EU State Aid Law Particularities in the Cooperation of Scientific Institutions with their Spin-offs (Part 1)

The article provides an overview of the EU state aid law specifics that spin-offs should keep in mind when collaborating with their spin-offs.

Legal policy timeliness:

In its coalition agreement, the traffic light coalition devoted an entire section to the topics of innovation, science, higher education and research. In order to trigger a surge in innovation, spin-offs are also to be promoted (p. 17 of the coalition agreement). These very welcome ambitions bring with them a number of challenges in the various areas of research and science law. In addition, other areas of law are also involved when it comes to the cooperation of scientific institutions with their spin-offs. Particularly in the areas of EU state aid law and public procurement law, there are a number of special aspects to be taken into account from the point of view of scientific institutions and universities. This two-part article shows which special features these are in detail. The first part of the book begins with an examination of EU state aid law.

EU state aid law specifics in detail:

Not only the funding of scientific institutions is to be measured against the rules of state aid law if they (also) carry out economic activities. The activities of the scientific institutions themselves may also be subject to the restrictions of the law on state aid, insofar as a scientific institution is attributable to the public sector. The anchor standard for EU state aid law is the prohibition of state aid in Art. 107 TFEU. If state or state-funded scientific institutions now want to cooperate with and support their spin-offs, usually private-sector start-ups, the constituent elements of the EU ban on state aid from Article 107 TFEU must be strictly observed.

Insofar as the scientific institution is bound by the law on state aid, cooperation with third parties must not give rise to any favoritism towards specific companies. The criterion of the granting of state funds or subsidies granted from state funds is regularly met if the scientific institution is a public body and directly distributes public funds to its spin-offs or passes on funds, which it has in turn received from state subsidies, to the spin-offs. Both the own distribution of funds and the transfer of state funds in the field of the law on grants may be classified as the granting of state funds or aid granted from state funds. The assessment of whether state resources are involved is to be made on the basis of an attribution catalog developed by the case law in the Stardust Marine judgment (ECJ judgment of 16.5.2002 – C-482/99).

Spin-offs usually qualify as enterprises within the meaning of Art. 107 TFEU. They engage in economic activities and are therefore usually not excluded from the scope of Art. 107 TFEU. A special feature is that spin-offs are generally not covered by the privileges of the R&D framework, as these only apply to research institutions and research infrastructure whose main purpose is independent basic research, industrial research or experimental development. Spin-offs, on the other hand, regularly do not aim to develop basic or experimental research as their main field of activity, but aim to improve their own position in the market, often through contract research or research services.

Insofar as spin-offs of scientific institutions are funded that are bound by state aid law, it must be ensured that this does not constitute an advantage that could lead to a distortion of competition. In principle, any advantage that is not counterbalanced by an appropriate consideration is an advantage that is relevant under state aid law. Whether a measure constitutes an advantage in the sense of state aid law is therefore determined by whether it is in line with market conditions. An advantage may not only consist in the payment of funds and the granting of preferential conditions, but may also take the form of other benefits such as the provision of research results or the offering of other resources of the scientific institution such as personnel, premises and equipment. Accordingly, both cash and in-kind contributions can constitute an advantage in the sense of state aid law and are impermissible if they threaten to distort competition and affect intra-Community trade.

It becomes clear that the prerequisites of the prohibition of state aid can often be fulfilled in the case of cooperation between public scientific institutions and their spin-offs. This is because projects originally located at universities and research institutions often move to the market, where they compete with rivals, as a result of being detached and founded as start-ups.

Opportunities for action:

In principle, aid granted by the State or through State resources which distorts or threatens to distort competition by favoring certain undertakings and affects trade between Member States is prohibited by Article 107 (1) of the EC Treaty. 1 TEU. In order to ensure effective monitoring of aid granted, all aid must be notified to the Commission (notification requirement under Article 108 (3) sentence 1 TFEU). Before the Commission has taken a decision on whether the measure is exceptionally permissible, the aid measure may not be implemented (Art. 108 (3) sentence 3 TFEU).

However, the situation is different if the specific measure is covered by a general exemption or authorization granted by the Commission and is therefore justified. In the case of an existing exemption, the specific measure would not have to be notified to the Commission and could be implemented immediately.

State aid law provides some exemption possibilities that scientific institutions should keep in mind when cooperating with their spin-offs. For example, the “De-minimis Regulation” (EU Commission Regulation No. 1407/2013 of 18.12.2013, OJ L 352/1 of 24.12.2013) opens up the granting of funds to private sector companies in the amount of 200,000 euros within three fiscal years without having to comply with the ban on subsidies. Any further exemptions can be found in the “General Block Exemption Regulation” (EU Commission Regulation No. 651/2014 of June 17, 2014, OJ L 187/1 of June 26, 2014), depending in each case on the scope and nature of the cooperation with the spin-offs.

These exemption options are usually complex and tied to certain notification requirements. There is a great risk of making mistakes here.

In addition to the exemption options, at the factual level, a price calculation for the use of a resource from public funds that complies with state aid law is the means of choice to prevent the state aid prohibition from intervening. This requires pricing at full cost plus profit or at a market price that covers at least full cost. Another prerequisite for preventing a subsidy is the return of the user fees to the non-economic area of the scientific institution.

Outlook:

It remains to be seen whether the government’s very welcome ambitions, which offer great potential, will be realized. Irrespective of future developments, scientific institutions should already start dealing with the legal specifics that they will face when working with their spin-offs. After this brief overview, which has provided an overview of the special features of EU state aid law, the next article in the following issue of the newsletter “Querschnitt Wissenschaft” will be devoted to an examination of which aspects must be taken into account in the cooperation between scientific institutions and their spin-offs in the field of public procurement law.