Prisoner Voting

Something that made me mad in today's UK Supreme Court prisoner voting judgment. Per Lord Sumption:

115. From a prisoner’s point of view the loss of the right to vote is likely to be a very minor deprivation by comparison with the loss of liberty. There are no doubt prisoners whose interest in public affairs or strong views on particular issues are such that their disenfranchisement represents a serious loss, just as there are prisoners (probably more numerous) whose enthusiasm for active sports makes imprisonment a special hardship. The severity of a sentence of imprisonment for the convicted person will always vary with a wide variety of factors whose impact on him or her will inevitably be arbitrary to some degree. It has been said, for example, that disenfranchisement may bear hardly on someone sentenced to, say, a short period of imprisonment which happens to coincide with a general election. For some prisoners, this will no doubt be true. But I decline to regard it as any more significant than the fact that it may coincide with a special anniversary, a long anticipated holiday or the only period of fine weather all summer.

So much for a proper respect for democracy...

In order to heal the soul, here is a paragraph from Baroness Hale's judgement in the same case:

90. To take an obvious example, we would not regard a Parliament elected by an electorate consisting only of white, heterosexual men as uniquely qualified to decide whether women or African-Caribbeans or homosexuals should be allowed to vote. (...) Given that, by definition, Parliamentarians do not represent the disenfranchised, the usual respect which the courts accord to a recent and carefully considered balancing of individual rights and community interests (...) may not be appropriate.

Phoebe Putney

An increasing problem in the competition law world is the relationship between competition law and varying degrees of state action in other realms. In Europe, this problem is artificially easy because of the hierarchy of laws involved. In Deutsche Telekom and the other margin squeeze cases, the European Court of Justice relied on the principle of primacy to hold that competition law, which is written in the main body of the Treaties, trumps sectoral regulation, which isn’t. When there is no Community dimension, and outside the EU, the answer isn’t quite that straightforward.

To begin with the easy one: When EU competition law applies, i.e. when someone is naughty in a way that “may affect trade between Member States”, the only question is who’s to blame:

• If the offending behaviour is mandated by EU sectoral legislation, the secondary legislation in question is null and void, something that can be established through the prejudicial question procedure or through an action for annulment, as the case may be. 
• If the offending behaviour is mandated by Member State sectoral legislation, the Member State is the culprit and it is up to the Commission to start an infringement procedure. In an appropriate case, the Member State legislation in question can also be slapped down by a national court, with or without a prejudicial question. 
• If, on the other hand, the relevant sectoral law merely permits the offending behaviour without mandating it, the onus is on the company to make sure it obeys both competition law and sectoral law, meaning that it can be punished for failing with regard to the former. This is what happened in the margin squeeze cases.

At the Member State level, when there is no Community dimension, saying that your naughtiness is expressly permitted by sectoral legislation is fundamentally a sound argument. Of course, in a given case the question remains whether this is a correct interpretation of the law, which will depend on which statute was enacted first, whether there is express saving language somewhere, the way the US Telecommunications Act expressly says that it is without prejudice to competition law, and it will depend on the various canons of interpretation. 

In the British Albion Water competition law case, for example, Ofwat, which under the UK system is both the sectoral regulator and one of the possible competition authorities, argued that Welsh Water’s pricing structure (the so-called “costs principle”) was expressly permitted by section 66E WIA 1991, an argument that was obviously gratefully echoed by Welsh Water itself. The Competition Appeal Tribunal went along with that approach to some extent, but concluded that it was not enough to save Welsh Water from competition law liability under a margin squeeze theory. (Albion Water v. Water Services Regulation Authority, [2006] CAT 23, par. 920-980. Cf. also Ofwat’s decision, par. 324-331.)

The reason why all of this is interesting now is that the problem has cropped up in the US again. There, the situation is a mixture of the previous one. On the one hand, the relationship between competition law and sectoral regulation has a clear hierarchical dimension, because American competition law is enacted at the Federal level in the Sherman and Clayton Acts (15 USC 1-38), on the other hand, the Federal authorities are much more reluctant to have this law displace State law, the Supremacy Clause notwithstanding. The result is something of a half-way system, as summed up in the 1943 Supreme Court case of Parker v. Brown.

In Parker, the Court held that the competition laws don’t displace state law. The Court argued that the Federal legislator would not do something so drastic without explicitly saying so, and in this case it didn’t. (Nor did the sponsors of the Sherman Act.) If the states want to create a monopoly or a cartel somewhere, they are allowed to. At the same time, however, the Court didn’t take back its earlier holding that the States can’t shield private actors from antitrust liability. (Cf. Northern Securities Co. v. United States from 1904.) So all sectoral legislation that does not create an outright statutory monopoly or cartel winds up somewhere in the middle.

This can produce some pretty unsatisfying results in either direction. Earlier this year, in FTC v. Phoebe Putney Health System, the Court held unanimously (Justice Sotomayor writing for the Court) that some hospital shenanigans in rural Georgia were not shielded by Georgia’s health care legislation, because the naughtiness in question was not “clearly envisaged” by the legislator. This is odd because, as the Court summarises it, 

the Law authorizes each county and municipality, and certain combinations of counties or municipalities, to create “a public body corporate and politic” called a “hospital authority.” §§31–7–72(a), (d).Hospital authorities are governed by 5- to 9-member boards that are appointed by the governing body of the county or municipality in their area of operation. §31–7–72(a).

Under the Law, a hospital authority “exercise[s] publicand essential governmental functions” and is delegated “all the powers necessary or convenient to carry out and effectuate” the Law’s purposes. §31–7–75. Giving morecontent to that general delegation, the Law enumerates 27powers conferred upon hospital authorities, including the power “[t]o acquire by purchase, lease, or otherwise and tooperate projects,” §31–7–75(4), which are defined to include hospitals and other public health facilities, §31–7–71(5); “[t]o construct, reconstruct, improve, alter, andrepair projects,” §31–7–75(5); “[t]o lease . . . for operationby others any project” provided certain conditions are satisfied, §31–7–75(7); and “[t]o establish rates and chargesfor the services and use of the facilities of the authority,”§31–7–75(10).

I find it difficult to see how that does not include the right to authorise a private actor to monopolise hospital services in a given county. In that regard, the standard applied by the 11th Circuit, who asked whether the hospital authority’s actions were “foreseeable” in the sense of “reasonably anticipated” by the legislator, makes more sense to me:

[I]t is not necessary, the court reasoned, for an anticompetitive effect to “be ‘one that ordinarily occurs, routinely occurs, or is inherently likely to occur as a result of the empowering legislation.’” (…) [Applying that standard], the court reasoned that the Georgia Legislature must have anticipated that the grant of power to hospital authorities to acquire and lease projects would produce anticompetitive effects because “[f]oreseeably, acquisitions could consolidate ownership of competing hospitals, eliminating competition between them.”

If you are going to protect the States’ right to organise regulated sectors in whatever way they please, you have to give a fair reading to their statutes. By applying the “presumption against state immunity” (p. 7) as drastically as it did, without properly considering what the Georgia legislature most likely intended, the Supreme Court made the state immunity doctrine a sham. 

Even more recently, the 4th Circuit backed the FTC’s decision against the North Carolina State Board of Dental Examiners, who had set out to prevent non-dentists from offering teeth-whitening services. Here, the basic legal approach is eminently sensible; being a private body consisting predominantly of dentists, the state board is asked to show that their behaviour was “actively supervised by the State itself”. (Cf. the 1980 Supreme Court ruling of California Retail Liquor Dealers Association v. Midcal Aluminum.) Since it wasn’t, the state board was nailed to the wall by the FTC and the court.

But again I’m not completely convinced by how it goes on. The problem is what the 4th circuit and the FTC are doing with regular competition law. After all, just because the state immunity doctrine of Parker does not apply, does not mean that the state board is automatically at fault. You still have to tick all the usual competition law boxes. And the box that trips them up, I think, is the one that we Europeans would call “justification”, and which in the US goes to the question of whether the “restraint of trade” in question is “unreasonable”, I requirement that is read into the Sherman Act in order to keep it from invalidating every contract ever (15 USC 1).

In the US, in order to decide that question, the courts first consider whether a “per se rule” applies – or as it is called now: a quick-look test – or whether the case should be treated under the rule of reason. Quoting the 1984 Supreme Court case of NCAA v. Board of Regents of the University of Oklahoma, the 4th Circuit explained:

The rule of reason applies “if the reasonableness of a restraint cannot be determined without a thorough analysis of its net effects on competition in the relevant market.”

The court does some hand waiving to argue that the distinction doesn’t matter much, before observing that

the Supreme Court has cautioned that we should be hesitant to quickly condemn the actions of professional organizations because “certain practices by members of a learned profession might survive scrutiny . . . even though they would be viewed as a violation of the Sherman Act in another context.” Nat’l Soc’y of Prof’l Eng’rs v. United States, 435 U.S. 679, 686 (1978).

So here’s my question: Where is this scrutiny? Immediately after this observation, the 4th Circuit quotes some more language that says the same, and then it “conclude[s] that substantial evidence supports the FTC’s factual findings regarding the economic effects of the Board’s actions and that those findings support the conclusion that the Board’s behavior violates § 1” (p. 31) and tells the state board to get the North Carolina state legislature to pass some legislation if there are legitimate public health concerns about non-dentists providing teeth whitening services (p. 32). 

This seems wrong to me. Surely it should be lawful for a group of companies to form a cartel if the alternative is to allow a market failure – in this case a threat to public health – to persist? If the public health threat truly exists, the net economic answer would be that the restraint of trade is the lesser of two evils, meaning that a rule of reason approach would conclude that there is no violation of the competition laws. And so it follows that the state board should be allowed to prove that this public health threat is real. I appreciate that the court’s role is to “uphold [the FTC’s] factual findings if supported by substantial evidence” (p. 26), but then at the very least I’d like for the court to say what that substantial evidence is. Instead, all I have is this, where, in its final opinion, we find the FTC categorically rejecting such a justification without even examining the facts. Instead, it quotes the Professional Engineers case already quoted above by the 4th circuit, where the Supreme Court said:

The Sherman Act reflects a legislative judgment that ultimately competition will produce not only lower prices, but also better goods and services. (…) The assumption that competition is the best method of allocating resources in a free market recognizes that all elements of a bargain—quality, service, safety, and durability—and not just the immediate cost, are favorably affected by the free opportunity to select among alternative offers. (…) The fact that engineers are often involved in large-scale projects significantly affecting the public safety does not alter our analysis. Exceptions to the Sherman Act for potentially dangerous goods and services would be tantamount to a repeal of the statute. In our complex economy, the number of items that may cause serious harm is almost endless.

Yeah, that’s just wrong. If you want to rule out self-regulation in favour of bureaucratic micro-management, that’s fine, but then you don’t get to call your approach a “rule of reason”.

Salomons

In last month’s Akzo Nobel v. Competition Commission, the Competition Appeal Tribunal treaded a number of fine lines to end up with what would have seemed at first glance to be a no-brainer of a result. Yes, the Competition Commission (“the CC”) has jurisdiction to forbid Akzo Nobel from acquiring a company called Metlac, given its finding that the merger would result in a substantial lessening of competition in the UK.

Judging from the language of the judgment, the difficulty of this question seems to have surprised everyone involved. The legal trickery involved is as follows: While the familiar question is whether the competition authorities have the right to look at a merger in the first place, here the question is only whether the CC has the right to impose this particular remedy. After all, parties did not dispute that the proposed merger might affect market conditions in the UK (par. 21), and that the relevant turnover exceeded the £ 70 million threshold of section 23 of the Enterprise Act 2002 (“the Act”). No-brainer.

Things went horribly awry, however, when the CC decided to forbid the merger, relying on section 41 and section 84 of the Act. Forbidding, per se, was not the problem. Forbidding an anticompetitive merger is the most obvious remedy imaginable, which is why it is listed first in Schedule 8 of the Act. No, the problem was whether the CC had the power to forbid Akzo Nobel from performing an agreement, given that arguably neither that company nor the agreement was located in the UK. The key language is in section 86 of the Act:

86 Enforcement orders: general provisions

(1) An enforcement order may extend to a person’s conduct outside the United Kingdom if (and only if) he is—

(a) a United Kingdom national;

(b) a body incorporated under the law of the United Kingdom or of any part of the United Kingdom; or

(c) a person carrying on business in the United Kingdom.

(…)

(3) An enforcement order may prohibit the performance of an agreement already in existence when the order is made.

(4) Schedule 8 (which provides for the contents of certain enforcement orders) shall have effect.

Given that the parent company Akzo Nobel Holding, the legal entity that would perform the offending agreement, is incorporated in the Netherlands and has its headquarters there, the only possible way for the CC to get at it is to show that Akzo Nobel Holding is carrying on business in the United Kingdom, something it didn’t have to show in order to get jurisdiction over the merger as such, and something it wouldn’t have to show if its remedy had instead focused only on Akzo Nobel’s conduct within the UK. (In other words, if they’d chosen a behavioural remedy instead of a structural one.) And that is a problem, because – as one would expect given the name – Akzo Nobel Holding NV doesn’t really carry on any real business whatsoever. (Although given the definition of section 129 of the Act, it carries on business in the Netherlands. Cf. par. 111.) The holding company just owns shares, directly or indirectly, in about 450 subsidiaries, several of which do carry on business in the UK.

Which brings us, much to everyone’s great surprise, to Salomon v. Salomon, an 1897 case so fundamental that every British and Irish law student – and probably many more in the rest of the world – has to study it on the first day of Introduction to Company Law. In that case, the House of Lords was asked to say that Salomon the majority shareholder was liable for the debts of Salomon Ltd, given that the company in question was nothing more than a sole proprietor shoe maker doing business as a company with the six other shareholders being nothing more than placeholders. (Under the Companies Act 1862 a company had to have at least seven shareholders.) The Lords, however, declined to “pierce the corporate veil” and held that plaintiff person and the defendant (bankrupt) company were distinct entities, meaning that the liquidator of the company could not recover the company’s debts from Mr. Salomon.

And now, 116 years later, the CC needed some way around that doctrine in order to be able to say that Akzo Nobel Holding NV – as opposed to its subsidiaries – was carrying on business in the UK. The solution was to take refuge in an idea that suggests that no piercing of veils is in fact happening, the idea of the “Single Economic Unit”. Like so many bits of creativity in English law, this one comes to us ultimately courtesy of Lord Denning, although the CAT does not cite him. The CC itself seems to have been reluctant to go there explicitly (cf. par. 99), but the CAT seizes on it with abandon. It lists several pages of authorities to the effect that the rule that a Single Economic Unit can be treated at law as such does not exist because the whole story amounts to nothing more than piercing the corporate veil in a way that is forbidden by Salomon (par. 100-107) before concluding that, in this case, none of those concerns matter. 

It must be said that if ever there was a case where the Single Economic Unit argument fit like a glove, it was this one. Akzo’s de facto organisational structure involved an Executive Committee and a slew of Business Areas, Business Units and Sub-Business Units, none of which corresponded even remotely to the legal structure of the group (par. 49-50). Individual corporations tended not to have individual strategies, or even natural persons as directors or secretaries. But then again, much the same could be said for A. Salomon & Sons Ltd; while it at least had human beings for shareholders, its corporate strategy was determined entirely by its majority shareholder. By checking against the Salomon case, it becomes clear that the CAT comes dangerously close to distinguishing the Salomon precedent – and the many other precedents that build on it – on no firmer basis than that the Akzo case involves shareholders who are themselves corporations. And even though from an economics point of view, that might be sensible, legally it is extremely dicey. As the CAT itself said:

82. In our judgment, the appeal to the economic purposes of the Act and the apparent irony in that context of allowing technical legal concepts to limit the achievement of those purposes is, in the present context, misconceived. It is, of course, true that the subject-matter of the Act comprises the assessment and regulation of economic issues but that subject-matter is realised through a legally constituted framework of procedure and enforcement. (…) There can be no special dispensation from those general principles, in the absence of any statutory provision to the contrary, simply because the substance of the issues under consideration is economic.

There is another reason why the CAT’s reasoning might be considered weak. The quoted language comes from a discussion of why the jurisdictional basis for considering a merger in the first place should be different from the jurisdiction to forbid it. Essentially the Tribunal’s reply is that the different language used in the two provisions is quite deliberate, that Parliament had clearly made the distinction on purpose, and that therefore Parliament’s will should be respected: Not all mergers that are within the jurisdiction of the CC can be forbidden by the CC.

And yet, looking at this Single Economic Unit approach, it is not obvious that there are in fact many cases left that fit that description. As the CC itself concluded, Akzo’s governance structure is typical for large multinationals (cf. par. 66). And small multinationals that operate in a UK market will normally have a more direct presence there. So, realistically, does the CAT’s interpretation of section 86(1)(c) really preserve the difference with section 23? A disinterested reader may well conclude that the CAT in fact did the opposite of what it said it would do in par. 82: it put the economic logic of the case, and of merger review in general, before the law.

For this reason, if I were advising Akzo Nobel, I would suggest taking this case to the Court of Appeals. Given that this case touches on important issues of jurisdiction over mergers and company law, with the former being tackled in this case for the first time (par. 74), there is no reason why the CAT or the Court of Appeals should not give leave to appeal.

This Week and Last Week in Luxembourg

The Grand Chamber (Judge Juhász) reaffirmed that in competition law the actual facts on the ground are all that matter, regardless of anyone’s intentions. In this case, both the lawyers and the Austrian Kartellgericht said that the cartel in question was permitted, but that does not prevent the Austrian authorities from fining them anyway 15 years later. Bundeswettbewerbsbehörde and Bundeskartellanwalt v. Schenker et al. Cf. European Law Blog

The Grand Chamber (Judge Ó Caoimh) also gave the Czech Republic a € 250.000 lump sum fine for failure to comply with an – otherwise boring – infringement judgment. Commission v. Czech Republic

Guillermo Cañas’s attempt to marshal the forces of EU competition law against the world anti-doping agency WADA and against the ATP failed before the Court of Justice (Judge Bay Larsen) as it had before the Commission and the General Court. The problem continues to be that the applicant, having retired, no longer has an interest in fact in the dispute. Cañas v. Commission (FR)

In Impacto Azul Lda v. BPSA 9 et al., the Court (Judge Lõhmus) held that art. 49 TFEU allows national legislation that “excludes the application of the principle of the joint and several liability of parent companies vis-à-vis the creditors of their subsidiaries to parent companies having their seat in the territory of another Member State”, because the parent can easily contract around this.

The Court (Judge Rosas) agreed with AG Mengozzi that Luxembourg had discriminated impermissibly against foreign students in its system for financial aid. However, the way it got there was quite different. Giersch et al. v. Luxembourg Cf. Eutopia Law blog

Now that all the easy cases on mutual recognition of professional qualifications are dealt with, it’s time to move on to more difficult situations. In Nasiopoulos v. Ipourgos Igias kai Pronoias we have a German-trained Greek medical masseur-hydrotherapist (‘Masseur und medizinischer Bademeister’) who wants to work as a physiotherapist in Greece. While the Court (Judge Levits) agrees that that is a bit of a stretch, it thinks he should at least be allowed to practice that part of the profession that he is actually qualified for.

In the joined cases VG Wort v. Kyocera et al. and Fujitsu and HP v. VG Wort, the Court (Judge Malenovský) gave some guidance on art. 5(2)(b) and 6 of Directive 2001/29, the copyrights directive. As it turns out, printer manufacturers can be sued for some of the total “fair compensation” owed for all those naughty internet users printing off books in their attics, but not all of it.

The Court (Judge Jarašiūnas) signed off on a Maltese excise duty on mobile telephone use, concluding that neither art. 12 nor art. 13 of the Authorisation Directive applied to such a “consumption tax”. Vodafone Malta et al. v. Avukat Ġenerali et al.

AG Jääskinen, quoting pre-Supreme Court Louis Brandeis, argued that there is no general “right to be forgotten” under existing EU data protection law. The defendants wanted an allegedly incorrect search result deleted from Google. Google v. Agencia Española de Protección de Datos (AEPD) and Mario Costeja González Cf. UK Human Rights Blog and European Law Blog

AG Mengozzi has a state aid case in national court, where Deutsche Lufthansa complained about alleged state aid from Frankfurt-Hahn airport to Ryanair. As a result of this litigation, the Commission decided to get interested, with the result that the standstill clause of art. 108(3) TFEU came into effect. Given that the German court doesn’t necessarily agree that there is unlawful state aid here – the case was initially rejected by the Landgericht – the question is what the distribution of responsibilities and obligations is between the Commission, the national court and, potentially, the ECJ. Deutsche Lufthansa v. Flughafen Frankfurt-Hahn (NL, DE, FR)

For whatever reason, they let AG Kokott near one of those classic legal basis & common commercial policy cases. (Cf. my LL.M. thesis, long ago, here.) The case is about this Council of Europe convention. The Commission wants the EU to ratify it based on the normal rules of the common commercial policy under art. 207 TFEU, while the Council prefers a mixed agreement based on art. 114 TFEU. Curiously, the AG argues – correctly – that art. 3(2) TFEU codifies the ERTA doctrine, but then uses that to conclude that the EU’s competence in this area is not only exclusive, but also based on art. 207 TFEU. Commission v. Council

The General Court rejected two action for annulment in the Aluminium Fluoride cartel case. Most creatively, one of the applicants – ICF from Tunisia – tried to plead art. 36 of the Euro-Mediterranean agreement between the EU and Tunisia from 1998 as a grounds of invalidity. Unsurprisingly, the Court did not go for that one. ICF v. Commission (FR) and Fluorsid SpA and Minmet Financing v. Commission

This Week and Last Week in Luxembourg

The British system of special advocates for national security immigration cases survived a challenge under the free movement directive this week. While the Grand Chamber (Judge Von Danwitz) set some limits, those are the same as the limits already set by the ECtHR and the UK Supreme Court: Only when it is strictly necessary, and in any event the “essence” of the case must be disclosed. ZZ v. Secretary of State for the Home Department Cf. UK Human Rights Blog and Eutopia Law Blog

The big competition case last week was Bundeswettbewerbsbehörde v. Donau Chemie et al., where the Court (Judge Tizzano) held that access to a competition case file cannot be made subject to a right of veto of the parties. Even in cases of leniency submissions, the national court has to assess the balance of interests. Note that the new Commission proposal for a Directive on private damages suits in competition law forbids access to statements made in leniency submissions and settlement negotiations categorically. COM(2013) 404 Cf. Kartellblog and, on the Proposal, Recent Developments in European Consumer Law Blog

In January 2012, the General Court (Judge Forwood, of course) held that there was no longer any need to adjudicate the asset freeze case of Ayadi v. Commission, because Mr. Ayadi had since been removed from the asset freeze list. The Court (Judge Rosas) affirmed last month’s Grand Chamber judgement in Abdulbasit Abdulrahim v. Council (also by Judge Rosas) to hold that that was wrong. Ayadi v. Commission

In the Sardinian Hotel Aid case of HGA et al. v. Commission, the Court (Judge Arabadijev) signed off on the use by the Commission of a “corrective decision” in order to update a state aid procedure in mid-stream in light of new information provided by the Italian authorities (don’t ask). In so doing, the Court upheld the General Court’s decision in Regione autonoma della Sardegna et al. v. Commission (NL, DE, FR).

If one public authority hires another to clean its offices without any kind of (traditional) collaboration being established between them, that constitutes a public service contract under Directive 2004/18, meaning that it should have been tendered. Piepenbrock Dienstleistungen GmbH & Co. KG v. Kreis Düren

Ryanair lost its appeal in the Alitalia state aid case. The Commission’s decision finding that the loan provided by the state constituted unlawful state aid while the state’s other measures did not now stands. Ryanair v. Commission

As it turns out, just because you didn’t mention jurisdiction when opposing a the European order for payment, doesn’t mean you’ve forfeited the right to do so in the regular procedure under Regulation 44/2001. Goldbet Sportwetten v. Sperindeo

AG Mengozzi is proposing that, for a change, the Swiss should not end up holding the short end of the stick in a dispute about the tax-free amount for German inheritance tax. Welte v. Finanzamt Velbert

AG Kokott delivered an opinion on the rights of the citizen taxpayer when a Member State asks another Member State for information. She concluded that, as far as EU law is concerned, the citizen has no rights in this context. Jiří Sabou v. Finanční ředitelství pro hlavní město Prahu (NL, DE, FR)

The facts in the unfair commercial practices case of CHS Tour Services v. Team4 Travel make for a pretty interesting case, but tragically the ECJ’s portion of it is pretty straightforward. Defendant describes its arrangement as “exclusive” based on its contract with the hotel in question, plaintiff manages to book there anyway, and therefore challenges the use of “exclusive”. Result, according to AG Wahl: “Where a commercial practice falls within the scope of art. 5(4) of Directive 2005/29, it is of no relevance whether the criteria under art. 5(2)(a) and/or art. 5(2)(b) are also fulfilled.” So the plaintiff wins. Cf. Recent Developments in European Consumer Law Blog

According to AG Mengozzi, the requirement that you have to provide your fingerprints for your passport does not violate art. 8 Charter. Schwarz v. Stadt Bochum (DE, FR)

AG Jääskinen made some pointed remarks about the brevity with which the French Cour de Cassation formulated its prejudicial question (par 19), before concluding that the questions posed are irrelevant for the dispute at bar and therefore inadmissible. The case concerns the locus delicti of a case of alleged music piracy under Regulation 44/2001. Pinckney v. KDG Mediatech AG (NL, DE, FR)

The General Court (Judge Martins Ribeiro) handed down an interesting access to documents judgment last week. In Stichting Corporate Europe Observatory v. Commission, it held that the fact that certain documents about the EU-India free trade negotiations had been provided to trade associations – i.e. potentially to large numbers of people – did not mean that the Commission had essentially already made those documents public.

Fyra

In his weekly column, which is usually unique among opinion pieces in being both carefully reasoned and highly insightful, Bas Heijne tore into a slew of targets yesterday. The reason why he lost his calm like that? Fyra.

Fyra is - or rather: was - the high-speed train between Amsterdam and Brussels. There is also a high-speed from Amsterdam to Brussels and then on to Paris, the Thalys, but that train works just fine and is not the topic of this story. Fyra, on the other hand, is an unmitigated disaster. It was launched on December 9, last year, and by the time I took the highspeed (Thalys) to Brussels in early January, it already had a reputation for offering at best an even chance of reaching its destination. Later that month, it was taken out of service, as reported by the BBC here. On May 31, the Belgian railways announced they were cancelling the Fyra service permanently, and a few days later the Dutch followed suit.

So who's to blame? Bas Heijne mentions a few people, but he seems mostly interested in talking about Parliament. However, let's start at the beginning:

• The supplier of the train, the Italian company AnsaldoBreda, seems to have supplied a train that was not fit for purpose.
• NS and NMBS took delivery of a train that was not fit for purpose.
• NS and NMBS contracted with AnsaldoBreda in the first place.
• The Dutch and Belgian governments are the only shareholders of NS and NMBS respectively, so clearly they dropped the ball.
• Likewise, there are some things wrong with the regulatory system. More on that below, but again it is the governments of the two countries that are responsible for that one.
• And finally, Mr. Heijne notes how Parliament (the Dutch one) seems to spend all of its time either screaming at the government about something that was on the front pages of the newspapers the day before, or screaming at the government because of some mess that resulted from the government giving it what it asked for. While that is quite correct, I'm not sure if it is such a relevant consideration in this particular instance. I don't recall any screams from Parliament about how we urgently needed a highspeed connection with Belgium. The government seems to have originated that idea all on its own.

So who's really to blame? Well, it may be my professional background, but I think the issue is one of regulation, not politics. Remember the issue of NS: Like Schrödinger's cat, it is two things at once. It is a state-owned for-profit company that contracts with another state-owned for-profit company for access to the network, which it is entitled to because of a concession it was granted by its owner, the state. All the money it makes running trains and avoiding taxes it pays out to the state in dividends.

In the 1990s, this schizophrenia infected even the state. The Treasury department viewed NS as a for-profit subsidiary and advocated treating it as such until its privatisation, which was to happen sooner rather than later. The Transport department, on the other hand, viewed it as a state-owned enterprise that should be encouraged to run the trains as wisely as possible based on the government's instructions without being burdened with such nuisances as competition or privatisation. The former was run almost exclusively by the liberal VVD party between 1994 and 2007, mostly through the highly influential Deputy-Prime Minister and occasional party leader Gerrit Zalm, while the latter ministry was traditionally a bastion of Christian-Democrats and Socialists. And so, with the ebbs and flows of power between parties and between ministries, the government's policy goals with regard to the railway sector changed as well. That is how the country ended up with a fully unbundled railway sector with competitive tenders in large parts of the system, but also with a state-owned incumbent who is given the most important concession outright every few years. (The last time until 2025.)

Highspeed South, which includes both Fyra and Thalys, is a wonderful example of this schizophrenia at work. When the Treasury was powerful, it pushed through a competitive tender for this concession. NS was so paranoid about letting any foreign company onto the Dutch market that they went crazy and overbid massively. As Mr. Heijne's own newspaper, the NRC, discovered in 2011, the company's internal bid team thought that €120 - 130 million per year would be the maximum realistic bid. The board, however, added to that in a series of meetings until they ended up with € 148 million, a sum € 18 million higher than the € 130 million that the Transport Ministry had estimated as the maximum. The bid was so high that the government went back and encouraged them to re-evaluate, but in the end the bid was accepted. (No other company even came close to bidding € 100 million, much less € 148 million, so NS's concern was entirely unwarranted.)

When High-Speed Alliance, the NS-KLM joint venture tasked with running the trains, went bankrupt in 2011, the Treasury had long since lost its influence. So the liberal approach to railway regulation was unceremoniously replaced by a conservative approach: The Dutch company gets to keep its concession. Instead of re-tendering, the highspeed service was added to NS's regular concession and granted outright, at a reduced price of € 108 million per year. (Ironically, since 2010 the Transport Minister was a liberal.) Nationalism and bureaucracy instead of competition.

In my view, that is how we ended up with this Fyra debacle. As NRC wrote in January, the reason why in 2004 NS and NMBS bought the AnsaldoBreda trains instead of rolling stock from another manufacturer was purely a matter of price. They compromised on speed (which you wouldn't need anyway given how close together the stops are) and quality in order to get the cheapest possible train. That decision made sense from the point of view of a company that was in over its head, having bid way too much in a competitive tendering process. The trouble only arrived now, long after all the responsible railway executives and government ministers have retired.

To review:

• 2001: The government screws up the tender by accepting a bid that was unrealistically high. (Tenders are hard.)
• 2004: NS and NMBS buy the cheapest trains they can get their hands on.
• 2011: HSA collapses and is rescued by the Dutch state.
• 2013: The trains start running and then break down. 

This is not a problem that started in Parliament. They wrote a law that is fundamentally sound. It just leaves a little too much room for shenanigans, so shenanigans is what we got. The solution seems to be that NS should be privatised post haste. A company that makes € 300 million profit per year should fetch a handy sum, which should please the orthodoxy, and theoretically privatisation should remove any further temptation for the Transport Ministry to do anything stupid. Let a private NS run the trains it has contracted to run, and let the Transport Ministry and the Regulator ACM fine them up the wahzoo if they screw it up.