HEIs increasingly complicated from a legal/administrative perspective.[14]

  • [1] Decision 1982/2006/EC concerning the Seventh Framework Programme of the EuropeanCommunity for research, technological development and demonstration activities (2007-2013)OJ [2006] L 412/01.
  • [2] The full costing element of the centrally introduced Transparent Approach to Costing (seeChap. 4 Sect.
  • [3] Community framework for state aid for research and development and innovation OJ [2006]C 323/01.
  • [4] The Issue Paper (European Commission 2012) makes this particularly clear by pointing outthat mere labelling of an activity as collaborative research does not necessarily make this noneconomic in nature.
  • [5] Chapter 3 Sects. and above.
  • [6] E.g. European Commission 2012.
  • [7] This has been remarked about competitors rather than the universities under scrutinythemselves.
  • [8] The private sector partner could also pay for the entire collaboration or receive IPRs reflectingthe work packages conducted by the private sectors partner.
  • [9] Commission Regulation 651/2014/EU declaring certain categories of aid compatible with theinternal market in application of Articles 107 and 108 of the Treaty (General Block ExemptionRegulation) OJ [2014] L 187/1.
  • [10] Commission Decision 2012/21/EU on the application of Article 106(2) of the Treaty on theFunctioning of the European Union to State aid in the form of public service compensationgranted to certain undertakings entrusted with the operation of services of general economicinterest OJ [2012] L 7/3.
  • [11] Commission Regulation 1407/2013/EU on the application of Articles 107 and 108 of theTreaty on the Functioning of the European Union to de minimis aid’ OJ [2013] L 352/1.
  • [12] Regulation 360/2012/EU on the application of Articles 107 and 108 of the Treaty on theFunctioning of the European Union to de minimis aid granted to undertakings providing servicesof general economic interest OJ [2012] L 114/12.
  • [13] See, for example Article 4 of Decision 2012/21/EU. See also the secondary legislationreferred to in Chap. 3 Sect. 3.3.5 text surrounding n 275-279.
  • [14] This is exemplified by, for example, compliance in the form of beginnings to introduce fullcosting and separate accounting in Germany in line with the previous Research Frameworkdespite this being difficult to be combined with public accounting in that country.
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