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The Impact of Free Software on competition

Do public administrations distort the market through the release of Free Software? An article by Prof. Dr. Simon Schlauri about the legal and economic arguments resulting from this question and originally written for our Public Money? Public Code - policy brochure.

Free Software is well established in the IT world. A significant number of companies, from SMEs to global corporations, invest considerable sums in the further development and use of Free Software. Public administrations now also regularly use Free Software. For example, for administration in municipalities, as a decision database for courts, or for the provision of geodata on the Internet1. The reasons for using Free Software in companies and public administrations are manifold, e.g. the openness of the standards used, the independence from suppliers and products, the exchange with the community of users and developers, security, as well as stability and possible cost savings.

The free availability of Free Software creates an ecosystem in which software developers, providers of complementary services (such as maintenance or support), and users are equally involved. Another important advantage of the Free Software model is the accelerated software development by users and developers, once the software code is made available to third parties.

It is debatable whether the release of software under a Free Software licence by the state could violate competition neutrality (i.e., the obligation of the state to treat competitors equally). In some countries the obligation of ensuring competition neutrality of the state’s actions is a constitutional principle. It may also arise from European law, for example from single market policy, or from public procurement or state aid law.

If the state itself enters a market and pursues commercial interests in the process, this is generally unproblematic from a competition neutrality perspective. By contrast, in most cases the consideration of other motives (public interest) leads to a distortion of markets and hence violates competition neutrality. In extreme cases, private activity is even completely displaced by public supply because the community subsid‐ izes its services with the use of state funds from the general budget. Vice versa, it can be argued that the more the state acts as a rational private competitor, the less the risk of distortion of competition.

Permissibility of making Free Software available by the state is dependent on whether, from the point of view of a private market participant, the release of Free Software would also be a viable business model, i.e. whether a private market participant, in a similar situation as the community, would also decide to release the source code under a Free Software licence2.

In addition, a recourse to subsidy law may be helpful. Subsidies include non‐refundable cash benefits, preferential conditions for loans, guarantees, free or discounted services, and benefits in kind. According to EU case law, such benefits exist if a private investor, compared to therelevant public administration, has not taken the same measure in a comparable situation3.

Thus, since there are a number of reasons for private market participants to release their own code free of charge under a Free Software licence, its release by the state is often unproblematic from a competition neutrality perspective.

An exclusive focus on closed source software could violate the principle of competition neutrality

Moreover, an exclusive focus of public administrations on closed source software could also discriminate against the companies involved in the aforementioned Free Software ecosystem and thus also violate the principle of competition neutrality.

Furthermore, in terms of public procurement law, the question arises as to whether cooperation between two or more contracting public authorities is possible within the framework of a joint Free Software project. This is the case under the EU Public Procurement Directive, if there is a contractual basis between the public authorities under which common objectives are pursued, where cooperation is exclusively in the public interest, and where the contracting authorities involved perform less than 20% of the activities covered by the cooperation in the market as a whole. Especially in the case of administration‐specific software, this causes hardly any problems4.

It should be noted, however, that the disclosure of Free Software by a public administration might be problematic from a fair‐trade or administrative law perspective, if the disclosure exceeds the administration’s legally assigned tasks. So, for example, the distribution of general office software by any public administration would not be allowed5.

Nevertheless, in most cases, a government strategy to publish Free Software remains unproblematic, since there are many valid reasons for doing so which would also apply to private market participants.

About this article

This article was first published in the FSFE's "Public Money? Public Code!" - policy brochure. This brochure evaluates the modernisation of public infrastructure with using Free Software from the perspectives of academia, law, business, and government and stars leading experts from various ICT areas. The brochure is released in digital and print, and is published under a CC BY-SA 4.0 licence.

Footnotes

1. Thomas Poledna / Simon Schlauri / Samuel Schweizer, Gutachten zu den rechtlichen Voraussetzungen der Nutzung von Open Source Software in der öffentlichen Verwaltung, Berlin 2017, p. 23 ss.
2. Poledna/Schlauri/Schweizer, p. 101 ss., 108.
3. Poledna/Schlauri/Schweizer, P. 107 s.
4. Poledna/Schlauri/Schweizer, p. 123 ss.
5. Poledna/Schlauri/Schweizer, p. 85, 158.