Thursday, January 30, 2014

Ferries & Competition - Appendix

Good news: In the Terschelling Ferries case that I blogged about on Monday, EVT won on appeal! The Court of Appeals in The Hague ruled today that EVT gets to continue to operate between Harlingen and Terschelling for the time being. (A new regulatory scheme is currently the subject of parallel litigation. Don't ask.)

Competition Law
As I predicted, the Court of Appeals did not go near the competition law aspects of the case, other than to discuss a letter sent by the Dutch Competition Authority ACM in November last year, where the ACM expressed grave concerns about the Minister's proposed solution. In this letter, it confirmed that competition law probably applied, because the government would probably qualify as an undertaking in this matter, given the Höfner precedent I mentioned.

The only difference between the ACM's tentative analysis and mine is that they approached this as a possible case of abuse of dominance by the State, while I preferred - and continue to prefer - to think of it as collusion between the State and TSM. In the end, that does not affect the analysis very much, except that the collusion frame would open the door to a fine for TSM. It is true that the State is almost certainly dominant in the market for Waddenzee port facilities, assuming the Harlingen port isn't an outright essential facility. Either way, the State's decision to terminate the contract with EVT clearly implicates one or more examples of abuse listed in the Treaty:
Article 101 TFEU (ex Article 81 TEC) 1. The following shall be prohibited as incompatible with the internal market: all agreements between undertakings (...) which have as their object or effect the prevention, restriction or distortion of competition within the internal market, and in particular those which: (b) limit or control production, markets, technical development, or investment; (c) share markets or sources of supply;
Article 102 TFEU (ex Article 82 TEC) Any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States. Such abuse may, in particular, consist in: (b) limiting production, markets or technical development to the prejudice of consumers;
(Obviously these provisions don't directly apply, since the required impact on trade between Member States is missing, but the Dutch Competition Act contains identical language for strictly domestic situations.)

Contract Law
The reason why I got my prediction wrong - I predicted that EVT would lose - is that I underestimated how much the Court of Appeals would be willing to second-guess the government's decision about what the public interest required, and how much the Court would be willing to do so in an expedited procedure. (Note the timeline: The District Court in The Hague heard this case on December 17 and ruled on December 31. EVT submitted its grievances with the Court of Appeals on January 10. There was an oral hearing on January 21, and the Court of Appeals ruled today.)

The District Court used a fairly deferential standard, holding essentially that the State could reasonably come to the conclusion that the public interest required termination. The Court of Appeals, on the other hand, relied on a Supreme Court decision from 2012 about a rental contract between a small business owner and a foundation specialising in playgrounds where the subject of the lease was a small recreational area. In that case the Supreme Court held that for long term leases a decision to terminate the contract must not necessarily be judged only against a deferential abuse of right standard, but that reasonableness ("redelijkheid en billijkheid") under art. 6:248 Civil Could could require that the court take a more general view of the circumstances of the case and the interests of each party.

I think that the Court of Appeals put too much weight on that precedent. The reasonableness standard of art. 6:248 Civil Code is particularly important to protect a weak party against a stronger one. While parties don't get any stronger than the State, and while EVT was faced with being put out of business, I don't think the circumstances of the case were analogous to those of the Supreme Court's case.  EVT knew what it was getting into when it first started the service, just like it knew what it was getting into when it asked and received permission to start using a larger ship. It was trying to enter a previously monopolised market, and it knew that the State (and the municipalities of Vlieland and Terschelling) would side with the incumbent in case of trouble. Hence the parallel litigation about the new concessions regime, aforementioned; EVT needs for this entire market to be organised differently if it is to have a fair chance. Making a competition law argument could have forced the State's hand, but this contract law approach is just too forgiving.

So why did the Court of Appeals go there? Well, I can only speculate, but it feels suspiciously like it was trying to hold the State to a public law standard even though this was a private law case. In administrative law, the standard would have been somewhere in between the District Court's abuse of right standard and the Court of Appeals' reasonableness approach. While the administrative law standard officially asks whether the government entity could have reasonably done as it did, in practice this allows for quite a bit of second-guessing. But this was not an administrative law case.

Finally, it should be mentioned that the Court of Appeals flagged up a much better contract law argument, without however relying on it. After holding that the State acted unreasonably in terminating the lease without sufficient cause and without consulting with EVT, the Court discussed EVT's chances in a full trial, i.e. a non-expedited one. It said that it is "not impossible" that EVT would win on its competition law argument (par 12), and then it noted that there may well be an issue with the contractual provision that the State relied on to terminate the contract. The provision in question requires, simply put, that continuing on with the contract should "prevent" a proper service with the islands. The District Court had interpreted that provision broadly, but the Court of Appeals proposed a more narrow reading. In par. 13-14 of its judgement, the Court argued that in a full trial EVT may well succeed in proving that its service is not actually preventing the service in any way, shape or form.

It may seem like a technicality, but I much prefer this argument to the one the Court actually relied on. Too bad it will probably never see the light of day, because while theoretically an expedited hearing is meant as a temporary measure until a full trial can be held, it is exceedingly rare for an expedited judgement to be followed by a proper trial. So unless the State takes this case to the Supreme Court, this litigation is now over.

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