Protecting Health, or Protecting Trade? A fine balance in the Scotch Whisky Association judgment

Angus MacCulloch, Lancaster University Law School 

The Court of Justice has now delivered its judgment in Case C-333/14 in relation to the lawfulness of the Scottish measure to introduce minimum alcohol pricing, or MUP for short. Both the Scottish Government and the Scotch Whisky Association, which brought the legal challenge, have “welcomed the ruling,” although I think that the SWA are probably a little happier than the Scottish Government as the case returns to the Inner House of the Court of Session, which had referred it to the CJEU. I’ve previously written about the AG’s Opinion and the Court has adopted a very similar approach, but in many ways the judgment leaves as many questions as it answers. It does appear to give quite a strong steer to the Court of Session that the CJEU would prefer the adoption of the “less restrictive” increase in general excise duties instead of the MUP, but it leaves the final decision on the proportionality of MUP to the Scottish court.

Is MUP caught by Art 34 TFEU?

Both parties to the dispute had accepted that MUP pricing was caught by Art 34 TFEU (the ban on measures with an equivalent effect to quantitative restrictions on imports), but there was little clarity as to how such a measure breached the prohibition. That at least has been clarified today. The Court followed the AG’s elegant solution of evading the complications of categorising a MUP as a “selling arrangement” and dealing with the matter under the Gourmet International style analysis, but rather preferring to use the Trailers “market access” test. A minimum pricing measure restricts access to the UK market as it prevents lower cost products from other Member States from exploiting that cost advantage in lower retail prices [32]. As the removal of the benefits of the cost advantage triggers the market access test there is no need to discuss whether there is any discrimination inherent within the scheme. This is another example of the Court preferring the flexibility of the new test to the more traditional Cassis and Keck line of decisions.

The Tricky Balancing Act in Proportionality

The majority of the ruling deals with the much more difficult question of the potential justification of the measure on health grounds and whether the restriction is proportionate. At first instance the Outer House of the Court of Session accepted that the measure was proportionate as it targeted ‘harmful and hazardous’ drinkers who tended to consume low price high alcohol products which were most effected by MUP, but in the CJEU ruling there is a different view taken as to the purpose of the measure. On the evidence presented to it the CJEU takes the view that MUP has a “twofold objective” [34], both targeting these “harmful and hazardous” drinkers, while also reducing general alcohol consumption in the wider population “albeit only secondarily”. It is this “ambiguity”, as the AG put it, which I think is at the heart of the problem in the Ruling. If one cannot clearly define what a measure is designed to achieve it is incredibly hard to come to a firm conclusion as to whether it is proportionate. The Court did accept, at [38], that the measure was a real attempt by the Scottish Government to address health problems within Scotland, but set out that it cannot go beyond what is necessary in order to protect health. The choice before the CJEU was between the Scottish Government’s preference for MUP, and the argument that the same health benefit could be obtained through an increase in the general excise duties applied to all alcohol products, as preferred by the SWA and the European Commission. The Court argued that increased taxation could be an effective heath protection measure, as it is in relation to tobacco, and that an increase in taxation:

“is liable to be less restrictive of trade in those products within the European Union than a measure imposing an MPU. The reason is … that the latter measure, unlike increased taxation of those products, significantly restricts the freedom of economic operators to determine their retail selling prices and, consequently, constitutes a serious obstacle to access to the United Kingdom market of alcoholic drinks lawfully marketed in Member States other than the United Kingdom and to the operation of fair competition in that market.”

The contention that an increase in taxation would be less restrictive of trade, in comparison to MUP, is one of which I have never been convinced. Taxation affects all products, and MUP would only affect a limited number; on that simple basis I contend that MUP is arguably less restrictive in terms of the volume of trade impacted by the measure. Volume of trade affected has been seen as important in other Art 34 cases, see for example the Sunday Trading litigation of the 80s, but here the Court refers to this issue much more explicitly than before. It is not concerned with reducing the volume of trade impacted, but is much more concerned that the measure does not impact “fair competition” within the market; even if a greater number of products are affected. The Court refers to an argument made by the Lord Advocate questioning the relevance of the Court’s previous cases that dealing with minimum pricing in tobacco markets. The Court rejects that position, at [45], but I am nervous about simply reading across from those cases. Those cases centred on the Tobacco Harmonisation Directives, which were explicitly designed to enhance the single market integration by using price competition as a driver of integration. The direct protection of retail price competition is not usually seen so explicitly under Art 34 TFEU. It appears that the Court is now reading the protection of price competition into the prohibition. There is also, to my mind, another important distinction between the health problems associated with tobacco consumption and the health problems associated with alcohol - different problems will require different solutions. 

The final issue in the proportionality discussion relates to the vexed question of choosing the least restrictive of the two measures, and the intrinsically connected question of the balance between restrictiveness of a measure and its effectiveness at achieving its aim. Here we return to the “ambiguity” of the purpose of MUP. The Courts states, at [47]:

“the fact that increased taxation of alcoholic drinks entails a generalised increase in the prices of those drinks, affecting both drinkers whose consumption of alcohol is moderate and those whose consumption is hazardous or harmful, does not appear, in the light of the twofold objective pursued by the national legislation at issue in the main proceedings … to lead to the conclusion that such increased taxation is less effective than the measure chosen”.

The Court appears to suggest that as taxation can achieve both the general and the specific aim it is as effective. I find that difficult to follow. One of the main reasons that MUP was adopted was it was targeted, in that it only impacted on cheap and strong products and would not have a wider impact on moderate drinkers or on-sales, which would generally be above the MUP floor. The Court is expressing a preference for the secondary aim of the measure and effectively side-lining its primary purpose. It describes this generalised impact as “additional benefits” [48], but I would argue this is not additional in any valuable sense if it removes the primary benefit, targeting, from the measure. The Court goes on to the usual statement that the final decision is, of course, for the referring court, once it has heard all the evidence and argument, but it is pretty clear where its preference lies. This preference for one aim over another does not sit well with the settled position, repeated at [35], that the Member State can decide on the degree of protection it requires.

On the Article 36 TFEU Derogation

The previous discussion was in relation to the ‘rule of reason’ within the Art 34 TFEU prohibition, but as health protection is one of the grounds for derogation in Art 36 TFEU it is also possible to justify MUP on that basis. The Court discusses Art 36 separately and while the questions are similar the Court appears to adopt a slightly more relaxed tone. It stresses the same proportionality test as above, and that it is the Member State’s responsibility to prevent the appropriate evidence, but also that:

“that burden of proof cannot extend to creating the requirement that, where the competent national authorities adopt national legislation imposing a measure such as the MPU, they must prove, positively, that no other conceivable measure could enable the legitimate objective pursued to be attained under the same conditions”.

This appears to give some succour to the Scottish Government that the ball is now in their court, and that they must present the best evidence they can to convince the Court of Session. The alcohol policy evidence, including the Nuffield Report published yesterday, tends to suggest that there is a good case to be made for MUP. In that sense there is a still a lot for both sides to play for when the Court of Session comes back to this issue in 2016.

Conclusions

It is unfortunate that the Court has followed the reasoning of the AG and the weaknesses that it exhibited. We now have confirmation that price competition receives protection under Article 34 TFEU, and any attempt by Member States to interfere with the free setting of prices is likely to be scrutinised as a matter of EU law. The most disappointing aspect of the ruling is the lack of clarity in the Court’s discussion of proportionality, it has been described as “Delphic” by some commentators. I have explained some of my concerns, but the most troubling aspect is the Court’s apparent willingness to suggest that the Scottish Parliament picked the “wrong” health aim, and use proportionality analysis to “correct” that mistake. The Inner House of the Court of Session still has a lot of work to do in unpicking the Court’s Ruling.

Barnard & Peers: chapter 12

Photo credit: www.bestdrugrehabilitation.com

Minimum Alcohol Pricing: the AG balances public health, trade and competition

Angus MacCulloch, Lancaster University Law School

Background to the Opinion

Advocate-General (AG) Bot delivered his Opinion in Case C-333/14, ECLI:EU:C:2015:527, on 3 September regarding plans by the Scottish Government to introduce a Minimum Unit Pricing (MUP) for retail sales in Scotland set at £0.50 per unit. Before it could be introduced the measure was challenged by the Scotch Whisky Association. At first instance the Scottish Government successfully defended their proposal, in The Scotch Whisky Association & Ors, Re Judicial Review [2013] CSOH 70, but on appeal the Inner House referred several questions to the CJEU: Scotch Whisky Association & Ors v The Lord Advocate [2014] CSIH_38. The questions referred address the compatibility of MUP with both the single Common Market Organisation (CMO) and the free movement provisions in the TFEU. The AG’s Opinion has been hailed as a victory by both sides in the dispute, and on less partisan examination it does give insight into the importance of price competition to EU law.

The Compatibility of MUP with the single CMO

Article 167(1)(b) of the ‘single CMO’ Regulation, Reg 1308/2013, sets out that Member States must not allow price fixing for wine. But the AG notes that the provision is set out in the specific context of Art 167 which governs the laying down of ‘marketing rules’ to regulate supply [33], particularly where the rules are promulgated by stakeholder ‘interbranch organisations’. He therefore found there was no direct prohibition of retail price fixing in the CMO, and Member States retained their shared competence on this issue.

He then turned to the potential for indirect prohibition through the Member States’ obligation not to jeopardise the objectives of the CMO through Art 4(3) TFEU. The Commission argued that regulating retail prices would be contrary to the principle of the free setting of prices, by denying low cost producers the pricing advantages encouraged by the CMO. At [36] the AG set out that: ‘the free formation of prices is the expression … of the principle of free movement of goods in conditions of effective competition.’ Minimum retail pricing in a Member State would undermine low cost competitive advantage and distort competition, and is therefore incompatible with the single CMO [38 & 39]. Notwithstanding this, the existence of the CMO did not prevent Member States from adopting measures which pursue ‘legitimate objectives’ such as the protection of public health [40]. However, when pursuing such an objective, ‘the principle of proportionality requires that the national measure must actually meet the objective … and must not go beyond what is necessary in order to attain that objective’ [44]. The proportionality analysis should be the same as used under Art 36 TFEU, concerning possible Treaty-based limitations on the free movement of goods.

The Compatibility of MUP with Art 34 TFEU

The first notable aspect of the AG’s Opinion in relation to Art 34 (the ban on quantitative restrictions or measures of equivalent effect – or MEEQRs – on the free movement of goods) is that he undertakes an analysis of whether MUP is a MEEQR, even though both parties to the dispute had accepted it was. Reconciliation of the CJEU’s approaches in its previous judgments in van Tieggle, Keck, and Trailers is not easy. Can, after Keck, MUP be characterised as a ‘selling arrangement’ and fall outside Art 34 TFEU in principle, effectively rendering the finding in van Tieggle otiose? The AG avoids the problem by, at [58], adopting a hybrid approach which takes elements from all the judgments, including the ‘market access’ test in Trailers, thus: ‘a national measure may constitute an obstacle not only when, as a selling arrangement, it is discriminatory, in law or in fact, but also when, irrespective of its nature, it impedes access to the market of the Member State concerned’. If the measure hinders access there is therefore no need to consider if it is discriminatory, because it will fall within the scope of Article 34 in any event. He goes on to make clear that the loss of the ability to exploit low cost competitive advantage is in itself a hindrance to market access and brings MUP within the scope of Art 34 TFEU; effectively contemporising van Tieggle reasoning through the Trailers ‘market access’ test [60]. This is perhaps one of the most interesting suggestions in the Opinion. It gives price competition special protection as a driver of free movement within the internal market. The AG, for completeness, goes on to also discuss whether MUP might be a dynamic selling arrangement (like an advertising restriction), but his arguments [66-67], particularly those about domestic wine production, are not very convincing.

Moving on to consider the potential justification of a MEEQR under Art 36 TFEU, the AG first discusses the discretion available to Member States when deciding on the level of protection for a legitimate objective. He argues that the Member States must be allowed discretion as range of policy choices could be taken in these complex areas, but that Member States must adduce evidence to show that they have made a suitable and proportionate choice [87]. The explanation of how the analysis of proportionality should be undertaken, at [91]-[93], is, however, not particularly clear. Para [93] is the most troubling, suggesting that the national court should balance the ‘degree of impediment’ to trade against ‘the importance of the objectives pursued and the expected gains’. Should a domestic court be required to balance the benefits of trade against a public health benefit?

When the AG moves onto more direct consideration of MUP he examines a vital question in the first instance judgment, which I have previously addressed elsewhere: the identification of the particular aim of the measure. He suggests, at [116]-[117], that there is an ‘ambiguity’ whether MUP’s aim is to tackle, ‘harmful’ and/or ‘hazardous’ drinking, or protect the health of all drinkers; it is, however, acknowledged that the national court will have to take the final decision on this matter. The AG does accept that in relation to harmful and hazardous drinking, notwithstanding the complexities involved, it ‘does not seem unreasonable’ that a Member State might consider MUP an ‘appropriate means’ of attaining the objective [127]. He was also convinced by evidence presented by the Lord Advocate regarding the particular impact of MUP alongside other polices in relation to harmful and hazardous drinkers, particularly amongst the young [135]. At this point you might think that the Lord Advocate has won over AG Bot, but there is sting in the tail of the Opinion.

When it comes to the necessity of the measure the AG is less convinced, especially when MUP is compared with the alternate policy of a general increase in alcohol duty. At first instance the Outer House of the Court of Session rejected a general increase in duty because it did not effectively target the measure at harmful and hazardous drinkers, as it would also have an impact on moderate drinkers, and less problematic on-sales consumption. The AG is not convinced by the argument that the measure is more targeted [147]. The key passage comes in para [149]: ‘on the assumption that the objective of the rules … is genuinely confined to combating the hazardous and harmful consumption of alcoholic beverages … I consider that it is for the those responsible for the drafting of those rules to show that increased taxation is not capable of meeting that targeted objective.’ In itself that is not a controversial statement; the burden of proof in such an instance is well established. But he goes on to add another element: he argues the Lord Advocate would have to ‘adduce evidence’ that a general increase would have a ‘disproportionate impact’ on moderate drinkers, and that it could also have a benefit in addressing harmful or hazardous consumption in higher income groups who are less likely to be effected by MUP. He also adds that a general increase might also have another ‘additional advantage’: a contribution to general health objectives. This might ‘constitute a decisive factor that would justify the choice of that measure rather than the MUP measure’ [150].

To my mind this is a false step at the end of the Opinion. Increases in general excise duties have been the preferred measure in many of the Tobacco cases referred to in the Opinion, but the problems of tobacco and alcohol consumption are very different and suit different solutions. All tobacco consumption is bad, and all consumption is essentially the same. That is not true of alcohol, even in Scotland. Consumption in bars and restaurants poses very different problems when compared to alcohol purchased for consumption at the home or on the streets. Patterns of consumption of different types of product are also very different. I am far more convinced that the targeting of the measure serves a useful purpose. I am also still confused as to why a general increase in duty, which by definition will impact on all consumers and all trade in alcohol, as opposed to the limited impact of MUP, is seen as being less restrictive on trade. A general increase in duty must affect a higher volume of trade if nothing else. I suggest the push towards general duty increases is not really about trade at all. Again we see a policy choice designed to protect price competition in the market. The Tobacco Directives make their competition goal explicit, but it appears that the AG is using Art 34 & 36 TFEU to achieve the same result in the free movement sphere.

Barnard & Peers: chapter 12

Is the new Council of Europe treaty on match-fixing compatible with EU internal market law?

Tom Serby, Senior Lecturer in Law, Anglia Law School, Anglia Ruskin University

There is a growing epidemic of betting related match fixing in sport. To address it, the Council of Europe recently opened for signature a Convention on the Manipulation of Sports Competitions. However, Malta has asked the CJEU to rule on whether this treaty offends against the rules of the internal market, specifically freedom to provide services. This legal challenge highlights the difficulty in obtaining international agreement on how best to fight the match fixing.

The first 15 countries, including Russia and Germany, as well as six other EU Member States (Bulgaria, Denmark, Finland, Greece, Lithuania and Netherlands) signed up to the Convention as soon as it was open for signature, on September 18^th 2014; Malta’s is a lone voice in opposition. UEFA and the IOC (the Olympic movement) back the Convention but the associations of regulated European bookmakers are more guarded, sharing some of Malta’s concerns.

Match fixing, which the Convention addresses, has moved up the agenda for sports governing bodies, national governments and the the European Commission (which has funded various studies into it), in the wake of the scandals over the last decade which have affected in particular, but not only, the sports of football and cricket.

The growth in betting related match fixing, (or “spot fixing” where an event within a match is fixed rather than the overall result), is well known to anyone with only a passing interest in sport. The rise in this corrupt “manipulation” of sport, where athletes take bribes to underperform in order to facilitate winning on betting, has been fuelled by the huge rise in both licensed and unlicensed online gambling. INTERPOL investigations have proved that much of the fixing is at the behest of international (particularly from Asia where betting is often illegal) criminal gangs and is used for Money laundering purposes.  The infamous Calcioscommesse football scandal for instance, was financed out of Singapore, the corruptors acted in Italy, bets were placed all over Asia, and money proceeds were laundered through Panama.

Manipulation or fixing is very difficult to detect, and thus to prevent, as it crosses jurisdictions and is largely the result of online activity. Sports governing bodies have acknowledged that, while they have a role to play by tightening up their Codes of Ethics and Disciplinary procedures and introducing Integrity Units to investigate any suspected malpractice by athletes, they cannot on their own eradicate the problem without governmental support.

Under the Lisbon Treaty and TFEU Art 165 the EU has a role in promoting sport which specifically falls short of law harmonization. Under what has become known as the doctrine of the “specificity” of sport the CJEU will only interfere in the internal rules and regulations laid down by sporting federations in so much as they have an economic impact. So famously, in the Bosman ruling, the Court ruled as unlawful (under the internal market freedom of movement provisions) UEFA’s then transfer rules which restricted, on the basis of a player’s nationality, football clubs signing players from other EU Member States.

Malta’s complaint in regard of the Convention is brought under Article 218 TFEU, which is a special jurisdiction allowing the CJEU to rule if an envisaged treaty (ie not in force for the EU yet) is compatible with EU law or not. The object of the Convention is to establish international cooperation in terms of defining unlawful manipulation of sports competitions (ie corrupt betting related fixing) and in the investigation and prevention of fixing.

A key provision of the Convention is at Article 3 (5)(a) which defines "illegal sports betting" as "all sports betting activity whose type or operator is not allowed under the applicable law of the jurisdiction where the consumer is located".  The Convention prescribes at Article 11 website blocking and a ban on advertising to enforce the restriction on illegal betting. In other words, a betting operator licensed in say Malta, could be prohibited from going about its business in another EU state, say Poland, if Polish law proscribes some of the betting methods which in Malta are perfectly legal; thereby constituting a classic impediment to an internal market.

In Poland gambling is legal, and indeed is a source of important public revenue being relatively highly taxed; however, unusually for the EU, online gambling is illegal.  In practice blocking of foreign websites is not enforced and many Poles therefore work round this restriction on online gambling.

In Malta, on the other hand, betting operators are highly prized as economic entities and both regulation and tax are very light on betting companies in order to stimulate an important part of the economy for this, the smallest EU member state. Not unreasonably the Maltese argue that the Convention exceeds the ambit of EU competence by introducing regulations on gambling which is not a settled matter in the EU. Moreover, Malta will argue that any unduly restrictive provisions which drive gamblers into the unregulated market are counter-productive, since it is widely acknowledged that it is the unregulated betting market that is the source of much of the match fixing problem.

Malta’s case is that the definition of “illegal betting” is discriminatory under TFEU Art 18, and unlawful under articles 49 (freedom of establishment) and article 56 (freedom to provide services); and it is expected that Malta will argue before the Court that while they accept that the regulation on illegal gambling is in pursuit of a justifiable public policy aim (the eradication of match fixing), attacking gambling which is licensed in one EU State but not another, is not a proportionate means of achieving the aim given the evidence that unlicensed as opposed to licensed gambling is primarily the source of match fixing.

The complex and voluminous case law on the Court of Justice on this issue (most recently reiterated in Pfleger) makes clear that Member States have a great deal of discretion to regulate gambling. However, that discretion is not unlimited, and there are circumstances in which gambling regulation can constitute a disproportionate restriction of internal market rights.

There are two possible outcomes of this litigation. First of all, if the CJEU rules that the relevant rules in the Convention are incompatible with EU internal market law, neither the EU nor the Member States will be able to ratify it. Secondly, if the Court rules that there is no breach of internal market law, it will probably indicate in detail how to interpret the relevant provisions of the Convention in order to ensure compatibility with EU law. In that case, the opinion of the CJEU will of course inform the manner in which the Convention is implemented in Member States. 

As the Convention is the first multinational treaty aimed at harmonizing different states’ fight against betting related sports corruption, the Court’s ruling is eagerly anticipated.  Watch this space……

Barnard & Peers: chapter 14, chapter 16, chapter 24

The Essent judgment: Another revolution in the case law on free movement of goods?

Filippo Fontanelli, Lecturer in International Economic Law, University of Edinburgh

Introduction

On 11 September 2014, the Court of Justice of the EU delivered the judgment in the Essent case (Joined Cases C-204 to C-208/12, not to be confused with Case -91/13, also named Essent, of the same day). The judgment contains a delicate assessment of proportionality involving several interlaced interests: promotion of free energy trade, protection of the environment and human health, compliance with international commitments on emission-reduction, promotion of local employment, and incentives to achieve energy self-sufficiency.

If this maelstrom of values were insufficient to raise the interest of the readership, the judgment has also a purely doctrinal undertone. Indeed, the Court appears to ignore – deliberately – the summae divisiones which it itself has maintained for decades between distinctly and indistinctly applicable measures, as well as between justifications under Article 36 TFEU (which set the explicit Treaty-based grounds for restricting the free movement of goods) and other mandatory requirements (the other grounds for restricting such free movement). Thousands of EU law academics might now need to finally drop the standard exam-questions on “Measures equivalent to a quantitative restriction (MEQRs) from Cassis to Keck and beyond” yearly rephrased and administered since time immemorial: it might turn out that, after all, Cassis is no longer good law.

The case

The facts of the main proceedings relate to a complex domestic regulatory regime which, in turn, implements devilishly detailed EU acts. However, the crux of the dispute is easily summarised: a Flemish Regional scheme requires energy suppliers connected to the electricity grid to demonstrate the use of a certain amount of renewable energy, on pain of a hefty penalty. Only locally produced green energy counts toward that quota, hence suppliers cannot use green energy produced abroad to prove compliance.

Essent could have met or at least approached the quota had it been allowed to factor in the calculation renewable energy that it had sourced from Norway, Denmark, Sweden and the Netherlands, but it was not. It then incurred a series of yearly sanctions, and challenged them repeatedly before the Belgian courts. The Belgian judges raised a preliminary question to the Court of Justice asking, essentially, whether the discriminatory treatment of foreign green energy towards the fulfilment of the compulsory quota is in violation of the treaty obligations regarding freedom of movement of goods and the prohibition of discrimination based on nationality.

[Skip to the next section if you arrived to this post by Googling “mandatory requirements” and you must submit your essay three hours from now. For the others, a few words on the legal context of the dispute.]

Directive 2001/77 (governing the facts of the main proceedings, now replaced by Directive 2009/28) recognizes that renewable energies are underused in the Union, an unfortunate circumstance given that the development of a green energy industry could, at once, alleviate the dependence of EU countries from foreign supply, contribute to the fulfilment of the climate-change commitments entered into under the Kyoto protocol, and foster local employment policies. Therefore, the EU encourages national schemes supporting the consumption of renewable energy, without harmonising them. Better, “until a [Union] framework is put into operation”, which is presumably in the works (see recital 14 of the Preamble of Directive 2001/77).

In order to facilitate the trade in green energy, the Directive established a compulsory system of certification, whereby energy derived from renewable sources is entitled to a “guarantee of origin”. Guarantees of origin issued in EU members are mutually recognized across the Union.

National support schemes can provide various incentives to facilitate the production and consumption of green energy. Typically, benefits are available only to producers and suppliers handling green energy, which necessarily hold the relative guarantees of origin. However, member states are not required to make the specific benefits dependent on the possession of the guarantees. The Preamble of the Directive is clear in this sense: “[s]chemes for the guarantee of origin do not by themselves imply a right to benefit from national support mechanisms established in different Member States”. Guarantees of origin are therefore necessary but possibly insufficient conditions to enjoy national incentives.

The Flemish scheme implementing the Directive, for instance, is premised on the possession (and periodic surrendering) of “green certificates”. Green certificates are granted to producers of green energy based in the Flemish region, which sell them alongside the energy. Suppliers are under an obligation to surrender a certain quota of green certificates to avoid sanctions. At the stage of surrendering, guarantees of origin attached to green energy purchased abroad cannot substitute for the missing green certificates to fill the quota.

A provision of the relevant Flemish Decree envisages the possibility for the Flemish government to accept non-Flemish certificates for the purpose of filling the quota, but no implementing act has been adopted to regulate this possibility, which therefore remained wishful thinking.

The Flemish scheme was challenged under the Directive, under Article 34 TFEU prohibiting measures equivalent to quantitative restrictions (MEQRs), and under Article 18 TFEU prohibiting discrimination based on nationality.

The Directive clearly does not require Member States to link support schemes to guarantees of origin. It simply requires States to issue them and recognize them across the Union, so that consumers are always informed of the green-ness (or lack thereof) of the energy they purchase.

The real challenge to the Flemish scheme was brought under Article 34 TFEU. The domestic measure encourages suppliers operating in the Flemish regions to buy renewable energy from local producers, as equally green foreign energy is unusable towards fulfilment of the quota. Local green energy is artificially made more precious, because of the green certificates it is associated with, which rational producers must crave, to avoid fines. The restrictiveness of the scheme was plainly acknowledged by the Court (para. 83), although it focused on the trade of electricity rather than the trade of guarantees of origin, an impossibly murky issue that would have required determining whether intangible guarantees qualify as “goods”.

The Court therefore examined whether the scheme was justifiable “on one of the public interest grounds listed in Article [34 TFEU] or by overriding requirements” and whether it satisfied the test of proportionality (para. 89).

The purpose of the scheme was found in the promotion of the use of renewable sources for producing energy (para. 95). This legitimate purpose does not feature in Art. 36 TFEU and therefore, by exclusion, was provisionally accepted by the Court under the doctrine of the rule of reason. Under this principle, domestic measures setting mandatory requirements on goods, which restrict inter-state trade, are justified if they pursue a reasonable policy objective and the restriction entailed is not disproportionate to the contribution made towards that objective. Mandatory (or “overriding”) requirements are not limited to the values listed in Art. 36 TFEU, and routinely include objectives such as consumer interests and environmental protection. In its customary incarnation, the rule of reason can only be used to justify rules that do not discriminate according to the origin of the goods.

The reasoning of the Court on the proportionality of the Flemish scheme is not linear, but proceeds by accumulation. It essentially lists the reasons why the scheme is not as vicious as Essent would claim, invoking contextual elements, policy considerations and semantic tricks. In short, the Courts makes the following remarks, which I briefly assess in the brackets.

Essent claimed that the Flemish scheme does not encourage the consumption of green energy, but only its production. The Court objected (para. 98) that this is normal, as the greenness of energy relates precisely to its method of production (This is a massive non sequitur. If taken seriously, this would mean that green energy might as well be wasted after production, as the benefit to the environment was done already. To the contrary, the only raison d’être of renewable energy is that it is supposed to supplant the consumption of non-renewable energy).

The Court also noted that Member States are allowed by the Directive to set national targets of production of green energy (para. 99), suggesting perhaps that the discrimination inherent in the support scheme was dictated by the concern to achieve these targets (This suggestion is misleading. Whether its motivation is allowed or not by EU law has nothing to do with the EU-compliance of the Flemish measure).

The Court answered also the most difficult question. If the Flemish scheme genuinely aims to increase the production of green energy for environmental purposes, how come it does in fact discourage the purchase of green energy produced abroad, by refusing to accept foreign guarantees of origin as substitutes of Flemish green certificates? The brief answer is worthy of a Sibyl: “it should be observed that the starting points, the renewable energy potential and the energy mix of each Member State vary” (para. 100) (This is too obscure to attempt a reading. Suffice it to say that because guarantees of origin are subject to mutual recognition under the Directive, one would presume that these alleged variations are capable of being taken into account to certify the green nature of the energy, therefore an equivalence between Flemish certificates and any other guarantee is arguably possible to concoct).

Finally, the Court noted (para. 101) that national support schemes are important to achieve the objectives of the Directive (irrelevant per se) and that “it is essential that Member States be able to control the effect and costs of their national support schemes according to their potential, whilst maintaining investor confidence” (para. 102) (With a bit of effort, one can see why discrimination is justified: Member States do not want to make available to all EU producers subsidies whose cost is “ultimately [borne] by the [local] consumers” (para. 107). Also, they cannot suddenly withdraw support schemes when it turns out that they operate mainly for the benefits of foreign producers: investor claims would follow and hit hard).

“In the light of the foregoing,” the Flemish scheme was found to be proportionate, and therefore compliant with Article 34 TFEU (para. 103).

The Court then extended the proportionality analysis to other accessory elements of the schemes. It considered the penalties imposed, leaving it to the national judge to assess their proportionality to the sought objective (para. 114). It also speculated on the fairness of the market of green certificates that can fulfil the compulsory quotas, whose supply is artificially restricted. The Court therefore advocated the establishment of mechanisms under which these certificates can be traded “under fair terms” (para. 111). The irony of the last remark is highlighted in the comments below.

Comments

The Court nonchalantly applied a mandatory requirement to a facially discriminatory measure, sending Cassis to the museum of judge-made law no longer in force, and tacitly ignoring the exhaustiveness of Article 36 TFEU. It conflated overriding requirements and values listed in Article 36 TFEU into a single pool of excuses.

The passing reference to the contribution of reduced emissions to human health (para. 93) should not mislead: if human health hat were indeed the relevant objective of the Flemish scheme, it would have been at the centre of the ensuing proportionality test (just to mention one element, there should have been an analysis of the Flemish scheme’s contribution to increased health protection). That the quota has discriminatory effects which hinder trade was also undoubtable.

Therefore, a distinctly applicable measure was justified on the basis of a public interest other than those listed in Article 36 TFEU. This had also been the case in the parallel case of Ålands Vindkraft, C‑573/12, on which the Court delivered its judgment on 1 July 2014; see paras. 76-77 (the Opinion of this case was also prepared by Bot, and delivered shortly after his Opinion in Essent). Indeed, the Court has seemingly lost interest in making a big deal of the difference between discrimination de jure and discrimination de facto.

Advocate Bot had suggested the Court to abandon the distinction and expressly overturn its previous case-law. The Court did the former but not the latter, suddenly dropping a carefully constructed judicial test that it itself had devised in the wild years of Article 34 TFEU to accommodate reasonable policies which fell outside the scope of Article 36 TFEU.

That direct and indirect discrimination should be treated alike makes perfect sense. This is, for instance, the practice in the GATT, the agreement regulating the removal of trade barriers for trade in goods in the WTO regime. Treating them differently, for instance allowing one to be justified by excuses that do not apply to the other, is irrational: the hindering effect of de jure or de facto discriminatory measures can be identical in the facts, and a harsher treatment of direct discrimination serves only as an incentive for Member States to disguise discrimination on the basis of nationality within the folds of maliciously designed neutral measures.

However, there was some intuitive value to the bygone distinction: direct discrimination is prima facie illegal and must be hard(er) to justify. Think of the judgment in Test-Achats, which does not even attempt to look at a justification for gender-based direct discrimination. In fact, as registered by AG Kokott in the Opinion to that case (para. 59), justifications based on statistical data can support a proportionality assessment of indirect discrimination but cannot suffice to excuse direct discrimination.

In his proposal, AG Bot had reflected this concern, calling for a reinforced test of proportionality applicable to distinctly applicable measures: the reasons advanced to justify direct discrimination must be of particular weight. See at para. 94: “I think that discriminatory measures, particularly those which infringe a principle as fundamental as that of the prohibition of direct discrimination on grounds of nationality, ought to be subject to a strict requirement of proportionality” (emphasis added).

The Court did not deem it necessary to devise a reinforced (“strict”) proportionality test and, in my view, this might have contributed to a puzzling proportionality analysis, which features several controversial passages.

In short, by applying the routine test of proportionality the Court focused on the pursued objective (protection of the environment through increased production of green energy). In so doing, the discriminatory (and trade-restrictive) nature of the Flemish scheme was side-lined in the analysis. Once a decent contribution to the environment was somewhat found, it was downhill from there. The happy run of proportionality apparently skipped the stop of necessity: was there a less restrictive measure available for Flemish authorities to encourage the consumption and production of green energy? Yes there was: the interchangeability of green certificates and foreign guarantees of origin would have averted trade-restriction and promoted environmental protection even more than the Flemish scheme could possibly do.

The measure can only appear proportionate if the elective purpose is another unconfessed one, which is itself somewhat discriminatory. For instance, it could be argued that the growth and operation of a local green-energy industry is the real purpose, and therefore no alternative policy is available: any infant industry policy inherently involves some deal of temporary protectionism, but is for a good cause. The Court, however, did not resort to this “lesser-evil” reasoning, and pretended that discrimination is fully justified by the environmental purpose of the measure at large.

The irony of the finding is the after-thought of the Court with respect to the fairness of the market for green certificates. By virtually banning substitutable foreign certificates, the Flemish government is providing absolute protection to local producers, which might be few in number and, by definition, have the luxury of setting a higher price than they could if an undistorted transnational market were in function. Formally, there is no ban, but the value of local certificates is artificially inflated by the Flemish schemes, and makes it inconvenient for energy-suppliers to purchase green energy from abroad. This is a textbook example of a market distorted by protectionism, where demand is forced to opt for the local product, and foreign competitors are treated much less favourably. The Court concedes that buyers of green certificates, which need to comply with a compulsory quota, might find it unfair that the supply of certificates is artificially restricted to the collective monopoly of local producers, which can charge above-market prices. Local content requirements such as those envisaged by the Flemish scheme constitute a prototypical instrument of protectionism, and not surprisingly they are included, for instance, among the measures prohibited in the WTO Agreement on Trade-Related Investment Measures. It does not get any more protective and trade-distorting than that.

However, the Court limits itself to elegantly call for some “mechanisms” to ensure that suppliers can purchase green certificates “under fair terms” (para. 111), a puzzling statement in light of the previous validation of a protectionist scheme which is trade unfairness incarnated.

Ultimately, this is a memorable case, because it seemingly puts to bed the rule of reason as we knew it. Also, the reasoning on the merits is very hard to decode because the dropping of direct discrimination as a crucial element of the analysis resulted indeed in a confusing assessment of proportionality, which often loses sight of the differential treatment at stake and forgets about the necessity test altogether.

Barnard & Peers: chapter 12, chapter 16, chapter 22

Applying the EU Charter of Rights to Member States' internal market derogations

By Steve Peers

Today’s judgment of the Court of Justice of the European Union (CJEU) in Pfleger confirmed an important issue as regards the scope of the EU Charter of Fundamental Rights – but also raised some implicit questions about its added value in such cases.

The case concerned Austrian restrictions on gambling machines. In fact, the CJEU has decided very many cases relating to national restrictions on gambling, an issue which is not regulated by detailed EU legislation but which is nonetheless in principle subject to EU internal market law. Here, the parties challenging the enforcement of the Austrian law raised questions concerning the compliance of that law with the EU Charter, in particular as regards Articles 15 to 17 of the Charter (concerning freedom to conduct an occupation, to run a  business and the right to property) and Article 50 (the prohibition on double jeopardy).

Does the Charter apply?

Article 51 of the Charter limits the scope of its application to EU bodies, and to the Member States ‘only’ when they are ‘implementing’ EU law. At first sight, this rule narrows the established scope of the previous CJEU case law on the scope of human rights protection, which (going back to the 1991 judgment of ERT) had always held that any national derogations from EU free movement rights had to comply with human rights obligations as general principles of EU law. On a strict interpretation, such national derogations could not easily be seen as measures ‘implementing’ EU law, and many academics therefore wondered whether the Charter was narrower in scope than the general principles.

However, last year’s judgment in Fransson confirmed that the scope of the Charter was exactly the same as the scope of the general principles. Logically, it followed that national derogations from free movement rules are within the scope of the Charter, but the Pfleger case was the first opportunity that the Court has had to confirm this.

Comparing internal market rules and the Charter

Despite the importance of this case from a human rights perspective, the main issue in the Pfleger judgment is the compliance of the national rules with EU internal market law. The CJEU, no doubt exhausted with the amount of litigation on this issue, simply reiterates its prior case law, and asks the national court to apply it to the facts. Also, the CJEU does state that if the national restrictions on gambling do not have any real link to combating crime or social problems, but are simply a means of increasing tax revenue, then this cannot be justified – but it relies on the national court’s findings in this regard.

What does the Charter add to this? On the facts of this case, not very much. According to the CJEU, if the national law restricted internal market freedoms, then it also restricted the economic rights in Articles 15-17 of the Charter. Equally, if it could not be justified under the internal market rules, then it could not be justified as a limitation on Charter rights pursuant to Article 52 of the Charter either.

It should be noted that the Court did not rule that an analysis of the internal market rules in the Treaty would always lead to the same result as the Charter analysis. The ruling expressly concerned ‘circumstances such as those at issue in the main proceedings’. So it is possible to imagine, for instance, that as regards a different aspect of the free movement of services more directly connected to human rights than gambling – broadcasting, for instance – a national restriction might be proportionate from the point of view of the internal market but a questionable restriction of freedom of expression. At the very least, a separate application of the internal market and human rights rules would surely be called for where (for instance) the content of communications is being restricted.

The Court did not touch on the separate question of whether the enforcement (as distinct from the substance) of the national rules needed to be judged from a human rights perspective, noting only that if the national rules breached the Treaty rules on internal market freedoms, they could not be enforced anyway. The Advocate-General’s opinion, in contrast, assumed that if the national rules were substantively in compliance with internal market law and the Charter, the details of their enforcement could still be tested for compliance with the Charter.

Implications of the judgment

While this judgment only concerned national derogations from internal market Treaty freedoms, there is no reason to think that its impact is limited to such cases. There is a lot of EU legislation on different issues which allows Member States to derogate in various ways from its rules, and there is no reason to think that the internal market Treaty provisions are in some way special as regards the scope of application of the Charter.

In particular, as discussed already on this blog, the national derogations from the e-privacy Directive, as regards data retention and other forms of interception of telecommunications, are subject to the Charter, even following the annulment of the data retention Directive. The Court has already examined such national derogations in the context of civil proceedings, and logically should do so as regards criminal proceedings too.

Barnard & Peers: chapter 9, chapter 16

The EU’s Financial Supervisory Authorities: Mind the Accountability Gap

Dr Marios Costa, Lecturer in Law, City Law School

In 2010 we witnessed the establishment of three European Supervisory Authorities: the European Banking Authority; the European Insurance and Occupational Pensions Authority; and the European Securities and Markets Authority (ESMA). They were set up by the Union as a response to the current, unprecedented financial crisis. The Court of Justice of the European Union (CJEU) gave on 22 January 2014 a significant judgment in relation to more recent legislation empowering ESMA to adopt legally binding measures upon financial institutions of the Member States in the event of a threat to the proper functioning of the financial market or to the stability of the financial system of the EU (Case C-270/12, United Kingdom v Council & Parliament). The legal action concerned the annulment of Article 28 of Regulation 236/2012 in relation to ESMA’s power to ban ‘short selling’, a practice which permits the sale of shares not owned by the vendor at the time of sale with the view of benefiting from a fall in the share price.

There are broader constitutional implications which this judgment highlights. The judgment, which does not come as a surprise, clarifies issues in relation to the powers that can be lawfully exercised by EU independent financial regulatory agencies. This commentary examines, with all due respect, whether the recent ruling will remedy the lack of accountability of EU agencies.

ESMA can draft highly detailed technical and implementing standards which are later on adopted by the Commission under Article 290 and 291 TFEU (which concern, respectively, the adoption of delegated and implementing acts). In relation to Article 290 TFEU, the Commission sets out the conditions and specifies the criteria under which the agency can adopt further regulatory measures of a technical nature, but the drafting of the technical measure always comes from the agency. A very important issue here is whether the Commission has the sources, technical knowledge and scientific expertise required to control the appropriateness of the measures drafted by the agency. If the Commission decides not to adopt the measures drafted by ESMA then it is required to send it back to the Agency and explain why it has decided to not to endorse it (see Article 10 and 15 of Regulation 1095/2010). Interestingly enough, there are extreme limitations imposed upon the Commission. According to the preamble of Regulation 1095/2010, the Commission can only depart form the draft measures prepared by the agency only if they are incompatible with EU law, violate the principle of proportionality or contradict the EU’s financial services legislation.

Facts of the case

The UK government challenged the legality of article 28 of Regulation 236/2012 on the power of the ESMA to ban short selling practices. The Regulation was adopted on the basis of Article 114 TFEU which allows for the enactment of harmonisation measures necessary for the establishment and the functioning of the internal market. The rationale for the adoption of the Regulation and in particular Article 28 is for the ESMA to interfere and issue legally binding measures against the financial institutions of the Member States to prohibit short selling in the event of a threat to the proper functioning and integrity of financial markets or to the stability of the whole or part of the EU’s financial system. The ESMA has wide discretionary power to issue such bans, and it is the only adjudicator of whether such a threat exists.

The UK raised four arguments. First of all, it argued that ESMA is given political powers which entail policy choices to adopt legally binding measures vis-a-vis the financial institutions of the Member States. These powers do not fit well with the old Meroni line of case law, which states that delegation to autonomous bodies is considered to be acceptable as long as Commission retains control powers to monitor how the agency is carrying out its tasks. According to the Meroni line of reasoning, the conferment of broad discretionary power, reconciling competing public interests, to an EU agency cannot be justified on the basis of scientific expertise. In any case, the CJEU has several times emphasised that ‘[s]cientific legitimacy is not a sufficient basis for the exercise of public authority’ (Pfizer). However, in this judgment the Court of Justice ruled that the parent EU legislation, and the delegated and implementing acts adopted pursuant to that legislation by the Commission, sufficiently circumscribed ESMA’s powers.

Secondly, the UK argued that the power for ESMA to ban short-selling breached the principle in Romano that the EU legislature could not delegate the power to adopt ‘quasi-legislative measures of general application’. However, the Court ruled that Romano did not add anything to Meroni, noting in particular that the Treaty provides for agencies to adopt measures of general application.

Thirdly, the UK argued that Articles 290 and 291 TFEU (the provisions on the adoption of delegated and implementing acts) were in effect exclusive, ruling out a contrario the delegation of powers like the short-selling ban to EU agencies. In the Court’s view, the Treaty (in particular, the rules on judicial review) presupposed that agencies could adopt binding acts, and the provision allowing ESMA to ban short selling had to be seen in its overall legal context.

Finally, the UK argued that Article 114 TFEU cannot constitute a correct legal basis for the adoption of the rules laid down in Article 28 of the Regulation. Earlier in 2013 the Opinion of Advocate General Jääskinen concluded in favour of the annulment due to concerns in relation to the appropriateness of the legal basis of Article 114 TFEU. According to his view, the adoption of legally binding measures by the ESMA addressed to the financial institutions of the Member States cannot be considered as EU harmonising measures or uniform practices which could be justified under Article 114 TFEU. The Court, however, decided not to follow the non-binding view of the Advocate General and ruled that Article 114 TFEU constitutes an appropriate legal basis for the adoption of Article 28 of the Regulation since it aims (a) to approximate national law and (b) to improve the conditions for the establishment and functioning of the internal market in the financial field. On the first point, the Court brought together its prior case law which had specified that Article 114 could be a legal base for the creation of EU agencies (Case C-217/04 UK v Council and EP), and for the conferral of power upon the EU institutions to adopt legally binding acts (Case C-359/92 Germany v Council).

Comments

The Court’s judgment has significantly clarified the law relating to the conferral of powers to EU agencies. First of all, the Meroni doctrine, while still in force, does not prevent the conferral of such power when the relevant legislative framework is sufficiently detailed. Secondly, the Romano ruling adds nothing to Meroni. Thirdly, Articles 290 and 291 TFEU do not prevent the conferral of powers upon agencies, at least where such conferral of power takes place in the context of an overall legislative framework. Finally, at least the internal market powers of the EU (and arguably, by analogy, other legal bases) do not prevent the delegation of powers to agencies to adopt legally binding measures.

The Court’s ruling gives significant emphasis to the fact that the measures adopted by the EU financial agencies are subject to judicial review under Article 263 (4) TFEU. However, regulatory and implementing technical standards drafted by the EU financial agencies are subject to the Commission’s endorsement and although they constitute the basis for the adoption of the final act by the Commission they are technically and legally preparatory documents and as such they are excluded, in principle, from judicial scrutiny. Additionally, non-privileged applicants, such as financial institutions negatively affected by any ban adopted by ESMA, might not be in a position to satisfy the EU’s locus standi requirements. They may be excluded from direct actions under Article 263 (4) TFEU on the basis that the ban adopted still entails separate implementing measures within the meaning of the Telefonica judgment.

With great respect to the ESMA judgment, the fact that the founding Regulation of the ESMA [Regulation 1095/2010, Article 10(1) and 15 (1)] limits the power of the Commission to proceed with the drafting of technical standards or to unilaterally amend them empowers EU financial agencies with wide political decisions which entail policy choices. The wider implications of the judgment and also of the current framework establishing the agencies seem to suggest what has already pointed out in the literature that ‘in any event, it is clear that EU independent agencies are independent in the sense of being relatively free of control by any other organs of the [Union]’ (Shapiro, 1997). Another point is whether the Commission or the agency will be held responsible in cases where adverse consequences occur if the assessment by the agency proves to be wrong and has further financial repercussions? Moreover, according to the ESMA judgment additional powers could be conferred on agencies to adopt acts of general application outside the scope of articles 290 and 291 TFEU. The delegated and implementing acts of the Commission which detailed ESMA’s powers to adopt the short-selling bans were themselves drafted by…ESMA. This raises important questions in relation to the accountability of ESMA which the Court seemed, with all due respect, to ignore.

Conclusion

The Court’s ruling is important given that it is the first case which deals with the powers of the newly created financial supervisory authorities. It empowers, however, the financial authorities with further powers in order to be able to foresee and secure financial stability in the European Union. Therefore, there are certain constitutional questions that need to be answered: who are these highly independent autonomous bodies answerable to? Scientific legitimacy and complex decision-making in the area of EU’s financial regulation cannot be a legitimate justification for increasing the powers of the EU’s financial agencies, something which can only be accepted if there are control powers vested in the main EU institutions for securing the accountability of these EU agencies.

Barnard & Peers: chapter 8