Extraterritoriality of EU Economic Law: The Application of EU Economic Law Outside the Territory of the EU (European Union and its Neighbours in a Globalized World, 4) 3030822907, 9783030822903

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European Union and its Neighbours in a Globalized World 4

Nuno Cunha Rodrigues   Editor

Extraterritoriality of EU Economic Law The Application of EU Economic Law Outside the Territory of the EU

European Union and its Neighbours in a Globalized World Volume 4

Series Editors Marc Bungenberg, Saarbrücken, Germany Mareike Fröhlich, Saarbrücken, Germany Thomas Giegerich, Saarbrücken, Germany Neda Zdraveva, Skopje, North Macedonia Advisory Editors Başak Baysal, Istanbul, Turkey Manjiao Chi, Beijing, China Annette Guckelberger, Saarbrücken, Germany Ivana Jelić, Strasbourg, France Irine Kurdadze, Tbilisi, Georgia Gordana Lažetić, Skopje, North Macedonia Yossi Mekelberg, London, UK Zlatan Meškić, Riyadh, Saudi Arabia Tamara Perišin, Luxembourg, Luxembourg Roman Petrov, Kyiv, Ukraine Dušan V. Popović, Belgrad, Serbia Andreas R. Ziegler, Lausanne, Switzerland

The series “The European Union and its Neighbours in a Globalized World” will publish monographs and edited volumes in the field of European and International Law and Policy. A special focus will be put on the European Neighbourhood Policy, current problems in European and International Law and Policy as well as the role of the European Union as a global actor. The series will support the cross-border publishing and distribution of research results of cross-border research consortia. Besides renowned scientists the series will also be open for publication projects of young academics. The series will emphasize the interplay of the European Union and its neighbouring countries as well as the important role of the European Union as a key player in the international context of law, economics and politics. Unique Selling Points: • Deals with a wide range of topics in regard of European and International Law but is also open to topics which are connected to economic or political science • Brings together authors from the European Union as well as from accession candidate or neighbouring countries who examine current problems from different perspectives • Draws on a broad network of excellent scholars in Europe promoted by the SEE | EU Cluster of Excellence, the Europa-Institut of Saarland University as well as in the South East European Law School Network

More information about this series at http://www.springer.com/series/16257

Nuno Cunha Rodrigues Editor

Extraterritoriality of EU Economic Law The Application of EU Economic Law Outside the Territory of the EU

Editor Nuno Cunha Rodrigues Law Faculty University of Lisbon Lisbon, Portugal

ISSN 2524-8928 ISSN 2524-8936 (electronic) European Union and its Neighbours in a Globalized World ISBN 978-3-030-82290-3 ISBN 978-3-030-82291-0 (eBook) https://doi.org/10.1007/978-3-030-82291-0 The European Commission support for the production of this publication does not constitute an endorsement of the contents which reflects the views only of the authors, and the Commission cannot be held responsible for any use which may be made of the information contained therein. © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021, corrected publication 2021 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Contents

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Nuno Cunha Rodrigues Part I

1

EU Competition Law

Unilateral Application of Competition Laws to Transnational Business Transactions: The Development of the “Effects” Doctrine in the US and the EU . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Peter Behrens Extraterritoriality in EU Competition Law . . . . . . . . . . . . . . . . . . . . . . Marek Martyniszyn

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Extraterritoriality in Japanese Competition Law: Reaching Foreign Entities in the Face of Changing Global Norms . . . . . . . . . . . . . . . . . . . Masako Wakui

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Extraterritorial Effects of EU Law on Gas Pipelines: The Case of Gazprom and Nord Stream 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ignacio Herrera Anchustegui and Nuno Cunha Rodrigues

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Extraterritoriality of EU Competition Law and the Changing Face of Global Cartel Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pieter J. F. Huizing

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The Three Body Problem: Extraterritoriality, Comity and Cooperation in Competition Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pedro Caro de Sousa

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The Extraterritoriality of European Competition Law Under a Brazilian Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Daniel Favoretto Rocha

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Part II

Contents

Foreign Investment and Internal Market

EU, China, and Technical Standards in the Belt and Road Initiative (BRI): Extraterritoriality or Transnational Governance? . . . . . . . . . . . Francis Snyder

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Filling the Regulatory Gap to Address Foreign Subsidies: The EC’s Search for a Level Playing Field Within the Internal Market . . . . . . . . . Nuno Cunha Rodrigues

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The Conclusion of Trade Agreements and the EU’s Duty to Respect Human Rights Abroad: Extraterritorial and Territorial Considerations . . Eva Kassoti and Ramses A. Wessel

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Extraterritorial Effects of EU Financial Markets Laws . . . . . . . . . . . . . Johan Schweigl Extraterritoriality and EU Standards in Investment Law: The Reform of the Energy Charter Treaty . . . . . . . . . . . . . . . . . . . . . . . Claas Friedrich Germelmann Part III

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EU Consumer Law

Adjusting National Consumer Protection Legislation in Georgia, Moldova and Ukraine to EU Standards: Practices, Experience and Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Oksana Holovko-Havrysheva Part IV

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EU Environmental Law

Extraterritoriality and the Impact of EU Regulatory Authority: Environmental Protection as Soft Power . . . . . . . . . . . . . . . . . . . . . . . . Jamile Bergamaschine Mata Diz and Hélio Eduardo de Paiva Araújo

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Contributions of the Seventh Framework Programme of the European Union on Environmental Matters: Future Perspectives on the Matter . . . Carlos Molina del Pozo

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Part V

Data Protection

The Extraterritoriality of the Right to Data Portability: Cross-Border Flow Between the European Union and Brazil . . . . . . . . . Augusto Jaeger Junior and Daniela Copetti Cravo

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Personal Data and Transborder Flows Between the EU and the US: Dilemmas and Potential for Convergence . . . . . . . . . . . . . . . . . . . . . . . . Alexandre Veronese

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Correction to: Filling the Regulatory Gap to Address Foreign Subsidies: The EC’s Search for a Level Playing Field Within the Internal Market . . . Nuno Cunha Rodrigues

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Introduction Nuno Cunha Rodrigues

Abstract In this Chapter, the author provides a global overview of the Collective Book entitled “Extraterritoriality of EU economic law”. It starts with a general description of the purposes of the Jean Monnet Chair that led to this book. Then it moves on to a description of each of the subsequent chapters, distributed along five parts entitled: Part 1—EU competition law; Part 2—Foreign Direct Investment (FDI) and internal market; Part 3—EU consumer law; Part 4—EU environmental law; Part. 5—EU data protection.

The application of EU law considers an appropriate link with the territory of the Union in order to respect the basic principle of territoriality enshrined in public international law. However, in some cases, public international law allows States to exercise their jurisdiction extraterritorially, for example considering the objective territorial principle or the subjective territorial principle. Over the years, EU economic law has been expanding its territory, by applying exceptions to the principle of territoriality and adding new elements of connection. This phenomenon—that we call “extraterritorial effects of EU economic law”—can be noticed in different branches of law, such as EU competition law; Foreign Direct Investment (FDI) and internal market; EU consumer law; EU environmental law and EU data protection. The recognition of possible extraterritorial effects of EU economic law has been accompanied, in recent years, by a new EU attitude in international trade that is noticeable in the change in the external trade policy of the EU. This is unquestionably motivated by the freezing of multilateralism in international trade. Academic analysis of these topics lay behind the publication of this book. In the end, the objective was to understand how EU economic law is perceived and applied outside the territory of the EU and the possible global reach of EU law through hard N. Cunha Rodrigues (*) Law Faculty, University of Lisbon, Lisboa, Portugal e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 N. Cunha Rodrigues (ed.), Extraterritoriality of EU Economic Law, European Union and its Neighbours in a Globalized World 4, https://doi.org/10.1007/978-3-030-82291-0_1

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law and soft law. Furthermore, the book also aims to understand how the EU prepares itself for possible extraterritorial effects produced outside the EU that can distort the functioning of the EU internal market. A group of prestigious experts and academicians in the field of EU law were invited by the author to make up this volume. The idea was to have different perspectives and thoughts in this matter coming from all over the world. By doing so, it was expected that would provide different international angles of approach to the chosen topic that would help to enrich the academic analysis of EU law. The authors were thus invited to analyse the general topic—“Extraterritoriality of EU economic law”—in the light of five different areas of EU law: (i) EU competition law; (ii) Foreign Direct Investment (FDI) and internal market; (iii) EU consumer law; (iv) EU environmental law and (v) EU data protection. The final result has clearly gone beyond any of the initial expectations. In section 1, Peter Behrens explains the development of the “effects” doctrine in the US and in the EU. Peter starts from the historical discussion on the jurisdictional aspects of implementing national competition rules in international economic relations and the four different approaches that may be identified in this respect: the unilateral, the bilateral, the regional, and the multilateral one. The author then discusses the jurisdictional principles of public international law to which the EU is bound and which define the outer limits of its extraterritorial jurisdiction. Peter Beherns then analyses the evolution of the ECJ’s jurisprudence concerning the extraterritorial reach of EU competition rules concluding that, without going beyond the limits that public international law principles have established, the EU is now as equally well equipped as the US to protect its market against restrictive practices from abroad. Marek Martyniszyn’s paper, entitled Extraterritoriality in EU Competition Law, critically analyses the extraterritorial application of competition law by the EU. It explains that as a unilateral action, extraterritoriality was never in the EU’s DNA and concludes that the EU’s many efforts to encourage multilateral solutions and the limitations of the available cooperative instruments underscore the necessity, not convenience, of the EU’s embracing of extraterritoriality—the only effective tool to address cross-border anticompetitive practices. In the following paper, Masako Wakui explains how extraterritoriality is dealt with according to Japanese Competition Law. She starts by explaining that the Japanese Antimonopoly Act (AMA, 1947) does not state how far its provisions reach internationally, and the Japan Fair Trade Commission (JFTC) has been extremely cautious about applying the AMA to actions taken abroad. Masako’s paper studies article 6 of the AMA, its function, limitations and criticisms. From here she moves to the analysis of the gradual changes to expand the reach of the AMA. At the end, among other conclusions, Masako Wakui explains that after several decades of hesitation, Japan has finally decided that the AMA applies to an act performed by a foreign entity in a foreign country, so long as that act undermines the free competition regime in Japan.

Introduction

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In the next paper, Ignacio Herrera Anchustegui and Nuno Cunha Rodrigues utilise a case-study—that of Gazprom and Nord Stream 2—in order to explain how EU law tries to produce extraterritorial effects. They conclude that, in the specific field of gas, the EU has been adopting a strategy that, on the one hand, follows basic principles of public international law— such as the territoriality principle—but, on the other hand, seeks to ensure that third countries respect EU law when conducting business within its borders. This latter can be achieved through links established in EU legislation that promote what can be called the “territorial extension” of EU law. According to the authors, this is the case with the Gas Directive 2019/692. The scope of this has been extended when compared with its predecessor, without this implying an extraterritorial application of EU energy law to import pipelines from third states. They conclude that the Gas Directive only applies with respect to the portion of the pipeline located in the territorial sea of the country in which it has its entry point. However, its application on EU territory generates direct or indirect effects outside the EU territory, affecting part or the whole of the pipeline. After this, Pieter J. F. Huizing explains the extraterritoriality of EU competition law and the changing face of global cartel enforcement. This chapter is focused on the approach to extraterritoriality adopted by the Commission and the EU Courts, against the specific background of global cartel enforcement. Pieter J. F. Huizing concludes that from the perspective of efficiency for authorities and proportionality for cartel defendants, the changing face of global cartel enforcement calls for jurisdictional restraint and enhanced international inter-agency coordination on case allocation and overall sanctioning. In the following paper, Daniel Favoretto Rocha explains the extraterritoriality of EU competition law from a Brazilian perspective. The author explores the potential effects of EU competition law extraterritoriality over Brazil. It firstly identifies whether EU extraterritoriality could impact Brazilian jurisdiction and, then, explains how Brazil could be affected. The paper demonstrates the expected increase in common-jurisdiction cases, based on the trade relation between Brazil and Europe and on the legal criteria of qualified effects. At the end, it concludes that EU extraterritoriality will create challenges for harmonizing competition policies and will require Brazilian market agents to increasingly consider EU competition policy in their legal risk analysis. In section 2, foreign direct investment and its connection with the EU internal market are analysed from the view of possible extraterritorial effects produced both from and in the EU. Francis Snyder’s chapter explores relations between the European Union (EU) and China in the context of China’s Belt and Road Initiative (BRI). It focuses on technical standards, which are an integral part of the BRI. The author explains how standards are norms that seek to translate general objectives into specific technical requirements and that BRI is a normative meeting ground, a crucible of legal pluralism and potential extraterritoriality. It concludes that relations between the EU and China in the BRI are addressed most fruitfully, not through the concept

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of extraterritoriality, but instead by ideas of regulatory cooperation and transnational governance. In the following chapter, Nuno Cunha Rodrigues starts from the perceived EU gap to address foreign subsidies. In the paper entitled “Filling the regulatory gap to address foreign subsidies: the EC’s search for a level playing field within the internal market”, breaches in EU competition law are scrutinized, namely in the light of the EU merger control regime and article 101 and 102 of the TFEU. The effects of foreign subsidies in the internal market are also studied from the point of view of state aid rules. Finally, in section 4 and 5 of the paper the new FDI-screening Regulation and the White Paper on levelling the playing field as regards foreign subsidies are examined. It concludes that the EU is gradually becoming more proactive and equipped with legal instruments that welcome the effects theory and which will allow the EU to evaluate economic policies followed by third countries, especially related to investment in the EU when associated with foreign subsidies. In the next chapter, Eva Kassoti and Ramses A. Wessel explore the question of whether the EU is bound by human rights obligations towards individuals located outside the territory of the Member States when it concludes trade agreements with third countries. In relation to the possible extraterritorial applicability of the Charter of Fundamental Rights, it is argued that territorial criteria hold no relevance in determining the Charter’s applicability. In the following paper, Johan Schweigl discusses extraterritoriality in the EU legal framework concerning the regulation of financial markets. Having first outlined and categorised the core aspects of extraterritorial effects of laws, the author presents a list of respective laws with a short description targeting their extraterritoriality. In the end, the author systemises existing EU laws according to the nature of their extraterritorial effects. After this, Claas Friedrich Germelmann provides an analysis of extraterritoriality and EU standards in Investment Law based on the reform of the Energy Charter Treaty. The author concludes that if, after all, an indirect “extraterritorial” impact of EU legal standards in the field of international investment law cannot be denied, it is at the same time conditional on compromise solutions providing that a rule-based, international approach should work. Furthermore, it concludes that this has long been the paradigm of EU external relations and this should still be its priority in international investment law. In section 3, possible extraterritorial effects of EU consumer law are seen through the lens of Georgia, Moldova and Ukraine. Here, Oksana Holovko-Havrysheva provides a description of practices, experience and challenges of national consumer protection legislation in Georgia, Moldova and Ukraine in the light of EU Standards. The author explains that each of these countries faces, and has faced, challenges on the path to the rapprochement of their legislation and regulatory practices conforming to the EU acquis. Okasana Holovko-Havrysheva concludes that Georgia, Moldova and Ukraine, being at different stages in the approximation of their domestic consumer protection legislation to the EU acquis, face the need to develop their national consumer protection policies coherently with their economic policies

Introduction

5

in order to make consumer protection standards affordable by local businesses and comply with the approximation obligations per se. In section 4, possible extraterritorial effects of EU environmental law are analysed. In the first paper, entitled extraterritoriality and the impact of EU Regulatory authority: environmental protection as soft power, Jamile Bergamaschine Mata Diz and Hélio Eduardo de Paiva Araújo analyse the case of the adoption of criteria to allow access into the EU market by log producers and/or traders, based on EU regulations that address a specific sector and the main purpose of which is provided by invoking environmental protection through the fight against deforestation. In the second one, Carlos Molina del Pozo analysis contributions from the VII framework programme of the EU on environmental matters and clarifies future perspectives on the matter. The author seeks to offer a perspective on some of the main current problems that environmental matters face such as the US withdrawal from the Paris Agreement or the irremediable environmental catastrophe and the possible non-return of disasters caused in the last century which, as the author claims, seem to be irreversible. In the final section 5 the extraterritoriality of EU data protection is studied in two papers. In the first, Augusto Jaeger Junior and Daniela Copetti Cravo study the extraterritoriality of the right to data portability and cross-border flow between the EU and Brazil. The paper seeks to investigate from whom the right to data portability, provided by the European GDPR, can be demanded. In this sense, the paper aims to answer the following questions: is it possible that the right to data portability could be demanded from agents who perform data processing outside the territory of the European Union? Or from agents who do not have establishments in its territory, such as organizations located in Brazil? And in the case when this is applied in an extraterritorial way, what are the consequences and the peculiarities of this situation? It concludes that it is possible to apply the right to data portability to agents who operate in Brazilian territory, provided that this is framed within the provisions of article three of the European GDPR. The consequences of this extraterritorial application of data portability are the creation of a new right/duty in third countries and the international transference of data, which will, in the long term, contribute to the harmonization and the convergence of data protection policies around the world. In the next paper, Alexandre Veronese looks at personal data and transborder flows between the EU and the US: dilemmas and potential for convergence. The chapter provides an overview on the attempts to make the national personal data protection systems compatible. It reaches three conclusions: (i) the dissemination of the EU model has allowed for a greater engagement of several non-EU countries around the world, and that is an exciting initial step in the global evolution of the subject; (ii) some agreement will always exist between the US and the EU to regulate this area even if the CJEU rules against the Privacy Shield in Schrems II and (iii) US authorities, like the FTC, are imposing fines to enforce privacy protection, similar to the EU. Therefore, one can see future potential reinforced convergence on both sides of the North Atlantic.

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This book is one of the outcomes of the Jean Monnet Chair that was granted by the European Commission to the editor in 2018. For the organiser, it was a privilege to receive so many contributions provided by renowned authors coming from different parts of the world, from China to Brazil or Norway to Japan. Furthermore, all the contributions have shown themselves to be exquisite essays and stand as a landmark in the context of EU law studies. I am truly grateful to every author that has written for this book. It was really an honour to have so many outstanding contributions. In the end, all the effort involved has been well worth it. I do hope the reader takes as much pleasure from this book as I had when editing it.

Part I

EU Competition Law

Unilateral Application of Competition Laws to Transnational Business Transactions: The Development of the “Effects” Doctrine in the US and the EU Peter Behrens

Abstract This contribution deals with the extraterritorial reach of rules against restraints of competition. On the basis of public international law principles regarding State’s jurisdiction to prescribe, to adjudicate and to enforce, the early development of the “effects doctrine” in the jurisprudence of the US is briefly explained. It follows a detailed analysis of the jurisprudential development in the EU where the ECJ and the GC have for a long time incrementally refined the territoriality principle by following the “single economic entity” concept and the “implementation test” until it became only recently unavoidable to also squarely accept the “qualified effects doctrine”. The EU is now as equally well equipped as the US to protect its market against restrictive practices from abroad. In order to soften international jurisdictional conflicts, the EU has entered into bilateral co-operation agreements, in particular with the US, which provide for “positive comity”.

1 Introduction The European Union (EU) has opened its internal market to a considerable extent towards third countries. On the basis and within the framework of a large number of treaties with foreign states, firms from outside the EU are free to access the internal market. The expansion of the internal market into the European Economic Area, the establishment of free trade areas by means of association agreements, free trade agreements and partnership agreements as well as the EU’s membership of the WTO and its adherence to GATT and GATS have led to a remarkable degree of economic This contribution is in large parts based on the author’s previous contribution to the liber amicorum in honor of Prof. Tadeusz Skoczny published in 2017 by Wydawnictwo C.H. Beck Sp. z.o.o. Warszaw. The author appreciates the publisher's reprint permission. P. Behrens (*) Faculty of Law, University of Hamburg, Hamburg, Germany Institute for European Integration of Europa-Kolleg Hamburg, Hamburg, Germany e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 N. Cunha Rodrigues (ed.), Extraterritoriality of EU Economic Law, European Union and its Neighbours in a Globalized World 4, https://doi.org/10.1007/978-3-030-82291-0_2

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integration in a global system of international economic relations. As different as the scope of market access provided by the various treaties may be in detail, by selling their goods or services to customers within the EU, foreign firms may and do in fact operate as competitors of “domestic” firms within the internal market. The internal market which, according to Article 3(3) of the Treaty on European Union (TEU), forms one of the goals of the EU, is based on two pillars: The first pillar is represented by the economic freedoms provided by the Treaty for the Functioning of the EU (TFEU) which are, according to the jurisprudence of the European Court of Justice (ECJ), designed to eliminate “all obstacles to intraCommunity trade in order to merge the national markets into a single market bringing about conditions as close as possible to those of a genuine internal market.”1 The second pillar is represented by “the institution of a system ensuring that competition in the common market is not distorted” (originally Art. 3 lit. f EEC Treaty); even though this concept is no longer included in the wording of Art. 3 (3) TEU (Lisbon version), it is now laid down in Protocol No. 27 “on the internal market and competition” which was annexed to the Lisbon Treaty and has the same legal status as the TFEU itself.2 The competition rules laid down in the TFEU (Article 101 prohibiting cartels and Article 102 prohibiting the abuse of a dominant position within the internal market), including the body of secondary legislation pertaining to competition,3 are therefore the essential “rules of the game” with which firms operating in the internal market must comply. These rules are enforced by the EU Commission4 as well as by the national competition authorities5 using administrative means and sanctions, but also by national courts6 in private or administrative proceedings which even allow for private enforcement. It is the purpose of EU competition rules to make sure that the internal market is a competitive market. Only such a market provides firms with freedom to compete and consumers with freedom of choice. This is why business strategies are prohibited, if they have as their object or effect the prevention, restriction or distortion of competition within the internal market (Article. 101 TFEU), if they represent an abuse of a Case C-15/81 Gaston Schul v. Inspecteur der Invoerrechten en Accijzen ECLI:EU:C:1982:135, para. 33 (this was the first judgment of the Court defining the substance of the internal market concept). The ECJ’s definition was later incorporated in the EEC Treaty by Art. 13 of the “Single European Act” of 1986 (OJ 1987/L 169/1) and then ended up in Article 26(2) TFEU (Lisbon version, OJ 2007/C 306/1), according to which “[t]he internal market shall comprise an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the Treaties”. 2 The High Contracting Parties to the Protocol expressly stated “that the internal market as set out in Article 3 of the Treaty on European Union includes a system ensuring that competition is not distorted.” 3 Most important being: Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EC Merger Regulation), OJ 2004/L 24/22. 4 See Council Regulation (EC) No. 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 101 and 102 of the Treaty, OJ 2003/L 1/1. 5 See id. Article 5. 6 See id. Article 6. 1

Unilateral Application of Competition Laws to Transnational Business. . .

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dominant position within the internal market (Article 102 TFEU) or if they imply a concentration which would significantly impede effective competition in the internal market (Article 2(3) EU Merger Regulation), provided they may affect trade between Member States or—in the case of a merger—have a Community dimension defined in terms of interstate turnover (Article 1 EU Merger Regulation). These criteria do not distinguish between undertakings according to their domestic or foreign origin. Hence, whenever firms are operating in the internal market, they are obliged to comply with the prohibitions for restrictions of competition irrespective of whether they are domestic firms from anywhere within the EU or foreign firms operating from outside the EU on the basis of the free access to the internal market that they enjoy. For consumers it is of little interest whether their freedom of choice is restricted by a cartel agreement between domestic or foreign suppliers; and for firms it is of little interest whether a domestic or foreign undertaking holding a dominant position in the market attempts to drive them out of the market by exclusionary and therefore abusive conduct or by way of a merger. This leads to the question whether and, if so, to what extent the EU or its Member States are legally allowed to protect the “system of undistorted competition” by applying EU competition rules not only to domestic but also to foreign undertakings. This is, in the first place, a matter of public international law principles pertaining to the jurisdiction of States. Since the EU has legal personality (Article 47 TEU) and acts as a legal subject of public international law, it is bound by these principles in the same way as States. The discussion about international principles of jurisdiction has been going on for many decades.7 This applies especially to the jurisdictional aspects of implementing national competition rules in international economic relations.8 Four different approaches may be identified in this respect: the unilateral, the bilateral, the regional, and the multilateral9 none of which is without problems. The unilateral approach includes the “extraterritorial” application by one single State (or by the EU for that matter) of its competition rules to foreign undertakings; if this approach is generally followed, it may easily lead to jurisdictional conflicts among trading partners. The bilateral approach attempts to reduce such conflicts by introducing, by way of mutual agreement or commitment providing for “positive comity”, some degree of co-operation among competition authorities with regard to the enforcement of national competition rules.10 The regional approach is represented by regional agreements organizing co-operation within a specific group of States;11 the EU is clearly the most advanced example which goes far beyond enforcement co-operation, however, and is instead based on a system of supranational competition rules that apply uniformly in all Member States. The

7 See, for classical treatments of international jurisdiction: Mann (1984); Meesen (1996); more recently: Rosenthal and Knighton (2018); for a collection of relevant documents see Lowe (1983). 8 See for a more recent analysis Pavic (2001); Connor and Bush (2008); Davis (2019). 9 Jackson (1994). 10 For an overview, see Dabbah (2010), pp. 494–578. 11 For an overview of regional agreements in various parts of the world, see id., pp. 366–417.

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multilateral approach would imply harmonization of competition rules on a global scale; it is represented by such unsuccessful attempts as, most notably, the draft Havana Charter for the establishment of an International Trade Organization (ITO) of 1948 or the Draft International Antitrust Code published by a group of experts.12 In a world of sovereign States with markedly different systems of competition rules,13 the unilateral approach will necessarily prevail, international agreements being the exception. Since competition law regulates the behaviour of market participants in the public interest, unilateralism also prevails from a conflict-oflaws (private international law) perspective: different from private law aspects of transnational transactions, the competent national courts and agencies are, in principle, bound to exclusively apply their domestic competition rules which are designed to prevent restrictions of competition within the domestic economy. Hence, the place where a restriction of competition was initiated is of no relevance for the determination of the applicable law; what matters instead is the place where the outcome is felt, which is the market on which competition is restricted. In order to apply domestic competition law, this market must therefore be located within the territory of the forum state whereas the responsible undertakings may be located elsewhere.14 The main part of the following analysis will therefore explore in suitable detail the EU’s assertion of exterritorial jurisdiction over foreign undertakings as it has slowly been developed and brought into line with the approach followed in the US by the jurisprudence of the ECJ (Sect. 3). It is necessary, however, to first discuss the jurisdictional principles of public international law to which the EU is bound, and which define the outer limits of its extraterritorial jurisdiction (Sect. 2). The final part will then briefly mention the EU’s practice to enter into bilateral co-operation agreements in order to reduce jurisdictional conflicts with foreign trading partners resulting from the unilateral application of its competition rules to foreign undertakings (Sect. 4). The analysis will close with summarising conclusions (Sect. 5).

2 Public International Law Principles of Jurisdiction It is common ground that three aspects of a State’s jurisdiction may be distinguished”:15 jurisdiction to legislate (prescriptive jurisdiction), jurisdiction to adjudicate (curial jurisdiction) and jurisdiction to enforce (enforcement jurisdiction). Prescriptive jurisdiction relates to a State’s power to regulate persons, things or

12

Fikentscher and Immenga (1995). For a comparative overview of the EU and the US competition law regimes as the two most important systems in the world, see: Dabbah (2010), pp. 159–274. 14 For a comprehensive in-depth analysis of the conflict-of-laws (private international law) aspects of competition law, see Schwartz and Basedow (1995). 15 See, for a detailed delineation, Crawford (2012), pp. 456–486. 13

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conduct. Adjudicative jurisdiction relates to the application of national laws by a State’s courts or administrative bodies to specific cases. Enforcement jurisdiction relates to the exercise of compulsion or force in order to ensure compliance with decisions taken by national courts or administrative bodies on the basis of such laws. When it comes to the jurisdiction of States (or of the EU for that matter), the threshold question under public international law is whether it must be positively granted by a permissive rule or whether its exercise is permitted unless it is prohibited by a rule limiting a State’s jurisdiction. Even though this question is still not totally uncontroversial, two principles are generally accepted as positively providing jurisdiction: the territoriality principle and the personality principle. The territoriality principle implies a State’s unlimited power to exercise jurisdiction within its territory, i.e. also over foreign nationals who are found within that territory. This comes in two distinct varieties: subjective territoriality covers acts originating in the forum State’s territory even though they may have been completed abroad; objective territoriality covers acts originating abroad but at least partially completed within the forum State’s territory. The personality principle implies jurisdiction over the nationals of the forum State even if they are not present within its territory. Hence, the question arises as to whether and to what extent a State may exercise jurisdiction over foreign nationals’ conduct taking place outside its own territory. This question is at the core of a potential extraterritorial application of domestic competition laws of the forum State. Here the famous judgment of the Permanent Court of International Justice (PCIJ) handed down in 1927 in the Lotus case16 comes in which appears to still be a (though not undisputed) cornerstone of the public international law of jurisdiction.17 The case was about the institution of criminal proceedings in Turkey against an officer of a French steamer which was involved in a collision on the high seas with a Turkish steamer whereby Turkish sailors and passengers were killed. Before the PCIJ, the French Government argued that the Turkish courts, in order to have jurisdiction, should point to some “title to jurisdiction recognized by international law in favour of Turkey”. Turkey, on the other hand, argued that it had jurisdiction “whenever such jurisdiction does not come into conflict with a principle of international law”. The PCIJ ruled as follows: [T]he first and foremost restriction imposed by international law upon a State is that – failing the existence of a permissive rule to the contrary – it may not exercise its power in any form in the territory of another State.

This statement clearly relates to enforcement jurisdiction. It reflects the negative side of positive territoriality: A State’s sovereign power to apply coercion or force against persons or things within its territory is necessarily exclusive of any other State’s equivalent power. It is important to note, however, that the PCIJ went on to say that

16 17

The Lotus Case, France v. Turkey (1927), P. C. I. J. Reports, Series A, No. 10, at p. 18. See, for a detailed analysis, Pazartzis (2013); Hertogen (2015); Guilfoyle (2017).

14

P. Behrens [i]t does not, however, follow that international law prohibits a State from exercising jurisdiction in its own territory, in respect of any case which relates to acts which have taken place abroad, and in which it cannot rely on some permissive rule of international law. [. . .] Far from laying down a general prohibition to the effect that States may not extend the application of their laws and the jurisdiction of their courts to persons, property and acts outside its territory, it leaves them in this respect a wide measure of discretion which is only limited in certain cases by prohibitive rules.

An undisputed prohibitive rule is exactly that which the PCIJ initially stated in the Lotus judgment, i.e. that States have no enforcement jurisdiction in other States’ territory. On the other hand, States may, in principle, exercise prescriptive as well as adjudicative jurisdiction as far as persons and transactions are concerned that took place outside their territory. According to the Lotus judgment, public international law would therefore, in principle, neither prevent the EU from extending its prohibitions to anticompetitive conduct in foreign countries, if the effect thereof is felt on the internal market, nor from applying such prohibitions to foreign conduct by way of decisions taken by the Commission or by judgments of the General Court (GC) or the ECJ. The EU cannot, however, enforce such decisions or judgments outside its own territory. Lotus must, however, be read in conjunction with later judgments of the International Court of Justice (ICJ). The ICJ has in the meantime specified limits to States’ “wide measure of discretion” when defining the scope of their extraterritorial jurisdiction. Such limiting principles may be derived from two famous judgments concerning States’ right to provide diplomatic protection in favour of their nationals. The Nottebohm case18 involved a German national who had been residing for many years in Guatemala and whose property was said to have been unlawfully affected by the Government of Guatemala during the Second World War. In 1939, Nottebohm, without giving up his German nationality, had successfully applied for naturalization by the State of Liechtenstein. Since after the Second World War Guatemala and Germany were still in a state of war, it was Liechtenstein that claimed to be entitled to provide diplomatic protection in favour of Nottebohm. Guatemala rejected this claim and Liechtenstein instituted proceedings before the ICJ. The ICJ held: [I]nternational law leaves it to each State to lay down the rules governing the grant of its own nationality. This is so failing any general agreement on the rules relating to nationality. [. . .] It has been considered that the best way of making such rules accord with the varying demographic conditions in different countries is to leave the fixing of such rules to the competence of each State. On the other hand, a State cannot claim that the rules it has laid down are entitled to recognition by another State unless it has acted in conformity with this general aim of making the legal bond of nationality accord with the individual’s genuine connection with the State [. . .].19

The Barcelona Traction case20 involved a Canadian company whose investment in Spain had allegedly been harmed by Spanish authorities. The vast majority of the Nottebohm Case, Liechtenstein v. Guatemala, I.C.J. Reports 1955, p. 4. Id. p. 23 (emphasis added by the author). 20 Barcelona Traction, Light and Power Co. Case, Belgium v. Spain, I.C.J Reports 1970, p. 3. 18 19

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company’s shareholders were Belgian nationals. Since Canada, the State of incorporation, had initially intervened on behalf of the company, but then withdrawn, Belgium claimed to be entitled to provide diplomatic protection in respect of the injury suffered by the shareholders who were its nationals. Spain rejected this claim and Belgium instituted proceedings before the ICJ. In this case the ICJ required that there should exist between the corporation and the State in question a genuine connection of the kind familiar from other branches of international law.21

Even though the ICJ emphasized that in the particular field of diplomatic protection of corporate entities no absolute test of the “genuine connection” (such as the place of incorporation, the registered office, the actual head office, the central place of management or the centre of control) found general acceptance, the judges made it crystal clear that, in order for a State to be entitled to provide diplomatic protection in favour of a company, the showing of a “genuine connection” was crucial. Far beyond the particular field of diplomatic protection, the concept of “genuine connection”, “genuine link” or “effective link” has since been generalized as a precondition for the exercise of a State’s jurisdiction. Hence, even though States enjoy a “wide measure of discretion” when defining the scope of their extraterritorial jurisdiction, the right to apply national laws to persons, things and conduct outside the national territory or to adjudicate cases involving such persons, things or conduct is justified only if a “genuine connection” can be shown. This concept has become a core element in the determination of the extraterritorial reach of national competition laws as well.22 How this is reflected in the ECJ’s jurisprudence concerning the extraterritorial reach of EU competition rules will be discussed below after a short account of the pioneering development in the US.

3 Extraterritorial Application of Competition Law 3.1

The Development in the US

The US have developed an approach which has led to the most extensive extraterritorial application of antitrust laws to foreign companies and individuals.23 It has served as a model for other jurisdictions in developing an equally “long arm” of their national competition rules. As will be shown below, the EU has only very recently followed suit.

Id. para. 70 (emphasis added by the author). See, for a general analysis of extraterritorial application of competition law, Wagner-von Papp (2012); Sweeney (2015). 23 For a detailed overview of the history of cases, see Lowenfeld (1979), pp. 373–411. 21 22

16

P. Behrens

The initial approach of American courts to their jurisdiction in the field of antitrust law was strictly based on the territoriality principle. A case in point is the dispute between American Banana Co. and United Fruits Co. about a conspiracy between the latter corporation and a Central American government to the effect that the former corporation was deprived of the use of a banana plantation in Panama and driven out of the banana market by other exclusionary practices there. The US Supreme Court24 held that any statute (such as the Sherman Act of 1890) must be construed as intended to be confined in its operation and effect to the territorial limits over which the lawmaker has general and legitimate power. ‘All legislation is prima facie territorial.’ [. . .] Words having universal scope, such as ‘every contract in restraint of trade,’ ‘every person who shall monopolize’ etc. will be taken as a matter of course, to mean only everyone subject to that legislation, not all that the legislator subsequently may be able to catch.

Furthermore, the Court concluded that the prohibitions of the Sherman Act of 1890, from which the verbal quotations in the judgment were taken, do not extend to acts undertaken in foreign countries even though done by citizens of the United States and injuriously affecting other citizens of the United States. The question whether the acts complained of might have had a negative effect on competition within the United States was not even raised at all. This approach was finally abandoned in the famous Alcoa case25 involving an international cartel that was agreed among aluminium producers outside the US and that allocated quotas between the parties which resulted in quantitative restrictions of aluminium imports into the US. Judge Learned Hand, alluding to the American Banana case, said in his judgment: [I]t is quite true that we are not to read general words, such as those in [§ 1 of the Sherman Act] without regard to the limitations customarily observed by nations upon the exercise of their powers; limitations which generally correspond to those fixed by the ‘Conflict of Laws’. We should not impute to Congress an intent to punish all whom its courts can catch, for conduct which has no consequences within the United States.26

But then he went on to state: On the other hand, it is settled law [. . .] that any state may impose liabilities, even upon persons not within its allegiance, for conduct outside its borders that has consequences within its borders, which the state reprehends; and these liabilities other states will ordinarily recognize.

And he concluded with regard to the cartel agreements that were relevant in the case at hand:

American Banana Co. v. United Fruits Co., 213 U.S. 347 (1909). United States v. Aluminium Company of America, US Court of Appeals (2nd Circuit), 148 F.2d 416 (1945). 26 Id. at p. 443. 24 25

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Both agreements would clearly have been unlawful, had they been made within the United States; and it follows from what we have just said that both were unlawful, though made abroad, if they were intended to affect imports and did affect them.

As such, the basis of the court’s approval of its jurisdiction was neither the presence of the persons or corporations involved in the cartel agreements nor the place where these agreements were made, but rather the negative effects on competition within the US. This so-called “effects doctrine” has become a core element of American international antitrust law ever since. The American Law Institute incorporated the doctrine in its (Third) Restatement concerning the Foreign Relations Law of the United States27 where it is stated in § 415 pertaining to the jurisdiction to apply antitrust laws. After restating in subsection (1) the jurisdiction over anticompetitive conduct within the United States according to the territoriality principle, this provision goes on to state: (2) Any agreement in restraint of United States trade made outside of the United States, and any conduct or agreement in restraint of such trade carried out predominantly outside of the United States, is subject to the jurisdiction to prescribe of the United States, if a principal purpose of the conduct or agreement is to interfere with the commerce of the United States, and the agreement or conduct has some effect on that commerce. (3) Other agreements or conduct in restraint of United States trade are subject to the jurisdiction to prescribe of the United States if such agreements or conduct have substantial effect on the commerce of the United States and the exercise of jurisdiction is not unreasonable.

This latter reasonableness test was meant to reduce potential conflicts with foreign jurisdictions that could easily arise if the “effects doctrine” would prevail without limits. It was argued that wherever the extraterritorial application of domestic antitrust law would interfere with relevant foreign State interests, international law required that such a conflict should be resolved by a balancing of domestic and foreign interests and by accommodating the application of domestic competition law accordingly.28 This discussion came to an end, however, as soon as the US Supreme Court handed down its judgment in the Hartford Fire Insurance case29 where the Court confirmed the “effects doctrine” and clearly argued against an obligation to take foreign States’ interests into consideration in order to determine the extraterritorial jurisdiction of the US.30

27

American Law Institute, Restatement of the Law (Third): The Foreign Relations Law of the United States (1987); see Hixson (1988). 28 See American Law Institute, ibid § 415, Reporters’ notes, para. 4; for an in-depth study along those lines see Meessen (1984). 29 Hartford Fire Insurance v. California, 544 U.S. 155 (1993); in the same vein more recently United States v. Hsiung, 758 F. 3d 1074 (CA 9th Circuit 2014): “The Sherman Act [. . .] applies to conspiracies that occur entirely outside the United States if they have a substantial and intended effect in the United States.” 30 See, for a detailed analysis of the case, Dam (1993).

18

3.2

P. Behrens

The Development in the EU

EU jurisprudence concerning the extraterritorial reach of EU competition rules is characterized by an incremental development from the territoriality principle towards the “effects doctrine”. The fact that this development took more than 50 years is due to some Member States’ (especially the UK’s) strong adherence to the territoriality principle. As will be seen, this may explain the reluctance of the ECJ to squarely embrace the “effects doctrine”. Different from US courts, the ECJ rather upheld the territoriality principle as part of EU law as long as possible.31 The development may be divided into three phases: the first phase was characterized by the attempt of the ECJ to reconcile the extraterritorial reach of EU competition rules with the territoriality principle by applying the “single economic entity” concept to international groups of companies (Sect. 3.2.1); in the second phase the ECJ developed, for the same purpose, a distinction between the “formation” of a restrictive practice (such as a cartel) and its “implementation” and considered both elements alternatively as proper connecting factors for the assertion of jurisdiction (Sect. 3.2.2); during the third phase, as will be explained below, it was at first the GC who, in the Gencor case,32 showed it was prepared to accept the “effects doctrine”; more recently, the Intel case gave the GC an opportunity to restate this approach33 and, upon appeal, the ECJ34 finally confirmed the GC’s approach (Sect. 3.2.3).

3.2.1

Phase 1: The “Single Economic Entity” Concept

The first most important case that confronted the ECJ with the problem of extraterritorial application of EU competition law was the famous Dyestuffs case.35 In this case the ECJ had to deal with a concerted practice of all the leading dyestuff producers in Europe, including the British Imperial Chemical Industries (the ICI group), the object of which were several simultaneous price increases all over Europe concerning a large range of dyestuffs. At the time the concertation took place, the UK was not yet a Member of the EU. Hence, the British parent company of the ICI group was not located within the territory of the EU. It did have subsidiary companies within the EU however, which were distributing ICI’s products there at prices that reflected the price fixing concertation. The Commission imposed fines on all participants irrespective of whether they were EU or foreign companies, including the British parent company of the ICI group. ICI challenged the Commission’s decision inter alia on the grounds that the EU lacked jurisdiction. ICI argued (on the basis of the territoriality principle) that its 31

See, for comparative studies, Alford (1992); Griffin (1999); Akhtar (2019); see also Scott (2019). GC Case T-102/96, Gencor Ltd v. Commission, ECLI:EU:T:1999:65. 33 GC Case T-286/09, Intel v. Commission, ECLI:EU:T:2014:547. 34 ECJ Case C-413/14, Intel v. Commission, ECLI:EU:C:2017:632. 35 ECJ Case C-48/69, ICI v. Commission, ECLI:EU:C:1972:70. 32

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anticompetitive conduct did not take place within the EU and applying EU competition law to conduct outside its territory was a violation of public international law. According to ICI, the territorial jurisdiction which the EU had over ICI’s subsidiaries within the EU could not be extended to the British parent company. The Commission based its jurisdiction, firstly, on the fact that ICI had instructed its subsidiaries within the EU to sell at the prices that had been collectively fixed (this was said to amount to ICI’s conduct within the EU), and, secondly, on the notion that EU competition rules prohibit all restrictions on competition which produce, within the EU, effects covered by them no matter where the companies responsible for such conduct have their registered office. The first approach would reflect the notion that parent and subsidiary companies form a single enterprise (“single economic entity”), the second approach reflected the “effects doctrine”. According to the Commission, this was in line with the Lotus judgment of the PICJ, since it did not involve any enforcement activities of the Commission on foreign territory, and it was said to also be in compliance with the “genuine connection” requirement established under public international law. The government of the UK had nevertheless sent the ECJ an aide-mémoire expressing its concern that the Commission’s decision had infringed upon the territoriality principle and the UK’s sovereignty.36 Advocat General (AG) Mayras, in his opinion submitted to the Court, appeared not convinced by the Commission’s “single economic entity” approach but rather favoured the “effects doctrine” as a proper basis for the Commission’s jurisdiction.37 He was careful to emphasize, however, that public international law requires certain conditions to be fulfilled in order for the domestic effects of foreign conduct to grant jurisdiction. The effects should be “qualified”, i.e. they should be direct, foreseeable and substantial. These conditions clearly reflect the “genuine connection” criterion established by the jurisprudence of the PCIJ and the ICJ in the Nottebohm case38 and the Barcelona Traction case,39 respectively. The ECJ in its judgment did not follow the AG’s proposition, but rather based its reasoning on the territoriality principle.40 According to the ECJ, anticompetitive effects within the internal market (i.e. within the territory of the EU) are, according to the wording of the EU competition rules, a substantive pre-condition for their application, but they were not in and of themselves considered a sufficient basis for the Commission’s international jurisdiction in the case at hand. The ECJ rather considered ICI’s conduct to have taken place not only outside, but also inside the EU due to what has since then been labeled the “single economic entity” doctrine. The judgment reasoned as follows:

The text of the aide-mémoire of 20 October 1969 is reproduced in Lowe (1983), pp. 144–147. Opinion of AG Mayras, ECJ Case C-48/69, ICI v. Commission, ECLI:EU:C:1972:32, pp. 693 et seq. 38 Supra note 18. 39 Supra note 20. 40 ECJ Case C-48/69, ICI v. Commission, ECL:EU:C:1972:70, paras. 125 et seq. 36 37

20

P. Behrens (128) [T]he actions for which the fine at issue has been imposed constitute practices carried on directly within the Common Market. (130) By making use of its power to control its subsidiaries established in the Community, the applicant was able to ensure that its decision was implemented on that market. (132) The fact that a subsidiary has separate legal personality is not sufficient to exclude the possibility of imputing its conduct to the parent company. (133) Such may be the case in particular where the subsidiary, although having separate legal personality, does not decide independently upon its own conduct on the market, but carries out, in all material respects, the instructions given to it by the parent company. (135) In view of the unity of the group thus formed, the actions of the subsidiaries may in certain circumstances be attributed to the parent company.

Since the ECJ was convinced that ICI’s British parent company was able to exercise “decisive influence” over the policy of its subsidiaries as regards selling prices in the Common Market and in fact had used this power upon the occasion of the three price increases in question,41 the formal separation between these companies could not “outweigh the unity of their conduct on the market for the purposes of applying the rules on competition”. Hence the judgment concluded that it “was in fact the applicant undertaking which brought the concerted practice into being within the Common Market”.42

3.2.2

Phase 2: The “Implementation” Test

The next step in the development of the ECJ’s jurisprudence extended the concept of “implementation” of a restriction of competition as mentioned in the Dyestuffs case already43 beyond the scope of cases where the responsible foreign company was somehow present within the EU due to its EU subsidiaries with which it would form an economically uniform entity. The occasion to consider such extension arose in the Woodpulp case44 which involved a concerted practice of foreign pulp producers leading to the fixing of prices for their exports into the EU. In this case the “single economic entity” concept could not be applied, because none of the relevant foreign producers had subsidiary companies within the EU. All of them merely sold their products into the EU. It was therefore expected that the ECJ would now be willing to accept the “effects doctrine” in order to justify the Commission’s assertion of jurisdiction. AG Darmon, after having analysed the implications of the Lotus und Barcelona Traction judgments of the PCIJ and the ICJ, respectively, as well as that of the

Id. para. 137. Id. para. 141. 43 See id. para. 130 (reproduced above). 44 ECJ Joined Cases C-89/85, 104/85, 114/85, 116/85, 117/85 and 125/85 to 129/85, Ahlström Osakeyhtiö et al. v. Commission, ECLI:EU:C:1988:447. 41 42

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jurisprudence of US courts, suggested that the ECJ should apply the “qualified effects” criterion as already developed by AG Mayras in the Dyestuffs case.45 Hence, he based the Commission’s jurisdiction on the anticompetitive effects within the EU, provided they were “direct and immediate, reasonably foreseeable and substantial”. However, the UK had been granted leave to intervene and had thereupon expressed the position that the case should be decided exclusively on the basis of the territoriality principle. It seems not to be too farfetched to assume that the ECJ was therefore attempting to avoid the “effects doctrine” and to find another way of justifying the Commission’s jurisdiction on the basis of the territoriality principle. The ECJ’s way out was the distinction between the “formation” of a cartel or concerted practice and its “implementation”.46 The reasoning of the judgment was as follows: (16) It should be observed that an infringement of 85 [now Article 101 TFEU], such as the conduct of an agreement which has had the effect of restricting competition within the [internal] market, consists of conduct made up of two elements, the formation of the agreement, decisions or concerted practice and the implementation thereof. If the applicability of prohibitions laid down under competition law were made to depend on the place where the agreement, decision of concerted practice was formed, the result would obviously be to give undertakings an easy means of evading those prohibitions. The decisive factor is therefore the place where it is implemented. [. . .] (18) Accordingly, the [EU’s] jurisdiction to apply competition rules to such conduct is covered by the territoriality principle as universally recognized in public international law.

This reasoning is plausible up to the extent that not only the price fixing itself (or the “formation” of the restraint of competition) but also the selling of products on the market at cartelized prices (i.e. the “implementation” of the restraint of competition) is part of the conduct prohibited by EU competition rules. This would then meet the requirements of the objective territoriality principle, which covers conduct originating abroad but completed within the territory of the EU, and hence satisfy the concern expressed by the UK.47

3.2.3

Phase 3: Towards the “Effects Doctrine”

The first case where the GC proved to be at least open to go beyond the territoriality principle and to also (though not quite unambiguously) take the “effects doctrine” into account was the Gencor case.48 This case involved the merger of a South African and an English company through the acquisition of joint control

45

Opinion of AG Damon, Joined Cases C-89/85, 104/85, 114/85, 116/85, 117/85 and 125/85 to 129/85 Ahlström Osakeyhtiö et al. v. Commission, ECLI:EU:C:1988:258, paras. 53 et seq. 46 See, for a more detailed analysis, Britton (1990). 47 This is supported by the fact that in the meantime sec. 2(3) of the UK Competition Act had indeed incorporated the “implementation” concept. 48 GC Case T-102/96, Gencor Ltd v. Commission, ECLI:EU:T:1999:65.

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over another South African company. All of the companies concerned were exporting platinum and rhodium into the EU. The Commission blocked the merger, because it would have led to the creation of a dominant duopoly position on the world platinum and rhodium market and as a result effective competition would also have been significantly impeded within the EU. The GC first analysed the territorial scope of the Merger Control Regulation (MCR) in terms of the “community dimension” of the merger (Art. 1 MCR) and stated: (79) Article 1 does not require that, in order for a concentration to be regarded as having a Community dimension, the undertakings in question must be established in the Community or that the production activities covered by the concentration must be carried out within Community territory. [. . .] (82) The legal bases for the Regulation, namely Articles 87 and 235 of the Treaty [now: Articles 103 and 352 TFEU], and more particularly the provisions to which they are intended to give effect, that is to say Articles 3(g) and 85 and 86 of the Treaty [now: Article 3(3) TEU in conjunction with Protocol 27, and Articles 101 and 102 TFEU], as well as the first to fifth, ninth and eleventh recitals in the preamble to the Regulation, merely point to the need to ensure that competition is not distorted in the common market, in particular by concentrations which result in the creation or strengthening of a dominant position. They in no way exclude from the Regulation’s field of application concentrations which, while relating to mining and/or production activities outside the Community, have the effect of creating or strengthening a dominant position as a result of which effective competition in the common market is significantly impeded.

The GC went on to emphasize that the quantitative thresholds mentioned in Art. 1 MCR are based on turnover, i.e. on sales within the EU. Since the foreign companies concerned did in fact sell platinum and rhodium into the EU, the GC concluded that the “implementation” test developed in the Woodpulp case was also satisfied and provided a territorial link to the internal market. Nevertheless, the GC continued by also examining the “immediate, substantial and foreseeable effect” of the merger within the EU thereby implying the application of the “effects doctrine”. In light of the goal of merger control, it is not surprising that the GC considered the effects on the internal market structure as crucial. The concentration in question would have altered the competitive structure within the internal market since it would have reduced the number of suppliers of platinum and rhodium in the market from three to two. The judgment, therefore, firstly, stated that (94) [. . .] the concentration would have had the direct and immediate effect of creating the conditions in which abuses were not only possible but economically rational, given that the concentration would have significantly impeded effective competition in the market by giving rise to a lasting alteration to the structure of the markets concerned.

The GC found the criteria of substantiality and foreseeability of the relevant effects equally satisfied. The ambiguity of the judgment results from the fact that it somehow combines the “implementation” and the “effects” criteria. It was not totally clear whether the GC stayed within the territoriality principle or went beyond its proper scope.

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This ambiguity was finally eliminated by the GC’s judgment in the Intel case.49 The case involved an abuse of a dominant position prohibited under Art. 102 TFEU. Intel, a US-based corporation, was held to be in a dominant position in the market for x86-processors that were used by its customers as inputs for the production of computers. All of the producers were also located outside the EU. Following a complaint lodged by Intel’s competitor AMD, another US-based corporation, the Commission found that Intel had abused its dominant position by granting its customers rebates as well as payments that were conditioned upon exclusive purchasing of Intel’s x86-processors or exclusively selling computers containing such processors. The Commission found that Intel had engaged in exclusionary practices by preventing its competitor AMD from staying in the market for processors including the internal market of the EU. Intel appealed to the GC arguing inter alia that the Commission lacked jurisdiction. Since the exclusionary rebates and payments were granted by Intel outside the EU, the abuse of Intel’s dominant position was clearly “formed” outside the EU. Was the abuse at least “implemented” within the EU, however, so that the jurisdiction of the Commission could be established on the basis of the territoriality principle? What exactly does “implementation” in the case of an exclusionary practice mean? Arguably, in this case, it meant Intel’s customers’ abandonment of AMD as one of their suppliers of processors and this happened clearly outside the territory of the EU as well. The consequence thereof was, however, that competition on the market for processors or for computers containing such processors was restricted and this was also felt in the internal market within the EU. But to consider these effects as an “implementation” of the abuse (i.e. as part of Intel’s exclusionary conduct consisting of inciting its customers to abandon AMD as a supplier) would overstretch the concept. Hence, only the effects of Intel’s abuse could be regarded as a proper basis for the Commission’s jurisdiction. When Intel appealed to the GC, it was therefore to be expected that the court, in order to establish jurisdiction, would have to accept the “effects doctrine”. And this is exactly what happened. The judges started their reasoning by noting that the jurisprudence of the ECJ and of the GC had followed two approaches in order to establish the Commission’s jurisdiction in accordance with the rules of public international law: firstly, the territoriality principle (as reflected by the “implementation test” developed in the Woodpulp case) and the “qualified effects doctrine” (as mentioned in the Gencor case).50 The GC then continued to clarify the above mentioned ambiguity inherent in the Gencor judgment regarding the relation between the two tests: (234) By submitting that where trade with third countries is involved, even where implementation of the practices at issue takes place within the European Union, the Commission must also prove the existence of immediate, substantial, direct and foreseeable effects within the European Union, the applicant’s reasoning amounts to an assertion that implementation and qualified effects in the European Union are cumulative conditions.

49 50

GC Case T-286/09, Intel v. Commission, ECLI:EU:T:2014:547. Id. paras 231–233.

24

P. Behrens (235) The Commission stated, at the hearing, that, in the present case, its jurisdiction was justified, first, under the doctrine of implementation of the practices at issue in the EEA, which was followed in Woodpulp, paragraph 232 above, and, second, under the effects doctrine, which was followed in Gencor, paragraph 233 above. (236) In that regard, the Court would point out that demonstrating the implementation of the practices at issue in the EEA [European Economic Area] or demonstrating qualified effects are alternative and not cumulative approaches for the purposes of establishing that the Commission’s jurisdiction is justified under the rules of public international law.51

This latter statement is crucial, because it indicates already how the GC wants the Gencor judgment to be interpreted: The court implicitly says that the effects of an anticompetitive practice is one of two criteria, each of which may establish jurisdiction on a stand-alone basis. The ambiguity of the Gencor judgment in this respect is thereby eliminated. The GC expressly stated: (240) [I]n Gencor, paragraph 233 above (paragraphs 89 to 101), the General Court relied solely on the qualified effects in order to establish that the Commission’s jurisdiction was justified under the rules of public international law.

It must be added, however, that the GC has also emphasized the relevance of the criteria which, according to the Gencor judgment, qualify the effects within the EU that may justify the Commission’s jurisdiction. The court insisted again that the effects must be “substantial, immediate and foreseeable”. Intel lodged an appeal to the ECJ. AG Wahl, referring especially to the opinions of AG Mayras in the ICI52 case and AG Darmon in the Woodpulp53 case, submitted in his opinion that the ECJ, who to date had neither endorsed nor expressly rejected the effects-based approach to jurisdiction, should no longer avoid the issue and adopt this approach to the application of Articles 101 and 102 of the TFEU.54 Thereupon the ECJ, firstly, stated that it had established the “implementation test” in order to prevent undertakings from evading the prohibitions against restraints of competition by simply locating the place of the formation of such restraints beyond the territorial borders of the EU. The ECJ then continued to reason with regard to the “effects test” as follows:55 (45) The qualified effects test pursues the same objective, namely preventing conduct which, while not adopted within the EU, has anticompetitive effects liable to have an impact on the EU market. (46) The argument put forward by Intel, supported by ACT, that the qualified effects test cannot serve as a basis for the Commission’s jurisdiction is therefore incorrect.

Hereby, the ECJ has indeed unconditionally confirmed that the “qualified effects” on the internal market of a restriction of competition originating abroad is a separate

51

Emphasis in this paragraph supplied by the author. Supra note 37. 53 Supra note 45. 54 Opinion of AG Wahl Case C-413/14, Intel v. Commission, ECLI:EU:C:2016:788, para. 296. 55 ECJ Case C-413/14, Intel v. Commission, ECLI:EU:C:2017:632, para. 44. 52

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basis for the EU’s jurisdiction independent of the place of “implementation” of the restriction.56

4 Towards Bilateral Co-Operation The more the EU as well as foreign States follow a unilateral approach to the application of competition rules to transnational business transactions, the more likely is the emergence of jurisdictional conflicts that may, as the past has shown, even lead to jurisdictional warfare and political tensions between the governments of the States concerned.57 In order to avoid such tensions, States may turn to bilateral co-operation.58 The EU and the US provide an important example. They have entered into an agreement on the application of the “positive comity principle”59 according to which they promise to mutually support each other’s competition law enforcement without giving up their jurisdictional principles altogether. “Positive comity” applies where one party can demonstrate to the other that anticompetitive activities are occurring within the latter’s territory which are adversely affecting the interests of the first party; the competition authorities of the first party, the “requesting party”, may request the authorities of the other party, the “requested party”, to investigate and, if warranted, to remedy anticompetitive activities in accordance with the latter’s competition laws; the “requesting party” may then defer or suspend the application of its own laws. The result is that neither the US nor the EU will any longer offer a safe haven for companies engaging in restraints of competition.

5 Conclusion For many decades, the international “long arm” of the EU’s competition rules was by far shorter than the “long arm” of US antitrust laws. The ECJ has always been careful to stay within the scope of the territoriality principle even when jurisdiction was based on the “single economic entity” concept and later on the “implementation” test. In order for the ECJ to finally accept the “qualified effects” doctrine, it took a borderline case such as Intel, where none of the previously developed approaches 56

See, for more detailed comments, Campbell and Grimes (2018); Prete (2018); Cremona (2019); Fox (2019); Monti (2019). 57 See, for an account of the famous Laker Airways litigation that gave rise to heavy tensions between the US and the UK, Cannon (1985). 58 See Fullerton and Mazard (2001); Guzman (2011); Demedts (2018). 59 Agreement between the Government of the United States of America and the European Communities on the Application of Positive Comity Principles in the Enforcement of their Competition Laws of June 1998, OJ 1998/L 173/26.

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would plausibly have established jurisdiction. According to the “qualified effects” doctrine, the anticompetitive “effects” within the EU must, firstly, meet the requirements laid down in the competition rules themselves and, in order to comply with the “genuine connection” requirement under public international law, they must be “immediate, substantial, direct and foreseeable”. Looking back, it might be submitted that the ECJ’s reluctance to embrace the “qualified effects” doctrine in the past may have been due to the UK’s insistence on the territoriality principle; in the light of “Brexit”, this concern is no longer a relevant consideration. Without going beyond the limits that public international law principles have established, the EU is now as equally well equipped as the US to protect its market against restrictive practices from abroad. At the same time, the EU and the US are providing a model for bilateral co-operation on the basis of “positive comity” that is capable of at least softening jurisdictional conflicts which may result from the unilateral assertion of jurisdiction on both sides of the Atlantic.

References Akhtar Z (2019) Mergers, extraterritorial jurisdiction and convergence of EU and US law. Eur Rev Priv Law 27(1):59–81 Alford RP (1992) The extraterritorial application of antitrust laws: the United States and European Community approaches. Virginia J Int Law 33(1):1–50 Britton SL (1990) Jurisdictional issues in EEC competition law, Hersch Lauterpacht Lectures. Cambridge, England, Feb. 8 Campbell S, Grimes L (2018) Extraterritoriality - the court of appeal takes an expansive view of article 101 TFEU’s scope. Eur Compet Law Rev Quart Rev 39(6):266–273 Cannon R (1985) Laker airways and the courts: a new method of blocking the extraterritorial application of U.S. antitrust law. J Comp Bus Capital Mark Law 7:63–87 Connor JM, Bush D (2008) How to block cartel formation and price fixing: using extraterritorial application of the antitrust Laws as a deterrence mechanism. Penn State Law Rev 112 (3):813–857 Crawford J (2012) Brownlie’s principles of public international law, 8th edn. OUP, Oxford Cremona M (2019) Extending the reach of EU law: the EU as an international legal actor. In: Cremona M, Scott J (eds) EU law beyond EU borders: the extraterritorial reach of EU law. Oxford University Press, Oxford, pp 64–111 Dabbah MM (2010) International and comparative competition law. CUP, Cambridge Dam KW (1993) Extraterritoriality in an age of globalization: the Hartford fire case. Supreme Court Rev:289–328 Davis DM (2019) Extraterritoriality and the question of jurisdiction in competition law. In: Gerard D, Lianos I (eds) Reconciling efficiency and equity: a global challenge for competition law? Cambridge University Press, Cambridge, pp 385–397 Demedts V (2018) The future of international competition law enforcement: an assessment of the EU’s cooperation efforts. Brill Nijhoff, Leiden Fikentscher W, Immenga U (eds) (1995) Draft international antitrust code. Nomos, Baden-Baden Fox EM (2019) Extraterritorial jurisdiction, antitrust, and the EU intel case: implementation, qualified effects, and the third kind. Fordham Int Law J 42(3):981–998 Fullerton L, Mazard CC (2001) International antitrust cooperation agreements. World Compet 24:405 Griffin JP (1999) Extraterritoriality in U.S. and EU antitrust enforcement. Antitrust Law J 67 (1):159–199

Unilateral Application of Competition Laws to Transnational Business. . .

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Guilfoyle D (2017) SS Lotus (France v Turkey) (1927). In: Bjorge E, Miles C (eds) Landmark cases in public international law. Hart, Oxford, pp 89–109 Guzman AT (2011) Cooperation, comity, and competition policy. Oxford University Press, New York Hertogen A (2015) Letting Lotus Bloom. Eur J Int Law 26(4):901–926 Hixson K (1988) Extraterritorial jurisdiction under the third restatement of foreign relations law of the United States. Fordham Int Law J 12(1):127–152 Jackson JH (1994) Alternative approaches for implementing competition rules in international economic relations. Aussenwirtschaft – Swiss Rev Int Econ Relat 49(II/III):177–200 Lowe A (1983) Extraterritorial jurisdiction: an annotated collection of legal materials. Grotius, Cambridge Lowenfeld AF (1979) Public law in the international arena: Conflict of laws, international law, and some suggestions for their interaction. Receuil des Cours 163(II):315–445 Mann FA (1984) The doctrine of international jurisdiction revisited after twenty years. Recueil des cours ¼ Collect Courses Hague Acad Int Law 186:9–116 Meesen KM (1996) Extraterritorial jurisdiction in theory and practice. Kluwer Law International, The Hague Meessen KM (1984) Antitrust jurisdiction and customary international law. Am J Int Law 78:783–810 Monti G (2019) The global reach of EU competition law. In: Cremona M, Scott J (eds) EU law beyond EU borders: the extraterritorial reach of EU law. Oxford University Press, Oxford, pp 174–196 Pavic V (2001) Extraterritoriality in matters of antitrust. European Press Academic Publishing, Fucecchio Pazartzis P (2013) Judicial activism and judicial self-restraint: the PCIJ’s Lotus case. In: Tams CJ (ed) Legacies of the permanent court of international justice. Nijhoff, Leiden, pp 319–335 Prete L (2018) On implementation and effects: the recent case law on the territorial (or extraterritorial) application of EU competition rules. JECLAP 9:487–495 Rosenthal DE, Knighton WM (2018) National laws and international commerce: the problem of extraterritoriality. Routledge, Taylor & Francis Group, New York Schwartz IE, Basedow J (1995) Restrictions on competition. In: International Encyclopedia of comparative law, Vol. III: private international law, Ch. 35. Martinus Nijhoff, Tübingen, Mohr Siebeck, Dordrecht Scott J (2019) The global reach of EU law. In: Cremona M, Scott J (eds) EU law beyond EU borders: the extraterritorial reach of EU law. Oxford University Press, Oxford, pp 21–63 Sweeney B (2015) International governance of competition and the problem of extraterritorial jurisdiction. In: Duns J, Duke A, Sweeney B (eds) Comparative competition law. Edward Elgar Publishing, Cheltenham, UK: Northampton, MA, pp 345–383 Wagner-von Papp F (2012) Competition law and extraterritoriality. In: Ezrachi A (ed) Research handbook on international competition law. Elgar, Cheltenham, pp 21–59

Peter Behrens M.C.J. (New York University), is Professor emeritus at the Law Faculty of the University of Hamburg and Member of the Board of Directors of the Institute for European Integration at the Europa-Kolleg Hamburg. He has taught as Visiting Professor at the Law Schools of the Universities of Chicago and Michigan (Ann Arbor). He has also taught for many years in postgraduate Master programs at the College of Europe (Bruges), the Central European University (Budapest) and the University of St. Gallen (Switzerland). He continues teaching in a postgraduate Master program at the Europa-Kolleg Hamburg (Hamburg). He is also a Member of the Board of Directors of the Institute for European Integration of the Europa-Kolleg Hamburg/Germany. He publishes in the field of European Union Law, in particular European Competition Law; he is, among others, co-editor of the Europäische Zeitschrift für Wirtschaftsrecht/European Journal of Business Law (Beck, Munich).

Extraterritoriality in EU Competition Law Marek Martyniszyn

Abstract This piece critically analyses extraterritorial application of competition law by the European Union. The EU is a key global player in competition law and policy. Its competition law is actively and assertively applied to foreign activities of foreign entities affecting EU market. In the recent decision in Intel the EU for the first time recognised extraterritoriality two steps removed (‘extraterritoriality v2’), significantly broadening the reach of EU competition laws and setting an international precedent. Getting to this point was a gradual process. It reflected evolving circumstances, changing intra-EU dynamics and setbacks in striving for multilateral governance of international business practices. The EU embraced extraterritoriality out of necessity, not convenience. The rise of the doctrine marks the emergence of a multi-polar governance of transnational anticompetitive conduct, and of the European Union as a key global player in competition law and policy.

1 Introduction The European Union (EU) in the recent Intel case1 expanded the reach of its competition laws, a significant step in the slow expansion of its jurisdiction. This piece critically analyses how the EU gradually embraced the extraterritorial application of competition law. Moving beyond case law analysis, this phenomenon is examined in the contexts of intra-EU institutional interplay and changing broader circumstances, especially related to expanding globalization and a failure to develop a multilateral solution to the challenges posed by transnational anticompetitive conduct. While over time the EU increasingly asserted the use of extraterritoriality in competition law, it was a long process informed not by convenience, but

1

Case C-413/14 P, Intel v Commission.

M. Martyniszyn (*) Queen’s University Belfast, Belfast, UK e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 N. Cunha Rodrigues (ed.), Extraterritoriality of EU Economic Law, European Union and its Neighbours in a Globalized World 4, https://doi.org/10.1007/978-3-030-82291-0_3

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necessity. The most recent developments in this regard recognise the very far reach of EU competition law, making the EU one of the most assertive enforcers and setting an important precedent for other jurisdictions. Sections 2 and 3 provide a brief introduction to key concepts and a broader backdrop that is vital to understanding developments within the EU. Section 4 examines the relevant case law and policy pronouncements. It points to changing intra-EU dynamics and the approach of the EU courts, blending judicial economy with a pragmatism that recognises the limitations of international law. Section 5 explores the frictions that arise from extraterritoriality as well as the considerable efforts the EU has invested in seeking cooperative solutions rather than unilateral action. The conclusion brings these different perspectives together.

2 The What and Why It is worth examining here what extraterritoriality is, why it is needed, and why it is controversial. Functionally, extraterritorial jurisdiction (extraterritoriality) is needed to deal with cross-border phenomena which would otherwise escape scrutiny. Jurisdiction itself is a power or competence of a state to make, apply and enforce laws.2 The key source of that state’s power (i.e., its basis) is territory. It provides for the state’s jurisdiction over persons, property and events within its borders. However, various phenomena extend beyond a single state. In many areas, including competition law, there are no global, multilateral rules in place. In effect, adherence to strict territoriality would allow transnational conduct no matter how damaging to the state to escape scrutiny. That is why there is a need for extraterritoriality, that is, for a state to be able to reach out beyond its territory. In the case of competition law, it is a matter of being able to deal with competitive harm—conduct by foreign entities that affects domestic consumers and producers, with such foreign entities often based and operating solely outside the affected forum. By its very nature extraterritoriality constitutes unilateral action by the state against a foreign offender. Therefore, it is prone to causing controversies. This is especially so in policy areas where differences exist between national laws. Hence, it is unsurprising that tensions arose in competition law, especially since initially, after World War II, only a handful of countries had such legislation. Even in such cases, the substantive rules often differed significantly, allowing for conduct proscribed elsewhere. Thus, extraterritoriality in competition law can be seen as an encroachment on domestic policy choices, affecting another country’s sovereignty. Moreover, competition legislation virtually everywhere focuses on harm in the forum’s market. Conduct causing harm externally is not proscribed and may even be beneficial to states hosting firms engaging in anticompetitive conduct externally. Industrial policy may promote such conduct because it can facilitate exports and the

2

Oppenheim et al. (1992), p. 456.

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transfer of wealth from harmed markets to the forum hosting violators.3 As Lord Wilberforce masterfully put it ‘it is axiomatic that in antitrust [that is, competition] matters the policy of one state may be to defend what is the policy of another state to attack’.4 Controversies surrounding extraterritoriality can be simplified into the two perspectives of the state which hosts an offender and the state harmed by anticompetitive conduct. The host state would challenge the other country’s right to extraterritorial enforcement against a firm located within its territory. The harmed state would assert violation of its laws, and the harming of entities within its territory. As already indicated, jurisdiction has different facets. The distinction between them is highly relevant. Prescriptive (otherwise: legislative, substantive or subjectmatter) jurisdiction refers to a state’s competence to make its laws applicable to certain activities or persons.5 In the context of extraterritoriality that is the most relevant aspect. In fact, in most cases the terms ‘extraterritoriality’ or ‘extraterritorial jurisdiction’ are used to denote extraterritorial prescriptive jurisdiction. Two other relevant facets are adjudicative (judicial, curial, personal) and enforcement (executive) jurisdiction. The former relates to subjecting persons or things to adjudicative processes. The latter refers to inducing compliance or punishing non-compliance with applicable laws. It may involve performance of various acts of authority, inclusive of the use of force. Examples of such acts include physical searches of premises or seizures of assets. While extraterritoriality in the prescriptive and adjudicative sense may be acceptable, performance of acts of authority by one state within the territory of another—without consent—is prohibited under international law.6

3 The Backdrop As outlined above, the adherence to strict territoriality would permit unsatisfactory outcomes in transnational cases. Hence, a more flexible approach was needed. The key doctrinal steps in this regard were taken by the Permanent Court of International Justice in the famous Lotus case, in 1927, concerning collusion between ships of different states.7 In particular, the Court clarified that international law does not provide any general prohibition against applying domestic laws beyond a state’s

3

The continuing tolerance of export cartels (also in the EU) is the best example of such indulgence at the expense of others. Martyniszyn (2012), p. 181. 4 Rio Tinto Zinc Corp. v Westinghouse Elec. Corp., [1978] A.C. 547, 617. 5 Staker (2014), p. 312. 6 Ibid, 331. 7 France v Turkey, Ser. A, No. 10 (PCIJ 1927). For further analsysis see von Bogdandy and Rau (2008).

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territory.8 It recognised that in many countries ‘offences, the authors of which at the moment of commission are in the territory of another State, are nevertheless to be regarded as having been committed in the national territory, if one of the constituent elements of the offence, and more especially its effects, have taken place there’.9 The Court then found that ‘if . . . a guilty act committed . . . produces its effects . . . in foreign territory, . . . there is no rule of international law prohibiting the [affected] State . . . from regarding the offence as having been committed in its territory and prosecuting, accordingly, the delinquent.’10 In effect, a new jurisdictional principle of objective territoriality was recognised. The adjective ‘objective’ refers to the fact that the object of the violation crosses the border, not the person responsible for it. The Court recognised that even the effects of a conduct can constitute sufficiently close connection for jurisdictional purposes. However, in Lotus the effects—the harm in question—were immediate and very tangible in nature (that is, a ships collision led to sinking of a ship and a death of eight people). The judgement was controversial with the Court itself being divided. Nevertheless, it has opened the door for extraterritoriality. Against that backdrop the United States courts developed a far-reaching extraterritorial approach in competition law. In particular, they began asserting jurisdiction over foreign persons in relation to foreign conduct causing economic effects on the US market. The principle became known as the effects doctrine. It was established by means of case law, given that the original legislation11 was mute on the question of its possible reach. It was first formulated in Alcoa in 1945.12 Alcoa concerned an international cartel of aluminium producers, involving British, Canadian, French, German and Swiss firms. When it came to the jurisdictional issue, the Court famously held that ‘it is settled law . . . that any state may impose liabilities, even upon persons not within its allegiance, for conduct outside its borders that has consequences within its borders which the state reprehends; and these liabilities other states will ordinarily recognize [emphasis added].’13 It found that anticompetitive agreements ‘were unlawful, though made abroad, if they were intended to affect imports and did affect them’,14 thereby requiring intended effects on the US market for jurisdictional assertions. In this, the Court departed from an earlier line of US case law recognising extraterritorial jurisdiction when at least some of the conduct in question occurred on the US soil.15 What distinguished the effects doctrine from the principle of objective territoriality, as formulated in Lotus (a case

8

Ibid, 19. Ibid, 23. 10 Ibid, 25. 11 The Sherman Act, 15 U.S.C. §§1-2. 12 United States v Aluminium Company of America (Alcoa), 148 F.2d 416 (2nd Cir. 1945). 13 Ibid, 443. 14 Ibid, 444. 15 For example, Thomsen v Cayser, 243 U.S. 66 (1917); United States v Pacific & Arctic Ry & Nav. Co., 228 U.S. 87 (1913); United States v American Tobacco Co., 221 U.S. 106 (1911). 9

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not referred to in Alcoa itself) was the nature of the effects. In Alcoa these were purely economic in nature. The jurisdictional holding in Alcoa was ground-breaking, by no means ‘settled law’. At the time no foreign government protested. This is understandable, given that much of the world was at war, but also due to Alcoa’s factual framework. Firstly, the Canadian entity involved was effectively a shell created to look after the foreign assets of Aluminium Company of America (Alcoa) and the actual connection with the US went far beyond the agreement’s effects. Therefore, jurisdiction could have been asserted in more traditional ways. Secondly, Alcoa itself—at the time—was a much despised monopolist and one of the key targets of first the Roosevelt and then the Truman administrations’ drive to de-monopolise and restructure the US economy.16 After Alcoa US courts eagerly embraced the effects doctrine. Its exact scope of application—the question of what is required to actually allow for extraterritorial application of US competition laws—was repeatedly tested in US courts (predominantly by private plaintiffs, motivated by the possibility of treble damages awards17). The doctrine was in need of at least some general qualifiers, or remits. If any effect on the US market could trigger US jurisdiction then, given the interconnectedness of the world economy, US antitrust laws would be nearly universally applicable at a time when few states had any such laws. Over time two jurisdictional tests emerged: (1) in cases involving imports: the Supreme Court established that US competition laws apply extraterritorially when ‘foreign conduct . . . was meant to produce and did in fact produce some substantial effect in the United States’,18 and (2) in all other cases: US competition laws apply extraterritorially if the conduct in question has direct, substantial and reasonably foreseeable effects on US commerce. This jurisdictional test was introduced in very ambiguously worded legislation—the 1982 Foreign Trade Antitrust Improvements Act

16

For a broader political context see Stoller (2019), pp. 130–140. The Clayton Act §4, 15 U.S.C. §15. 18 Hartford Fire Insurance Co. v California, 509 U.S. 764, 796 (1993). 17

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(FTAIA)19—which was introduced principally to limit exposure of US firms to private suits for damages brought in the US by foreign victims.20 As further cases began emerging, various governments began protesting against US jurisdictional assertions. Some countries (inclusive of Australia, France, Germany and the UK) went so far as to introduce so-called blocking legislation, aimed to obstruct the long reach of US antitrust laws.21 It was only in the 1990s that the protests against the doctrine subsided, and a new status quo emerged, although the blocking statues have not been repealed.22 Largely in response to the tensions caused by such transnational cases, much effort has been invested in the last few decades in cooperation between competition agencies of different states. Formal and informal ties began emerging. They helped to foster awareness and understanding of existing substantive and procedural differences between jurisdictions and to build trust. Cooperation helped to depoliticise extraterritorial enforcement and make it seem more legitimate in the states whose firms were affected. Moreover, with the passage of time, well over one hundred countries introduced competition legislation. In many competition law areas (both substantive and procedural), there has been significant convergence between systems. While divergence continues, it is narrower in scope and international consensus has emerged on important points, especially as to the harmful nature of private international cartels. Gradually, the effects doctrine became a synonym for extraterritoriality in competition law worldwide, being first accepted and then widely adopted, maturing into a norm. A majority of systems now provide for extraterritorial application of their domestic competition legislation on such a basis. The doctrine rests on the recognition of in-forum economic effects of foreign anticompetitive conduct as a sufficiently close connection for jurisdictional purposes. Framing of relevant provisions in

15 U.S.C. § 6(a)–the FTAIA: Sections 1 to 7 of this title shall not apply to conduct involving trade or commerce (other than import trade or import commerce) with foreign nations unless: 19

(1) such conduct has a direct, substantial, and reasonably foreseeable effect: (A) on trade or commerce which is not trade or commerce with foreign nations, or on import trade or import commerce with foreign nations; or (B) on export trade or export commerce with foreign nations, of a person engaged in such trade or commerce in the United States; and (2) such effect gives rise to a claim under the provisions of sections 1 to 7 of this title, other than this section. Proviso: If sections 1 to 7 of this title apply to such conduct only because of the operation of paragraph (1)(B), then sections 1 to 7 of this title shall apply to such conduct only for injury to export business in the United States. 20 Fox and Crane (2010), p. 455. 21 For analysis see Martyniszyn (2014), p. 103. 22 For analysis of foreign governments’ protests by means of amicus curiae briefs submitted in US antitrust cases see Martyniszyn (2016), pp. 626–632.

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competition laws of different countries unsurprisingly varies.23 Hence, while it is entirely correct to talk of ‘the’ effects doctrine, it is equality correct to refer to ‘an’ effects doctrine, depending on the context and reflecting the heterogeneity of existing approaches. Cases requiring reliance on the doctrine remain relatively rare as often some local conduct or presence of foreign perpetrators obviates the need to rely on it. Nonetheless, a range of both developed (Canada24 and Japan25) and developing states (Brazil,26 Chile,27 China28 and South Africa29) have successfully applied the doctrine, principally in relation to cartels. In the mid-1940s, the US began persistently relying on extraterritoriality to safeguard their market. European firms were often on the receiving end of such enforcement. With time the Old Continent realised the need to follow a similar path. This process was facilitated by growing condemnation of cartels—the usual target of extraterritorial enforcement—thanks to the spreading adoption of competition legislation internationally. The EU’s adventure with extraterritoriality in competition law should be seen in this broader context.

4 EU’s Embracing of Extraterritoriality The EU Treaties do not explicitly address the question of the scope of application of competition provisions. However, the European Commission eagerly internalised the jurisdictional approach spearheaded by the US, which the Commission relied on from the outset. Yet, for a long time the EU courts were hesitant to embrace the effects doctrine. For some time both institutions engaged in a jurisdictional cha-cha. The Commission was pushing two steps forward via its decisional practice and policy pronouncements, developing a strong pro-effects narrative, while the EU courts tended to pull a step back when required to engage with the matter. In effect, the EU was expanding the jurisdictional reach, yet at a slower pace than the Commission hoped. The courts were walking a fine line between protecting the EU market from transnational violations and deferring to the conservative views of public international law aficionados. Yet, cynics could argue that the courts were simply providing a smokescreen; their unwillingness to rule on the validity of the 23

See further Martyniszyn (2021). For example, R v Mitsubishi Corp. [2005] 40 C.P.R. (4th) 333 (Can). 25 For example, JFTC, Cease-and-Desist Order and Surcharge Payment Order against Marine Hose Manufacturers (22 February 2008), at http://www.jftc.go.jp/en/pressreleases/yearly-2008/feb/ individual_000147.files/2008-Feb-22.pdf. For analysis see Martyniszyn (2017), p. 747. 26 For example, Administrative Proceeding n 08012.004599/1999-18. 27 For example, Supr. Ct. (24 September 2012), available at https://www.fne.gob.cl/wp-content/ uploads/2013/09/secs_xx_2013.pdf. 28 For example, NDRC Decision of 4 January 2013, the LCD Price-Fixing Cartel. 29 For example, Order of the Competition Tribunal Confirming the Settlement Agreement of 4 November 2008, Competition Commission v American Natural Soda Ash Corp (Soda Ash), Case 49/CR/Apr00. 24

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effects doctrine kept it in a grey zone of acceptability, enabling the Commission to continue relying on it. Not until 1988 did the Court of Justice hesitantly embrace the doctrine in Wood Pulp, paving the way for its current, assertive position in Intel. This 2017 case extended the reach of EU competition provisions to two steps removed from the EU’s shores. With Intel, the EU moved into the vanguard of extraterritoriality in competition law.

4.1

Early Experiences

The Commission applied EU competition laws extraterritorially from the beginning of its enforcement efforts in a series of negative clearance decisions under Regulation 17, which entered into force in 1962.30 In fact, the very first decision adopted under the current Art. 101, in Grosfillex, in 1964, concerned an exclusive distributorship agreement between French and Swiss firms whereby the Swiss entity would be forbidden from re-exporting back to the EU. The clearance was granted as the Commission was satisfied that any re-exportation to the EU would be most unlikely due to double duties.31 The case showed that the Commission believed it had jurisdiction over arrangements involving entities operating outside the EU in so far as they may affect competition within the EU. Similarly, in Mertens the Commission issued a clearance in relation to a distributorship agreement between US and Belgian firms, noting that ‘the mere fact that the granting undertaking is located outside the common market does not preclude the application of Article [101] of the Treaty since the agreement has effects within the common market’.32 While never challenged and validated by the courts, these decisions presented the Commission’s view on the extraterritorial scope of application of EU competition provisions. The Court’s first pronouncement on the possible extraterritorial reach of EU competition provisions was delivered in Béguelin33 within the scope of a preliminary ruling procedure and more as an obiter statement. The Court clarified that ‘the fact that one of the undertakings which are parties to the agreement is situated in a third country does not prevent application of [Art 101] since the agreement is operative on the territory of the common market.’34 Afterwards the Commission would cling to

30

EEC Council: Regulation No 17: First Regulation implementing Articles 85 and 86 of the Treaty, OJ 13, 21.2.1962, 204–211. 31 Commission Decision of 11 March 1964 (IV/A-00061—Grosfillex-Fillistorf), 64/233/CEE, OJ 58, 9.4.1964, 915-916. 32 ‘. . . considérant que le seul fait que l'entreprise concédante est située en dehors du marché commun ne fait pas obstacle à l'application de l'article [101] du traité dès lors que l'accord a des effets à l'intérieur du marché commun.’ Commission Decision of 1 June 1964 (IV-A/12.868), 64/344/CEE, OJ 92, 10.6.1964, 1426-27. 33 Case 22/71, Béguelin Import Co. v S.A.G.L. Import Export [1971] ECR 949. 34 Ibid, para 11.

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that sentence, despite it being more of an obiter observation than a proper consideration of the jurisdictional issue. The Commission proceeded to signal its position more broadly. For example, in 1972 it was concerned about voluntary restraints agreements on behalf of Japanese firms, given that such measures would affect EU consumers and therefore fall within EU jurisdiction. It went so far as to issue a formal notice, expressly addressed to the Japanese firms—and, of course, all other foreign entities—informing them that being registered outside the EU would not hinder application of EU competition rules should their arrangements affect the EU market.35 Later the Commission investigated a Franco-Japanese arrangement concerning importation of Japanese ballbearings, which were to be sold in the EU at inflated prices at the request of French competitors. The Commission established a violation, with the decision being addressed to both French and Japanese firms.36 However, no fines were imposed as the Franco-Japanese agreement was never implemented in the wake of the Commission notice.37

4.2

Dyestuffs and the First Beats of Jurisdictional Cha-Cha

The first controversies about the extraterritorial application of EU competition laws arose with Dyestuffs, in which the Commission investigated and fined an aniline dye price-fixing cartel made up of entities from the EU, Switzerland and the UK.38 The Commission held that the EU’s anti-cartel provision, Art. 101, applies to any entities whose conduct affects EU markets, irrespective of their location.39 The decision met not only with a challenge by the non-EU cartelists, but also with a formal protest from the British government.40 The UK, a future EU member, argued that the effects doctrine was unsupported by international law and that application of EU Treaty provisions on such a basis would be unjustified.

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Bekanntmachung betreffend die Einfuhr japanischer Erzeugnisse in die Gemeinschaft, auf die der Vertrag von Rom anwendbar ist, OJ C111, 21 November 1972, 13. See also Bulletin of the European Communities, 5(10) 1972, 55–56. 36 Commission Decision of 29 November 1974 relating to proceedings under Article 85 of the Treaty establishing the EEC (IV/27.095 - Franco-Japanese ball- bearings agreement), 74/634/EEC, OJ L343, 21.12.1974, 19–26. 37 ECSC, EEC, EAEC, Fourth Report on Competition Policy (1974 Report), 50–51. 38 European Commission, 69/243/EWG, Decision Relating to a Proceeding Under Article 85 of the EEC Treaty, IV/26 267- Dyestuffs, OJ L195, 11-17 (1969). 39 ‘Die Wettbewerbsregeln des Vertrages finden demnach Anwendung auf alle Wettbewerbsbeschränkungen, die die in Artikel 85 Absatz 1 bezeichneten Auswirkungen innerhalb des Gemeinsamen Marktes haben. Es kommt deshalb nicht darauf an, ob die Unternehmen, die derartige Wettbewerbsbeschränkungen verursachen, ihren Sitz innerhalb oder ausserhalb der Gemeinschaft haben.’ 40 Reprinted in Lauterpacht (1967), pp. 58–59.

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In pleadings on appeal, the Commission changed its position. It argued it had jurisdiction on the basis of the territorial principle, due to the presence in the EU of foreign firms’ subsidiaries. It argued that in this context, parent and subsidiary were one for the sake of attribution of actions and liability, thereby bringing non-EU parents within EU jurisdiction. Reliance on the effects doctrine became a secondary argument. Advocate General Mayras sided with the Commission, but was entirely unconvinced by its change of heart (that is, shifting away from the effects doctrine).41 Having provided a comparative overview (noting that in Belgium, Germany, France, Switzerland and, of course, the US the effects doctrine was either explicitly provided for or implicitly followed42), AG Mayras encouraged the Court to adopt a qualified effects test. This test would recognise EU jurisdiction only when the underlying foreign conduct caused direct, substantial effects that were immediate and reasonably foreseeable (with showing of intent not being necessary).43 Hence, he called for embracing the effects doctrine with notable qualifiers. Probably to position the doctrine as a natural extension to the principle of objective territoriality, AG Mayras underlined that in competition law economic effects are one of the constitutive elements, if not the essential element, of the offence.44 This, in turn, would mean that the effects doctrine is no more than an application of the principle of objective territoriality in the sphere of competition law, where only economic effects exist. The Court followed the route freshly marked by the Commission. It found that non-EU parent companies availed of their power over subsidiaries to implement restrictive agreements. In the Court’s view the lack of real autonomy of the subsidiaries allowed to attribute their conduct to parent companies, thereby bringing the latter within the scope of EU jurisdiction.45 This approach became known as a single economic unit doctrine (SEUD). It enabled the Court not to pronounce on, or even discuss, the effects doctrine. The Court might ‘have taken an easy way out’,46 while preventing foreign violators from escaping sanctions for their anticipative conduct and showing that corporate structures will not shield them from liability.47 The

41

Case 48/69, Opinion of Mr Advocate General Mayras in case Imperial Chemical Industries Ltd. v Commission [1972] ECR 619. Original text in French. For English translation see 'Imperial Chemical Industries Ltd. v Commission of the European Communities, Opinion of AdvocateGeneral Mayras delivered on 2 May 1972, Case 48/69’, Competition Law in Western Europe and the USA (Kluwer Law International 1976, last updated January 1979, Supplement No. 13) (1988). 42 Ibid, 176–182. 43 Ibid, 190–192. 44 Ibid, 192. 45 Case 48/69, Imperial Chemical Industries Ltd. v Commission (Dyestuffs), [1972] ECR 619, paras 125–142. 46 Allen (1974), p. 35, 58. 47 However, even that step did not escape criticism. It was argued that the notion of a unity of a group of companies may be recognised only after jurisdiction over the entities involved has been established. As Schenck noted, the EU was ‘putting the cart of prescriptive authority before the horse of jurisdiction.’ Schenck (1989), p. 495, 509.

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finding may also need to be seen in a broader context. At the time, in the late 1960s, the EU was a much less consolidated, less powerful entity vis-à-vis its member states. Some of the arguments made against embracing the effects doctrine related to the impossibility of exercising competences not explicitly provided for the EU in the Treaties. Formulation of SEUD allowed the Court to sidestep such EU-specific, internal concerns. While not going too far, SEUD proved helpful for the Commission, which has availed of it in a number of cases.48 Apart from bringing a foreign parent into EU prescriptive jurisdiction, SEUD came with a valuable although unintended side effect of providing for enforcement jurisdiction over foreign parents, facilitating, for example, execution of fines. In more general terms, Court’s issue avoidance in Dyestuffs, that is—not pronouncing on the effects doctrine—effectively allowed the Commission to continue developing and relying on a pro-effects narrative. For example, in the 2nd Report on Competition Policy, of 1973, a mention of Dyestuffs is followed by a verbatim quote from the earlier Béguelin case, only marginally touching on the extraterritorial question.49 In its 6th Report on Competition Policy, of 1976, the Commission referred to the 2nd Report, noting that both itself and the Court considered that ‘the Community had power to act against a non-Community undertaking . . . wherever the effects of the restrictive practice were felt within the common market’,50 directly referring to the effects doctrine and clearly overstretching the Court’s position. In 1981 the Commission, referring to Grosfillex, considered itself one of the first competition agencies to have relied on the effects test, while—at the same time—acknowledging that all such transnational cases involved either foreign firms with EU subsidiaries or some participants located within the EU.51 It observed that itself and the Court developed SEUD ‘alongside the effects theory’, yet again imputing the latter views which it has not expressed beyond a single sentence in Béguelin.52 The Competition Commissioner, speaking at the American Bar Association’s antitrust event in Washington in 1981, underscored that the Commission relies on the effects doctrine ‘expressed in a great number of . . . decisions and . . . confirmed by many judgements of the Court of Justice [emphasis added]’. In doing so the Commission ‘acts in line with the practice of most free market countries and also . . . in accordance with international law.’ He also referred approvingly to the jurisdictional test of the US FTAIA, requiring direct and substantial effects on the domestic market to allow for jurisdictional assertions.53

48

For example, in Case 6/72, Europemballage Corp and Continental Can Co. Inc. v Commission [1973] ECR 215 and Cases 6-7/73, Commercial Solvents v Commission, [1974] ECR 223. 49 ECSC, EEC, EAEC, Second on Competition Policy (1972 Report), 30-1. 50 ECSC, EEC, EAEC, Sixth on Competition Policy (1976 Report), 37. 51 The European Commission, Eleventh on Competition Policy (1981 Report), 35. 52 Ibid, 36. 53 Frans Andriessen, ‘Antitrust in the International Sphere; Antitrust- an Endangered Species?’ (Address at the American Bar Association's National Institute on Antitrust, Washington, 6 November 1981).

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As already indicated, it was not just a matter of making pronouncements and arguably misrepresenting the Court’s position. The Commission repeatedly relied on the effects approach. For example, in 1977, it fined firms partaking in a concerted practise relating to vegetable parchments. One of the sanctioned firms was Finnish. Finland was not in the EU at the time. The decision made no mention of any EU subsidiaries of that entity, hence the Commission must have relied on the effects approach.54 Similarly, in 1978, the Commission fined a number of white lead producers, inclusive of a UK firm, for their concerted practices.55 The UK entity argued that, given that the conduct in question took place prior to the UK’s accession into the EU, the EU competition rules were not applicable to it. The Commission rejected this claim, referring to the Court’s holding in Béguelin, and the UK firm was fined.56 Similarly, in Aluminium imports57 the Commission investigated an arrangement between Western European firms and state trading enterprises from the Eastern European communist bloc, aimed at restraining aluminium imports to the EU. Here again jurisdiction over foreign entities without subsidiaries in the EU (both from the Soviet bloc and the UK, pre-accession to the EU) was established on the basis of the effects doctrine. The decision referred yet again to Béguelin and noted that the principal effects of the agreements in question were felt on the EU market.58 However, the Commission found ‘it would not be opportune to impose fines’,59 probably due to the peculiar, state-related status of the Eastern European entities. The decision was not appealed. Overall, the Commission was able to get away with pursuing the effects doctrine so long as its decisions were not challenged.

4.3

Wood Pulp and the Court’s Inability to Avoid the Matter

The next major challenge to the Commission’s extraterritorial assertions post-Dyestuffs, followed its investigation of a large price-fixing scheme among wood pulp producers. The cartel involved over 40 members from the EU and Canada, Finland, Sweden and the US (including two trade associations based outside the EU). The Commission found they engaged in concerted practices, fixing prices of sales to buyers in the EU, and it imposed substantial fines.60 One of the fined entities was a 54

Commission Decision of 23 December 1977 relating to a proceeding under Article 85 of the EEC Treaty (IV/29.176 - Vegetable parchment), 8/252/EEC, OJ L70, 13/3/1978, 54–68. 55 Commission Decision of 12 December 1978 on a proceeding under Article 85 of the EEC Treaty (IV/29.535 - white lead), 79/90/EEC, OJ L 21, 30.1.1979, 16–24. 56 Ibid, para 32. 57 European Commission, 85/206/EEC, Decision of 19 December 1984, IV/26.870- Aluminium Imports from Eastern Europe (Aluminium imports), OJ L 92, 1 (1985). 58 Ibid, 14.3, 14.6 and 14.8. 59 1984 Report, 59. 60 European Commission, 85/202/EEC, Decision Relating to a Proceeding Under Article 85 of the EEC Treaty, IV/29.725- Wood Pulp, OJ L85, 1-52 (1984), 83.

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US trade association, which served as an informational clearing house for its members, without producing or selling the products in question. Some foreign entities had EU subsidiaries, falling under EU jurisdiction under SEUD. However, some non-EU cartel members did not have any such establishments and they would have escaped liability. For these members the Commission relied on the effects doctrine, noting that ‘the effect of the agreements . . . within the EEC was therefore not only substantial but intended, and was the primary and direct result of the agreements and practices.’61 Thereby, the Commission echoed the jurisdictional test enacted in the US FTAIA and proposed by AG Mayras in Dyestuffs. Cartelists headquartered outside the EU challenged EU jurisdiction. In this they were supported by the UK, which disapproved of the Commission’s approach. The case was pending on the court’s docket for nearly 4 years, pointing to the Court’s uneasiness. However, the Court could no longer avoid the issue. In his advisory opinion the AG Darmon called for embracing of the qualified effects test, as formulated by AG Mayras in Dyestuffs.62 His analysis established that the test conformed with international law.63 In his view the EU also had jurisdiction over the US trade association, even though the price recommendations it issued were not strictly binding on its members.64 The Court, however, again approached the matters differently. In particular, it found that by seeking orders from EU customers, foreign entities engaged in competition within the EU.65 They have acted in concert with the effect of selling at coordinated prices in the EU.66 More generally, the Court recognised that conduct prohibited under Art. 101 of the Treaty is ‘made up of two elements, the formation of the agreement . . . and the implementation thereof’ with the latter being the decisive factor.67 Thereby in Wood Pulp the Court coined what came to be known as the ‘implementation test’. In the case at hand, it held that the Commission did not err in its jurisdictional assertion. In fact, the Court considered jurisdiction being exerted in this case on the basis of the territoriality principle, clearly seeing the effects approach as a natural extension thereto.68 However, the Court annulled the decision in relation to a US trade association after finding it did not play any separate role in the implementation of the agreements.69 Despite considering the case for nearly 4 years, the judgement was brief, with no specific references to the practice of other countries, the UK’s disapproval or the AG’s opinion—as if keeping it brief could make it more acceptable. While

61

Ibid, 79. Joined Cases 89, 104, 114, 116, 117 and 125 to 129/85, Opinion of Mr Advocate General Darmon in case A Ahlström Osakeyhtiö and others v. Commission (Wood Pulp), [1988] ECR 5193, 53. 63 Ibid, 27. 64 Ibid, 63. 65 Ibid, 12. 66 Ibid, 13. 67 Ibid, 16. 68 Ibid, 18. 69 Ibid, 24–28. 62

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effectively embracing the effects test and allowing for extraterritorial application of EU competition law further afield, the Court did not clarify how to operationalise the implementation test. In particular, it did not explain how exactly the implementation test can be fulfilled, nor did it provide illustrative examples. From Wood Pulp’s factual setting it was clear that a direct sale to consumers in the EU meets the threshold. A refusal to deal with pre-existing trading partners or a conspiracy to limit sales on the EU market with a view to drive prices up, that is—some form of a deliberate withdrawal or omission would probably also satisfy it, but one could argue to the contrary. Moreover, the Court did not recognise any particular qualifiers. Would any ‘implementation’, any effects on the EU market suffice, even if a decisive majority of the effects were felt elsewhere? This question was unaddressed. Finally, the Court did not elaborate on a possible need to balance the interests of other countries when asserting far-reaching jurisdiction in any such cases, although this need was being judicially recognised in the US at the time.70 Despite being excessively economical in its reasoning in Wood Pulp, the Court provided the Commission with the validation it had sought of its long-held jurisdictional approach, even if somewhat differently framed. Yet again, the Court’s reticence left the Commission with a larger policy space, potentially allowing it to read into the Court’s reasoning, as it has done in the past. Post-Wood Pulp the Commission made good use of the implementation test, holding to account firms that might have escaped EU jurisdictional reach under SEUD. For example, the Commission explicitly relied on the test when dealing with a price-fixing cartel among PVC producers, inclusive of a Norwegian manufacturer with no subsidiaries in the EU.71 Similarly, it did so when dealing with concerted practices among cartonboard supplies, some of who were non-EU firms implementing the agreement by selling directly to EU customers.72 However, the Commission stopped short of further testing the permissible limits of exterritorial jurisdiction in the realm of scrutiny of multi-party conduct. Further push for its extension came via the rules on control of mergers.

4.4

Validating Offshore Mergers Review

As in most modern competition systems, the EU seeks to review mergers ex ante, that is before they are concluded, so as to prevent creation or strengthening of dominant positions in the EU market. The merger control rules (i.e. the Old Merger

70

See, in particular, Timberlane Lumber Co. v Bank of America, N.T. & S.A., 549 F.2d 597 (9th Cir. 1977) and Mannington Mills, Inc. v Congoleum Corp., 595 F.2d 1287 (3rd Cir. 1979). 71 European Commission, 89/190/EEC, Decision of 21 December 1988 Relating to a Proceeding Pursuant to Article 85 of the EEC Treaty, IV/31.865- PVC, OJ L74, 1–20 (1989). 72 European Commission, 94/601/EC, Decision of 13 July 1994 Relating to a Proceeding under Article 85 of the EC Treaty, IV/C/33.833- Cartonboard, OJ L 243, 1–78 (1994).

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Regulation) were originally enacted in 1989,73 about 16 years after such proposals were first made in the EU. At the time, few jurisdictions provided for preventative merger control. The EU rules apply to transactions among firms achieving certain levels of turnover (i.e. sales) worldwide and within the EU so as to catch the larger fish. The smaller transactions fall under the purview of EU member states if their markets are affected, irrespective of the seat or the principal place of operations of the parties involved.74 Hence, the EU relies on a purely functional and ‘necessarily arbitrary’ test,75 casting the net of the merger control system very widely. As the EU Competition Commissioner, on whose watch the rules were introduced, put it: ‘the signal from Europe to the rest of the world is clear . . . Any concentration, wherever conceived or born . . . wherever located, must be notified if it meets the threshold requirements.’76 This also means the review catches transactions with no effects on the EU market. For example, in 1993 the Commission cleared a transaction between four Japanese telecommunication providers. While the transaction met the notification thresholds, none of the parties was licenced to operate outside Japan and the Commission concluded the transaction had no effect in the EU.77 Hence, this approach errs on the side of over-scrutinising. The EU claims power to review mergers somewhat excessively, effectively accepting that there may cases of overreach, in which parties will rightly challenge EU jurisdiction. The alternative would be to under-scrutinise, that is, to claim jurisdiction in fewer cases and accept that some offshore deals affecting the EU market will take place. The jurisdictional limits of the EU merger review were tested and validated in Gencor.78 The case focused on a proposed transaction between two groups of platinum and rhodium mines in South Africa (Gencor and Lonrho, a UK-registered entity). The deal was notified to and cleared by the South African competition authorities. Given the EU’s formalistic approach to turnovers, it was also duly reported in the EU. Here, the Commission issued a prohibition decision after finding that the merger would have been anticompetitive from the EU’s

73

Council Regulation (EEC) No 4064/89 of 21 December 1989 on the Control of Concentrations between Undertakings (the Old Merger Regulation), OJ 1989 L 395, 1-12, corrigenda OJ 1990 L 257, 13. 74 The 10th recital in the preamble of the Merger Regulation: ‘A concentration with a Community dimension should be deemed to exist where the aggregate turnover of the undertakings concerned exceeds given thresholds; that is the case irrespective of whether or not the undertakings effecting the concentration have their seat or their principal fields of activity in the Community, provided they have substantial operations there.’ Council Regulation (EC) No 139/2004 of 20 January 2004 on the Control of Concentrations between Undertakings (the Merger Regulation) OJ L 24, 1-22. The Old Merger Regulation followed the same approach. 75 Brittan (1991), p. 33. 76 Idem, 43. 77 European Commission, Decision of 30 June 1993 Declaring a Concentration to be Compatible with the Common Market according to Council Regulation (EEC) No 4064/89, IV/M.346 - JCSAT/ SAJAC, OJ C219, 14. 78 Case T-102/96, Gencor Ltd v Commission [1999] ECR II-753.

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perspective by creating collective dominance on the relevant world markets.79 This was done despite an earlier intervention by the South African government, which raised concerns about such a possibility and a possible jurisdictional clash.80 Gencor, in turn, appealed the EU decision, arguing that the Commission lacked jurisdiction to review the transaction. The Court of First Instance (CFI) without any deliberations on this point held that extraterritorial application of the Merger Regulation is justified under public international law when ‘it is foreseeable that a proposed concentration will have an immediate and substantial effect’ in the EU, and it found these criteria satisfied.81 The fact that both parties carried out sales in the EU before the proposed transaction and would have continued to do so afterwards was undisputed.82 Thereby, the CFI set a precedent and validated far-reaching EU jurisdiction in merger cases, allowing the Commission to deal with offshore mergers affecting EU market. It also usefully clarified that the EU jurisdiction and meeting of formalistic turnover thresholds under the Merger Regulation are two different matters. Doctrinally, it compartmentalised jurisdictional tests—with the implementation test remaining the rule in conduct cases and the new qualified effects test being applicable in merger control. A more recent example of a far-reaching review of an offshore takeover concerned a proposed iron ore production joint venture in Australia between BHP Billiton and Rio Tinto, announced in 2009. The European Commission started analysing the proposal despite both entities having relatively small sales to EU consumers, with key customers being Asian steel mills.83 However, in light of the competition concerns raised by the EU, the parties abandoned the transaction and no formal decision was issued.84

4.5

Assertive Courts and the Leap Into Extraterritoriality Two Steps Removed

Post-Gencor the Commission continued with its progressive jurisdictional assertions, although—unlike in the past—these were being pragmatically squared within the earlier recognised notions. For example, in Gas Insulated Switchgear, a case involving a cartel between EU and Japanese firms, the Commission fined both EU

79

European Commission, 97/26/EC, Decision Declaring a Concentration to be Incompatible with the Common Market and the Functioning of the EEA Agreement, IV/M.619- Gencor, OJ L11, 30-72 (1996). Note, Gencor was dealt with under the Old Merger Regulation. 80 Gencor (n 77), 62. 81 Ibid, 90–100. 82 Ibid, 87. 83 European Commission, IP/10/45, Commission opens formal proceedings concerning iron ore production joint venture between BHP Billiton and Rio Tint (25 January 2010). 84 For the case analysis see Bellis (2016).

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and Japanese members, who—per the cartel agreement—agreed to abstain from the EU market. While they made no sales into the EU, the Commission held the view that their abstention was part of the single and continuous infringement.85 While it has not been challenged, it clearly was a novel approach to asserting jurisdiction over foreign entities agreeing to abstain from the EU market and an example of quietly pushing for more expansive extraterritorial reach. However, when possible the Commission was relying on both previously recognised tests, erring on the side of caution. In particular, in LCD it fined members of a world-wide cartel among producers of liquid crystal display (LCD) panels (the main component of TV, laptop and monitor screens).86 The cartel involved Korean and Taiwanese firms, operating in Asia. To assert jurisdiction the Commission relied on the Woodpulp implementation test, arguing that even if Europe was not singled out by the cartelists’ strategy, the agreement’s implementation took place in the EU by means of direct sales.87 The Commission also went on to show that the conduct had foreseeable, immediate and substantial effects in the EU, meeting the test introduced in Gencor.88 Initially one of the cartelists challenged the decision on jurisdictional grounds,89 however it later dropped the case, depriving the EU courts of an opportunity to rule on the matter. These different strands of cases on extraterritoriality were brought together and the law was significantly developed in Intel.90 In particular, it was recognised that the implementation and qualified effects tests are alternative ways of establishing jurisdiction. In relation to the former, it was finally clarified that a negative act (refraining from doing something) constitutes implementation. Intel also pushed the reach of EU laws significantly further, by recognising EU jurisdiction in a factual scenario two steps removed from EU shores, as outlined below. With it, the EU became one of the most assertive extraterritorial enforcers, no longer hesitant in its approach. It also demonstrates continued flexibility in adapting to whatever corporate schemes violators may envisage to avoid liability in the EU. Intel was also the first proper EU case concerning extraterritoriality in the context of abuse of dominance.91

85

European Commission, Decision of 24 January 2007, Relating to a Proceeding under Article 101 of the Treaty on the Functioning of the European Union and Article 53 of the EEA Agreement, Case COMP/F/38.899—Gas Insulated Switchgear (2012). 86 European Commission, Decision of 8 December 2010 Relating to a Proceeding under Article 101 of the Treaty on the Functioning of the European Union and Article 53 of the EEA Agreement, COMP/39.309- LCD- Liquid Crystal Displays (2010), 314–319. 87 Ibid, 236–237. 88 Ibid, 238. 89 Case T-94/11, AU Optronics v Commission, OJ C120, 14. 90 Intel v Commission (n 1). 91 The Commission’s jurisdiction over Gazprom (in relation to investigation of its possible abuse of dominance in the EU), in an investigation launched in 2012, was also initially questioned. The case was settled by means of commitments. However, the initial jurisdictional protest was most likely

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Intel, a US computer chip maker, was fined for incentivising (by means of conditional rebates) computer manufacturers (such as Acer, HP and Lenovo) to make all or almost all laptops with Intel chips (that is, central processing units, CPUs). This was done against the backdrop of pre-existing contracts between computer manufacturers and AMD, Intel’s only significant competitor and another US chip maker. Similar rebates were provided to a leading retail group for stocking products with Intel’s chips. This was a strategy to foreclose AMD, which would limit consumer choice and diminish incentives to innovate.92 Intel appealed, arguing, among other points, that the Commission incorrectly established jurisdiction over Chinese Lenovo and Taiwanese Acer. It underlined that neither of the firms, nor Intel, purchased any chips in the EU. All the relevant transactions took place outside it—either in China or Taiwan. In Intel’s view the fact that some number of laptops (apparently not particularly large) with its chips were later sold—by third parties (that is, Lenovo and Acer)—in the EU was irrelevant in the context of its agreements implementation and their effects. Hence, the EU jurisdictional tests were not met.93 The General Court clarified that the implementation and qualified effects tests are not cumulative, but rather alternative approaches to jurisdiction, indicating they can be applied across areas of competition law (be it agreements, dominance or mergers).94 In relation to the qualified effects test, the Court underlined that, contrary to Intel’s assertions, showing of actual effects is not needed.95 The Court found that the qualified effects test had been met by incentivising laptop producers not to sell laptops with competing chips anywhere in the world, inclusive of the EU.96 It also found the practice at issue was indeed implemented in the EU, pointing out that a direct sale is just one means of doing so. In this case, implementation consisted of a granting of a financial incentive to non-EU producers with a view to have them postpone launch in the EU of products with competing inputs (chips).97 Effectively, the General Court, for the first time, recognised EU extraterritorial jurisdiction despite the underlying conduct being two steps removed from the EU market. In particular, there were no direct sales by Intel (nor some direct withdrawal of sales to the EU on their part). Instead, an independent non-EU third party was incentivised by Intel to commit relevant acts (postponement of new products). In other words, extraterritorial jurisdiction arises when a violator makes another party change its course of conduct with a view to foreclosing competition, causing harm in the EU.

groundless given Gazprom’s presence and its business conduct in the EU. Hence, Intel remains the first proper unilateral conduct case. For more about Gazprom see Martyniszyn (2015a), p. 291. 92 European Commission, Decision of 13 May 2009 Relating to a Proceeding under Article 82 of the EC Treaty and Article 54 of the EEA Agreement, COMP/C-3/37.990- Intel (2009). 93 Case T-286/09, Intel Corp v Commission, paras 221–228. 94 Ibid, 236, 244. 95 Ibid, 251. 96 Ibid, 250 et seq. 97 Ibid, 303–307.

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Intel appealed. AG Wahl considered the appeal well-founded on the jurisdictional grounds. In his view, given this was a unilateral conduct case, the Commission should have showed that Intel’s conduct was implemented in the EU, not the conduct of a third party (Lenovo). For him, the Commission’s approach, embraced by the General Court, was going too far, opening doors to exorbitant jurisdictional assertions.98 In terms of the qualified effects test, AG Wahl pointed out that the Court should not have relied on the notion of single and continuous infringement for jurisdictional purposes.99 He argued that the Court should not have focussed on Lenovo’s course of conduct, instead it should have investigated whether Intel’s agreements had the required qualified (i.e. immediate, substantial and foreseeable) effects on the EU.100 That question, in AG Wahl’s view, was left unanswered. On appeal, the Court of Justice upheld the jurisdictional analysis of the General Court, engaging with the jurisdictional issues rather briefly. The implementation and qualified effects tests remain valid alternatives for establishing jurisdiction, the Court found.101 In the Court’s view Intel’s agreements with Lenovo, leading to postponement of finished product availability in the EU, were correctly taken into account as part of an overall strategy to foreclose Intel’s competitor in the EU and elsewhere.102 Holding otherwise would have led to fragmentation of the conduct in question, enabling some of it to escape scrutiny in the EU.103 The Union’s highest Court therefore recognised a significantly broader jurisdictional reach of EU competition provisions. It remains an open question whether the Court would have formulated a similar view but for the existence of Intel’s overall foreclosure strategy. In effect, extraterritoriality two steps removed is the new EU rule (extraterritoriality v2). That is a precedent for the international community at large, going beyond approaches practised to date. Yet, there is nothing intrinsically problematic with it that would cause friction. The territory remains the necessary connecting factor and the harm being addressed remains the harm in the EU market. The EU is neither usurping the role of the world’s competition enforcer, nor is it undermining policies of other states (as indicated by the lack of any formal governmental protests in Intel). It is a logical move forward on the sliding scale of options. While significant, it is more of an adjustment than a framing of some novel jurisdictional perspective. Its exact remits will undoubtedly be tested in future cases. Progressives will welcome it as it can limit the scope for transnational anticompetitive conduct going unpunished. The Commission is likely to build on it, should opportunities arise with case-specific

In AG Wahl’s view under such an approach ‘almost any conduct—no matter how remotely related to the EU territory—could be construed as falling under the Commission’s jurisdiction’. Case C-413/14 P, Opinion of Advocate General Wahl in case Intel v Commission, 312. 99 Ibid, 319–320. 100 Ibid, 322. 101 Intel v Commission (n 1), 45. 102 Ibid, 56. 103 Ibid, 57. 98

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circumstances in the future. Unlike in the past, the EU courts seem more assertive on jurisdictional issues, potentially more supportive of such developments.

5 Frictions and Cooperative Approaches The EU’s embracing of extraterritoriality has had a number of knock-on effects, which will be examined in more detail in this section. First, the evolution of the EU’s approach signifies the emergence of a bipolar and, later, when other jurisdictions followed this path, multipolar system of judicial oversight of anticompetitive conduct. The pre-existing hegemon—the US—had to adapt to a new reality. US firms needed to learn to comply with competition legislation of multiple foreign states, in whose markets they were active, with whatever different, divergent norms applied. Second, extraterritoriality was and remains the second best tool for the EU. By design, the EU is a cooperative creature, typically consensus driven. Reliance on extraterritoriality as a unilateral, non-cooperative action is in many ways an alien mode of operating. While necessary to protect the EU markets, it has never been part of EU’s DNA. This is, perhaps, also why the EU courts took so long to embrace extraterritoriality and the effects doctrine. While that ultimately happened, the EU’s significant, but unsuccessful, efforts to develop a binding multilateral way of dealing with transnational anticompetitive conduct should not be overlooked. The EU also enjoyed various successes in fostering cooperative initiatives in this area of law, for example establishing bilateral ties by means of cooperation agreements.

5.1

Breaking the Merger Taboo

The US has never opposed the EU’s incremental internalising of extraterritoriality. This is unsurprising given the US was laid the groundwork. However, given divergence in rules and their interpretations, tensions were unavoidable. While punishing cartel members for price fixing was politically less problematic, the introduction of the pre-emptive (ex ante) merger review was bound to and did create frictions.104 This was well-understood in the EU. Lord Brittan, the EU Competition Commissioner on whose watch the merger rules were introduced, predicted at the time that ‘there may be conflicts of jurisdictions, for example with the United States’.105 This awareness made the Commission call for a formal agreement with the US to deal with such problems,106 showing the EU’s cooperative and consensusdriven mode of operation.

104

For an outline of the EU merger review system see notes 72-76 above and accompanying text. Brittan (1991), p. 44. 106 Idem, 44. 105

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The first contentious merger involved Boeing and McDonnell Douglas. Both US firms operated in the aerospace industry, dealing principally with commercial aircrafts and defence needs. Neither firm had assets or subsidiaries in the EU. At the time, the global market for large jet aircrafts was very concentrated: Boeing held over a 60% share, the European Airbus about 30% and McDonnell Douglas less than 10% of the market. While the deal was cleared in the US, the European Commission raised significant objections. This led to political outrage in the US. US President Clinton met with top US officials and economic advisers to discuss possible retaliatory measures in case of a prohibition decision, considering both unilateral sanctions and litigation within the framework of the World Trade Organisation.107 US Vice President Gore threatened that the US ‘will take whatever action is appropriate to assure justice and fairness’.108 A trade war between the EU and the US seemed imminent. However, ultimately a compromise was found. Following consultations, under the EU-US Cooperation Agreement, the EU carved out defence matters from its analysis.109 On top of that, the firms restructured the deal in a way that addressed the Commission’s concerns, enabling it to approve the deal.110 The Boeing/ McDonnell Douglas merger served as a wake-up call to US businesses and the legal community. The Commission nearly prohibited an offshore deal between two US firms that had been unconditionally cleared in the US, pointing to the need to understand and appreciate substantive differences between the two systems and, in more general terms, marking the end of US hegemony in this area of law. Reinforcing the lessons from Boeing/McDonnell Douglas, at the turn of the new millennium the EU marked its position by blocking a transaction between General Electric and Honeywell,111 which had been cleared by the US and Canadian competition authorities. This was no ordinary deal. The largest industrial merger in world history, it was valued at about $42 billion.112 On appeal the prohibition was confirmed.113 Briefly, the contentious issues for the EU concerned the global markets for jet engines and other avionic and non-avionic products. While the firms made a number of proposals on how to amend the transaction, these were

S. Pearlstein and A. Swardson, ‘U.S. Gets Tough to Ensure Boeing, McDonnell Merger’, The Washington Post, 17 July 1997; Tom Buerkle, ‘Clinton Warns EU Of Trade Conflict Over Boeing Deal’, International Herald Tribune, 18 July 1997. 108 Edmund L. Andrews, ‘Minister of Objection Nettles Washington’, The New York Times, 21 May 1997. 109 European Commission, IP/97/729, The Commission Clears the Merger between Boeing and McDonnell Douglas under Conditions and Obligations (30 July 1997). 110 European Commission, 97/816/EC, Decision Declaring a Concentration to be Compatible with the Common Market and the Functioning of the EEA Agreement, IV/M.877- Boeing/McDonnellDouglas, OJ L336, 16-47 (1997). 111 European Commission, 2004/134/EC, Decision Declaring a Concentration to be Incompatible with the Common Market and the Functioning of the EEA Agreement, COMP/M.2220- General Electric/Honeywell, OJ L48, 1-85 (2001). 112 ‘Welch squelched’, The Economist, 21 June 2001; ‘Engine failure’, The Economist, 5 July 2001. 113 Case T-210/01, General Electric Co. v Commission [1999] ECR II-753. 107

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considered insufficient by the Commission. Boeing/McDonnell Douglas hinted at what the GE case now made clear: the US was no longer the sole arbiter of global governance in the realm of competition law and policy. The Commission’s decision met with strong criticism in the US. Assistant Attorney General James was reported as saying that ‘clear and longstanding US antitrust policy holds that the antitrust laws protect competition, not competitors’.114 Treasury Secretary O’Neill accused the Commission of ‘making judgments about business combinations of companies that are completely located outside their jurisdiction’.115 Senator Rockefeller IV, the Chairman of the Senate Aviation Subcommittee, argued that the decision ‘could have a chilling effect on future trans-Atlantic aviation and aerospace cooperation’, while Senator Holling, the Chairman of the Senate Commerce Committee, accused the Commission of using protectionism at the expense of US companies.116 Despite the rhetoric, it is important to note there was no trade war. Despite considerable outrage, it was clear the EU had legitimately flexed its extraterritorial powers in competition law and, given the EU’s economic importance, they could not be ignored. The GE case spawned the creation, in 2001, of the International Competition Network (ICN), a platform for engagement of competition agencies from different jurisdictions. Unsurprising its first initiative was the establishment of a Working Group on the Merger Control Process in the Multijurisdictional Context. The group was originally led by the US Department of Justice.117 However, since General Electric/Honeywell, no other merger created similar tensions vis-à-vis the US or any other jurisdictions. This can be explained in a fourfold way. First, EU’s jurisdictional approach to review mergers affecting the EU market was broadly accepted. Second, non-EU firms planning to merge recognised the need to comply with EU rules, pre-empting frictions. Third, when exercising its extraterritorial prescriptive jurisdiction, the EU continues with imposing only territorial, EU-focused remedies (hence, without asserting extraterritorial enforcement jurisdiction).118 Fourth, the European Commission developed and continued with a cooperative approach of engaging with foreign counterparts in transnational merger cases. This is possible due to confidentiality waivers typically granted by the merging firms, which have an interest in speedily securing necessary clearances and in favourable, non-conflicting reviews by different agencies. In fact, the Commission cooperated with one or more non-EU competition agencies in roughly half

114

Wilke (2001). Lambro (2001). 116 Wilke (2001). 117 Deborah P. Majoras, ‘Merger Enforcement at the Antitrust Division’ (Address at the Mergers and Acquisitions Forum, KPMG/Chicago Graduate School of Business, 27 September 2002). 118 OECD, Working Party No. 3 on Co-operation and Enforcement: Roundtable on the Extraterritorial Reach of Competition Remedies—Note by the European Union, DAF/COMP/WP3/WD (2017)35 (30 November 2017), 12. 115

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of the more complex merger cases it reviewed (i.e., mergers cleared with remedies or requiring further scrutiny, in so-called phase 2).119

5.2

Pushing for Cooperative Solutions

Despite an increasingly assertive view on applying competition law extraterritorially, cooperation is at the heart of the EU’s governance model. It therefore sought cooperative solutions to the challenges posed by transnational anticompetitive conduct. Such initiatives were being undertaken in different formats (bilateral and multilateral) with a view to develop both binding and voluntary instruments.

5.2.1

Failed Hopes for the Binding Multilateral Route

The EU’s interest in developing a multilateral framework for competition law was not only principled but also pragmatic, reflecting the changed circumstances of the successful Uruguay trade negotiation round. The latter led to a significant elimination of public barriers to trade, putting private restraints, that is, anticompetitive conduct, in the limelight. The EU began pointing to the need to address the lacuna in competition law while the trade negotiations were ongoing.120 The first conceptual efforts to address possible international rules, in the 1990s, were academic and private in nature. In 1992–1993 a group of twelve mostly German scholars121 prepared what came to be known as the Draft International Antitrust Code (DIAC).122 The draft foresaw enactment of certain minimum standards into domestic law and creation of an international competition authority with quite extensive powers. It was meant to be adopted by means of a plurilateral agreement. DIAC was presented to Peter Sutherland, then the Director General of the General Agreement on Trade and Tariffs (GATT), the WTO’s predecessor, with a view to stimulate discussion. It is noteworthy that Sutherland, prior to assuming his GATT role, served as the EU Competition Commissioner (1985–1989), hence he understood the EU perspective on these matters. In general terms, this private initiative later informed more formal efforts within the EU. 119 OECD, Working Party No. 3 on Co-operation and Enforcement: Roundtable on the Extraterritorial Reach of Competition Remedies—Note by the European Union, DAF/COMP/WP3/WD (2017)35 (30 November 2017), 19. 120 See, for example, The European Commission, XXIInd Report on Competition Policy 1992, 114. 121 These were J Drexl (DE), W Fikentscher (DE), E Fox (US), A Fuchs (DE), A Heinemann (DE), U Immenga (DE), HP Kunz-Hallstein (DE), EU Petersmann (DE), WR Schluep (CH), A Shoda (JP), S Sołtysiński (PL), LA Sullivan (US). 122 See appended to Gifford (1997), p. 1. For a reflection on DIAC and a critique by one of the drafters see Fikentscher (1996), p. 533.

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The EU’s first formal work towards a multilateral solution consisted of the appointment, in 1994, by Karel van Miert, EU Competition Commissioner, of a group of experts to consider the regulatory framework and to propose a way forward. The group was composed of six Commission staff and three external experts, two of who were co-drafters of DIAC. The group issued its report in 1995.123 It considered the existing framework—circulation of information and nominal cooperation between competition agencies—as inadequate.124 The development of bilateral ties was seen as ‘essential but insufficient’.125 The main recommendation was to create a plurilateral agreement on competition matters, initially between the main trading powers (hence, following a building block approach) with a dispute settlement system akin to the one provided for in the WTO framework.126 While the report did not point to any particular forum, the possibility of concluding such an agreement in the WTO framework was explicitly mentioned.127 Building on the report, in 1996 the Commission called for the creation of a framework for competition rules within the newly established WTO.128 It was not to be an international competition agency with its own enforcement powers, but a combination of binding commitments (to introduce domestic competition laws) and some intergovernmental procedures (especially a compliance mechanism).129 The Commission also proposed creation of a working group within the WTO to conduct necessary exploratory work.130 In 1996, under the leadership of Peter Sutherland, the former EU Competition Commissioner and the GATT Director General, the WTO established such a working group.131 Frédéric Jenny, then the vice president of the French Competition Council was appointed its chair. Jenny was also one of the three external experts working on the EU’s 1995 report. The EU made the first submission to the group, outlining the benefits of a potential international framework of competition rules and proposing the work programme.132 The prospects were encouraging. In 1998 Commissioner Van Miert reported group’s adoption of a work plan and asked whether the

123

European Commission, Competition Policy in the New Trade Order: Strengthening International Cooperation and Rules. Report of the Group of Experts, COM(95) 359 final (12 July 1995). 124 Ibid, 10. 125 Ibid, 12. 126 Ibid, 14. 127 Ibid, 16. 128 European Commission, Towards an International Framework of Competition Rules. Communication from the Commission to the Council, COM(96) 284 final (18 June 1996). 129 Ibid, 10 et seq. 130 Ibid, 14. 131 Singapore Ministerial Declaration, WT/MIN(96)/DEC (13 December 1996), available at http:// www.wto.org/english/thewto_e/minist_e/min96_e/wtodec_e.htm, point 20. 132 WTO Working Group on the Interaction between Trade and Competition Policy, Communication from the European Community and its Member States, WT/WGTCP/W/1 (11 June 1997).

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international community ‘should not consider next year, opening negotiations on global competition rules within the WTO.’133 Despite a positive start and intensive work by the working group, including 246 formal contributions over the years, the idea did not galvanise sufficient support among the WTO members. While initially placed on the WTO agenda (for the Doha ministerial conference in 2001), the idea was opposed by the US and a group of developing countries—for different reasons.134 This subsequently led to the working group being disbanded in 2004,135 representing a failure of the EU’s hopes for a multilateral framework for competition law within the WTO. Since then, no effort has been made to revive it. The route towards a binding multilateral solution was abandoned, underscoring the necessary recourse to extraterritoriality as a means of dealing with transnational anticompetitive conduct. Hence, the embracing of extraterritoriality by the EU was its BATNA.136 The WTO efforts aside, the EU eagerly embraced a US proposal, made in Autumn 2000, to set up an international virtual network of competition agencies— the International Competition Network (ICN). Initially, 14 jurisdictions joined this initiative (inclusive of the EU and four of its Member States). It was meant to be a platform for voluntary cooperation. The ICN was not empowered to adopt rules. It was conceived as a consensus-focused, project-oriented platform allowing enforcers to tease out systemic differences and identify best practices, thus facilitating convergence and strengthening cooperation. Some in the Commission saw it as ‘a valuable instrument that will bear fruit in the short to medium term’, complementing bilateral cooperation and the long term work on intergovernmental fora, potentially leading to a formal regime within the WTO.137 While the WTO efforts failed, the ICN proved very successful. It currently brings together over 100 competition agencies from all over the world. Over the years it has delivered numerous practical outputs and facilitated many interactions among enforcers.138 The EU continues to actively contribute to and engage in its framework.

5.2.2

Fostering (Some) Bilateral Ties

In addition to multilateral efforts, the EU invested in bilateral cooperation. In particular, over time it concluded bilateral cooperation agreements with

Karel Van Miert, ‘Globalization of Competition: The Need for Global Governance’ (Speech at the Vrije Universiteit Brussel, 25 March 1998). 134 See discussion in Maher (2012). 135 Decision Adopted by the General Council on 1 August 2004, WT/l/579. 136 In negotiation theory BATNA stands for best alternative to a negotiated agreement. 137 Pons (2002), p. 12. 138 See, for example, ICN Factsheet and Key Messages, available at https://www.international competitionnetwork.org/wp-content/uploads/2018/09/Factsheet2009.pdf. 133

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11 jurisdictions.139 Most of these constitute so-called 1st generation agreements, which aim to preempt any potential frictions relating to extraterritorial application of domestic rules and to facilitate engagement between parties. The agreements provide notification procedures for cases that may affect important interests of the other party. They also facilitate channels of communication and, more generally, help to develop mutual trust between counterparts. However, they do not allow for sharing of confidential information (unless investigated parties agree to it, as they typically do in merger review cases), or for rendering assistance in gathering such information or case-specific evidence. Some of the agreements provide for ‘negative comity’, that is, an obligation to take the other party’s important interest into account when enforcing law. Some agreements, for example with the US, also contain ‘positive comity’ clauses, which enable one party to request the other party to investigate conduct of firms based in the requested party’s territory which harm the requesting party’s interests. There is no obligation to undertake any enforcement action following such request (that is, it is discretionary). This possibility under the EU-US agreement has been formally used only once, without much satisfaction to the requesting party (the US),140 and it seems this solution carries only limited practical potential. The EU developed also one 2nd generation agreement, with Switzerland, concluded in 2013, which goes further. It allows for exchange of confidential information. However, it is only possible in relation to conduct being investigated by authorities in both jurisdictions. That is, it is of no avail in a case opened by the European Commission in relation to conduct not being scrutinised in Switzerland.141 Such formal bilateral tiles are particularly useful when it comes to facilitating contacts and trust-building. However, at the turn of the new millennium it became clear that the EU could not ‘realistically expect to build the same intensive bilateral cooperative relationship [in competition law] with all . . . counterparts around the word’ due to clear resource limitations.142 Little has changed since then. 11 cooperation agreements do not amount to a particularly impressive record for a major economy such as the EU. This explains why the EU was originally so eager to find a multilateral solution and why it embraced the less-resource-intense engagement on the ICN forum.

139 These are agreements with: Brazil (2009), Canada (1999), China (2012), India (2013), Japan (2003), Korea (2009), Mexico (2018), Russia (2011), South Africa (2016), Switzerland (2014), United States (1991, 1995 & 1999). See the listing of ‘Bilateral relations on competition issues’ available at https://ec.europa.eu/competition/international/bilateral/#s. 140 It was invoked in the Sabre-Amadeu case. US Department of Justice, ‘Justice Department asks European Communities to investigate possible anticompetitive conduct affecting U.S. airlines’ computer reservation systems’, 28 April 1997. As James Rill put it ‘the pace of action . . . suggest[s] that the formal process will not produce results living up to early expectations . . . formal positive comity is not a fully effective mechanism’. Rill (2011). 141 For further analysis see Martyniszyn (2015b), p. 11. 142 Pons (2002), p. 3.

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However, it should be noted that any contacts or interactions with foreign competition officials help to eliminate or at least soften potential frictions arising from extraterritorial application of competition laws. With this in mind, the European Commission has long practiced notifying foreign counterparts of cases if they contain elements relevant to the notified country. It has also avoided exercising extraterritorial enforcement jurisdiction. For example, it stopped short of engaging in ‘fishing expeditions’—sending its inspectors to conduct work outside the EU.143

6 Conclusions This piece critically analysed the EU’s embracing of extraterritorial application of its competition laws. This evolution occurred amidst: growing inter-connectedness of the world’s economy; trade negotiations that facilitated increased global trading; and the removal of state-created barriers to cross-border business activities. All of these elements intensified the need to deal with private barriers to trade—that is, restrictive business practices, or, in competition law parlance, anticompetitive conduct. The EU’s overall response was balanced. While the European Commission was eager to assertively follow the US path shaping new jurisdictional standards, the EU courts proved more reticent, or else more pragmatic and eager to remain aligned with international law. It is possible the courts’ hesitance was informed, in the first decades, by the relative novelty of the entire EU project and the courts’ fairly recent intra-EU standing. Nevertheless, over time the EU steadily expanded the reach of its competition laws by means of policy pronouncements and the gradual imprimatur of the EU courts. By doing so, the EU effectively ended the US dominance in this area of law, setting the stage for a system of multi-polar governance. As a unilateral action, extraterritoriality was never in the EU’s DNA. As a compromise-orientated and consensus-driven creature, in the 1990s the EU invested heavily in galvanising support for a multilateral solution—a binding system of governance within the WTO. Yet, in the face of opposition from the US and some developing countries, these hopes were lost. The EU rechannelled its cooperative efforts into voluntary platforms, primarily into the International Competition Network, while relying also on a rather limited, yet useful, set of bilateral cooperation agreements with some of its key partners. The EU’s many efforts to encourage multilateral solutions and the limitations of the available cooperative instruments underscore the necessity, not convenience, of the EU’s embracing of extraterritoriality—the only effective tool to address cross-border anticompetitive practices. The Court’s recent pronouncement in Intel unambiguously positioned the EU as an assertive and progressive extraterritorial enforcer. The Court’s recognition of extraterritoriality two steps removed (extraterritoriality v2) places the EU in the

143

Brittan (1991), p. 19.

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vanguard of competition law enforcement globally. The Court’s ruling and the EU’s assertive approach should be welcomed by all those who favour limiting the gaps in global governance of transnational anticompetitive conduct.

References Allen NL (1974) The development of European economic community antitrust jurisdiction over Alien undertakings. Legal Issues Eur Integr 35:58 Bellis J-F (2016) The iron ore production joint venture between Rio Tinto and BHP Billiton: the European angle of a multinational antitrust review. In: Emerging issues in sustainable development. Springer Brittan L (1991) Competition policy and merger control in the single European market. CUP, p 33 Fikentscher W (1996) The draft international antitrust code (DIAC) in the context of international technological integration. Chicago-Kent Law Rev 72:533 Fox EM, Crane DA (2010) Global issues in antitrust and competition law. Thomson/West, p 455 Gifford DJ (1997) The draft international antitrust code proposed at Munich: good intentions gone awry. Minn J Glob Trade 6:1 Lambro D (2001) O’Neill hits EU body for blocking GE merger. The Washington Times, 3 July Lauterpacht E (ed) (1967) British practice in international law. BIICL, pp 58–59 Maher I (2012) Transnational legal authority in competition law and governance: territoriality, commonality and networks. In: Handl G et al (eds) Beyond territoriality: transnational legal authority in an age of globalization. BRILL Martyniszyn M (2012) Export Cartels: is it legal to target your neighbour? Analysis in light of recent case law. J Int Eur Law 15(1):181 Martyniszyn M (2014) Legislation blocking antitrust investigations and the September 2012 Russian executive order. World Compet 37(1):103 Martyniszyn M (2015a) On extraterritoriality and the Gazprom case. Eur Compet Law Rev 36 (7):291 Martyniszyn M (2015b) Inter-agency evidence sharing in competition law enforcement. Int J Evid Proof 19(1):11 Martyniszyn M (2016) Foreign States’ Amicus Curiae participation in U.S. Antitrust cases. Antitrust Bull 61(4):611, 626–632 Martyniszyn M (2017) Japanese approaches to extraterritoriality in competition law. Int Comp Law Q 66(3):747 Martyniszyn M (2021) Competitive harm crossing borders: regulatory gaps and a way forward. J Compet Law Econ:7–8. https://doi.org/10.1093/joclec/nhaa034 Oppenheim L et al (1992) Oppenheim’s international law: peace, vol 1. Longman, p 456 Pons J-F (2002, 3–5 June) Is it time for an international agreement on antitrust? Frauenchiemsee, p 12 Rill J (2011) The US/EC antitrust cooperation agreement: genesis, innovation, and early implementation. Antitrust Chronicle 10 Schenck DW (1989) Jurisdiction over the foreign multinational in the EEC: lifting the Veil on the economic entity theory. Univ Pa J Int Bus Law 11(495):509 Staker C (2014) Jurisdiction. In: Evans MD (ed) International law. OUP, p 312 Stoller M (2019) Goliath: the 100-year war between monopoly power and democracy. Simon and Schuster, pp 130–140 von Bogdandy A, Rau M (2008) The Lotus. In: Wolfrum R (ed) The Max Planck Encyclopedia of public international law, online edn. OUP Wilke JR (2001) U.S. Antitrust Chief Criticizes EU Decision to Reject Merger of GE and Honeywell. Wall Street Journal, 5 July

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Marek Martyniszyn is a Senior Lecturer in Law at Queen’s University Belfast, Northern Ireland. His research focuses on competition law and policy in international and transnational contexts, including the limits of extraterritorial jurisdiction, state involvement in anticompetitive practices and the challenges facing new and developing competition law systems. Dr Martyniszyn is a Member of the UNCTAD’s Research Partnership Platform and a Non-Governmental Advisor to the International Competition Network (ICN).

Extraterritoriality in Japanese Competition Law: Reaching Foreign Entities in the Face of Changing Global Norms Masako Wakui

Abstract The Antimonopoly Act (AMA) of 1947, enacted during the post-war US occupation of Japan, contains no explicit provision allowing for extraterritorial application. Instead, it has a special prohibition against Japanese companies participating in international anticompetitive agreements and contracts. Under this provision, cease and desist orders were issued against Japanese companies, even where a foreign company imposed vertical restrictions. Over time, the globalisation of economic activities and the adoption of the effect doctrine prompted Japan to follow suit, which ultimately led the Supreme Court of Japan to implement a kind of effect theory in Cathode Ray Tube (concerning a price fixing cartel) in 2017. This article explores the historical development of the decisional practice of Japan’s competition authority and the debate on prescriptive jurisdiction, confirming the need for extraterritorial application of competition law. I then argue that the position adopted by the Supreme Court should be maintained and the AMA should be applicable when a cartel undermines the free competition regime in Japan. In particular, export cartels formed by Japanese companies should be regulated under the AMA even if consumers in Japan do not suffer immediately, as such activities endanger the competitive process in Japan. Meanwhile, a high level of procedural fairness also needs to be achieved, to facilitate global collaboration and gain international support for Japan’s active enforcement of the AMA.

1 Introduction The Japanese Antimonopoly Act (AMA 1947) does not state how far its provisions reach internationally, and the Japan Fair Trade Commission (JFTC) has been very cautious about applying the AMA to actions taken abroad (Tsuchida 2013, p. 3). Instead, there is a special provision, Article 6, that prohibits enterprises from being

M. Wakui (*) Kyoto University, Kyoto, Japan e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 N. Cunha Rodrigues (ed.), Extraterritoriality of EU Economic Law, European Union and its Neighbours in a Globalized World 4, https://doi.org/10.1007/978-3-030-82291-0_4

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parties to anticompetitive international agreements, and the JFTC applied this to Japanese companies for a few decades after the AMA was enacted. This enforcement created a peculiar situation in which the JFTC issued cease and desist orders only to Japanese companies, and ignored foreign companies that engaged in or even initiated anticompetitive practices. Changes in international norms prompted the JFTC to engage in a gradual shift from partial enforcement of the AMA to extraterritorial application to foreign entities. The Supreme Court’s Cathode Ray Tube (CRT) judgement (2017) is a milestone case, as the court finally pronounced that the AMA was applicable to foreign companies’ actions abroad if those actions affect the free competition regime in Japan. As a result of the currently globalised nature of business activities, consumers can be harmed by the actions of foreign entities taken abroad. How far the AMA can reach beyond the border is primarily determined by prescriptive jurisdiction, or ‘a state’s authority to lay down legal norms’ (Kamminga 2012). Controversy previously existed over whether ‘the concept of territoriality attaches to the sojourn of the acting person and the place where the act was committed’ (the (strict) territoriality principle) (Basedow 2014) or whether ‘a State may exercise [it] when foreign conduct produces substantial effects on its territory’ (effect doctrine) (Kamminga 2012). However, this controversy is largely settled by now, and most jurisdictions take the effect into account when deciding the reach of their competition law (WongErvin and Heimert 2020, p. 3). The CRT judgement is in line with this global norm. Prescriptive jurisdiction stills entails another issue: should a state regulate domestic anticompetitive practice that targets foreign states? This relates to domestic export cartels, in which Japanese companies agree to charge a specified export price or to restrict exports, and to international cartels, in which Japanese and foreign companies are involved but the targeted markets are abroad. The JFTC has established the decisional practice to take action against these cartels that affect the domestic export market. Given the emergence of intricately connected global supply chains and the likelihood that cartels targeted elsewhere facilitate cartels affecting Japanese markets, the traditional JFTC approach should be maintained. In the following, the historical development of the JFTC’s decisional practice, focusing on Article 6, is firstly examined, and the paper considers what prompted it to change. The CRT case is then examined, and the remaining issues and future directions that Japan should take, particularly regarding the regulation of export cartels, are explored.

2 Article 6 The AMA was first enacted in 1947 during the occupation of Japan by the General Headquarters (GHQ) in which the United States played a decisive role. As part of the post-war agenda to abolish cartels (Hadley 1970, pp. 4–7; Maddox 2001, pp. 86–96), the GHQ required the Japanese government to issue Imperial Ordinance No. 33 (1946), which nullified all Japanese international cartel agreements

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(Hirabayashi 2012, pp. 102–103). The GHQ also insisted that the AMA should prohibit involvement in international cartels. The Japanese team drafting the AMA tried to insert a provision exempting practices relating to international trade, but this was met with severe opposition from the GHQ and so the idea was dropped (Nishimura and Sensui 2006, p. 196; Hirabayashi 2012, p. 116). As a result, Article 6, prohibiting business entities from concluding anticompetitive agreements with foreign entities, was incorporated. The provision has been amended several times, and Article 6 currently states: ‘An enterprise must not enter into an international agreement or an international contract which contains such matters which fall under unreasonable restraint of trade or unfair trade practices’ (emphasis added). ‘Unreasonable restraint of trade’ means horizontal agreements including hardcore cartels, while ‘unfair trade practices’ covers a variety of conduct such as vertical restrictions and exclusions. These are generally prohibited under Articles 3 and 19, respectively.

2.1

Function of Article 6

Article 6 is unique in that it is typically addressed to Japanese entities only, although the provision relates to international agreements (Kita 2012, p. 142). For a few decades after the enactment of the AMA in 1947, most people considered that it was impossible to apply the AMA provisions to foreign entities unless those entities had subsidiaries or branches operating businesses in Japan (Imamura 1961, pp. 153–154; Shoda 1966, pp. 363–364; Imamura 1978, p. 185; Kanazawa 1979, p. 116). It was once understood that Article 3 related only to competition between Japanese companies, while Article 6 related to competition between Japanese and foreign companies (Kanazawa 1979, p. 118). Furthermore, while the AMA contains neither a per-se prohibition nor a by-object prohibition, and requires a cartel to create a substantial restraint of competition in the relevant market in order to be illegal, the case law was not clear until recently about what needed to be demonstrated to establish a violation of Article 3 (Wakui 2018, pp. 88–92). Demonstrating an actual price increase effect could be necessary, and the ‘mutual restriction’ element, which exists only for Article 3, set another hurdle. These created the gap that Article 6 fills (Kanazawa 1961, p. 7; Kawai 1978, p. 30; Negishi 1977a, pp. 227–228; Negishi 1977b, pp. 242–243; Matsushita 1985, p. 308). Article 6 was used when the JFTC could not find one or more of the factors evidencing an illegal cartel under Article 3 (Scenario 1) or when the vertical restriction at issue was imposed upon Japanese companies by a foreign entity (Scenario 2). It is easier to understand the function of Article 6 in Scenario 1. While foreign cartelists were considered out of reach, the JFTC tried to prevent the cartel by enforcing Article 6 against Japanese entities. In Nippon Felt, for instance, Japanese and foreign felt fabric manufacturers agreed on the price they should charge in foreign markets (JFTC 1973). Article 6 was used, as competition between Japanese and foreign companies was restricted (Kagawa and Shirakawa 1973, p. 15). In Toyo

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Boseki, Japanese acrylic spun yarn manufacturers came to terms with the German Worsted Yarn Association as to the maximum output that Japanese manufacturers could export to West Germany (JFTC 1972b). The restriction was deemed not to be mutual, as there was no restriction on the business activities on the German side; however, Article 6 was applicable as it does not require mutual restriction (Ohara 1981, pp. 166–167). In Asahi Kasei, Japanese and European rayon yarn manufacturers came to an agreement to honour their home markets, and the Japanese manufacturers subsequently set quotas amongst themselves (JFTC 1972a). It was understood that the JFTC found that competition in Japan had not been restrained, as it was unlikely that European manufacturers would have exported their products to Japan anyway, but Article 6 was still applicable as it was not necessary to show any such effect (Ohara 1981, p. 165). Notably, in Nippon Felt, the JFTC notified the Organisation for Economic Co-operation and Development (OECD) of the foreign companies’ engagement in cartels, expecting that their home countries would take measures against them (Kagawa and Shirakawa 1973, p. 15). Scenario 2 is trickier, as the JFTC typically found that there was a violation by the Japanese company on which the restriction was imposed. Generally, Scenario 2 involved vertical agreements, and the party who committed the Article 6 violation was the Japanese company whose freedom to deal with other companies, or to engage in business activities outside the designated region or length of time, was restricted by the foreign company. This odd application took place because of Japan’s lack of enforcement jurisdiction over foreign companies (Shoda 1966, p. 368). When there could be no meaningful application of the AMA to foreign entities, Article 6 allowed the JFTC to demand that Japanese companies amend or delete anticompetitive contractual terms. The JFTC issued cease and desist orders in several dozen such cases under Article 6 from 1949 to 1970 (Kita 2012, pp. 161–166). A notification system also existed under which more than a thousand international agreements were submitted to the JFTC every year in the late 1960s, and the JFTC actively gave guidance to ensure they were compliant with the AMA provisions (Uesugi 1993).

2.2

Limitations and Criticisms of Article 6

The effectiveness of Article 6 was obviously limited regarding international cartels. If foreign companies continue to engage in cartels, Japanese consumers who purchase imports will continue to suffer damage. Moreover, where foreign companies remain engaged in anticompetitive cartels, one cannot expect Japanese companies to start behaving competitively, either, as it is possible that tacit collusion will remain for some time. To break a cartel, disruption must take place; issuing a cease and desist order only to the Japanese company falls far short of what is needed. Meanwhile, the lack of procedural fairness was a serious issue in dealing with vertical agreements under Article 6. When issuing a cease and desist order to a Japanese company, the JFTC did not hear the foreign company’s side of the

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argument. Japanese companies whose activities were restricted tended not to mind the deletion of a restrictive contractual clause, while their foreign counterparties did, as it constituted a retrospective change to the contract in favour of the Japanese company. A substantial percentage of notified international agreements concerned to licensing and technology transfer agreements (Uesugi 1993, p. 14), for which the JFTC (1968) set out guidelines. Although the guidelines mirrored the stringent US approach, there was criticism on the grounds that the JFTC unfairly discriminated foreign licensors (Newberg 2000-2001, p. 724). The Japanese Supreme Court considered the matter in Novo. The JFTC found that Novo’s counterparty, Amano, had violated Article 6, and it ordered Amano to delete the relevant contractual clauses. Novo appealed the decision to the Tokyo High Court, which refused to accept that Novo had the standing to bring an appeal. The Supreme Court (1975) upheld this judgment, stating that the JFTC’s cease and desist order was not addressed to Novo and thus that Novo had no legal interest in the matter. This was unfair, as the deletion of the contractual clause affected the interests of Novo (Imamura 1976, pp. 93–94; Negishi 1976, pp. 1007–1016; Fukuoka 1981, p. 388; Matsushita 1985, pp. 315–316). This prompted Japanese commentators to criticise the way in which the JFTC enforced Article 6 in relation to vertical restraint (Kanai 1998, p. 66). Meanwhile, the issues relating to international cartels have eased over time, as will be explained in the next section. The JFTC has not applied Article 6 since 1972 (Wada 1997, p. 31), and the notification system was abolished in 1997.

3 Gradual Changes to Expand the Reach of the AMA In a report issued in 1990. the JFTC Secretariat (1990, p. 67) stated that the AMA was applicable to the practices of foreign companies, so long as those foreign companies were engaged in exporting to Japan, and their practices constituted an AMA violation. The first significant step was taken through the 1998 amendment to the AMA, which made mergers in which all the parties are foreign companies subject to the regulation of mergers in the AMA. In relation to Articles 3 and 19, the discussion continued as to the reach of the AMA, and many argued over whether the location of the action was relevant (Matsushita and Hildebrand 1972, p. 131). In Nordion, the Canadian company Nordion had agreed on requirement contracts with Japanese companies, excluding its rival Belgian company from the Japanese market. The JFTC (1998a) found that the contract was concluded in Japan and that Nordion had caused the effect of substantially restraining competition in Japan, so it applied Article 19 to Nordion. While the JFTC did not state what position it took, commentators understood that the case was in accordance with both the effect doctrine and the territoriality principle (Obata 1999, pp. 17–18).

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In Marine Hose, on the other hand, the JFTC (2008) found that Japanese and foreign companies had breached Article 3 by engaging in global market allocation and price-fixing activities. The JFTC did not mention where the agreement was made, but again it did not clarify its reasoning. The price-fixing activities were addressed to Japanese customers, and Kawashima (2009, p. 283) pointed out that the application of the AMA in the case can be explained in the light of both the effect doctrine and objective territoriality. Generally, the principle of objective territoriality means that ‘a state may exercise prescriptive jurisdiction over conduct that commences or occurs outside the state if the conduct is completed, or if a constituent element takes place, within the state’ (American Law Institute 2018, s. 408), while the (strict) territoriality principle generally requires that all the constituent elements exist within the territory. However, invoking objective territoriality is of little help in clarifying the scope of prescriptive jurisdiction, because the anticompetitive effect constitutes a legal element under Article 3. This implies that the effect doctrine and the principle of objective territoriality can lead to the same conclusion. Although objective territoriality and the effect doctrine may differ in how they deal with remote consequences, the cartel participants in Marine Hose clearly intended to cause an anticompetitive effect in Japan. Moreover, Marine Hose was only a JFTC decision, and its value as a precedent is minor compared to High and Supreme Court judgements. Although the positions of both the JFTC and the courts remained unclear for quite some time, these moves signalled a more active enforcement of the AMA against foreign companies. Meanwhile, AMA scholars began explaining that Japan was poised to adopt, or had adopted, the effect doctrine (Sanekata 1987, p. 341; Tanso 1995, p. 319; Kanai 1998, p. 68). Several events took place in the background. First, the US application of its antitrust law to foreign companies indicated that the extraterritorial application of competition law could be a real option (Uesugi 1986, pp. 369–401). While Japanese businesses and the Japanese government reacted to the US decision by criticising this application (Martyniszyn 2017, pp. 752–755), AMA scholars began re-examining the jurisdictional issues by deliberately referring to the international norm. Matsushita (1968, pp. 65–67), a pioneer in the field, advocated the effect doctrine and continued to work on jurisdictional issues. Second, the US and other jurisdictions started to introduce the leniency system, which changed the way competition agencies conducted investigations (Hammond 2000). Leniency documents and applicants’ cooperation with competition authorities facilitated the investigation of actions taken abroad by foreign companies, and made the extraterritorial application of competition law a real option for competition agencies. Prompted by the OECD (2002), Japan amended the AMA and implemented the leniency system in 2007. Third, Japan began concluding cooperation agreements involving the enforcement of competition laws with foreign competition authorities and countries, including the European Community (JFTC, International Relations). Such cooperation agreements mitigate the international friction caused by the extraterritorial application of competition law, and address the difficulties of collecting evidence in foreign

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jurisdictions. In 2002, the AMA was amended to introduce a procedure to also serve notices in foreign countries (Uesugi 2012, p. 36). Fourth, the European Union also underwent changes. Japan appears to have followed a similar path to that of Europe. Gencor (ECR II-753) in 1999 paralleled the 1998 AMA amendment to the merger regulations as well as the Nordion decision of the same year. Intel (C-413/14 P) in September 2017, in which the Court of Justice of the European Union adopted the effect doctrine, preceded the CRT Supreme Court judgement (December 2017) that is examined below. The way in which illegal cartels can be established under Article 3 has also been clarified over time, and overall, it has become easier to find violations. The changes narrowed the gap that Article 6 had to fill (Seryo 2009, p. 112).

4 CRT Judgement In the CRT case, several cathode ray tube (CRT) manufacturers based in East and Southeast Asia engaged in price-fixing cartels involving CRT sold to the subsidiaries of Japanese TV manufacturers in Southeast Asia. The Japanese TV manufacturers and the parent companies of the CRT manufacturers negotiated the price and other conditions relating to the core contractual terms, but sales were made by the CRT manufacturers to subsidiaries of the TV manufacturers located outside Japan. The Japanese TV manufacturers controlled the business operations of their Southeast Asian subsidiaries, and a substantial number of TVs produced by the latter were bought by the former for resale in Japan or elsewhere. The JFTC (2009, 2015) found that there was a violation of Article 3, and the Tokyo High Court upheld this decision. The decision was again upheld by the Supreme Court (2017). Having admitted that the AMA does not contain a specific provision to clarify its jurisdiction over practices taking place abroad, the Supreme Court noted that the aim of the AMA was to protect the free competition regime. The Supreme Court then stated that the AMA was applicable to price-fixing cartel agreements concluded abroad if they infringed on the free competition regime in Japan. The Supreme Court went on to state that, given that ‘substantial restraint of competition in any particular field of trade’ means an impairment of the functions of competition in the market, such an infringement of the free competition regime in Japan is deemed to be present in cases where a price-fixing agreement concluded abroad impairs the functioning of the market, and Japan constitutes a part of that market. According to the Supreme Court, Japan constitutes the market where the price-fixing agreement restricts competition for trading partners located in Japan. The Supreme Court concluded that the AMA was applicable to the CRT cartel. The judgement made it clear that the AMA is applicable to cartel agreements concluded abroad by foreign companies when the cartelists sell goods and/or services to customers in Japan. In that aspect, the position taken by the Supreme Court is considered to be in line with the effect doctrine (Ikehara 2018, p. 115). Subsequently, in Hard Disk Drive Suspension (HDDS), the JFTC (2018a) issued

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cease and desist orders to Japanese and foreign manufacturers who were charged with an Article 3 violation. The sales were made to a company in Hong Kong, which assembled suspensions and other parts to produce head gimbal assemblies (HGAs) and sold these on to a Japanese company, Toshiba. Although Toshiba was not party to the sale of the suspensions, being a buyer of HGAs, it negotiated the price with the suspension manufacturers, and the Hong Kong company bought the suspensions at that price. The case commentary published by a JFTC official explained that the AMA was applicable to this price-fixing cartel as Toshiba engaged in the price negotiation, arranged for the Hong Kong company to buy suspensions at the negotiated price, and bought the HGAs that incorporate those suspensions; thus Toshiba was deemed to be a customer in the relevant market (Tanabe 2018, p. 89).

5 AMA’s Reach over Practices of Foreign Companies Taken Abroad The actions of foreign companies that are taken abroad can harm Japanese markets, and the lack of extraterritorial application can result in insufficient enforcement. Currently, neither a world competition law nor a global competition authority exists, and it is inconceivable that this will change in the near future. On the other hand, most jurisdictions now accept the importance of maintaining competition in the marketplace, and have brought in competition laws. Closer cooperation and coordination have also become possible through the International Competition Network and the OECD, as well as international cooperation agreements. Although the US once acted as though it was the global competition authority, by enforcing its laws vigorously, it is becoming increasingly cautious about the extraterritorial application of US law, and it has now aligned its position with the qualified effect doctrine, in which the effect must be foreseeable, direct and substantial; it also takes international comity into account (15 U.S.C. § 6a (Foreign Trade Antitrust Improvement Act); Hoffman-La Roche Ltd. v Empagran S.A., 542 U.S. 155 (2004)). Furthermore, the capacity of foreign agencies to collect evidence abroad is limited (Waller 1997, p. 376; Gerber 2018, p. 10).

5.1

Need for Extraterritorial Application

Although there is no way to verify the degree of anticompetitive harm caused by international cartels in the light of the globalisation of economic activities and the inflow of goods and services into Japanese markets from abroad, it is reasonable to assume that this harm may be substantial. Prior to CRT and HDDS, the JFTC had not taken formal action in the good number of cases in which the US and EU competition authorities had uncovered worldwide cartels whose participants included

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Japanese companies (Connor 2008, p. 21; Tada 2012, pp. 97–98; Ministry of Economy Trade and Industry (METI) 2016, p. 16). Such instances include the Sorbates, Vitamins, DRAMs, Graphite Electrodes, Switchgear and Submarine High Voltage Power Cables cases (Connor 2017; Ministry of Economy, Trade and Industry (METI) 2016, p. 20). It may have been that the JFTC could not enforce the AMA effectively because of the perceived lack of jurisdiction. The lack of extraterritorial application could also have resulted in a small number of leniency applications by foreign companies. Although the actual status of applications is unknown, there used to be no foreign company on the publicly available applicant list (JFTC, Leniency Applicants), while it is known that Taiwanese and Thai companies successfully applied for leniency in the CRT (Obata 2017, p. 50) and HDDS cases (JFTC 2018b). A small number of leniency applications could have jeopardised the JFTC’s ability to carry out an investigation. Rigid adherence to the territoriality principle, requiring Japan to be the place where the unlawful action took place, creates an easy loophole, as companies can avoid liability by concluding the agreement abroad (Ochi 2012, p. 40). As noted earlier, when it comes to competition law, the effect doctrine and the modified exterritoriality principle—objective extraterritoriality—are no different. Given that competition law deals with the distortion of competition, it would be straightforward to determine the jurisdiction by reference to the type of effect. In the light of the above, the JFTC’s change in approach to extraterritoriality, and the Supreme Court’s CRT judgement, should be welcomed. If the European Union’s adoption of the effect doctrine facilitated these changes in Japan, this suggests that EU law has had a favourable impact on Japanese law.

5.2

Remaining Issues

Both CRT and HDDS focused on the location of the counterparties who engaged in negotiations and decided to buy products from the cartelists. Unlike several prominent AMA scholars, who cautiously take a critical view of the CRT ruling (Takigawa 2015, p. 12; Shiraishi 2016, p. 189; Martyniszyn 2017, pp. 759–760; Obata 2017, pp. 69–70; Sensui 2018, p. 349; Shiraishi 2018, p. 13; Negishi 2018, p. 1081), the author believes that such facts are sufficient to found jurisdiction in Japan. Price negotiation constitutes the essence of the competitive process, and it is reasonable to use the AMA to protect Japan from anticompetitive practices. If foreign cartelists are negotiating with Japanese companies throughout, the foreign companies’ natural expectation is that the Japanese companies are effectively their customers, regardless of who ultimately signs the contract. The JFTC should be able

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to discern an immediate, substantial, and reasonably foreseeable effect in the Japanese market in such a case.1 The opponents of CRT stress that consumers in Japan were not harmed, because the inflow of the TVs incorporating the CRTs was insubstantial. Given that the AMA is aimed at protecting the interests of general consumers (Article 1), this argument may sound persuasive. However, the AMA also protects the fair and free competition, or the process of competition. Moreover, no provision of the AMA requires it to be established that the general consumer is harmed. Competition law protects consumers, but, in practice, a consumer is just a counterparty in an affected trade, and it is generally sufficient to show that competition is substantially restrained by price-fixing agreements. This is reasonable, because requiring it to be shown that general consumers suffer an actual adverse effect would make competition law unactionable. Competition law is based on the understanding that free competition serves the consumer interest, and showing that there is an unreasonable restriction of competition should be all that is needed. CRT dealt with the situation in which the cartelists had restricted competition by fixing prices, and the counterparties, or direct purchasers, were in Japan—albeit that the group of ‘counterparties’ was slightly expanded to include those who negotiated the price. The above is not to say that every practice relating to entities in Japan is within the AMA’s scope. At the time of writing, the qualified effect doctrine, which requires a close link between Japan and the matter or a reasonably foreseeable, immediate and substantial effect in Japan, appears to be the most widely adopted doctrine amongst scholars when it comes to actions taken abroad (Negishi 2002, p. 138; Seryo 2009, pp. 117–118; Tsuchida 2012, p. 31; Tsuchida 2013, p. 9; Tojo 2013, p. 22; Hienuki 2020, pp. 423–424; Negishi 2020, p. 60). The issue will be clarified by the JFTC and the courts in the future, in a case, for example, in which the cartelists and counterparties are located abroad, while the latter sell goods and/or services in Japan, or where a small number of the parts affected by the cartel are incorporated into a product that appears in the Japanese market. The free competition regime in Japan is infringed not only by cartels but also by other actions prohibited under the AMA, including exclusionary and deceptive practices and the abuse of a superior bargaining position. Views of the international antitrust community vary in these areas, while an active extraterritorial enforcement of the AMA could create serious friction, since ‘one nation’s (view of) abusive conduct is sometimes another nation’s view of pro-competitive conduct’ (Fox 2019,

Meanwhile, in the US, Judge Posner has refused to find that the US antitrust law is applicable where the harm is suffered by a parent company whose subsidiary bought the overcharged products abroad (Motorola Mobility v AU Optronics Corp 775 F.3d 816, 820–25 (7th Cir. 2014)). However, commentators have criticised this view, and suggest that the court should have reached a different conclusion (Cognetti 2016, pp. 671–682; Fox 2018, p. 7). Gerber (2018, p. 20) argues that there should be an amendment to the Foreign Trade Antitrust Improvements Act to include a provision that ‘a wholly owned or controlled subsidiary of a US parent would be considered part of the parent rather than an independent entity’. Note that CRT differs from Motorola Mobility in that the number of products incorporating parts was not large. 1

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p. 991). International dialogue is necessary so that the various parties come to a mutual understanding.

6 Export and International Cartels Targeting Foreign Countries The effect doctrine can be a double-edged sword, as a focus upon effect can negate Japan’s prescriptive jurisdiction where the economic loss is primarily caused abroad. The issue matters particularly in relation to export cartels formed by Japanese companies, or international cartels in which both Japanese and foreign companies participate. If Japan adopts a narrowly defined effect doctrine, such that the counterparty’s economic loss in terms of a price increase, or loss of profit or surplus, is necessary to found jurisdiction, the AMA may not apply to these practices. The CRT judgement did not touch upon this issue. Meanwhile, the JFTC has established the practice of determining that such cartel activities substantially restrict competition in the field of export trade (Tsuchida 2012, p. 10). The author considers that this approach should be maintained. The Supreme Court’s adoption of one kind of effect doctrine should not mean there is an ‘implicit exemption’ under which competition law is not applied to domestic export cartels for jurisdictional reasons (Sokol 2008, p. 970). It should be clear that export and international cartels formed in Japan undermine the free competition regime in Japan and distort the function of the markets there. As Negishi points out, export cartels restrict business activities and limit output in Japan (Negishi 1972, p. 3). In a similar vein, Areeda and Hovenkamp (2006, pp. 284–285) explain that the immediate impact of export cartels formed by US companies that are targeting abroad is a reduction in output and thus a demand for less labour and production in the US. They continue by saying that ‘it might be thought that the Sherman Act cares exclusively for domestic consumers, but we generally presume that domestic consumers are best served by unrestrained commerce’. Moreover, cartels whose targets are abroad are often accompanied by coordination among Japanese firms, as in the case of Asahi Kasei. Where suppliers operate their businesses globally and encounter each other in numerous jurisdictions, a successful implementation of an international cartel elsewhere also increases the chances of success of a cartel organised to target the home country (Immenga 1995, pp. 125–126, 129; Leslie 2017, pp. 575–591). The current way of detecting and investigating cartels also underlines the importance of a home country maintaining jurisdiction over export and international cartels. In particular, jurisdictional issues should not discourage cartel participants from applying for leniency to the competition authorities in their home country. The complex nature of international cartels can mean that even the cartel participants do not have the entire picture of the arrangement. As a result of physical distance, linguistic barriers, and a lack of access to investigative tools, the home country’s

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competition authority may be the only competition authority that can carry out the initial investigation. Contending that the local competition law does not apply to local export cartels would substantially undermine the capability of competition authorities globally to detect and carry out investigations. It is true that an export cartel may be formed to meet a request from a foreign country. Governments make such requests to limit the losses suffered by local businesses as the result of an increase in imports. Japan previously facilitated export cartels under the Export and Import Transaction Act (EITA 2008), when exports from Japan increased dramatically and caused diplomatic tension (Wada 1997, pp. 38–39). Although one may think that there should have been no reason for Japan to regulate export cartels under such circumstances, the reality was more nuanced. This is illustrated by several export cartels that were formed by Japanese companies supposedly to meet the importing countries’ needs, but were later found to be violating those countries’ competition laws (Mori 1972, pp. 31–32). Furthermore, a request like this often only reflects the interests of certain businesses and is made at the expense of consumer welfare, economic growth and free markets. Citizens should know about such cartels, and export cartels should be under continuous scrutiny by governmental bodies as well as buyers, academics, and organisations representing the consumer interest. To that end, there should be at least a statutory exemption under which the parties are obliged to submit notification of the cartel in advance. If the competition law in the home country does not apply to export cartels in the first place, from what are they requiring exemption? The Japanese experience with the EITA demonstrates the importance of such a notification system and the involvement of the JFTC. The EITA sets conditions for exemption and, once these conditions are breached, the Minister of Trade must order exporters to change or abolish the agreements. The JFTC may request the Minister to issue such an order. Advance notification to the Minister is necessary, and the Minister must inform the JFTC of the notification without delay. Based on the understanding that the AMA would otherwise have been applicable to the notified cartels, the JFTC has kept insisting that the exemption must be minimal (JFTC 1997, ch. 5 sec. 1; Suslow 2005, pp. 810–811). The JFTC also publishes the number of notifications annually, and this number has been zero since 1998 (JFTC 1998b, ch. 3). If the JFTC considered that these cartels were outside Japan’s jurisdiction, they would not have engaged in such competition advocacy work. One may still argue that the number of jurisdictions with competition laws has increased and that the current worldwide level of sanctions is excessive, to the extent that the proportionality principle may have been breached. Although it is difficult to measure the scale of harm caused by cartels worldwide, the fact that a substantial number of jurisdictions currently do not enforce their competition laws rigorously, particularly in relation to export and international cartels, means that it is possible that a substantial number of anticompetitive practices have been either undetected or insufficiently deterred (Connor 2016; Gerber 2018, pp. 9–10; Horna 2020, 1.4). In any case, if a fine is excessive, an adjustment should be made to the level of the fine, and not to the jurisdictional principle.

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7 Conclusions After several decades of hesitation, Japan has finally decided that the AMA applies to an act performed by a foreign entity in a foreign country, so long as that act undermines the free competition regime in Japan. This change is welcome, given that the market economy in Japan is more readily harmed by actions taken abroad. At the same time, it increases the need for international cooperation and dialogue, not only for effective JFTC investigations, but also in order to avoid undermining the interests of foreign jurisdictions by the reckless enforcement of the AMA. Clarifying the jurisdictional reach in more detail is also an urgent task for both the JFTC and the courts. The jurisdictional issue also relates to whether, or to what extent, competition law should apply to hardcore cartels targeting other countries, and this paper has argued that the AMA should remain applicable to them. This position, however, only solves half the problem. A competition authority tends to lack the will to enforce competition law against such cartels (Fox 2015, p. 5; Ezrachi 2013, p. 203; Horna 2020, 5.5.5.1). There should be an enhanced global mechanism to ensure that consumer interests in importing countries are considered. Although it is easy to criticise the enforcement of competition law against foreign companies as protectionism or unilateralism, the true picture tends to be more nuanced, as governments, businesses and citizens often have different stakes in the enforcement of competition law. Competition is never perfect, but few would wish to see the return of the rampant cartels and collusion that previously existed. The law enforcement activities of a competition authority are not unilateral protectionism if they are carried out under a global understanding that such enforcement benefits citizens in both countries. A high level of procedural fairness also needs to be achieved, to facilitate global collaboration and gain international support for Japan’s active enforcement of competition law.

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JFTC. (Leniency Applicants). Kachokin genmen seido not tekiyo jigyosha no kohyo. https://www. jftc.go.jp/dk/seido/genmen/kouhyou/index.html JFTC. International Relations. https://www.jftc.go.jp/en/int_relations/agreements.html Kagawa Y, Shirakawa K (1973) Fueruto oyobi kanbasu no kokusai karuteru jiken ni tsuite. Kosei Torihiki 269:12–15 Kamminga MT (2012) Extraterritoriality. In: Wolfrum R (ed) Max Planck Encyclopaedia of Public International Law. OUP, Oxford Kanai T (1998) Dokusen kinshiho. Seirin shoin, Tokyo Kanazawa Y (1961) Kokusai karuteru ni taisuru kokunaiho teki kisei. Kosei Torihiki 126:4–9 Kanazawa Y (1979) Dokusen kinshiho no kozo to unnyo. Yuhikaku, Tokyo Kawai Y (1978) Kokusaiteki keiyaku to dokusen kinshiho. Kokusai shojiho kenkyukai, Tokyo Kawashima F (2009) Kokusai shijo bunkatsu wo fukumu nyusatsu dango to ‘itteino torihiki bunya’. Jurist 1376:281–283 Kita H (2012) Gaikoku jigyosha ni taisuru dokusen kinshiho no tekiyo. In: Tsuchida K (ed) Dokusen kinshiho no kokusaiteki shikko. Nippon Hyoron, Tokyo Leslie CR (2017) Foreign price-fixing conspiracies. Duke Law J 67:557–614 Maddox RF (2001) The war within World War II: the United States and international cartels. Praeger, Westport Martyniszyn M (2017) Japanese approaches to extraterritoriality in competition law. Int Comp Law Q 66(3):747–762 Matsushita M (1968) Kokusai keiyaku kyotei no kisei to karuteru kinshi. In: Shoda A (ed) Karuteru to horitsu. Toyo Keizai Shinpo, Tokyo Matsushita M (1985) Dai 6 jo. In: Imamura S et al (eds) Chukai Keizaiho I. Seirin Shoin, Tokyo Matsushita M, Hildebrand JL (1972) Antimonopoly law of Japan relating to international business transactions. Case Western Reserve J Int Law 4(2):124–162 Ministry of Economy, Trade and Industry (METI) (2016) Kokusai karuteru jiken ni okeru kakkoku kyoso tokyoku no shikko ni kansuru jirei chosa hokokusyo. https://warp.ndl.go.jp/info:ndljp/ pid/11203267/www.meti.go.jp/press/2016/06/20160603002/20160603002-1.pdf Mori A (1972) Yushutsu karuteru ni kansuru shomondai [II]. Kosei Torihiki 257:30–32 Negishi A (1972) Yusyutsu karuteru to dokkinho tekiyo jogai. Kosei Torihiki 265:2–7 Negishi A (1976) Saihan showa 50.11.28 [Hyoshaku]. Minshoho Zassi 74(6):1002–1016 Negishi A (1977a) Kokusai keiyaku no igi to sono kisei. In: Tanso A, Atsuya J (eds) Dokusen kinshiho no kiso. Seirin shoin shinsha, Tokyo Negishi A (1977b) Dokusen kinshi ho no ikigaitekiyo no mondai. In: Tanso A, Atsuya J (eds) Dokusen kinshiho no kiso. Seirin shoin shinsha, Tokyo Negishi A (2002) In: Japan Association of Economic Law (ed) Keizaiho koza II Dokkinho no riron to tenkai (1). Sanseido, Tokyo Negishi A (2018) Hanrei hihyo. Minshoho Zasshi 154(5):1072–1082 Negishi A (2020) Chizai jiken, Kokusai jiken. Kosei Torihiki 834:54–62 Newberg JA (2000-2001) Technology licensing under Japanese antitrust law. Law Policy Int Bus 32:705–767 Nishimura N, Sensui F (2006) 1947 nen dokusen kinshiho no keisei to seiritsu. Kobe Law J 56:51–309 Obata T (1999) Wagakuni ni kyoten wo motanai gaikoku jigyosha niyoru shiteki dokusen jiken. NBL 659:13–19 Obata T (2017) Nihon to Eu no TV yo Buraunkan karuteru jiken. Ryutsu kagaku daigaku ronshu 25 (2):49–73 Ochi Y (2012) Ikigai tekiyo kara kokusaiteki shikko he. In: Tsuchida K (ed) Dokusen kinshiho no kokusaiteki shikko. Nippon Hyoron, Tokyo Ohara Y (1981) Kokusai karuteru to dokusen kinshiho. In: Association of Economic Law (ed) Dokusen kinshiho koza III. Shoji homu kenkyukai, Tokyo.

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Organisation for Economic Co-operation and Development (OECD) (2002) Fighting hard-core cartels: harm, effective sanctions and leniency programmes 2002. http://www.oecd.org/ competition/cartels/1841891.pdf Sanekata K (1987) Dokusen kinshiho. Yuhikaku, Tokyo Sensui F (2018) Keizaiho Nyumon. Yuhikaku, Tokyo Seryo S (2009) Dai 6 jo. In: Negishi A (ed) Chushaku dokusen kinshiho. Yuhikaku, Tokyo Shiraishi T (2016) Dokusen kinshiho, 3rd edn. Yuhikaku, Tokyo Shiraishi T (2018) Buraun kan jiken saikosai hanketsu no kento. NBL 1117:4–16 Shoda A (1966) Dokusen kinshiho. Nippon Hyoron, Tokyo Sokol DD (2008) What do we really know about export cartels and what is the appropriate solution? J Competition Law Econ 4:967–982 Supreme Court of Japan (1975) 28 November 1975, 29(10) Minshu 1592 (Novo) Supreme Court of Japan (2017) 12 December 2017, 71(10) Minshu 1958 (CRT) Suslow VY (2005) The changing international status of export cartel exemptions. Am Univ Int Law Rev 20:785–828 Tada T (2012) Kokusai karuteru to nihon dokkinho no shikko. In: Tsuchida K (ed) Dokusen kinshiho no kokusaiteki shikko. Nippon Hyoron, Tokyo Takigawa T (2015) Putting limits on extra-territorial coverage of competition laws in the age of global supply chains: comparison of the US and Japan. https://core.ac.uk/display/228681047 Tanabe T (2018) Hard-disk drive yo suspension no seizo hanbai gyossha ni taisuru haijo sochi meirei oyobi kachokin nofu meirei ni tsuite. Kosei Torihiki 815:84–89 Tanso A (1995) Kokusai torihiki to dokusen kinshi ho. In: Shoda A, Sanekata K (eds) Dokusen kinshi ho wo manabu, 3rd edn. Yuhikaku, Tokyo Tojo Y (2013) Dokkinho no tekiyo hanni. In: Japan Association of Economic Law (ed) Kyosoho no kokusaiteki shikko. Yuhikaku, Tokyo Tsuchida K (2012) Dokusen kinsiho no kokusaiteki shikko. In: Tsuchida K (ed) Dokusen kinshiho no kokusaiteki shikko. Nippon Hyoron, Tokyo Tsuchida K (2013) Dokusenkinshiho no kokusaiteki shikko. In: Japan Association of Economic Law (ed) Kyosoho no kokusaiteki shikko. Yuhikaku, Tokyo Uesugi A (1986) Amerika. In: Hiroshi I (ed) Nihon kigyo to gaikoku dokkinho. Nihon keizai shimbun, Tokyo Uesugi A (1993) Tokkyo know-how license keiyaku to kyodo kenkyu kaihatsu. Shojihomu kenkyukai, Tokyo Uesugi A (2012) Dokkinho kokousai jitsumu gaido book. Shojihomu, Tokyo Wada T (1997) Dokusenkinshi seisaku 50 nen to karuteru kisei. Shyogaku Tokyu 48:23–64 Wakui M (2018) Antimonopoly law: competition law and policy in Japan, 2nd edn. https://ssrn. com/abstract¼3270141 Waller SW (1997) The internationalization of antitrust enforcement. Boston Univ Law Rev 77:343–404 Wong-Ervin K, Heimert AJ (2020) Extraterritoriality: approaches around the world and model analysis. https://ssrn.com/abstract¼3518661

Masako Wakui Professor of Law at Kyoto University. She previously taught at the Universities of Osaka City and Rikkyo. She is a researcher in Japanese Competition Law and Policy. Her research interests include economic law, merger regulation, consumer protection, public procurement, intellectual property rights, and social law.

Extraterritorial Effects of EU Law on Gas Pipelines: The Case of Gazprom and Nord Stream 2 Ignacio Herrera Anchustegui and Nuno Cunha Rodrigues

Abstract This chapter discusses how legal instruments, as well as the investigative powers of the European Commission have been utilized to ensure the application of EU energy law in the gas sector to the infrastructure of and activities undertaken by companies from third countries both within and outside the Union. It starts by explaining EU dependence on imported gas from an energy security perspective, in particular gas imported from Russia. After, the extraterritoriality of the EU gas regime before the adoption of the Gas Directive 2009/73 and its amendment by the Gas Directive 2019/692 is addressed. Then, the way the EC used EU competition law against Gazprom is scrutinized. It is concluded that while EU law is not applied with extraterritorial effects, the EU clearly intends to create an ‘extraterritorial’ extension of EU law through the use of fine-tuned links that, as far as public international law is concerned, have the capacity to extend the effects of EU law beyond the territory of the Union.

1 Introduction The European energy markets, in particular gas, showcase the tension between the expansion of the application of European Union (EU) law beyond its borders (or at least the effects thereof), and geopolitics. As the EU depends on the export of oil and gas from third countries, there seems to exist an intend to create a regulatory framework which would expand the application of EU law also to cover the import

I. Herrera Anchustegui (*) Faculty of Law, University of Bergen, Bergen, Norway e-mail: [email protected] N. Cunha Rodrigues Faculty of Law, University of Lisbon, Lisbon, Portugal e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 N. Cunha Rodrigues (ed.), Extraterritoriality of EU Economic Law, European Union and its Neighbours in a Globalized World 4, https://doi.org/10.1007/978-3-030-82291-0_5

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of energy towards the EU market, and contribute towards building an Energy Union.1 In this chapter, we discuss how legal instruments, as well as the investigative powers of the European Commission (the Commission), have been utilized by the EU to ensure the application of EU energy law in the gas sector to the infrastructure of and activities undertaken by companies from third countries both within and outside the Union. In this discussion, the cases initiated by and against Gazprom, the Russian gas company giant, and amendments to Gas Directive 2009/73,2 introduced by Gas Directive 2019/692,3 have a central role and form the focus of our analysis. The chapter is organized as follows. Section 2 deals with European dependence on imported gas from an energy security perspective, in particular gas imported from Russia. Section 3 discusses the extraterritoriality of the EU gas regime before the adoption of the Gas Directive 2009/73 and its amendment in 2019. The section shows how, until its modification, EU energy law did not apply to import pipelines. Arguably, because of this lack of extraterritorial effect and to prevent market power abuses, the European Commission resorted to the application of EU competition law against Gazprom as we discuss in Sect. 4 of this chapter. In Sect. 5, there is an in-depth analysis of the Commission’s efforts to extend the application of the EU gas regime to import pipelines and the process—as well as controversy—that ultimately led to the adoption of the Gas Directive 2019/692, which amended the Gas Directive 2009/73. Following its adoption and entry into force, Gazprom, through its affiliated entities, unsuccessfully challenged the Directive before the EU courts, as discussed in Sect. 6. Section 7 concludes the chapter by showing how, while EU law is not applied with extraterritorial effects, the EU clearly intends to create an ‘extraterritorial’ extension of EU law through the use of fine-tuned links that, as far as public international law is concerned, have the capacity to extend the effects of EU law beyond the territory of the Union.

1

Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee, the Committee of the Regions and the European Investment Bank, A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy, /* COM/2015/080 final */ (2015). 2 Directive 2009/73/EC of the European Parliament and of the Council concerning common rules for the internal market in natural gas and repealing Directive 2003/55/EC (OJ [2009] L 211/94) (the Gas Directive 2009/73). 3 Directive 2019/692 of the European Parliament and of the Council amending Directive 2009/73/ EC concerning common rules for the internal market in natural gas (OJ [2019] L 117/1) (the Gas Directive 2019/692).

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2 Gas Dependence on Russia, Energy Security and Grounds for Seeking the Extraterritorial Effects of EU Law 2.1

Gas Flow Into the EU Member States

The possible extraterritorial application of EU law in the gas sector and actions undertaken to ensure the security of supply in this market are better understood within a secure energy supply and geopolitical context.4 The EU as a whole is a net importer of gas. Of all the EU Member States, only Denmark is a net exporter of gas as the Netherlands ceased to export it and became an importer in 2018.5 In numbers this translates to the Union being energy dependent on natural gas, with a dependency from imports of 77.9% in 2018, rising from 74.4% in 2017. By 2018, EU official statistics indicated that Norway was its main exporter of natural gas at 30.2%, followed by Russia at 20.5% and Ukraine6 and Belarus at 16.3% and 10.3% respectively.7 However, most of the gas that enters the EU from both Ukraine and Belarus actually comes from Russia. In practice, this means that 44.7% of the gas imported into the EU in 2019 and 39.3% of the gas imported in the first semester of 2020 was Russian-sourced gas.8 Dependence on Russian gas and the risks this entails from an energy security standpoint are issues that the Union has explicitly tried to address with limited success for more than a decade. As far back as 2009, the need to “eagerly promote the need for energy diversification aiming to improve the overall energy security level within the EU borders” was already being stressed.9 Moreover, the Commission had a clear aim to “promot[e] a diversification of sources of gas supply and routes.”10 These efforts to diversify gas supply continue with the clear aim of ending the “dependency on a single supplier in certain Member States”.11

4

See, for discussion on EU energy security and gas, inter alia: Leal-Arcas and Filis (2013); Proedrou (2013); Haghighi (2007). 5 See https://ec.europa.eu/eurostat/statistics-explained/index.php?title¼Natural_gas_supply_statis tics&oldid¼447636. 6 For a discussion concerning the gas sector in Ukraine as a key player in EU-Russia energy policy and politics see: Voytyuk (2020). 7 See https://ec.europa.eu/eurostat/statistics-explained/index.php?title¼Natural_gas_supply_statis tics&oldid¼447636. Other trading partners of much less importance are Algeria, Qatar and Nigeria. 8 See https://ec.europa.eu/eurostat/statistics-explained/index.php/EU_imports_of_energy_prod ucts_-_recent_developments#Main_suppliers_of_natural_gas_and_petroleum_oils_to_the_EU. 9 See https://www.europarl.europa.eu/RegData/etudes/note/join/2009/416239/IPOL-ITRE_NT (2009)416239_EN.pdf, p. 24. 10 See https://www.europarl.europa.eu/RegData/etudes/note/join/2009/416239/IPOL-ITRE_NT (2009)416239_EN.pdf, p. 25. 11 European Commission, Fourth report on the State of the Energy Union (2019), p. 14 (emphasis in original).

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The energy dependence is based on the lack of resources (oil or gas) and it is also aggravated because of the way in which the resources are transported to their consumption location. Natural gas is mainly transported through international pipelines, critical facilities for ensuring the security of supply as well as an integrated and workable EU energy market. These pipelines transport natural gas at high pressure over great distances. For example, the length of the Norwegian gas pipelines, taken as a whole, is similar to the distance from Oslo to Bangkok, more than 8600 km.12 The flow of a pipeline is controlled through compressor stations that are located along its length, making it possible for gas to be sent from one place to another.13 Natural gas pipelines transporting Russian-sourced gas into Europe are some of the main ‘highways’ by which this energy source enters the Union, with other pipelines coming from Algeria, Morocco and Tunisia. Most of the Russian infrastructure is owned by the Russian Federation under the umbrella of Gazprom. Gazprom is an energy company mostly owned by the Russian state, being the largest publicly-listed natural gas company in the world, and Russia’s largest company in terms of revenue.14 These pipelines are used to export gas to other countries, with the EU Member States being their main clients, and include transport networks such as Nord Stream 1, Nord Stream 2, Turk Stream 1 and Turk Stream 2.15 The gas pipelines are located in the physical territory of the countries they pass through, or are built offshore on the seabed, as is the case with Nord Stream 1 and Nord Stream 2. Upon entering the Union territory, the pipelines are connected to the EU gas network and the gas is distributed to the different EU countries. The EU has introduced rules governing gas as part of its policy to liberalize energy markets since the late 1990s. It began with Gas Directive 98/30/EC, which was later replaced by Directive 2003/55/EC and Directive 2009/73/EC of 13 July 2009, amended in 2019 by Directive 2019/692 as we discuss in detail below.16 The latter instrument and Regulation 715/2009/EC of 13 July 2009 are the cornerstones of gas regulation in the Union. The majority of these provisions are designed to address the issues of the transportation of gas through pipelines in order to increase the competitiveness of markets. On the whole, rules governing the transportation of energy (gas and electricity) in Europe are designed both to ensure access to the pipelines to non-owners (third-party access) through regulated access tariffs, and limit the infrastructure owners’ ability to exert market power and discriminate against other parties, by unbundling (i.e. separating) the extraction/generation of

12

See https://www.norskpetroleum.no/en/production-and-exports/the-oil-and-gas-pipeline-system/. See https://www.europarl.europa.eu/RegData/etudes/note/join/2009/416239/IPOL-ITRE_NT (2009)416239_EN.pdf, p. 14. 14 See https://www.investopedia.com/articles/markets/030116/worlds-top-10-natural-gas-compa nies-xom-ogzpy.asp. 15 For a general discussion of Russian pipelines and the EU see: Vinois and Bros (2019). 16 See also, discussing the ‘energy packages’ with regard to the activities of Gazprom: Pogoretskyy and Talus (2019). 13

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gas from its transportation.17 These rules have a critical impact on how the gas supply chain operates, and even have the power to alter the ownership of gas pipelines. In parallel to these sector-specific EU rules for the gas sector, the competition provisions enshrined in the European treaties, namely the prohibition of anticompetitive agreements and abuse of dominance, Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU), as well as the rules on merger control, are concomitantly applicable to the gas sector. Competition law has often been applied to advance energy security and policy objectives, at times beyond the status quo of EU energy law,18 and ensure the proper functioning of the energy markets. European institutions, most significantly the Commission through competition law infringement investigations19 and through the proposal of amendments for new legislation, have been actively seeking to expand the scope of the application of EU law over gas transmission pipelines. In some cases, these initiatives were intended to have a certain degree of extraterritorial applicability of EU law, for example, by requiring the application of the Gas Directive beyond the territorial sea of a Member State, or, better put, extending the effect of the application of EU law beyond the territory of the Union over import pipelines from third countries. In the following sections, we discuss these developments and potential extraterritoriality application or extraterritorial effects of EU energy law in the gas sector by analysing a series of procedures brought against and by Gazprom.20

2.2

Litigation and Clashes Beyond EU Jurisdiction

In addition to the aforementioned EU-centred measures, Gazprom and the Russian state have actively litigated against the application of EU energy rules to their pipelines with activities in different fora and varying degrees of success. The possible extraterritorial application of EU law has not been the focus of the litigation; issues of discriminatory treatment and legitimate investors’ expectations being more central. However, inevitably the cases also revolve around the

17

For a discussion concerning rules on third-party access and unbundling in electricity and gas see, inter alia: Herrera Anchustegui (2019); Cabau, E. (revised and updated by L. Sandberg) (2016). Unbundling of Transmission System Operators, in EU ENERGY LAW (C. Jones). Deventer, Claeys & Casteels 2016. I - The Internal Energy Market; de Hauteclocque and Talus (2011); Pielow et al. (2009); Pollitt (2008). 18 Bergqvist and Herrera Anchustegui (2020). 19 Regulation 1/2003 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty (OJ [2003] L 1/1). 20 See also the highlighting that “The European Commission’s efforts to create, with the support of the Court of Justice of the European Union (CJEU), a level playing field and ensure an open competition between gas market actors across the EU, have resulted in the imposition of multiple corrective measures” against Schmidt-Felzmann (2020), p. 129.

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extraterritorial effects of the regulation of the pipelines. Restricted by the scope of this chapter, we will limit ourselves to summarizing these. The Russian Federation initiated a procedure before the World Trade Organization (WTO) in 2014 concerning the validity of some of the rules contained in the EU Third Energy Package (TEP) of 2009, including Gas Directive 2009/73, which was first decided by a Panel Report on 10 August 2018.21 The dispute centred on the validity of the unbundling requirements imposed by the said instrument and its compatibility with the non-discrimination rules of Article II:1 of the General Agreement on Trade in Services, and Articles I:1 and III:4 of the General Agreement on Tariffs and Trade 1994. The Panel Report found that, inter alia, the unbundling rules were not contrary to WTO law as claimed by Russia. However, the EU appealed against the report on “certain issues of law and legal interpretations”.22 At the time of the writing of this chapter, this proceeding is still pending. Parallel to this procedure, in 2019, Nord Stream 2 AG, a subsidiary of Gazprom incorporated in Switzerland, initiated an international arbitration claim based on the Energy Charter Treaty against what was at the time a proposal for an amendment to Gas Directive 2009/73.23 Nord Stream 2 AG requested clarification concerning the derogation regime for existing pipelines regarding third-party access, unbundling and the regulated tariffs included therein. The claims were based on a possible breach of the provisions of the Energy Charter Treaty as the proposed rules were said to be discriminatory. The argument put forth by Nord Stream 2 AG was that, under the proposed Gas Directive, the Nord Stream 2 pipeline would be the only gas transport infrastructure in which a final investment decision had been made. Consequently, the adoption of new rules expanding the Gas Directive’s scope of application would be in breach of the investor’s legitimate expectations principle.24 This proceeding seems to be still pending as it appears that no amicable settlement has been reached so far.

Panel Report, European Union and Its Member States – Certain Measures Relating to the Energy Sector (EU–Energy Package), WR/DS476/R, circulated to Members on 10 August 2018. See also: Talus and Wüstenberg (2019). 22 See https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds476_e.htm 23 158 Letter from North Stream 2 to the Commission, 12.04.2019, available at: https://trade.ec. europa.eu/doclib/docs/2019/july/tradoc_158069.pdf_Redacted.pdf. 24 Mete (2019), p. 262. 21

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3 Extraterritoriality of EU Energy Law and the Previous Situation Under Gas Directive 2009/73 The TEP came into force in 2009, introducing several legal instruments to support the creation of competitive energy markets throughout the Union.25 This set of regulations and directives incorporated important changes to electricity and gas markets. In particular, three key provisions in Gas Directive 2009/73 were revised and strengthened, aimed at ensuring competitiveness and directly targeting the energy transportation infrastructure. These were the requirement of ex-ante and regulated third-party access to the transportation network (Article 32), based on pre-determined tariffs (Article 41), and the unbundling of the activities of transmission and generation or extraction of energy (Article 9).26 While not novel to the TEP,27 these three pillars of EU gas governance have had a great impact on the market structure of vertically integrated gas companies, as well as on the operation and governance of pipelines. When Gas Directive 2009/73 was adopted there was a consensus that the rules governing the gas system were insufficient to ensure well-functioning (and more/ better integrated) gas markets throughout the Union.28 This was in part because these markets had been largely national, dominated by vertically integrated energy companies and conditioned by imported gas. Thus, a revision of the gas regulation connected to the pipelines, including unbundling rules, was necessary to prevent discrimination against competing gas suppliers and promote market integration.29 Such regulatory changes were similar to those applied in other network sectors such as telecommunications or rail transport. Concerning its scope of application, Gas Directive 2009/73 did not contain any explicit provision clarifying whether this instrument was to be applicable to external (import) pipelines entering the territory of any EU Member State. As discussed previously, most of the natural gas coming into the EU is transported by these import pipelines. The question was, then, whether Gas Directive 2009/73 and its rules concerning unbundling, third-party access and regulated tariffs were to be applied only within the territory of the Member States of the EU or more generally to ‘import’ pipelines entering the Union and beyond EU territory. Not only was Gas

25

The Third Energy Package entered into force back in September 2009 and comprised a major review of the rules governing electricity and gas and for the first time creating a European Agency for the Cooperation of Energy Regulators (ACER) to help to govern the common energy market. 26 See Article 9 dealing with the basic unbundling requirements as well as Article 32 on third-party access to the transmission and distribution system, and LNG facilities based on published tariffs set by the competent regulator in Gas Directive 2009/73. 27 Directive 98/30/EC and Directive 2003/55/EC already contained some basic rules, which were not as strict, concerning third-party access and unbundling regimes—see Chapter V and Chapter VI of Directive 98/30/EC, and Article 9 and Article 18, of Directive 2003/55/EC. 28 Recital (5) of Directive 2009/73. 29 Recitals (6) to (9) of Directive 2009/73.

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Directive 2009/73 silent concerning its applicability over import pipelines, but it was also unclear as to whether it would have any “potential extraterritorial application”.30 Some authors, such as Talus,31 argued for the non-applicability of EU energy law over ‘import’ pipelines, based on the wording of the provisions (i.e., the lack of any explicit statement), the legislator’s intent and state practice with respect to other pipelines. Such a conclusion appears robust and is based on the definition of an interconnector incorporated into Gas Directive 2009/73, which would be a “transmission line which crosses or spans a border between Member States for the sole purpose of connecting the national transmission systems of those Member States”.32 A literal reading of this provision seems to clearly point out the possibility of regulating pipelines between Member States but not to pipelines between a Member State and a third country. Such an interpretation would imply that Gas Directive 2009/73 did not apply outside the territory of a Member State and without extraterritorial effects. Thus, it would only be applicable to pipelines within the Union. Others, such as Riley, argued that Gas Directive 2009/73 was applicable to import pipelines as “[i]t is indisputable that Union law applies in its own internal waters and territorial seas that Nord Stream 2 will pass through, and highly probable that Union law applies in the exclusive economic zone (EEZ) through which Nord Stream 2 will also passes.”33 Thus, Riley continues, as an import pipeline entering the Union, it is a “transmission pipeline under EU law to which the full weight of the EU’s liberalisation obligations apply, including ownership unbundling, third-party access and tariff regulation obligations”.34 Riley’s interpretation, extending the scope of application of Gas Directive 2009/ 73 to the Economic Exclusive Zone (EEZ), was supported by EU case law related to Directive 1992/43 on the conservation of natural habitats and of wild fauna and flora in Commission v. United Kingdom.35 In this case, the European Court of Justice (ECJ) concluded that this Directive 1992/43 must be implemented in the EEZ as a Member State to which the area belonged had, under public international law, the power to exercise sovereign rights,36 as this dealt with an issue related to environmental conditions. However, Riley’s opinion did not address whether such a proposed extensive application was in line with the Law of the Sea, or whether it could be seen as an extraterritorial application of EU energy law. Despite the academic controversies and the silence of the Directive itself, practice showed that Gas Directive 2009/73’s rules were not being applied to ‘import’ pipelines, including those owned by Gazprom or its affiliated enterprises, as was

30

Hancher and Marhold (2019), p. 295. See also, highlighting the existence of debate: Riley (2018). Talus (2017, 2018). 32 Article 2 (17) of Directive 2009/73 (emphasis added). 33 Riley (2016), p. 1. Riley (2018). 34 Riley. 2016, p. 2 (emphasis added). 35 Judgment of 20 October 2005, Commission v United Kingdom, C-6/04, EU:C:2005:626. 36 Judgment of 20 October 2005, Commission v United Kingdom, C-6/04, EU:C:2005:626, para. 117. 31

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the case for the Nord Stream 1 project, inaugurated in 2011.37 This was confirmed further by the practice of Member States of not requiring import pipelines to conform to the rules of Gas Directive 2009/73 and its national implementation. This was so as the national rules were not applicable and had no effect outside the physical territory of the Member State, therefore limiting the effects of EU energy law to these gas transmission lines. Simply put, Gas Directive 2009/73 had neither extraterritorial application nor extraterritorial effects and it was not interpreted and applied to cover import pipelines. As a result of this, the Commission started devising a strategy that extended the application or, at least, the effects of such rules to govern import pipelines by EU law. This would be the case for pipelines owned by Gazprom, including the Nord Stream 1 and Nord Stream 2 offshore projects.

4 Extraterritoriality in EU Competition Law? The Gazprom DG Comp Case 4.1

EU Competition Law Strategy Vs Gazprom

Parallel to the on-going discussion concerning the extraterritoriality of Gas Directive 2009/73, the Commission initiated an investigation against Gazprom for the alleged abuse of its dominant position in the Eastern European gas supply market in 2012.38 This investigation procedure, which took more than 5 years, came to an end in May 2018, when the Commission adopted a Decision in which it imposed binding commitments offered by Gazprom to put an end to some of its practices.39 The Decision addresses issues of gas supply coming to the EU from Russia through a pipeline controlled by Gazprom, to Central and Eastern European countries (Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland and Slovakia) and it raises certain matters concerning the extraterritorial application of EU competition law as well as its effects. The strategy followed by the Commission was to resort to EU competition law to address issues related to natural gas markets, and therefore, have some degree of control over the activities of Gazprom inside but also to some extent outside the EU. This case shows the complementary use of EU competition law in the energy sector to advance regulatory aims not achieved by the Directives and, to some extent, Regulations concerning electricity and gas.40 It also seems to confirm that Gas

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See also remarks on this in: Riley (2016), p. 2. On 31 August 2012, the European Commission formally initiated an investigation procedure against Gazprom for alleged breaches of Article 102 TFEU. 39 European Commission, CASE AT.39816—Upstream gas supplies in Central and Eastern Europe, C (2018) 3106 final. 40 Bergqvist and Herrera Anchustegui (2020); Von Rosenberg (2009). 38

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Directive 2009/73 was insufficient to regulate Gazprom’s conduct both inside and outside the Union as it had no extraterritorial effects. In the absence of such application or effect, competition law was able to remedy these issues to some extent. Lastly, the case also highlights the tense relationship between the application of EU competition law to third-country enterprises, its extraterritorial effects, geopolitics and energy supply security.

4.2

The Gazprom CEE Investigation

Since 2011 the Commission had taken steps to investigate the activities undertaken by the Public Joint Stock Company Gazprom, the parent company of the Gazprom group, and its wholly owned subsidiary Gazprom export LLC, in the European gas market. The Gazprom group, being majority owned by the Russian state, was and continues to be “active in the exploration, production, transportation, refining and marketing of natural gas and petrochemical products”.41 At the time not only Gazprom controlled the world’s largest natural gas reserves, it also owned pipelines that allowed it to transport about 180 billion cubic feet of gas to Europe, making it the EU’s largest gas supplier.42 Gazprom was active in the market for the supply of natural gas, defined as the market in which gas is consumed regardless of whether it is imported or locally sourced in a geographic location.43 Explicitly, the Commission distinguished the supply market from “gas transiting through that geographic area”,44 which would be the transport market.45 The gas in the upstream market was sold by Gazprom to incumbent national (European) firms. These then distributed it to end consumers within their national markets. This retailing system, linked to the fact that there is limited pipeline interconnections, led to the conclusion that each country was a single relevant geographic market. This conclusion concerned only EU Member States, not bordering nations from which the gas entered the Union. The Commission found Gazprom as holding a dominant position in the national markets under investigation. This conclusion was made based on the very high market shares it held for the period between 2004 and 2013 in “Bulgaria (80–100%); the Czech Republic (75–100%); Estonia (80–100%); Hungary (50–70%); Latvia (70–100%); Lithuania (100%); Poland (40–65%); and Slovakia (70–100%).”46 Without Gazprom’s natural gas supply, customers would be unable

41 European Commission, CASE AT.39816—Upstream gas supplies in Central and Eastern Europe, C(2018) 3106 final, para 6. 42 Ibid, para 7. 43 Ibid, para 21. 44 Ibid, para 21. 45 Ibid, para 19. 46 Ibid, para 34.

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to meet demand because there were physical barriers to entry related to lack of gas transmission connectivity and infrastructure controlled or owned by another gas supplier. The Commission argued that Gazprom had abused its dominant position in these markets by engaging in unilateral conduct to the detriment of consumers and competition in general by “preventing the free flow of gas across CEE and thereby fragmenting and isolating the investigated CEE gas markets”.47 The Commission argued that splitting markets allowed Gazprom to charge higher (excessive) prices than it would have been possible had there been competition in these markets from other suppliers. Lack of competition was due to the dearth of other pipelines and the fact that the existing ones were not open to third-party access outside the Union, though this was not discussed expressly in the Decision. The territorial restrictions were allegedly imposed through explicit contractual export bans with the buyers of gas, destination clauses and other contractual and non-contractual means that lead to similar effects.48 Thus, the Commission argued that Gazprom had breached its dominant position in these gas markets and conducted several anticompetitive practices in breach of Article 102 TFEU. Three of them were identified: (i) the imposition of territorial restrictions through contractual export bans or destination clauses with their national partners; (ii) charging an excessive price in comparison to its costs for the supply of gas in Bulgaria, Estonia, Latvia, Lithuania and Poland49 and (iii) coercing the Bulgarian gas incumbent to participate through investment in the Gazprom South Stream project.50

4.3 4.3.1

Revisiting the Extraterritoriality Application or Effects of EU Competition Law Vs Gazprom Extraterritorial Effects of EU Competition Law

The possible extraterritorial effects of EU competition law are a matter of considerable practical importance. This issue is often discussed whenever certain practices take place in the Union conducted by foreign undertakings, or when activity happening outside EU territory could have repercussions on the internal market. Despite decades of litigation before the EU courts and doctrinal work,51 this still

47

Ibid, para 39. European Commission, CASE AT.39816—Upstream gas supplies in Central and Eastern Europe, C(2018) 3106 final, para 40. 49 Ibid, para 62. 50 Ibid, para 80. 51 Behrens (2016); Prete (2018). 48

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remains a matter of discussion and evolution, and was recently revised by the ECJ in the Intel case.52 The application of EU competition law in cases such as that investigating Gazprom’s conduct should, like all instances of possible extraterritorial application of the law, be based on principles of public international law.53 Claims of such extraterritorial extension of EU competition laws, based on territorial grounds or effects, are quite common in competition law cases. And unsurprisingly so, without the ability of EU competition law to address conduct by foreign firms in the Union, or conduct out of the Union implemented in its territory, or which produces effects on the internal market, it would be easy to bypass and nullify the purpose of ensuring competition in the common market. As with general EU law, the EU courts and even the European legislator have found ways to prevent and sanction conduct that might distort the competitive process in the internal market. This is done by seeking some degree of connection or link with the EU territory,54 or through the so-called ‘territorial extension’ technique.55 Beyond territorial connections, EU courts have also moved towards an effect-based approach.56 However, some more competition law specific links to the application of EU competition law to foreign companies or to conduct taking place outside its territory have been developed in the case law. The first link, based on the concept of a “single economic entity”, was first advanced in the seminal Dyestuffs case.57 According to it, parent companies established outside the Union may be associated with the conduct of their subsidiaries located in the Union under certain circumstances.58 This extension doctrine was later expanded in the Woodpulp case in which competition law applicability was not based on the establishment of a parent or subsidiary company but rather on where the conduct that was agreed was implemented.59 A third doctrine supporting the extraterritorial application of EU competition law, this time further away from the territoriality principle, has evolved in ECJ’s case law and was confirmed in the Intel case,60 based on the effects of the conduct within or outside the internal market. This third doctrine was applied in the Gencor case,61 where the General Court held that the extraterritorial application of European rules dealing with concentration

Judgment of 6 September 2017, Intel v Commission, C-413/14 P, EU:C:2017:632. Judgment of 6 September 2017, Intel v Commission, C-413/14 P, EU:C:2017:632, para 43. 54 Prete (2018). 55 Scott (2014), p. 87. 56 Behrens (2016), p. 8. 57 Judgment of 14 July 1972, ICI v. Commission, C-48/69, EU:C:1972:70. 58 Judgment of 14 July 1972, ICI v. Commission, C-48/69, EU:C:1972:70, paras. 128–135. 59 Judgment of 20 January 1994, Ahlström Osakeyhtiö and Others v Commission, C-89/85, EU: C:1988:447, para. 16 60 Judgment of 6 September 2017, Intel v Commission, C-413/14 P, EU:C:2017:632. 61 Judgment of 25 March 1999, Gencor Ltd v. Commission, T-102/96, EU:T:1999:65. 52 53

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operations would be “justified under public international law when it is foreseeable (sic) that a proposed concentration will have an immediate and substantial effect (sic) in the Community”.62 The qualified effects test doctrine was advanced further in the Intel case, first by the General Court,63 and then ratified by the ECJ. According to it, it would be possible to apply EU competition law to conduct “which, while not adopted within the EU, has anticompetitive effects liable to have an impact on the EU market”.64

4.3.2

Is there any Possible Extraterritorial Application of EU Competition Law Versus Gazprom?

During and after the investigation of the Gazprom case, some discussion was raised as to whether EU competition rules were being applied in an extraterritorial and illegal manner or required an effects-based justification,65 and whether or not such application would be “within the confines of international law”.66 Gazprom voiced this argument when stating in an official document immediately after the opening of the investigation that it hoped that “the investigation will duly respect our legal rights and legitimate interests based on the European and international law, and that it will be taken into account that Gazprom, registered outside the jurisdiction of the EU, is a business entity empowered, according to the legislation of the Russian Federation. . .”.67 The question is, therefore, whether in the Gazprom case there was any extraterritorial application of EU competition law to regulate its gas-related activities or, if, on the contrary, claims of the illegal application of EU law were unfounded. As we discuss below, the answer to this issue is that, in the Gazprom case, there was no real extraterritorial application of EU competition law, as was also remarked by Martyniszyn.68 More interestingly, perhaps, is the response of the Russian government with the aim of preventing the application of EU competition law to Gazprom activities in the upstream gas supply market in the EU. Extraterritoriality claims in the Gazprom investigation were made because EU competition law was being applied to a foreign undertaking. Prior to a final decision being reached, authors like Morris suggested that the application of EU competition law to Gazprom and its activities needed an effect-based justification for the

Judgment of 25 March 1999, Gencor Ltd v. Commission, T-102/96, EU:T:1999:65, para. 90. Judgment of 12 June 2014, Intel v Commission, T-286/09; EU:T:2014:547. 64 Judgment of 6 September 2017, Intel v Commission, C-413/14 P, EU:C:2017:632, para. 45. 65 See also the remarks here: Morris (2014); Prete (2018), p. 494, note 52. 66 Morris (2014). 67 This official Gasprom statement is available at https://www.gazprom.com/press/news/2012/ september/article143314/. 68 Martyniszyn (2015). 62 63

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extraterritorial application of EU law to be lawful under public international law.69 Yet, upon examination of the conduct under investigation and the circumstances of the case, it is clear that the application of EU competition law is not extraterritorial as the conduct of the investigated undertaking takes place and produces its effects in the territory of a Member State of the EU. Based on this, competition law application to a foreign undertaking would be uncontroversial under public international law principles,70 and the extraterritoriality concept developed by the EU courts in competition law cases briefly discussed above. Despite this, Gazprom and its owner, the Russian state, implemented interesting tactics to prevent the application of EU competition law to regulate its behaviour and business practices in the EU. As the investigation advanced, the Russian state enacted a ‘Blocking Order’ to hinder the Commission’s activities.71 According to this Blocking Order, Russian strategic enterprises had to obtain consent from the Russian state before providing information to foreign authorities about their activities. Moreover, these companies would be allowed to implement certain measures after information was requested, including modification of contracts or disposing of some assets.72 By then, however, the Commission had already executed dawn raids for this investigation before this Order was adopted, which limited its initial effectiveness though it sent a clear geopolitical signal. It would appear that the purpose of the Order was to prevent the extraterritorial enforcement of a possible antitrust decision imposing a sanction or remedy, which could have been to require the unbundling of some of the gas pipelines owned by Gazprom,73 an objective pursued by Gas Directive 2009/73 but which could not be achieved for import pipelines. If the Commission had succeeded in requesting or obtaining a possible structural remedy requiring the unbundling of Gazprom pipelines as well as the application of EU energy law or similar provisions such as those related to gas transport it would have, therefore, have been able to find a way of implementing Gas Directive 2009/73

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Morris (2014). France v Turkey (Lotus), 1927, PCIJ (Ser. A. No. 10, 19: ‘Far from laying down a general prohibition to the effect that states may not extend the application of their laws and the jurisdiction of their courts to persons, property and acts outside their territory, it leaves them in this respect a wide measure of discretion which is only limited in certain cases by prohibitive rules.’ 71 Executive Order of the President of the Russian Federation No.1285 of 11 September 2012 on Measures to Protect Russian Federation Interests in Russian Legal Entities’ Foreign Economic Activities. A summary of the order can be found at: http://en.kremlin.ru/events/president/news/ 15256. 72 See, in discussing these matters: Martyniszyn (2014). 73 Martyniszyn (2015), p. 293. Examples of structural remedies in the energy sector to advance the Commission’s energy policy, in particular concerning unbundling, are not rare. For a discussion of this see also: Bergqvist and Herrera Anchustegui (2020). 70

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rules with an extraterritorial effect, which was a well-known aspiration of the Commission.74

4.4

Commitments

The Gazprom competition investigation came to an end in 2018 when a Decision75 based on Article 9 of Regulation 1/2003 was reached.76 It must be remembered that, following that Article, under a commitment decision the Commission may terminate an investigation without finding whether or not there has been a breach of EU competition rules, provided the involved undertakings “offer commitments to meet the concerns expressed to them by the Commission in its preliminary assessment, the Commission may by decision make those commitments binding on the undertakings”.77 While Gazprom rejected the claims by the Commission concerning possible breaches of EU competition law, it decided to unilaterally offer a series of behavioural commitments that were found to sufficiently address the concerns with respect to the effect of the identified behaviour in the national gas markets. None of the commitments, nor the Decision, addressed the issue of the extraterritorial application of the law. Furthermore, all the remedies that were implemented involved Gazprom’s behaviour within the territory of EU Member States, thus making a sufficient territorial link for the application of EU competition law to a non-EU undertaking. These included commitments to remove market segmentation strategies in Central and Eastern European countries, to revise pricing clauses and pricing practices, and to refrain from bringing any claims related to the cancellation of a gas pipeline project in Bulgaria. The Gazprom competition investigation showed that EU competition law was being used to control and, to some extent, constrain the activities of providers of natural gas to the EU. Moreover, it showed the complex and tense geopolitical and legal issues that arise from attempts to regulate gas pipelines, be they importing or exporting, when the Union is dependent on such an important provider, as well as the clear efforts made by the Russian Federation to mitigate all kinds of extraterritorial effects of EU law.

The lack of application of EU energy law to import pipelines was seen as “detrimental to the functioning of the internal energy market and the security of supply in the Union”, European Commission, ‘Questions and Answers on the Commission Proposal to Amend the Gas Directive (2009/73/EC)’ (Fact Sheet, 8 November 2017), https://ec.europa.eu/commission/presscorner/detail/ en/MEMO_17_4422. 75 Case AT.39816—Upstream gas supplies in Central and Eastern Europe, 24 of May 2018. For a detailed discussion of the Decision see: Shaburova (2019). 76 Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty. 77 Article 9.1 Regulation 1/2003. 74

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5 The Brussels Effect in Hard Law?78 the Case of Gas Directive 2019/692 5.1

Nord Stream 2 on Its Way

The discussion concerning the extraterritorial application of Gas Directive 2009/73 was set in train by a subsidiary of Gazprom as a result of developments in gas infrastructure, in particular the Nord Stream 2 project.79 Nord Stream 2 is a gas transportation project that was first announced in 2012 and was scheduled to be finished in 2020. It aims to deliver gas from Ust-Luga in Russia to Greifswald in Germany through the Baltic Sea.80 Nord Stream 2 pipeline is over 1200 km long, running parallel to the Nord Stream 1 gas pipeline, also owned by a subsidiary of Gazprom, and has a total capacity of 55 billion cubic metres of gas per year, effectively doubling the transport capacity of gas in the Baltic Sea. The pipeline crosses through the seabed the EEZ of several states: Russia, Finland, Sweden, Germany and Denmark.81 While Gazprom leads the project, there are other partners, ENGIE, OMV, Royal Dutch Shell, Uniper and Wintershall, who own and have financed 50% of the project.82 Once the project was announced, the Commission found itself in a complicated situation. As discussed in Sect. 2, Gas Directive 2009/73 was silent concerning its application to import pipelines from non-EU Member States into the Union and the practice was not to extend it. Of particular importance were the rules concerning third-party access, regulated tariffs and unbundling. However, there was a will to regulate import pipelines. Several moves were made. At first, the Commission hinted that it wished to extend the application of Gas Directive 2009/73 to external pipelines beyond the territory of EU Member States, including portions of a pipeline owned by an undertaking from a third country located in the EEZ of an EU Member State. However, this option was quickly discarded and instead, a proposal for a revision of the scope of application of Gas Directive 2009/73 was put on the table.

Building on earlier concepts of the “California Effect”, the idea of the “Brussels Effect” is divided into de facto—when third country companies that are required to comply with EU standards decide to comply with those standards even when they are producing goods for their domestic and/or a third country market—and de jure—when a third country legislature decides to incorporate the substance of EU standards into its domestic law. See Rodrigues (2017), p. 142 (footnote 40) and Cremona and Scott (2019), p. 31. 79 See, for stressing that the amendment of Gas Directive 2009/73 “cannot be separated from the ongoing Nord Stream 2 pipeline project”,Talus (2019), p. 2; Yafimava (2019), p. 1. 80 See https://www.gazprom.com/projects/nord-stream2/. 81 Order of 20 May 2020, Nord Stream 2 v Parliament and Council, T-526/19, EU:T:2020:210, para. 6. 82 Order of 20 May 2020, Nord Stream 2 v Parliament and Council, T-526/19, EU:T:2020:210, para. 4. 78

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The 2017 Proposal

In 2017, speculation concerning the extraterritorial applicability of Gas Directive 2009/73 was brought to a halt when the Legal Service of the European Council and of the Commission concluded that Gas Directive 2009/73 could not apply to thirdcountry sub-sea import pipelines as they were outside its scope of application.83 Such a situation was seen by the Commission as “detrimental to the functioning of the internal energy market and the security of supply in the Union”.84 In light of this clarification, the Commission embarked on a different strategy to extend the application of EU law to import pipelines beyond the physical territory of EU Member States. Having explored other options, it suggested a revision of Gas Directive 2009/73.85 This ultimately led to the adoption of Gas Directive 2019/ 692, amending Gas Directive 2009/73. The 2017 Proposal by the Commission stressed the need to apply EU energy rules related to unbundling, third-party access and regulated tariffs to import pipelines to ensure transparency, competitiveness and the efficient functioning of gas markets. Concomitantly, it also recognized the dependence of EU Member States on imported natural gas and the practical difficulties that these new norms could bring to the operation of import pipelines, which would now be under “at least two different regulatory frameworks”, leading to possible scenarios of a conflict of laws and the need for international cooperation and regulation.86 The Proposal included rules regarding the scope of application to import pipelines, new definitions and rules regarding the derogation of obligations derived from the requirements of third-party access, unbundling and regulated tariffs to existing pipelines completed before the entry into force of the proposed Directive. Based on the proposed text, EU energy law would have applied in full to import pipelines between the EU and third countries.87 The scope of the Proposal was fairly broad, it was intended to cover an import pipeline “which crosses or spans a border between Member States or between Member States and third countries up to the border of Union jurisdiction”.88 On a first reading this provision appeared to be unproblematic

83

European Commission, Proposal for a Directive of the European Parliament and of the Council amending Directive 2009/73/EC concerning common rules for the internal market in natural gas, COM(2017) 660 final, p. 2 (the Proposal). 84 European Commission, ‘Questions and Answers on the Commission Proposal to Amend the Gas Directive (2009/73/EC)’ (Fact Sheet, 8 November 2017), https://ec.europa.eu/commission/ presscorner/detail/en/MEMO_17_4422. 85 European Commission, ‘Questions and Answers on the Commission Proposal to Amend the Gas Directive (2009/73/EC)’ (Fact Sheet, 8 November 2017), https://ec.europa.eu/commission/ presscorner/detail/en/MEMO_17_4422. 86 Proposal, p. 2. 87 Hancher and Marhold (2019), p. 292. 88 Article 1, amending Article 2(17), of the Proposal, p. 5.

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concerning both extraterritoriality and extraterritorial effects, but on a closer look it was less so, as remarked by Hancher and Marhold.89 Under the proposal, EU energy law would apply to the portion of an import pipeline in the territory of EU Member States, the territorial sea and the EEZ of a Member State. Prima facie this application of the law was justified due to the existence of a territorial link with a Member State. This would be so even if, sensu stricto, the EEZ of an EU Member State is not ‘territory’,90 but rather an area beyond and adjacent to the territorial sea, subject to the specific legal regime in which limited sovereign rights can only be exerted upon certain economic activities and with limited jurisdiction.91 Articles 52 of the Treaty on the European Union and 355 TFEU clarify that the scope of application of EU law corresponds to the Member States and their territory, interpreted as including the “areas that are within sovereignty or jurisdiction of the Member States, including maritime areas”.92 In this respect, the ECJ has gone further and clarified that “the Community has the same rulemaking authority in matters within its jurisdiction as that conferred under international law” with respect to maritime areas. Thus, the application of EU law must be within the limits of public international law and, in this case, the law governing the seas.93 Here, one can question whether the scope of the Proposal, extending the application of EU law beyond the territorial sea, was extraterritorial and/or in contravention of public international law. Article 58 of the United Nations Convention for the Law of the Sea (UNCLOS)— to which the EU is a party94—clarifies that other states, such as the Russian Federation, have certain rights and duties whenever they conduct specific activities in the EEZ belonging to the coastal state. Among these, “all States, whether coastal or land-locked, enjoy, subject to the relevant provisions of this Convention, the freedoms referred to in article 87 of navigation and overflight and of the laying of submarine cables and pipelines, and other internationally lawful uses of the sea related to these freedoms”. The right of third states to lay cables and pipelines is further developed in Article 112 of UNCLOS, according to which “[a]ll States are entitled to lay submarine cables and pipelines on the bed of the high seas beyond the continental shelf”. However, according to Article 58 (3) of the UNCLOS, the freedom of third states concerning this pipeline layout “shall have due regard to the rights and duties of the coastal state and shall comply with the laws and regulations adopted by the coastal State in accordance with the provisions of this Convention and other rules of international law in so far as they are not incompatible with this Part”.95 Would this, therefore, imply that EU law or its national implementation could lawfully

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Hancher and Marhold (2019), p. 294. See also, stressing this point: Talus (2017), p. 32. 91 Articles 55 and 56 of the United Nations Convention for the Law of the Sea. 92 Paasivirta (2015), p. 1069. 93 See, discussing this in detail: id. at. 92. 94 The European Union ratified UNCLOS on 1 April 1998. 95 Article 58.3, UNCLOS. 90

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require the application of third-party access, unbundling and regulated tariffs to an import pipeline? The literature is divided on this issue. On the one hand, we find those that adopt a negative answer to the question. For example, Talus96 stresses that the limits imposed by the rights of coastal states over third states laying pipelines are mostly related to environmental aspects and not to the operation of pipelines or electricity lines.97 Furthermore, these limited rights of the coastal state may not be invoked to restrict the freedom of third states in order to ensure security of energy supply.98 The argument rests on the fact that the operation of a pipeline is not related to the economic exploitation of the EEZ itself.99 Somewhat similar was the conclusion of the ECJ in Aktiebolaget NN v. Skatterverket in which, when deciding an issue regarding the application of a VAT tax to the laying and supply of submarine cables, it was concluded that the sovereignty of the coastal state over the EEZ was functional and limited to the rights and activities allowed by UNCLOS.100 The application of VAT to submarine cables was not “included in the activities listed in those articles, that part of the operation carried out in those two zones is not within the sovereignty of the coastal State”.101 A different answer, but also stressing the incompatibility of the provision as proposed with public international law was that raised by Hancher and Marhold. These authors argued that the EU can only act in the EEZ of a Member State within the competences conferred on it by the Member States, which was not the case at hand. Concomitantly, a Member State would only have “jurisdiction to establish the conditions for pipelines entering its territory or territorial sea, while the sovereignty of the coastal state over the EEZ and the continental shelf is merely functional”.102 On the other hand, Riley opined that both Gas Directive 2009/73 and the proposed Directive were applicable in the EEZ as Article 79 of UNCLOS “is silent on whether the EEZ states can seek to regulate the operation of the pipeline and cables. Application of the 2009 directive would in no way stop any state laying its pipelines in the EEZ as it would merely control the way they operated. It is submitted that the EU Courts are likely to give significant weight to the argument made above in terms of the danger of regulatory fragmentation and the potential for a significant distortion of the conditions of competition on the EU market as a justification for applying the 2009 Directive in the EEZ.”103 96

Talus (2018), p. 169; Talus (2017). See also, discussing this: Woolley et al. (2012); Stanič (2018), p. 3. 98 Council of the European Union, ‘Opinion of the Legal Service, Directive 2009/73/EC of 13 July 2009 concerning common rules for the internal market in natural gas and repealing Directive 2003/ 55/EC—Compatibility with UNCLOS’ (6738/8, 1 March 2018) 2017/0284 (COD) 2, para. 17. 99 Hancher and Marhold (2019), p. 300. 100 Judgment of 20 March 2007, Aktiebolaget NN v. Skatterverket, C-111/05, EU:C:2007:195, para. 59. 101 Judgment of 20 March 2007, Aktiebolaget NN v. Skatterverket, C-111/05, EU:C:2007:195, para. 59. 102 See also, stressing this issue: Hancher and Marhold (2019), p. 300. 103 Riley (2018), p. 17. 97

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The academic and political dispute on whether it was lawful to extend the application of EU energy law on the EEZ of its Member States was put to rest when the Legal Service of the Council concluded that the proposed scope of application of the Gas Directive was contrary to public international law. In unequivocal terms, the Legal Service concluded that “the Union does not have jurisdiction to apply energy law on unbundling, transparency, third-party access and regulated tariffs, which is unrelated to the economic exploitation of the EEZ, to pipelines crossing the EEZ of Member States. The application of the Gas Market Directive to the EEZ would be contrary to Articles 56 and 58 of UNCLOS as interpreted by the Court of Justice.”104

5.3

Limiting an Expansive Application of EU Energy Law?

An intense political debate among Member States on the suitability of the Proposal ensued, including the need to either reform the text or terminate the legislative procedure. Most Eastern European and Baltic countries opposed the construction of Nord Stream 2, while Germany supported it, which generated political dialogue towards a modification of the text removing the application of EU energy law beyond the territorial sea over import pipelines from third states. A compromise was achieved and, finally, on 17 April 2019, the amended Gas Directive 2019/692 was approved, before the completion of Nord Stream 2. The amendment not only included rules regarding import pipelines (an interconnector), but also the right for national authorities to grant exceptions for new infrastructure (Article 36). Moreover, there were derogations to gas pipelines completed before the entry into force of Gas Directive 2019/692 (Article 49a), with regard to rules regarding third-party access, unbundling and regulated tariffs. While the amended and approved text removed the issue of Gas Directive 2019/ 692 vis-à-vis public international law, the final version increased and, for the first time in EU energy law, included within its scope of application import pipelines from third countries. An import pipeline, defined as an “interconnector” would be that “transmission line which crosses or spans a border between Member States for the purpose of connecting the national transmission system of those Member States or a transmission line between a Member State and a third country up to the territory of the Member States or the territorial sea of that Member State”.105

104 Legal Service of the Council of the European Union, Legal Opinion regarding Proposal for a Directive of the European Parliament and of the Council amending Directive 2009/73 concerning common rules for the internal market in natural gas—Legal basis, allocation of competences, derogations, 26 March 2018, para. 21 (emphasis added). 105 Article 1, Directive 2019/692, amending Article 2(17) of Directive 2009/73 (emphasis added).

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Therefore, the amended EU Gas Directive 2019/692 would be applicable with respect to third States’ pipelines in the territory of the Union and the “territory of the Member States. As regards offshore gas transmission lines, Directive 2009/73/EC should be applicable in “the territorial sea of the Member State where the first interconnection point with the Member States’ network is located.”106 Such an application would hold over not only planned and future pipelines but also over any already existing import pipeline classified as an interconnector. However, to avoid the retroactive application of the law, gas transmission lines “which are completed before the date of entry into force of this Directive” may be exempted from the Directive by derogation.107 In practice, this means that the amended Gas Directive 2019/692 will apply to import pipelines entering the Union, starting from the point of entry into the territorial sea of a Member State in which it has its first physical connection to the European gas system, but not over the area of the EEZ it goes through. In the case of Nord Stream 2, this would be “the section between its first connection point with the German domestic network at Lubmin and the border between the German territorial sea and the German EEZ)—but not to the Russian section”.108 Strictly speaking, the outcome of Gas Directive 2019/692 indicates that EU energy law does not have an extraterritorial application over import pipelines entering the Union from a third country. Considering the application of the law to the limit between the territorial sea and the EEZ has a clear territorial link, and it also respects the limits imposed by public international law concerning the right of third states to lay pipelines in the subsea bed.109 Moreover, this solution avoids the issue of several Member States applying their national law implementing Gas Directive 2019/692 to the portion of a pipeline that crosses their EEZ – as is the case in the path which Gazprom has laid out.110 Now, does this lack of territorial application of EU law in practice imply a lack of extraterritorial effect over the Nord Stream 2 gas pipeline or any future import pipeline into the Union? Put differently, what are the effects of the application of EU energy law in the territorial sea for an import pipeline? Are they limited only to the portion of the pipeline in the territorial sea and in the territory of a Member State or may these also have repercussions for the rest of the import pipeline? In our opinion, while Gas Directive 2019/692 does not have extraterritorial application – a solution rejected by the legislator, as it would infringe public international law—it potentially has effects that extend beyond the point of entry into the territorial sea of the first interconnection point where the Member States’ network is located. Other authors also support that view. As discussed in extenso by

106

Recital (9) of Directive 2019/692. Recital (4) of Directive 2019/692. 108 Yafimava. 2019, p. 2 (emphasis in original). 109 Talus (2019), pp. 4–5. 110 Id. at p. 5. 107

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Yafimaya,111 and even before the Proposal was considered by Riley concerning Gas Directive 2009/73,112 Gas Directive 2019/692 will have repercussions for the Nord Stream 2 pipeline, as well as any other future import pipeline beyond the portion located in the territorial sea and the entry point into the Union’s gas network. Among other provisions, Gas Directive 2019/692 now requires these interconnectors to implement related to unbundling, third-party access and regulated tariffs which generate an impact regarding the pipeline’s operation and possibly ownership beyond the 12 nautical miles of the territorial sea of the first Member State in which the pipeline connects. For example, complying with the obligation to unbundle might require changes of ownership or operational structure over the entirety of the pipeline.113 Gazprom would have several alternatives: separate its entire business of transmission and generation ownership with respect to all of its pipelines;114 transfer the entirety of the pipeline operation to a different entity; either transfer the operation of the portion of the pipeline on the German territorial sea to a different transmission system operator or sell that portion of the pipeline. With regard to third-party access, Gazprom could grant entry rights to the gas network to other providers only regarding the portion in the 12 nautical miles of the German territorial sea onwards into the Union; however, that is not possible as so far there is no connection point to other pipelines.115 Therefore, this requirement of third-party access would have to be extended to the entirety of the pipeline. Lastly, regarding access tariffs, Gas Directive 2019/692 grants to the German regulator the competence to fix and approve the methodologies and tariffs concerning the connection and access to national and cross-border transport infrastructures. From the text of Gas Directive 2019/692, it is unclear whether these obligations apply only to the national network or also to the crossborder infrastructure.116 However, the lack of application of the regulated tariff or at least the publication of the methodology would defeat the purpose of granting non-discriminatory access to the pipeline. Despite Gas Directive 2019/692’s scope having been extended, this does not imply an extraterritorial application of EU energy law to import pipelines from third states. Gas Directive 2019/692 only applies to the portion of the pipeline

111

Yafimava (2019). Riley (2016). 113 Yafimava (2019), p. 3. 114 In quite similar terms, Gazprom expressed such concerns regarding these extraterritorial effects before the General Court when holding that “[t]hose new obligations [referring to third party access, unbundling and the application of regulated tariffs] must lead to significant changes in the applicant’s case, since, in order to comply with them, it must sell the whole of the Nord Stream 2 pipeline to a third party or entirely alter its organizational and business structure, which fundamentally weakens the basis for funding that infrastructure, funding with which, moreover, European undertakings have been associated”, Judgement of 20 May 2020, Nord Stream 2 v Parliament and Council, T-526/19, EU:T:2020:210, para. 97. 115 See also, in coming to the same conclusion: Yafimava (2019), p. 3. 116 Id. at p. 2. 112

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located in the territorial sea of the country in which it has its entry point. Yet, its application in EU territory generates direct or indirect effects outside the EU territory, affecting part of the whole of the pipeline. In such a way and through the effect of EU energy law the Commission has, to some extent—albeit not to the extent that it had originally envisaged—expanded EU energy law to govern natural gas import pipelines from the Russian Federation (and other countries) as it had desired from a security of supply and geopolitical perspective.

5.4

Gas Directive 2019/692 German Implementation and Derogations Request

Based on this new applicability of EU energy law to the Nord Stream 2 pipeline as an interconnector, Gazprom requested before the national energy regulator, the Bundesnetzagentur, a derogation of the national rules concerning third-party access, unbundling and tariff (cost) regulation, according to the national implementation of Article 49(a) of Gas Directive 2019/692. The request was filed in January 2020, and on 15 May 2020 the Bundesnetzagentur rejected the application as it concluded that the Nord Stream 2 pipeline had not been fully laid at the time of entry into force of Gas Directive 2019/692, 23 May 2019.117 This was a condition for the derogations to be granted, according to Article 49(a) of Gas Directive 2019/692. Moreover, the resolution confirmed that when Nord Stream 2 is put into operation it “will be subject to German regulatory requirements and European rules on unbundling, network access and cost regulation”, pursuant to the implementation of Gas Directive 2019/692.118 This confirms that while Gas Directive 2019/692 does not have an extraterritorial reach, it does have an effect on pipelines entering the Union from third countries and affects their functioning within, and arguably, outside the territory of the Union.

6 The Last Battle? In the process of the adoption of Gas Directive 2019/692 and its subsequent national transposition, different actions were launched by Gazprom and the Russian Federation against the EU’s efforts to regulate natural gas import pipelines. This time,

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Bundesnetzagentur, Beschlusskammer 7, BK7-20-004-B1 (2020), available (in German) at: https://www.bundesnetzagentur.de/DE/Service-Funktionen/Beschlusskammern/1_GZ/BK7-GZ/ 2020/BK7-20-0004/BK7-20-0004_B1_Beiladungsbeschl_nicht_BDBext.pdf?__ blob¼publicationFile&v¼2. 118 Bundesnetzagentur, No derogation from regulation for Nord Stream 2 (2020), https://www. bundesnetzagentur.de/SharedDocs/Pressemitteilungen/EN/2020/20200515_NordStream2.html.

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Gazprom—through Nord Stream AG and Nord Stream 2 AG lodged two complaints before the General Court seeking annulment of Gas Directive 2019/692 on 26 July 2019,119 shortly after the Directive had entered into force in the EU on 23 May 2019. Gazprom claimed that Gas Directive 2019/692 was contrary to EU primary law based on three pleas. First, the deadline for obtaining potential derogation decisions under the newly inserted Article 49a of the modified Gas Directive 2009/73 was excessively short and thereby violates the general legal principle of proportionality as laid down in Article 5(4) TEU. Second, the amending Gas Directive was in violation of Article 296 TFEU since it is vitiated by a failure to state reasons for the introduction of the excessively short deadline in the contested provision. Third, the amended Gas Directive violated the principle of legitimate expectations as it unjustly limits the possibility of obtaining derogations under the newly introduced Article 49a of Gas Directive 2009/73.120 Among the arguments put forward by Gazprom, claims of illegal extraterritorial application of Gas Directive 2019/692 were not found. As we discussed before, this was due to the fact that, sensu stricto, the compromised solution of the Directive extends in principle only to the portion of any “transmission line between a Member State and a third country up to the territory of the Member States or the territorial sea of that Member State”.121 The General Court declared the two cases brought by Nord Stream AG and Nord Stream AG 2 inadmissible based on standing grounds, as it concluded that the claimants were not directly concerned by Gas Directive 2019/692. This was because the criteria to have standing were not met. Firstly, the Gas Directive was found not to constitute a ‘regulatory act’ as it was, instead, a ‘legislative act’ based on the way it is adopted.122 Secondly, and more substantively, the measure must directly affect the legal situation of the applicant. This was not the case as the two cumulative criteria, that the “measure must directly affect the legal situation of the applicant, and, second, it must leave no discretion to its addressees, who are entrusted with the task of implementing it, such implementation being purely automatic and resulting from EU rules alone without the application of other intermediate rules” were not met. This was because such measures were to be defined by the national implementation of the Gas Directive, even if the rules are sufficiently clear and precise.123 Concerning the extraterritorial application or effect of EU law, the General Court correctly clarified that the application of the amended Gas Directive is based on territoriality. Firstly, it confirmed that the amended Gas Directive now applies to import pipelines with regard to the “part located between a Member State and a

Order of 20 May 2020, Nord Stream 2 v Parliament and Council, T-526/19, EU:T:2020:210, and Order of 20 May 2020, Nord Stream v Parliament and Council, T-530/19, EU:T:2020:213. 120 T-530/19, Nord Stream v Parliament and Council, Application (OJ) (30/08/2019). 121 Article 2(17) of Directive 2009/73 as amended by Directive 2019/692. 122 Order of 20 May 2020, Nord Stream 2 v Parliament and Council, T-526/19, EU:T:2020:210, paras. 77–85. 123 Order of 20 May 2020, Nord Stream 2 v Parliament and Council, T-526/19, EU:T:2020:210, paras. 96–116. 119

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third State up to the territory of the Member States or the territorial sea of that Member State, made subject to the obligations laid down by Directive 2009/73 and the provisions of national legislation transposing that directive as amended by the contested directive”.124 The extent of the obligations derived from the amended Gas Directive will be defined by “the national transposing measures which the Member State in whose territorial sea that part of the line is located will adopt or has adopted under Article 2 of the contested directive, read in conjunction with the third paragraph of Article 288 TFEU”.125 Secondly, and more importantly, it justified such application through quite utilitarian but solid business reasons. That Gazprom, and other companies with import pipelines entering the Union, must abide by the EU gas rules, comes as “simply the result of its choice to develop and maintain its activity in the territory of the European Union, in this instance in the territorial sea of one of the Member States of the European Union”.126 These judgments of the General Court, with an appeal lodged against the Order of the General Court in T-526/19, Nord Stream 2 v Parliament and Council pending at the time of the writing of this chapter,127 may close for good the discussion concerning the alleged extraterritorial application of the amended Gas Directive. They clearly confirm the link to the EU territory as well as the grounds for such an application based on the self-interest of the gas supplier. Yet, the cases did not deal with the more complex issue regarding the repercussions of the application of the Gas Directive on the territorial sea in which the pipeline enters the Union, as we discussed in Sect. 5, and was remarked upon by Gazprom in the cases.128

7 Conclusion It is known worldwide that many states are highly dependent on the import of different sources of energy such as those provided by third countries or transported through these countries until they reach their consumption location. Accordingly, it Order of 20 May 2020, Nord Stream 2 v Parliament and Council, T-526/19, EU:T:2020:210, para. 104 (emphasis added). 125 Order of 20 May 2020, Nord Stream 2 v Parliament and Council, T-526/19, EU:T:2020:210, para. 105. 126 Order of 20 May 2020, Nord Stream 2 v Parliament and Council, T-526/19, EU:T:2020:210, para. 108 (emphasis added). 127 Appeal of 28 July 2020 against the order of the General Court (Eighth Chamber) delivered on 20 May 2020 in Case T-526/19, pending as C-348/20 P—Nord Stream 2 v Parliament and Council. 128 “Those new obligations [referring to third party access, unbundling and the application of regulated tariffs] must lead to significant changes in the applicant’s case, since, in order to comply with them, it must sell the whole of the Nord Stream 2 pipeline to a third party or entirely alter its organisational and business structure, which fundamentally weakens the basis for funding that infrastructure, funding with which, moreover, European undertakings have been associated”, Judgement of 20 May 2020, Nord Stream 2 v Parliament and Council, T-526/19, EU: T:2020:210, para. 97. 124

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is not easy to define rules that are equally applicable to third-country energy providers and/or to the transportation of these commodities as this task usually demands fine-tuning between rules defining a level playing field, market power, geopolitics and diplomacy as well as those regarding public international law. As such, energy law is perceived and stands as an interesting case study of possible extraterritorial application for national or regional laws. In the specific field of gas, the EU has been adopting a strategy that, on the one hand, follows basic principles of public international law—such as the territory principle—but, on the other hand, looks to ensure that third countries respect EU law when conducting business within its borders. This latter can be achieved through links established in EU legislation that promote what can be called the “territorial extension” of EU law. By doing so, the EU tries to attract foreign companies into the orbit of EU law, in areas such as EU competition law, energy law and EU internal market rules, including security provisions, third-party access and regulated tariffs for an energy network. As was shown above, in the past, this strategy was followed over gas transmission pipelines through the use of EU competition law, including the investigation against Gazprom, started in 2012 by the Commission for the alleged abuse of its dominant position in the Eastern European gas supply market. The investigation was ended as a result of commitments unilaterally offered by Gazprom and accepted by the Commission to address the alleged anticompetitive conduct within the Union. Recently, the construction of Nord Stream 2 created an opportunity for the Commission to fill some of the gaps detected in Gas Directive 2009/73 concerning the regulation of import pipelines. It is known that the latter was silent concerning its application to import pipelines from non-EU Member States into the Union and the practice was not to extend it. The approval of Gas Directive 2019/692 demonstrates how links can be used to assure that EU rules—such as those of internal market—are followed by foreign companies that undertake activity within the EU and, at the same time, to achieve geopolitical and diplomatic goals. In this particular case, a clear and lawful territorial link was established in the Directive by limiting the application of the Directive to import pipelines entering the Union between the territorial sea and the EEZ after considerable negotiation and controversy. Therefore, it is clear that Gas Directive 2019/692’s scope has been extended when compared with its predecessor without this implying an extraterritorial application of EU energy law to import pipelines from third states. As we have seen, the Gas Directive only applies with respect to the portion of the pipeline located in the territorial sea of the country in which it has its entry point. However, its application in EU territory generates direct or indirect effects outside EU territory, affecting part or the whole of the pipeline. In this way and through the effect of EU energy law the Commission has, to some extent, been successful in expanding EU law to govern natural gas import pipelines entering the Union from the Russian Federation (or any other country) from a security of supply as well as geopolitical perspective.

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In the end, EU energy law—and Gas Directive 2019/692 in particular—is an example of how the EU is leveraging its rule-making129 outside its territory, achieving extraterritorial effects through the use of fine-tuned links that, while respecting public international law, have the capacity to extend the effects of EU law beyond the territory of the Union.

References Behrens P (2016) The extraterritorial reach of EU competition law revisited: the “effects doctrine” before the ECJ. Europa-Kolleg Hamburg, Discussion Paper No 3/16 Bergqvist C, Herrera Anchustegui I (2020) Uses and abuses of EU competition law in energy. In: Hunter TS et al (eds) Routledge handbook of energy law. Routledge Cremona M, Scott J (2019) EU law beyond EE Borders: the extraterritorial reach of EU law. Oxford University Press de Hauteclocque A, Talus K (2011) Third party access: a comparative study on access Regimes in EU electricity grids and natural gas pipelines. Oil Gas Energy Law 3 Fahey E (2016) The global reach of EU law. Taylor & Francis Haghighi SS (2007) Energy security: the external legal relations of the European Union with major oil and gas supplying countries. Bloomsbury Publishing Hancher L, Marhold A (2019) A common EU framework regulating import pipelines for gas? Exploring the Commission’s proposal to amend the 2009 gas directive. J Energy Nat Res Law 37:289–303 Herrera Anchustegui I (2019) Transmission networks in electricity competition: third-party access and unbundling – a transatlantic perspective. In: Ruiz Peris JI, Carmen María Cerdá MartínezPujalte (eds) Competencia en Mercados con Recursos Esenciales Compartidos: Telecomunicaciones y Energía. Aranzadi Leal-Arcas R, Filis A (2013) Conceptualizing EU energy security through an EU constitutional law perspective. Fordham Int Law J 36:1225 Martyniszyn M (2014) Legislation blocking antitrust investigations and the September 2012 Russian executive order. World Compet 37:103–119 Martyniszyn M (2015) On extraterritoriality and the Gazprom case. Eur Compet Law Rev 36:291–294 Mete G (2019) Energy transitions and the future of gas in the EU: subsidise or decarbonise. Palgrave Macmillan Morris PS (2014) Iron curtain at the border: Gazprom and the Russian blocking order to prevent the extraterritoriality of EU competition law. Eur Compet Law Rev 35:601–612 Paasivirta E (2015) The European Union and the United Nations convention on the law of the sea. Fordham Int Law J 38:1045 Pielow J-C et al (2009) Legal and economic aspects of ownership unbundling in the EU. J World Energy Law Bus 2:96–116 Pogoretskyy V, Talus K (2019) The WTO panel report in EU–energy package and its implications for the EU's gas market and energy security. World Trade Rev 19:1–19 Pollitt M (2008) The arguments for and against ownership unbundling of energy transmission networks. Energy Policy 36:704–713 Prete L (2018) On implementation and effects: the recent case-law on the territorial (or extraterritorial?) application of EU competition rules. J Eur Compet Law Pract 9:487–495 Proedrou F (2013) EU energy security in the gas sector: evolving dynamics, policy dilemmas and prospects. Ashgate Publishing Ltd

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Riley A (2016) Nord stream 2: a legal and policy analysis. CEPS - Energy Climate House Riley A (2018) A pipeline too far? EU law obstacles to Nordstream 2. Int Energy Law Rev Rodrigues NC (2017) The use of public procurement as a non-tariff barrier: relations between the EU and the BRICS in the context of the new EU trade and investment strategy. Public Procure Law Rev 3 Schmidt-Felzmann A (2020) Gazprom’s Nord stream 2 and diffuse authority in the EU: managing authority challenges regarding Russian gas supplies through the Baltic Sea. J Eur Integr 42:129–145 Scott J (2014) Extraterritoriality and territorial extension in EU law. Am J Comp Law 62:87 Shaburova T (2019) The Gazprom case: a tool to Foster an EU internal gas market. Eur Compet Regulat Law Rev 3:63–71 Stanič A (2018) Key international law implications of the Commission’s proposal to amend the gas directive. European Economic and Social Committee Talus K (2019) EU gas market amendment - despite of (sic) compromise, problems remain. Oil Gas Energy Law Intell (OGEL) Talus K (2017) Application of EU energy and certain national laws of Baltic Sea countries to the Nord Stream 2 pipeline project. J World Energy Law Bus 10:30–42 Talus KP (2018) EU energy law and Nord stream 2 pipeline project: from applicability to legislative action. Int Energy Law Rev 2018:162–170 Talus K, Wüstenberg M (2019) WTO panel report in the EU - energy package dispute and the European Commission proposal to amend the 2009 gas market directive. J Energy Nat Res Law 37:1–13 Vinois J-A, Bros T (2019) Russian gas pipelines and the European Union: moving from a love-hate relationship “with adults in the room”?, Jacques Delors Energy Centre, Policy Paper 247 Von Rosenberg H (2009) Unbundling through the back door. . .the case of network divestiture as a remedy in the energy sector. Eur Compet Law Rev 30:237–254 Voytyuk O (2020) The Gas Sector of Ukraine: Past and Future. Wschodnioznawstwo 14:207–232 Woolley O et al (2012) Establishing an offshore electricity grid: a legal analysis of developments in the North Sea and in US waters. In: Roggenkamp MM et al (eds) Energy networks and the law: innovative solutions in changing markets. Oxford University Press Yafimava K (2019) Gas directive amendment: implications for Nord stream 2. The Oxford Institute for Energy Studies, Oxford

Ignacio Herrera Anchustegui Associate Professor at the Faculty of Law of the University of Bergen, and member of the Bergen Center for Competition Law & Economics (BECCLE) and the Bergen Offshore Wind Centre (BOW). His research interests are connected with the regulation of energy markets with a special emphasis on the regulation of offshore wind electricity. His PhD from the University of Bergen entitled “Buyer Power in EU Competition Law” was awarded the 2017 Concurrences PhD award. He received the Meltzerprisen for yngre forskere 2017 for academic research and significant contributions to EU/EEA market law scholarship. Nuno Cunha Rodrigues has a Bachelor (1995), Master in Law (2003) and PhD (2012) in Law from the Faculty of Law of the University of Lisbon. Associate Professor at the Faculty of Law of the University of Lisbon (FDL). Lawyer. VicePresident of the European Institute of the FDL. Researcher and Deputy Director of CIDEEFF (Center for Research in European, Economic, Financial and Fiscal Law). Editor and member of Advisory Board of the Journal of Competition and Regulation. Member of the Editorial Committee of the Journal of Public Finance and Tax Law. Holder of a Jean Monnet Module (2015–2018) and a Jean Monnet Chair, awarded by the European Commission (since 2018).

Extraterritoriality of EU Competition Law and the Changing Face of Global Cartel Enforcement Pieter J. F. Huizing

Abstract This chapter focuses on the EU’s evolving approach to extraterritoriality in the light of the changing face of global cartel enforcement. The fast few decades have witnessed a remarkable proliferation of authorities actively and effectively pursuing international cartel conduct. This results in concurrent jurisdiction, parallel investigations and multiple fines being imposed for the same overall conduct. The increasingly crowded enforcement community arguably calls for greater selfrestraint and enhanced international coordination. But this is inconsistent with the continuing trend of expanding the European Commission’s jurisdictional reach over foreign conduct. And while the Commission makes serious efforts to coordinate its investigations with other authorities, attempts to genuinely coordinate the punishment of international cartel violations are still in their infancy. There are certainly many challenges to overcome in this regard. Still, it would be unsustainable to continue to stretch the ‘long arm’ of the Commission and to continue to maintain an isolated and unilateral perspective on sanctioning, while ignoring the growingly mature enforcement regimes existing around the world.

1 Introduction It does not take much to enter into a cartel agreement. A mere phone call, email exchange or informal conversation between competitors to agree on a price increase can be sufficient to violate the cartel prohibition of Article 101 TFEU. The level of harm to competition within the EU resulting from such an agreement does not depend on the location where the discussion took place. The nationality of the relevant individuals and the country of incorporation of their companies is also of little relevance. What matters is the extent to which the agreement has adversely affected competition and has harmed EU consumers as a result. For example because

P. J. F. Huizing (*) Allen & Overy LLP, Amsterdam, The Netherlands e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 N. Cunha Rodrigues (ed.), Extraterritoriality of EU Economic Law, European Union and its Neighbours in a Globalized World 4, https://doi.org/10.1007/978-3-030-82291-0_6

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the cartelised products were sold within the EU at inflated prices. In this respect, a meeting in Tokyo between Japanese suppliers agreeing to raise the prices of products imported into the EU can be just as harmful for EU consumer welfare as a similar conversation between a German and French company taking place in Brussels. To ensure effectiveness of its enforcement, it is hence not surprising that the European Commission (hereafter: Commission) has been keen to apply EU competition law also to conduct and companies beyond the Union’s borders. The (extra)territorial reach of the Commission’s jurisdiction within the field of EU competition law has been a contentious topic for decades. Until this day, the Commission’s decision practice and the case law of the EU courts on the issue continues to develop, sparking further debate. The central question in this debate is not as simple as asking where the EU’s jurisdiction ends and that of another enforcement regime begins. The reality is that international conduct may be covered by a patchwork of partly overlapping claims of jurisdiction. The key question in my view is rather how to best address the risks of parallel and overlapping enforcement of the same overall conduct. This question is particularly relevant in the context of global cartel enforcement, an area that has witnessed very significant changes in the past few decades. More and more competition authorities are actively and effectively prosecuting cartels. With few exceptions, these authorities have now firmly embraced extraterritorial application of their competition laws. This means that international cartel conduct is increasingly likely to trigger parallel enforcement in a number of jurisdictions. In this chapter, I will assess the EU’s evolving approach to extraterritoriality in the light of the changing face of global cartel enforcement. I will submit that contrary to the Commission’s tendency of expanding its jurisdictional reach, the increasingly crowded enforcement community actually calls for greater self-restraint and enhanced international coordination. There certainly are many challenges to overcome in this regard, also described in this chapter. Still, I would argue that it is not sustainable to continue to stretch the ‘long arm’ of the Commission while ignoring the growingly mature enforcement regimes existing around the world.

2 The Development of Global Cartel Enforcement: More Authorities, Parallel Investigations, Higher Fines The Commission is one of the world’s most active cartel enforcers. It tops the list of competition authorities in terms of number of global cartels fined since the 1990s.1 Together with the US Department of Justice (DOJ) and the Canadian Competition Bureau, the Commission used to be just one of the few authorities to punish global cartel behaviour. However, over the course of the past 20 years, many jurisdictions have bolstered their competition laws and their cartel enforcement capabilities. 1

Huizing (2020a), p. 102.

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There are now at least 17 jurisdictions that have fined a global cartel2 and at least 75 authorities to have successfully prosecuted an international cartel.3 Brazil, Korea, Japan, Australia, New Zealand and South Africa, amongst others, are now active and growingly mature cartel enforcement regimes.4 The membership of the International Competition Network (ICN) reflects the rise of competition law enforcement around the world. Starting in 2001 with authorities from 14 jurisdictions, its current membership stands at 139 agencies. While growing in numbers, the effectiveness of competition authorities has also significantly improved. Enhanced enforcement powers, skills and experience, improved inter-agency cooperation and the proliferation of effective leniency programs have all contributed to this development. Assisted by the advocacy efforts of multilateral organisations such as the ICN, the United Nations Conference on Trade and Development (UNCTAD) and the Organisation for Economic Co-operation and Development (OECD), as well as bilateral initiatives to harmonise and strengthen enforcement policies and practices, the number of effective enforcers of competition law will only continue to rise.5 Nowadays, participants in international cartels can expect to be pursued by a number of different competition authorities in parallel. Looking at cartels with a global scope discovered after 2004, on average six different authorities were imposing fines in parallel.6 There have thus far been three cartels for which fines were imposed in ten or more jurisdictions: Auto Parts (12), Maritime Car Carriers (11) and Air Cargo (10). The trend of increased parallel enforcement of international cartels is not just a result of the significant growth and strengthening of the cartel enforcement community. It is also caused by the continuing globalisation of economic activities, which means that competition increasingly takes place on an international or even global scale. Not surprisingly, it is increasingly likely for conduct meant to restrict competition to affect markets across national borders. At the same time, competition authorities around the world have embraced extraterritoriality. Irrespective of where the cartel agreement was reached, any authority in whose country the cartel’s effects materialised may assert jurisdiction over the behaviour. In theory, this can extend to every state in which the cartelised products were directly or indirectly sold. With more and more authorities pursing cartel conduct, overall cartel fine levels have increased significantly. Apart from the proliferation of active cartel enforcement, this is also due to the gradually more aggressive fining policies adopted by individual authorities. The ICN found in both its 2008 and 2017 studies that in many

2

Ibid. Connor (2016), p. 6. International cartels in this context refer to cartels of which the membership composition is international. 4 See also Connor (2015). 5 See also Capobianco et al. (2016). 6 Huizing (2020a), pp. 101–102. 3

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jurisdictions the level of fines had been significantly increasing in recent years.7 The trend is also true for the Commission. Its total cartel fine level has risen from EUR 830 million in the 1990s, to EUR 12,814 million between 2000 and 2010, and further to EUR 16,225 between 2010 and 2020.8 These developments point to an increasingly active cartel enforcement environment. It is against this background that one should consider the impact of the EU’s approach to extraterritoriality.

3 The EU’s Approach to Extraterritoriality and Parallel Cartel Enforcement 3.1

Extraterritoriality of EU Competition Law

International law recognises various grounds for asserting subject-matter jurisdiction over certain conduct.9 First and foremost, the territoriality principle allows states to prescribe and apply laws in respect of conduct taking place within their own territory. States can under circumstances also assert ‘extraterritorial jurisdiction’ over foreign conduct.10 In the first half of the twentieth century, in the field of US antitrust law, an extraterritorial jurisdictional principle gained ground that focuses on the domestic effects of foreign conduct.11 This ‘effects doctrine’ was confirmed in the 1945 Alcoa case to allow for the application of US antitrust laws to the foreign conduct of foreign nationals.12 The resulting expansion of US economic law was met with criticism and even legislative countermeasures in other countries.13 In part this was due to the US antitrust laws—at that time—being much more strict than those in

7

ICN (2008), p. 44; ICN (2017), p. 57. Not adjusted for Court judgments. See https://ec.europa.eu/competition/cartels/statistics/statistics. pdf. 9 Subject-matter jurisdiction can be distinguished from enforcement jurisdiction. Subject-matter jurisdiction concerns the application of a state’s own laws, whereas enforcement jurisdiction concerns the ability to take measures in order to enforce these laws. This chapter will focus on the former. 10 In particular, they may rely on the active personality (nationality) principle, the passive personality principle, the protective principle or the universality principle. See e.g. Ryngaert (2015). 11 It could be argued that the ‘effects doctrine’ as developed under US antitrust law was not entirely new because it could be linked to the existing objective territoriality principle (also objective application principle), as also recognised in the 1927 Lotus ruling by the Permanent Court of International Justice. See e.g. Raymond (1967), pp. 560–562. Also, it may be argued that the effects doctrine is not in fact ‘extraterritorial’ because it considers the effects within a state’s own territory. Ryngaert (2007), p. 198. 12 Raymond (1967), p. 558. 13 Whish and Bailey (2018), p. 512. 8

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force elsewhere.14 The perceived overreach of US antitrust laws was felt in particular in the context of cartel enforcement, with the International Competition Policy Advisory Committee (ICPAC) noting in 2000 that: For many decades, the United States stood almost alone in the world in its commitment to antitrust enforcement, especially when the defendants were located in other countries. In fact, until quite recently, U.S. antitrust investigations into international cartels were met with chilly receptions from other governments.15

The debate on the territorial limits to US antitrust laws is still ongoing. Nevertheless, extraterritorial cartel enforcement has now become a standard practice for almost all mature antitrust regimes around the world. EU competition law also firmly embraces extraterritoriality on the basis of the effects doctrine. But the Commission and the EU Courts have made an interesting and meandering journey over the past decades to arrive at this point. The effects doctrine can, implicitly, be recognised in the Commission’s very first decisions on competition law in 1964.16 The Commission explicitly relied on the doctrine in the appeal proceedings against its 1969 decision in the Dyestuffs cartel case.17 This was the first case in which the Commission imposed cartel fines on companies incorporated in third countries. The Commission argued for “a prudent application of the doctrine of economic effects” rather than following the US approach adopted in Alcoa. According to the Commission, that latter approach allowed for the application of competition laws to foreign conduct no matter how indirect, distant or negligible the connection or effects to domestic competition.18 The Commission has since developed and regularly applied its ‘qualified effects doctrine’, albeit often as a secondary ground or line of defence. The Commission has primarily relied on alternative jurisdictional principles for asserting jurisdiction over foreign conduct infringing European competition law. For decades, the European Court of Justice (ECJ) endorsed those alternative principles rather than the qualified effects doctrine. First, this concerned the ‘economic entity doctrine’, attributing the conduct of European subsidiaries to foreign companies.19 As this doctrine was not applicable to the facts in the Woodpulp cartel case because certain foreign cartel members had no subsidiaries within the Community, the ECJ introduced the ‘implementation doctrine’. This doctrine focuses on the location where a cartel agreement is implemented (e.g. by selling the cartelised products),

14

See An Introduction to the Extraterritorial Application of the American Antitrust Laws (1969), p. 149. 15 ICPAC (2000), p. 185. 16 Huizing (2018), p. 25. 17 ECJ judgment of 14 July 1972 in case 48/69, Dyestuffs, ECLI:EU:C:1972:70. 18 Dyestuffs, 628-9. 19 Dyestuffs, paras 125–142.

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not where it was concluded or where it may have produced effects.20 It was only in the 2017 Intel abuse of dominance case that the ECJ—finally—explicitly acknowledged the qualified effects doctrine. With very little reasoning, the ECJ confirmed that the Commission could assert jurisdiction over foreign conduct that, viewed as a whole, was capable of having substantial, immediate and foreseeable effects within the EU.21

3.2

The Impact of Extraterritoriality on Cartel Enforcement

Advocates General (AGs) to the ECJ have repeatedly argued in favour of the qualified effects doctrine for asserting extraterritorial jurisdiction over foreign conduct.22 In their view, extraterritoriality did not violate international law while they considered it to be necessary to ensure the effectiveness of the Commission’s enforcement of European competition law. As noted by AG Wahl in its opinion in the Intel case: “If the prohibitions laid down in the Treaties were applied only where the agreement, decision or concerted practice was formed or adopted within the EU territory, that would provide undertakings with an easy way to fend off the application of EU competition rules”.23 Indeed, the extraterritorial nature of EU cartel enforcement, and EU competition law in general, has allowed the Commission to pursue many high-profile cases triggered by conduct taking place beyond its borders. At the same time, the AGs have consistently warned against an overly expansive application of the effects doctrine. AGs Mayras (in 1972) and Darmon (in 1988) already submitted that asserting jurisdiction on the basis of effects must be conditional upon those effects being direct, reasonably foreseeable and substantial.24 AG Wathelet noted in 2015 that “a broad interpretation of the territorial scope of EU competition law would entail the risk of conflicts of jurisdiction with foreign competition authorities and of double penalties for undertakings”.25 This warning was amplified by AG Wahl in 2016, who emphasised that restraint in applying the qualified effects doctrine has become increasingly important because there are now “over 100 national or supranational authorities worldwide that claim jurisdiction The ECJ found this implementation doctrine to be “covered by the territoriality principle as universally recognized in public international law”. ECJ judgment of 27 September 1988 in joined cases 89, 104, 114, 116, 117 and 125 to 129/85, Woodpulp, ECLI:EU:C:1988:447, para 18. 21 ECJ judgment of 6 September 2017 in case C-413/14 Intel, ECLI:EU:C:2017:632, paras 40–47; General Court judgment of 12 June 2014 in case T-286/09, ECLI:EU:T:2014:547, paras 251, 268-271, 280–290. See Huizing (2018). 22 See Opinion of AG Mayras in Dyestuffs, ECLI:EU:C:1972:32; Opinion of AG Darmon in Woodpulp, ECLI:EU:C:1988:258; Opinion of AG Wathelet in InnoLux, ECLI:EU:C:2015:292 and Opinion of AG Wahl in Intel, ECLI:EU:C:2016:788. 23 Opinion of AG Wahl in Intel, ECLI:EU:C:2016:788, para 291. 24 Opinion of AG Mayras, p. 693-694; Opinion of AG Darmon, para 53. 25 Opinion of AG Wathelet in InnoLux, ECLI:EU:C:2015:292, para 42. 20

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over anticompetitive practices”.26 Wahl found an “over-reach of EU competition rules” to raise several concerns: (1) encroachment of the interests of other States, (2) legal and practical difficulties of enforcement, (3) increased overlaps of enforcement and hence increased risks of conflicts and increased legal uncertainty, and (4) questions under the principle of good administration and effective use of public resources.27 I would submit that the potential for conflicts between different authorities is decreasing, at least in the field of hardcore cartel enforcement.28 This is because of the substantive and procedural harmonisation that has taken place in the past few decades. Still, this global conversion towards strict cartel enforcement only increases concerns of excessive overall punishment resulting from concurrent and overlapping jurisdictional claims. The easier it is for states to ‘grasp’ foreign conduct under its domestic competition rules, the greater the risk of that same conduct being subject to multiple punishment. This is especially the case where authorities fail to delineate the scope of their own enforcement from that conducted elsewhere. Overlapping jurisdiction over the same conduct calls for inter-agency coordination in pursuing that conduct. Significant progress has been made in this regard when it comes to the investigative stages of enforcement. Authorities and international organisations such as the ICN, UNCTAD and OECD have acknowledged that close inter-agency cooperation greatly enhances the chances of successful prosecution. This is especially true for international cartel cases, for which there may be little evidence available and the evidence that is available may well be located in other jurisdictions. To help overcome the investigative challenges, states have entered into a large number of bilateral cooperation agreements in the field of competition law enforcement.29 Such agreements typically allow for the sharing of information and the coordination of evidence gathering. This international coordination is well demonstrated by the fact that surprise inspections (‘dawn raids’) at the offices of suspected cartel members are often carried out simultaneously by multiple authorities in different locations across the globe.30 One might expect that concurrent jurisdiction over the same international cartel conduct would also result in inter-agency coordination of punishment: the various authorities are all seeking deterrence and retribution in respect of the same overall behaviour. However, there are only limited instances where authorities or courts have taken into account penalties imposed elsewhere, or where authorities have Opinion of AG Wahl in Intel, ECLI:EU:C:2016:788, para 300. Ibid., para 303. 28 On the potential for conflicts and need for comity in international competition cases more generally, see Ginsburg and Taladay (2017). 29 See the long lists of competition cooperation agreements signed by the European Commission and the DOJ since the mid-1990s, at https://ec.europa.eu/competition/international/bilateral/ and https://www.justice.gov/atr/antitrust-cooperation-agreements. 30 Simultaneous, coordinated inspections occurred for example in the global cartel cases regarding marine hoses, cathode ray tubes, freight forwarders, high voltage power cables, refrigeration compressors, auto parts and maritime car carriers. 26 27

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allocated prosecution and punishment amongst them.31 A good example is the US and UK treatment of individuals prosecuted and punished for their involvement in the Marine Hose cartel. These individuals were sentenced to imprisonment in both jurisdictions on separate charges, but they were allowed to serve the sentences concurrently. Notably, such a coordinated approach is typically lacking when authorities are imposing fines on corporate cartel defendants. In that context, the sanctioning of cartels is still very much a matter that authorities prefer to leave to themselves.

3.3

The EU’s Approach to Parallel Enforcement of International Cartels

The EU’s extraterritorial approach to cartel enforcement, and to EU competition law in general, further enhances the need for multi-jurisdictional coordination. This is also clearly recognised by the Commission itself. In her speeches on competition enforcement policy, Competition Commissioner Vestager is often advocating in favour of greater international cooperation. These efforts are partly focused on achieving greater substantive and procedural harmonisation on a multilateral level. For another part, the Commission’s efforts pursue greater bilateral cooperation, both in general and in specific cases. Practice shows that the Commission is indeed cooperating with one or more other agencies in most of its enforcement cases.32 Practice also shows that the Commission’s attempts to genuinely coordinate the resolution of international violations of competition law, in particular in terms of corporate fine levels, are still in their infancy. I am not aware of any cartel cases where the Commission has (explicitly) deferred prosecution in view of enforcement elsewhere. Admittedly, this may occur as part of the Commission’s enforcement priorities and may simply not be transparent. But if that were the case, it would have made sense to at least mention this in the Commission’s policy papers. I am also not aware of any cartel cases in which the Commission reduced its fines because of prior sanctions imposed elsewhere. To the contrary, it has consistently argued against the need to do so, starting early on in its decision practice. For example, in the Lysine cartel case, the Commission stated: The Commission does not consider that, in the present case, fines imposed elsewhere, especially in the USA [. . .] have any bearing on the fines to be imposed for infringing European competition rules. [. . .] the criminal fines imposed by those authorities on the undertakings concerned by this Decision only took account of the anti-competitive effects that the collusion under scrutiny in this Decision produced in the area of their jurisdictions.33

31

Huizing (2020b), pp. 76–79. Vestager speech (2015). She noted: “For instance, in 2012 and 2013, we cooperated with non-EU agencies in 62% of our enforcement decisions. And the trend is on the rise.” 33 Commission decision 2001/418/EC in Lysine (Case COMP/36.545/F3), para 311. 32

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The EU Courts have endorsed this approach, although an early judgment sparked confusion. In the 1969 Walt Wilhelm case, the ECJ ruled that “a general requirement of natural justice [. . .] demands that any previous punitive decision must be taken into account in determining any sanction which is to be imposed”.34 However, the EU Courts in later cases have consistently held that “neither the principle non bis in idem nor any other principle of law obliges the Commission to take account of proceedings and penalties to which the undertaking has been subject in non-member States”.35 In rare instances, the Commission does seem willing to take into account the international enforcement context in calculating its own fines. In the Air Cargo case for example, it applied a 50% reduction on relevant sales between the European Economic Area (EEA) and third countries given that on these routes, part of the harm of the cartel fell outside the EEA.36 However, the Commission did not engage in similar efforts to avoid ‘double counting’ of relevant sales in the LCD and CRT cases. In these cases, the Commission calculated its fines on the basis of not just sales of the cartelised products in the EEA, but also of sales in the EEA of ‘transformed products’ into which the cartelised products were incorporated outside the EEA following an intra-group sale. The Commission (and subsequently the EU Courts) dismissed the argument that those same intra-group sales could be subject to fines imposed by other authorities. The Commission even argued that it could have also taken into account sales to third party undertakings outside the EEA where those sales subsequently resulted in transformed products being sold in the EEA. Such ‘indirect sales’ were not part of the ultimate fine calculation. Not because of the clear risk of double counting, but because the Commission considered sufficient deterrence to already be achieved without including these sales.37

4 Achieving Better Coordination of International Cartel Enforcement 4.1

The Growing Importance of Jurisdictional Restraint

As mentioned, the DOJ has historically applied an expansive jurisdictional approach in the field of cartel enforcement, and it has received criticism for it. The US even used to be called “the world’s competition policeman”.38 At the same time, the DOJ

ECJ judgment of 13 February 1969 in case 14/68, Walt Wilhelm v Bundeskartellamt, ECLI:EU: C:1969:4, para 11. 35 ECJ judgment of 9 July 2015 in Case C-231/14 P, InnoLux, ECLI:EU:C:2015:451, para 75. 36 Commission decision of 9 November 2010 in Air cargo (Case COMP/39258), para 1217. 37 LCD (Case COMP/39.309) Commission Decision C(2010) 8761 final (8 December 2010), para 381. 38 Motorola Mobility LLC v. AU Optronics Corp., 775 F.3d 816, 826 (7th Cir. 2015). 34

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can be lauded for being a thought leader and advocate for effective cartel enforcement. By strictly enforcing its antitrust rules even beyond its borders, the DOJ has not only prevented the existence of cartel safe havens but has also advanced the development of national enforcement regimes in third countries. In this sense extraterritorial enforcement has accelerated the proliferation of cartel enforcement around the world. While joining a bit later in the game, the Commission deserves credit in this respect as well, for it has been at least as active in targeting global cartel conduct, for a large part through extraterritorial enforcement. The question is whether the growingly mature competition law enforcement regimes now existing around the world call for greater restraint in exercising extraterritorial jurisdiction. I would argue that it does. From the perspective of pursuing deterrence and retribution, the two main goals of cartel enforcement, there is less justification and less need for an overly ‘long arm’ of enforcement if the relevant conduct already falls in the hands of other capable enforcers. Both for authorities (efficient use of resources) and defendants (limiting concurrent procedures and piling on of fines), there is a lot to be gained when parallel enforcement over the same overall conduct can be curtailed. This in itself should not be controversial: it is already the basis for the European case allocation principles between the Commission and national competition authorities.39

4.2

The Importance of Increased Coordination of Sanctioning

While authorities should in my view strive to limit overlapping jurisdiction over the same conduct through jurisdictional restraint, parallel cartel enforcement will be the reality for the foreseeable future. That entails concurrent investigations and proceedings, but also multiple penalties being imposed for the same overall cartel conduct. The sanctioning in current international cartel cases is characterised by the piling on of individual fines, each unilaterally determined in accordance with national fining policies. With very few exceptions, those policies do not take into account fines imposed elsewhere relating to the same cartel.40 From the perspective of prosecuting authorities, this is justified because a foreign fine will normally only address the (potential) effects of the behaviour in that foreign jurisdiction. In contrast, from the perspective of cartel defendants, the fines will often be perceived as duplicative, because they all relate to the same behaviour. One could argue that for (the proportionality of) the overall fine level, it does not really matter whether a single fine is imposed that reflects the conduct and its (potential) effects in their entirety, or whether multiple fines are imposed with each fine only reflecting the (potential) effects in a specific territory. The latter may even 39 40

See the 2004 Commission Notice on cooperation within the Network of Competition Authorities. ICN (2008), p. 32; Huizing (2020b), p. 77.

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be in the interest of cartel defendants considering that not all affected jurisdictions may separately impose a fine.41 However, this reasoning would suggest that the level of deterrence and retribution resulting from multiple individual fines does not exceed the level that would have been sought in the case of one all-encompassing penalty. In other words, that parallel enforcement and concurrent punishment does not result in overlapping deterrence and retribution. It is doubtful that this is indeed the case. First, each individual cartel fine can be considered to reflect, at least for a significant part, the same base culpability for entering into the cartel. This actually forms the essence of a cartel infringement: agreeing with competitors not to compete. An undiscounted accumulation of individual fines duplicates the reflection of this base culpability. I find it difficult to justify why this base culpability should be multiplied or even affected solely by the number of affected jurisdictions. Secondly, with rare exceptions, authorities are currently not considering the overall proportionality of the overall punishment in international cartel cases.42 This punishment is meant to achieve optimal deterrence and retribution. But there seems to be no framework in place for authorities to consider when ‘enough is enough’. It would be artificial to assume that this can be assessed for each prosecuting authority in isolation, having a purely national focus. In reality, prior fines imposed elsewhere for the same overall cartel conduct will have already helped to achieve the sanctioning objectives pursued by each individual authority. Thirdly, at the international level there is no ‘totality principle’ or other appropriate absolute maximum that is applied to limit the total fine amount imposed for the same overall conduct. The absolute limit in international cartel cases is simply the sum of applicable national legal limits. The maximum fine that can be imposed for violations of EU competition law is capped at 10% of an undertakings total worldwide turnover.43 Other jurisdictions apply similar caps.44 Such a cap is meant to avoid excessive fines.45 It reflects that at a certain point, additional harm is no longer considered to justify an even higher penalty. Again, it is difficult to understand why this consideration should be affected by the number of affected jurisdictions. If all jurisdictions were to apply the same 10% fine cap as the Commission, it only takes five authorities enforcing in parallel to create an exposure of half of an undertakings

41

See Huizing (2020a), p. 103. One such exception is the judgment of the US District Court in San Francisco in the case against AU Optronics in the TFT-LCD cartel case. The court set the fine at USD 500 million—half the figure requested by the DOJ—inter alia because of the fines that the company had already paid and would still be paying. Transcript of Proceedings, United States v AU Optronics, No 3:09-cr-00110SI (N.D. Cal. 20 September 2012), 16. Australian courts have also taken into account prior fines imposed elsewhere, e.g. in the Maritime car carriers and Air cargo cartel cases. See Huizing (2020a), p. 106. 43 Article 23(2) of EU Regulation 1/2003. 44 ICN (2017), p. 34; OECD (2016), p. 21. 45 See ECJ judgement in joined cases C-189/02 Dansk Rørindustri A/S and others v Commission, ECLI:EU:C:2005:408, para 281. 42

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worldwide turnover.46 Such fine levels would only be possible at an international level, as they would clearly be considered disproportionate at a national level, irrespective of the level of harm done by the infringement. Notably, within the European context, it has been recognised that there should be no accumulation of the 10% fine cap in the case of parallel enforcement.47 Given the partly overlapping deterrence and retribution resulting from concurrent punishment for the same overall cartel conduct, there is a growing need for authorities to coordinate the sanctioning of international cartels. But this may be easier said than done.

4.3

Overcoming the Obstacles to Enhanced Coordination

There are various obstacles limiting the ability for authorities to reach coordinated punishment of international cartels. Ideally, all prosecuting authorities would first agree on the desired level of overall punishment for the cartel conduct as a whole, and would then decide how to slice this overall punishment between them. A good example of how this could work in practice was given in 2017 in the corruption case against Telia. In this case, the US, Dutch and Swedish authorities jointly reached a global settlement of USD 965 million with Telia, comprising fines and disgorgement. However, several factors explain why reaching a similar result in the field of cartel enforcement seems very challenging. First, in terms of the duration of investigations, some competition authorities are clearly moving at a quicker pace than others. As an example, both the DOJ and the Commission imposed fines in the Hydrogen peroxide & perborates cartel case in 2006, while the Brazilian authority imposed its fines as late as 2012 and 2016. Joint agreement on proportionate overall fines requires a finalisation of investigations at roughly the same time. But statutes of limitations may not allow the pace to be determined by the slowest moving investigation. Second, while the Commission and many other authorities are penalising all cartel defendants at once through an all-encompassing decision, other authorities are prosecuting the cartel defendants one by one. The existence of these different approaches further complicates arriving at a joint position as to the appropriate punishment for all defendants. Apart from these practical considerations, a more fundamental issue relates to the ability for different authorities to agree on an appropriate fine level. Authorities may 46

See also Lee (2016), pp. 18–19. In the Belgian Flour cartel case, the Belgian competition authority refrained from imposing additional fines for cartel conduct that was already penalised by the Dutch authority with fines reaching the maximum amount of 10% of a company’s worldwide turnover. The Belgian authority considered that imposing additional fines on these companies would result in these companies being worse off compared to the situation where only one fine was imposed by the European Commission up to the 10% maximum. Decision of the BMA-ABC in case 13-IO-06 Meel (28 February 2013). 47

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still maintain very different conceptions on proportionality, despite the convergence towards severe sanctioning policies. What is more, in some jurisdictions corporate fines are only one part of a set of sanctions being imposed in cartel cases. This would need to be factored in as well when determining overall proportionality of sanctions. Given these complications, it would seem more realistic for authorities to unilaterally seek a ‘coordinated’ sanctioning outcome by taking into account prior sanctions imposed elsewhere. This could go as far as deciding to defer prosecution or punishment altogether. It could also entail considering prior fines as a mitigating circumstance under national fine calculation methodologies. It would in any event require authorities to acknowledge the level of deterrence and retribution already achieved through foreign penalties. Admittedly, this approach creates its own problems. Based on the high levels of fines that are often imposed in cartel cases, authorities will understandably be reluctant to relinquish the collection of cartel fines. There is even a risk that authorities will be rushing through their cartel investigations to avoid being barred from imposing (full) penalties.48 The risk of such unilateral considerations distorting the pursuit of the common objective of ensuring proportionality of fines in international cartel cases calls for the development of multilateral principles and guidelines. Quite some time and effort will need to be invested in international fora such as the ICN, OECD and UNCTAD to move this forward. But I would argue that now is the time to move discussions beyond the international coordination of cartel investigations, and to start talking about the international coordination of cartel punishment.

5 Conclusion This chapter has focused on the approach to extraterritoriality adopted by the Commission and the EU Courts, against the specific background of global cartel enforcement. The ECJ’s Intel judgment confirms that EU competition law is moving towards a more expansive, rather than a more restrained, approach to asserting jurisdiction over foreign conduct. There is much light between the recommendations for self-restraint and comity by AGs and the broad discretion granted to the Commission by the EU Courts. Extraterritorial enforcement of EU competition law is therefore likely to remain a contentious issue for the foreseeable future. The trend towards more expansive extraterritoriality may not be surprising in the context of a continuously more globalised economy. In fact, more and more competition authorities are actively pursuing international cartel behaviour, and virtually all these authorities are now embracing extraterritorial enforcement. As a result, international cartel cases are characterised by concurrent jurisdiction, parallel investigations and multiple punishment.

48

Wils (2004), para 33.

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The Commission, together with the DOJ and other authorities, has done much to stimulate the proliferation of effective competition law enforcement around the world. It is now time to acknowledge the fruits of these efforts, i.e. the growingly mature regimes existing in many jurisdictions outside of Europe and North America. I would submit that from the perspective of efficiency for authorities and proportionality for cartel defendants, the changing face of global cartel enforcement calls for jurisdictional restraint and enhanced international inter-agency coordination on case allocation and overall sanctioning. This also means re-assessing the Commission’s approach to extraterritoriality. At the least, it means recognising that prior penalties imposed elsewhere for the same conduct will have contributed to the objectives of deterrence and retribution sought by the Commission.

References An Introduction to the Extraterritorial Application of the American Antitrust Laws (1969) Case W. Res J Int Law 1:132–149 Capobianco A, Davies J, Ennis SF (2016) Implications of globalisation for competition policy: the need for international cooperation in merger and cartel enforcement. Think piece for the E15 expert group on competition policy and the trade system Connor JM (2015) The rise of anti-cartel enforcement in Africa, Asia, and Latin America. Competition policy international: antitrust chronicle 1 Connor JM (2016) The Private International Cartels (PIC) data set: guide and summary statistics, 1990-July 2016 (Revised 2nd Edition). doi: https://doi.org/10.2139/ssrn.2821254 Ginsburg DH, Taladay JM (2017) Comity’s enduring vitality in a globalized world. George Mason Law Rev 24(5):1069–1090 Huizing PJF (2018) The ECJ finally accepts the qualified effects test: now was that really so hard? ECLR 39(1):24–30 Huizing PJF (2020a) Parallel enforcement of global cartels: facts & figures. Eur Compet Regulatory Law Rev 4(2):96–107 Huizing PJF (2020b) Proportionality of fines in the context of global cartel enforcement. World Compet 43(1):61–86 ICN (April 2008) Setting of fines for cartels in ICN jurisdictions. Report to the 7th ICN Annual Conference ICN (May 2017) Setting of Fines for Cartels in ICN Jurisdictions (2017). Report to the 16th ICN Annual Conference ICPAC (2000) Final report Lee H (2016) Sanctions in antitrust cases. Session IV at the 15th global forum on competition OECD (2016) Sanctions in antitrust cases. Background paper by the secretariat Raymond JM (1967) A new look at the jurisdiction in ALCOA. Am J Int Law 61(2):558–570. https://doi.org/10.2307/2197054 Ryngaert C (2007) Jurisdiction in international law: United States and European perspectives. University of Leuven, Leuven Ryngaert C (2015) Jurisdiction in international law. Oxford University Press, Oxford Vestager speech (20 April 2015) Enforcing competition rules in the global village. New York UniversityNew York Whish R, Bailey D (2018) Competition law. Oxford University Press, Oxford Wils WPJ (2004) The principle of ne bis in idem in EC antitrust enforcement: a legal and economic analysis. Concurrences:1–2004

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Pieter Huizing is a senior associate within Allen & Overy’s international antitrust group. He has worked in the Amsterdam, London and Washington D.C. offices, advising on all aspects of antitrust law. He regularly represents clients in proceedings before competition and regulatory authorities and courts. Pieter has extensive experience in merger control proceedings, cartel and abuse of dominance investigations, private litigation, general competition guidance and compliance. Pieter is a University of Groningen graduate, where he received a cum laude LL.M. degree in Economics and Business Law, a cum laude LL.M. degree in International Law, and a cum laude M.A. degree in International Relations. In March 2021 he obtained his PhD at Leiden University based on his research into international cartel enforcement. Pieter regularly publishes in Dutch and international journals on competition law and is a guest lecturer at Nyenrode University and Leiden University.

The Three Body Problem: Extraterritoriality, Comity and Cooperation in Competition Law Pedro Caro de Sousa

Abstract The three body problem in physics concerns the challenge of accurately calculating the interaction of three different bodies (e.g. planets), given the forces they each exert on the others. Examples include the motion of the Moon around the Earth as disturbed by the action of the Sun, or the movement of one planet around the Sun as disturbed by the action of another planet. Three body systems are chaotic, and despite centuries of work there is no general solution to this problem. Understanding the extraterritorial effect of competition law raises challenges akin to the three body problem: while primarily governed by one dominant gravitational pull (a country’s rules on the scope of its competition law), in practice the extraterritorial effect of competition law is affected by other forces, particularly international comity and cooperation. This means that a thorough analysis of extra-territorial effects requires us to look not only at legal/formal structures concerning the scope of a country’s law, but must also take into account more or less ‘informal’ mechanisms—e.g. comity, cooperation and a set of common principles shared by competition practitioners across jurisdictions—that impact how law is applied in practice. This paper reviews how jurisdictional rules, international comity and international practice interact in practice in the context of (EU) competition law. It will argue that, as with the traditional three body problem, no purely legal and formal conceptual framework can explain how competition law is applied extrajurisdictionally. The best we can do is to approach such a question through the increasingly sophisticated application of three partially overlapping legal doctrines—the jurisdictional scope of competition law, international comity, and international cooperation—against a common epistemic background shared by global (and regional) competition communities.

P. Caro de Sousa (*) OECD, Paris, France e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 N. Cunha Rodrigues (ed.), Extraterritoriality of EU Economic Law, European Union and its Neighbours in a Globalized World 4, https://doi.org/10.1007/978-3-030-82291-0_7

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1 Introduction As a result of globalisation, companies are increasingly active in multiple countries. Globalisation is generally associated with an increase in competition, as businesses reach beyond their borders to offer goods and services in new markets. This is beneficial for consumers and market efficiency, since widening a market to include new firms will set in motion competitive processes that force firms to become more efficient and to innovate. Openness to foreign competition has been observed to enhance the productivity of domestic firms in many cases, to the benefit of consumers.1 Globalisation also means that anticompetitive practices by enterprises are increasingly international in scope. But even as business practices become more international, competition enforcement remains a primarily domestic concern. Around the world, competition authorities are mandated to enforce their own laws and protect domestic consumers from anticompetitive conduct. As more and more competition regimes are established and become operational across the globe, the likelihood of business conduct being caught by more than a single set of competition rules, or regulated by multiple agencies, increases. According to recent data: • More than half of all cartel cases investigated by the European Commission nowadays involve an extraterritorial dimension.2 • Two-hundred and forty cross-border cartels were detected and fined between 1990 and 2015.3 • Total sales affected by cross-border cartels from 1990 to 2015 amounted to approximately USD 7.5 trillion. Assuming an overcharge of 20% of sales on average, this would mean that USD 1.5 trillion in rents were extracted in a direct injury to consumers.4 In other words, the national scope of competition laws and agencies’ jurisdiction does not match the increasingly international nature of business activity and anticompetitive conduct. Instead, potentially anticompetitive conduct can be subject to different competition authorities, each applying its:

1

OECD (2017b), p. 144. Bradley (2019). 3 OECD (2019), pp. 53–54. 4 Connor (2016). The average overcharge for the cross-border fined cartels in the Private International Cartels Database, for which this data was available, was approximately 20.5%. Overcharge amounts were available for 84 of the 240 cartels. Further, and as noted in OECD Business and Finance Outlook 2017 (OECD Publishing, Paris), p. 72: “this likely understates the total amount, as cartel conduct that ceased as a result of commitment decisions, where no fines were levied, is not included. Furthermore, average overcharges have been estimated in some studies to exceed 50% of sales.” 2

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1. jurisdictional tests (i.e. each authority assesses whether the conduct can produce harmful effects in their territory, and whether these effects are sufficiently important to merit enforcement); 2. competition rules (which determine whether the conduct or transaction is lawful); and 3. remedial powers (including powers to prohibit a conduct, or impose injunctions on businesses to follow a course of action). As a result, multiple competition authorities can review and intervene against the same business conduct or transaction—and may adopt different, and even contradictory decisions and remedies. For example, the same conduct may have different effects in different jurisdictions, leading to different assessments of its lawfulness even when the applicable legal standards are substantively similar. Should the effects of a conduct be similar across jurisdictions, the legal standards to assess its lawfulness may nonetheless vary from place to place, again leading to different decisions.5 Further, even when jurisdictions arrive at similar conclusions regarding the lawfulness of a given conduct or transaction, there is still a risk that they may adopt different or conflicting remedies.6 The possibility of arriving at different enforcement decisions and imposing potentially conflicting remedies is the natural consequence of lack of alignment on substantive competition standards and different market conditions across territories. With more than 130 competition regimes worldwide and increasing cross-border business activity, the potential for enforcement inconsistency and system friction is apparent. Addressing this potential for friction has been a focal concern for public authorities in recent decades even as the proliferation of competition regimes has been celebrated.7 This paper will focus on the age-old question of whether (and when, and how) competition law can apply to acts carried abroad.8 On its own, this is a straightforward legal question concerning the jurisdictional scope of each country’s competition law. However, this is not the sole focus of this paper. Instead, we are interested here in how competition law applies to foreign anticompetitive conduct in practice, looking beyond purely legal constraints. As the attentive reader may have inferred from the short discussion above, the answer to this question will be affected not only by the scope of a jurisdiction’s competition law but also by how that jurisdiction interacts with other competition regimes. This interaction can take two forms. First, a jurisdiction may exercise selfrestraint, perhaps in the expectation that other jurisdictions will act in a similar fashion. The technical name given to this type of self-restraint is ‘comity’. Second, jurisdictions may interact with one another to align their behaviours, enhance the 5

E.g. for an overview of substantive differences between EU and US competition law, see Ginsburg and Taladay (2017), pp. 1071–1074. 6 OECD (2017a), p. 8. 7 Ezrachi (2016), p. 23. 8 Monti (2016), p. 315.

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effectiveness of their enforcement activities and defuse potential conflicts. This set of behaviours typically falls under the ‘international cooperation’ umbrella. The argument I will be making is that these concepts—jurisdictional scope, comity and international cooperation—interact with one another in unpredictable ways, making it extremely hard, if not outright impossible, to develop a general conceptual legal framework of competition law enforcement across borders. The best we can do is to approximate such a framework through the increasingly sophisticated application of three partially overlapping concepts—extra-jurisdictional reach, international comity, and international cooperation—by members of a global community that shares a number of values and ideas concerning competition law. An apposite metaphor for this state of affairs can be borrowed from physics. The three body problem in physics concerns the challenge of accurately calculating the interaction of three different bodies on one another. For example, the impact of the Sun on the gravitational relationship between the Earth and the Moon has been called “the main problem of lunar theory”, and been studied extensively with a variety of methods beginning with Newton. After centuries, this three-body problem still has no complete analytic solution in closed form. While it may be solved through successive approximations, the intervention of a third body can lead to unpredictable, ‘chaotic’ behaviour that is impossible to predict accurately.9 It is submitted that the same phenomenon can be observed as regards cross-border competition enforcement. Whereas one major ‘force’ may be able to explain how the system works in general terms (in this case, the jurisdictional scope of competition law), allowing us to predict in broad strokes the form that cross-border competition enforcement will take, the interaction of this force with two other ‘forces’ with their own logics (e.g. comity and international cooperation) against a common background (e.g. global or regional epistemic communities of competition professionals) means that it is impossible to predict precisely how enforcement will occur in every case. The argument will be developed as follows. The next section will review the law on the (extra-)jurisdictional scope of competition law, with a focus on the EU. Section 3 will look at doctrines of international comity, while section IV will describe efforts to promote international cooperation. Finally, section V will bring these three elements together. This section will argue that legal tests (e.g. on the jurisdictional scope of competition law) and informal arrangements (such as mechanisms of international cooperation) are unable fully to explain how different competition regimes get along. Further, it will be argued that the very fluidity of each of these factors makes it impossible to derive detailed rules explaining or governing the international competition system. In the end, what we have is a system that is a permanent work-in-progress as each relevant factor, and the interaction between them, evolve.

9

See Peale (2006), available at www.britannica.com (accessed on 5 February 2020).

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2 Extraterritoriality 2.1

Subject-Matter and Enforcement Jurisdiction

A necessary, but not sufficient, requirement for a competition authority to investigate business conducts or review mergers is that its competition law grants it jurisdiction over them.10 Theoretically, it would be possible for competition laws to apply to business conduct wherever it might occur. In practice, the jurisdictional reach of municipal competition rules is limited by two public international law principles.11 The first principle is subject-matter jurisdiction. It governs the right which States—or regional entities like the EU—enjoy to make their laws applicable to the activities, relations or status of persons, and to the interests of persons in property. The second principle is enforcement jurisdiction, i.e. the power to induce, compel compliance or punish non-compliance with a jurisdiction’s laws through, for example, the imposition of fines or other penalties. Enforcement jurisdiction may involve the use of coercive power: for instance, property may be attached in order to secure the payment of a fine.12 There is general agreement that enforcement jurisdiction is inherently territorial in scope. For example, while the Court of Justice of the European Union (CJEU) does not object to orders being made against foreign undertakings,13 it is recognised by both the Commission and the CJEU that it would not be possible actually to enforce the order in the territory of a foreign State, even if it is possible to seize any assets present within the EU.14 Since the principles governing enforcement jurisdiction are fairly straightforward, debates about extraterritoriality focus mainly on subject-matter jurisdiction, and in particular on how far beyond territorial jurisdiction it might extend.15 It is to this question we now turn.

10

Competition rules can be national, but they can also be regional. The EU is a good example of this, but it is not the only one: in the WAEMU (UEMOA)—West African Economic and Monetary Union, for instance, both legislative and enforcement are exclusive regional competences. 11 See OECD (2017a), pp. 4–5. 12 Whish and Bailey (2015), paragraph 12.04; Butterworths Competition Law Service, Division XII Extra-territoriality, para. 2. 13 E.g. Cases 6, 7/73 Commercial Solvents v EC Commission [1974] ECR 223, [1974] 1 CMLR 30. 14 Butterworths’ Competition Law Service, Division XII Extra-territoriality. 15 However, there have also been some debates about the correct scope of enforcement jurisdiction, particularly as regards fine calculations—see Huizing (2017), p. 365; Huizing (2018), p. 231.

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Thresholds for Subject-Matter Jurisdiction

States normally exercise subject-matter jurisdiction on two bases. A state has full authority to lay down general or individual rules applicable: (1) to conduct within its territory (the “territoriality” principle); and (2) to its citizens and companies (the “nationality” principle). The territoriality principle, in particular, has two dimensions: a positive (the right to assert jurisdiction within the territory e.g. when conduct is implemented there) and a negative one (the obligation not to assert jurisdiction beyond domestic boundaries, so as not to interfere with the territory and sovereignty of other states).16 The territoriality and nationality principles are usually sufficient to establish jurisdiction over any activity which engages a State’s interests. In some cases, however, these bases of jurisdiction will not clearly allow the State to act, and the State may seek to rely on some other jurisdictional principle. Two main alternative bases have been invoked to assert jurisdiction: the economic entity doctrine and the effects doctrine. • The economic entity doctrine asserts that, where one company is under the control of another, the subsidiaries’ acts may be imputed to its parent. Accordingly, acts by a subsidiary of a non-EU foreign parent within the EU may be treated as acts of that parent within the EU, giving the EU authorities jurisdiction over it. In this way, it may be said that the economic entity doctrine operates by bringing acts by foreign corporate groups present in the EU within the scope of the territoriality principle. • Under the effect’s doctrine, jurisdictions can legitimately act against conduct carried out outside their territory by non-nationals, as long as it produces effects within their territory.17 The extraterritorial application of antitrust laws on the basis of the effects doctrine is by now widely accepted. There seems to be a transatlantic consensus that effects have to be ‘foreseeable, substantial and direct/ immediate’.18 Much of the debate concerning the jurisdictional scope of competition law has focused on the effects doctrine. The reason for this is that, even if this doctrine can be understood as an extension of the territoriality principle, one of its consequences is that the laws of all the countries where effects materialise may apply, i.e. two or more sets of competition laws may apply when a particular conduct has a cross-border dimension.19 This, in turn, allows for the conflicts and tensions in competition enforcement mentioned earlier to emerge.

16

Dabbah (2010), p. 420. The doctrine finds its source in the judgment of the Permanent Court of International Justice in SS Lotus (France v Turkey) (1927) PCIJ ser A, no 10. 18 Papp (2012), pp. 57–58. 19 OECD (2017a), p. 5. 17

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The Effects Doctrine and Competition Law

The US courts pioneered the use of the effects doctrine in competition matters.20 The debate about the jurisdictional reach of the U.S. Sherman Act, in particular, has been ongoing for many decades.21 In 1945, the U.S. Court of Appeals for the Second Circuit ruled in Alcoa that the Sherman Act reaches conduct causing intended effects within the United States; and that a state can impose liability even upon foreign persons for conduct outside its borders that has consequences within its territory.22 However, the Second Circuit Court in Alcoa left unclear how substantial an effect must be in order to trigger the subject-matter jurisdiction of US law. The nature of the requisite effect was also left unspecified.23 This lack of clarity has allowed different interpretations of the effects doctrine under the Sherman Act. It also led, in reaction to the perceived overreach of U.S. antitrust laws and civil litigation, to many countries adopting blocking and claw-back statues in the second half of the twentieth century24—some of which are still in place.25 Given this lack of clarity, it is clear that the extra-territorial reach of the Sherman Act can be expansive—but the effects doctrine has not been applied as freely much as one might expect, in large measure because the US exercised self-restraint.

See United States v Aluminium Co of America, 148 F.2d 416 (2d Cir. 1945) (“Alcoa”); Hartford Fire v California 509 U.S. 764, 795-796 (1993); Hoffmann-La Roche v Empagran, 542 U.S. 155, 165 (2004); and US Department of Justice & Federal Trade Commission Antitrust Guidelines for International Enforcement and Cooperation, 13 January 2017, Section 3, https://www.ftc.gov/ public-statements/2017/01/antitrust-guidelines-internationalenforcement-cooperation-issued-us (last accessed 5 March 2017). 21 OECD (2015a); OECD (2017a), pp. 5–6. 22 United States v Aluminium Co of America, 148 F.2d 416 (2d Cir. 1945) (“Alcoa”). 23 Popofsky (2008), p. 2422. 24 Examples of countries that passed blocking statutes include South Africa, Australia, France, UK and Canada. See Fugate (1996), p. 279ff; Born (1996), p. 587ff; Popofsky (2008), p. 2423 and the judgments referred to therein. 25 See French law 68-678 of 26 July 1968 (the “French Blocking Statute”). This statute prohibits any communication of economic, commercial, industrial, financial, technical documents or information for the purposes of use as evidence in legal proceedings outside of France, subject to mechanisms afforded under international agreements or treaties such as The Hague Evidence Convention. Violations are criminally punishable by fines up to €18.000 for individuals and €90.000 for legal entities, and/or up to six months’ imprisonment. Likewise, in the UK, The Protection of Trading Interests Act 1980 not only assigns powers to the Secretary of State to prohibit disclosure of evidence in certain cases, but also includes a claw-back provision. Under s. 6, ‘qualifying defendants’, i.e. British citizens or companies and persons carrying on business in the UK who have paid (whether voluntarily or by execution levied against their property) an amount on account of a multiple damages award, either to the plaintiff or to a co-defendant, are entitled to a remedy. The remedy is that the qualifying defendant has an absolute right, under s 6(2) of that Act, to recover the non-compensatory portion of any damages paid by him from the plaintiff by an action in the UK courts. According to s 6(5), the British court must entertain the action for recovery even if the person against whom the action is brought is not within the jurisdiction of the court. 20

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In 1982, the U.S. Congress passed the Foreign Trade Antitrust Improvements Act (FTAIA), regulating the Sherman Act’s reach with respect to conduct involving trade or non-import commerce with foreign nations. While the FTAIA still subjects conduct involving U.S. import trade or commerce to the Sherman Act, it excludes jurisdiction over non-import foreign trade or commerce unless it has a “direct, substantial, and reasonable effect” on U.S. domestic, import or export commerce, and such effect gives rise to a claim under the Sherman Act. The U.S. Supreme Court has also adopted a circumspect approach to the extraterritorial effect of US antitrust law, explaining that United States law governs domestically but does not rule the world.26 The court ruled in Hartford Fire that US antitrust law applies only “to foreign conduct that was meant to produce and did in fact produce some substantial effect in the United States”.27 The FTAIA and Hartford Fire tests thus qualify the effects required to establish US antitrust jurisdiction, setting a threshold above trivial effects. While the US was reigning in the jurisdictional scope of its antitrust rules, many countries were adopting competition laws of their own—and giving them extraterritorial reach by adopting the effects doctrine. As competition acts were progressively adopted around the world, US rules informed the jurisdictional limits of these laws. Thus, countries such as Australia, Japan and Korea rely on domestic effects to establish jurisdiction over harmful conduct;28 and the “direct, substantial and reasonable effects” requirement, with some differences in wording or intensity, is accepted by most jurisdictions as setting the limit for extraterritorial application of their competition laws.29 The EU has slowly inched its way towards a broadly similar approach to that of the US. The text of Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU) says nothing about their jurisdictional scope. Until recently, the CJEU had endorsed an ‘implementation’ test, which can be understood as a straightforward application of the territoriality principle—i.e. jurisdiction over conduct taking place within the EU’s territory. In Woodpulp, the CJEU distinguished between the place of formation of an illegal agreement to fix prices and the place of its implementation. While the producers were located, and entered into the pricing agreements, outside the EU, they sold the cartelised product to customers within it. The CJEU ruled that the implementation of the agreement could provide the European Commission with jurisdiction to take up the case.30 The Court has also applied the potentially more expansive single economic entity doctrine, under which the court has been willing to go beyond the legal façade of the separate legal

Microsoft Corp. v. AT&T Corp., 550 U.S. 437, 454-55 (2007). More recently, see in a patent law context Life Techs. Corp. v. Promega Corp., 580 U.S. (2017). 27 Hartford Fire Ins. v. California (91-1111), 509 U.S. 764 (1993). 28 OECD (2017a), p. 6. 29 OECD (2015b), www.oecd.org/daf/competition/cartels-involving-intermediate-goods.htm. 30 Joined Cases 89/85, A. Ahlström Osakeyhtiö and Others v Commission [1988] ECR 5193, para. 11-23 (Woodpulp). 26

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personalities of parent and subsidiary companies and say that, in reality, parent and subsidiary formed one economic entity—which is present in the territory of the EU.31 On the other hand, the EU’s approach to the effects doctrine was not set out clearly until recently. A very early case seemed timidly to endorse an effects’-based approach.32 However, in subsequent case law the Court of Justice avoided taking a clear position on the validity of such a doctrine.33 The lower courts, however, adopted a ‘qualified effects’ test. In Gencor, after the Commission blocked a merger between the South African interests of two companies, the General Court confirmed the EU’s extraterritorial jurisdiction whenever “it is foreseeable that a proposed concentration between undertakings established outside the Community will have an immediate and substantial effect within the Community”.34 More recently, the General Court applied the qualified effects’ approach to cartel activity, in the context of the power cables cartel.35 In 2017, the CJEU finally expressly adopted a qualified effects test in Intel.36 The question for the court in this case was whether the European Commission had competences to sanction an abuse of a dominant position by Intel consisting of making payments to computer manufacturers outside the EU in return for them not supplying computers with competing chips. This was a factual scenario that, as Advocate-General Wahl suggested, was difficult to reconcile with the application of

31 Case C-48/69 ICI Ltd v EC Commission [1972] ECR 619, [1972] CMLR 557 (Dyestuffs). The court came to the conclusion that Geigy, Sandoz and ICI, three non-EU undertakings, had participated in illegal price fixing within the EU through subsidiary companies located in the EU and under their control. 32 Case C-22/71 Béguelin Import EU:C:1971:113, paras. 12-13, holding that as long as an agreement is ‘operative’ in a Member State, in particular by preventing a distributor from importing or re-exporting products coming from outside the EEA into other Member States, it falls within the scope of the EU’s competition provisions. 33 Prete (2018), p. 489. 34 Case T-102/96 Gencor Ltd ν Commission of the European Communities ECLI:EU:T:1999:65 para 90-92. 35 Case T-422/14 Viscas v. European Commission EU:T:2018:446 (‘Viscas’); Case T-441/14 Brugg Kabel AG and Kabelwerke Brugg AG Holding v.European Commission, EU:T:2018:453 (‘Brugg’); Case T-447/14 NKT Verwaltungs GmbH, formerly nkt cables GmbH and NKT A/S, formerly NKT Holding A/S v. European Commission, EU:T:2018:443 (‘NKT’) (collectively referred to as ‘Power Cables’). This judgment was issued after the Intel decision by the CJEU. The Court found the effects of the cartel in the EU, including in relation to projects for the installation of power cables outside the EU, to be: (1) foreseeable, in that there were ‘probable effects’ of the cartel on competition within the EU; (2) immediate, because direct influence on the supply of high and extra high voltage power cables in the EU was ‘the object of the various meetings and contacts’; and (3) substantial, in view of the number and size of the producers participating in the cartel, which accounted for almost all of the market, the broad range of products affected by the various agreements, the gravity of the practices in question, as well as the significant duration of the practice (over ten years). See Shah et al. (2019), p. 82. 36 Case C-413/14 P Intel v Commission ECLI:EU:C:2017:632, para. 45.

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the implementation doctrine.37 However, in its judgment the CJEU accepted, with little discussion, the principle that the qualified effects test applied because the test was aimed at ‘preventing conduct which, while not adopted within the EU, has anticompetitive effects liable to have an impact on the European Union market’, citing Gencor approvingly. The CJEU accepted the General Court’s findings that the effects were: (1) substantial, on the basis that Intel’s foreclosure strategy, viewed as a whole, affected a significant part of the world market; (2) immediate, on the basis that Intel’s conduct sought and was capable of inducing computer manufacturers to delay the launch of an AMD-based product globally, including in the EU, while ‘weakening [Intel’s] sole significant competitor by foreclosing it from the most important sales channels’; and (3) foreseeable, since Intel could foresee and indeed intended to make an AMD-based computer model unavailable globally, including in the EU, and to thereby weaken AMD.38 The CJEU further stated that, when determining whether the qualified effects doctrine applies, regard has to be had to the conduct ‘viewed as a whole’; and that, in order to be foreseeable that the conduct complained of would have the requisite effect in the EU, it is sufficient for the conduct to have ‘probable effects’.39 While the CJEU only adopted the qualified effects test explicitly only in Intel, it can be argued that EU institutions have been applying EU competition law extraterritorially as if the qualified effects test were the law of the land for decades. This was achieved in myriad ways. It occurred through the explicit application of an effects test, as the Commission, the General Court and various Advocates General have done.40 The European courts have also applied other jurisdictional tests expansively—e.g. by employing the single economic entity principle41 and an expansive implementation test42—which, while notionally based on the territoriality

Opinion by Advocate General Wahl Case C-413/14 P, Intel v Commission ECLI:EU:C:2016:788, paras. 291–293. 38 Case T-286/09 Intel v Commission, ECLI:EU:T:2014:547, paras. 279–295. See Shah et al. (2019), p. 82. 39 Case C-413/14 P Intel v Commission ECLI:EU:C:2017:632, paras.46-51. Prete (2018), p. 491, notes that it is yet to be clarified how strictly the qualified effects criterion is to be applied. 40 Case T-286/09 Intel v Commission, ECLI:EU:T:2014:547, paras. 231–258: opinion by Advocate General Wahl in Case C-413/14 P, Intel v Commission ECLI:EU:C:2016:788, paras. 294–305. See also, and previously, Commission Decision 69/243/EEC, OJ 1969 L 195/11 (Dyestuffs); Advocate General Mayras’s opinion in Case 48/69, ICI v Commission, ECLI:EU:C:1972:32, paras. 688–691; Commission Decision 85/202/EC OJ 1985 L 85/1, para. 79 (Woodpulp); Advocate General Darmon’s Opinion in Joined Cases 89/85, 104/85, 114/85, 116/85, 117/85 and 125/85 to 129/85 Ahlström v Commission ECLI:EU:C:1988:258, para. 7 et seq.; obiter in Case T-91/11 InnoLux v Commission ECLI:EU:T:2014:92, para. 62, finding that the implementation test was satisfied in the case at hand; see also opinion of Advocate General Wathelet in Case C-231/14 P InnoLux v Commission ECLI:EU:C:2015:292, who, however, considered the effects not sufficiently direct in the component case in question; the Court eventually did not consider the question to be relevant. 41 Case 48/69 Imperial Chemical Industries Ltd. v Commission ECLI:EU:C:1972:70. 42 Joined cases 89/85, 104/85, 114/85, 116/85, 117/85 and 125/85 to 129/85, Ahlström v Commission ECLI:EU:C:1988:447, paras. 16–18 (“Wood Pulp I”). 37

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principle and theoretically narrower than the effects doctrine, has never in its practical application been more restrictive than the effects doctrine would have been. The qualifications of the effects test—that effects must be “direct, substantial and foreseeable”—have so far not proved to be a high hurdle, either.43

2.4

How Important Are Legal Constraints on Subject-Matter Jurisdiction?

A measure of international harmonisation has emerged in relation to norms governing the extra-jurisdictional enforcement of competition law. Almost all jurisdictions rely on the qualified effects test to establish jurisdiction over foreign conduct, meaning that they are able to review foreign conduct that causes domestic harm, and impose remedial measures against it.44 However, the legitimacy of this doctrine is somewhat controversial under public international law, even if they are accepted by the competition community. An assertive application of the bases for subject-matter jurisdiction—and particularly the effect’s doctrine—may have a significantly expansive impact in competition law. Full reliance on these expansive doctrines would necessarily lead to tensions between states and overlaps in enforcement. In effect, it has been argued that existing legal jurisdictional tests have virtually no screening power in the competition context; and that the only constraints on extra-jurisdictional competition enforcement in practice are the prosecutorial discretion exercised by competition authorities, the legal and practical difficulty of gathering evidence (and, to a lesser degree, enforcing decisions) against foreign conduct, and the inability to remedy the effects of anticompetitive practices in foreign jurisdictions.45 What this reflects is that the subject-jurisdictional scope of competition law—and the legal debates concerning the rules and principles governing jurisdiction—are not phenomena taking place in a vacuum. Instead, they are applied and discussed in light of doctrines and practices that influence them. Such practices can be adopted unilaterally or reflect informal arrangements to ensure coordination of enforcement efforts. We now turn to them.

43

von Papp (2017), available at https://ssrn.com/abstract¼2961721, pp. 9–10. OECD (2017a) Executive Summary of Roundtable on The Extraterritorial Reach of Competition Remedies DAF/COMP/WP3/M(2017)2/ANN1, p. 2. 45 Papp (2012). 44

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3 Comity 3.1

Analytical Distinctions

Parallel competition enforcement typically does not raise problems. Consider the thousands of merger reviews that take place simultaneously in numerous jurisdictions, or how international cartels are prosecuted and sanctioned in several jurisdictions in parallel. At the same time, parallel systems of unilateral extraterritorial enforcement can lead to overlaps. The cumulative application of multiple competition regimes to the same conduct can have negative effects, such as forum shopping, divergent results, duplicate sanctions and the misallocation of administrative resources.46 As a result, tensions may arise.47 Merger control in one country can prohibit a merger that can have pro-competitive effects in others. Antitrust enforcement by one country against certain agreements entered into in another can undermine efficiency-enhancing arrangements in the latter and lead to perceptions of interference in a country’s sovereignty. Comity and other reciprocal commitments can help ensure that policies in one jurisdiction do not (in)advertently impact the competitive environment in others. Comity “reflects the broad concept of respect among co-equal sovereign nations, and plays a role in determining ‘the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation.”48 For over 100 years, public international law has acknowledged comity as a means of tempering the effects of the unilateral assertion of extraterritorial jurisdiction. From this perspective, comity is the “international legal principle whereby a country agrees to take other countries’ important interests into account while conducting its law enforcement activities”.49 Despite invocations of comity by members of the international competition community, its meaning for competition law remains under-theorised, at least outside the US. Comity is a creature of international and private international law, not competition law. Comity was originally developed in the Netherlands in late seventeenth Century, in tandem with the development of the principle of absolute territorial sovereignty of states, and concomitant discussions about choice of law and the appropriateness of applying it extraterritorially. In this context, it was held that, in a context where states enjoyed absolute territorial sovereignty and where people in

46

Geradin et al. (2010), pp. 29–30. Guzman (2010), pp. 345–362; Guzman (2004), p. 355. 48 U.S. Department of Justice and Federal Trade Commission ‘Antitrust Enforcement Guidelines for International Operations’ § 3.2 (1995); and the new U.S. Department of Justice and Federal Trade Commission ‘Antitrust Guidelines for International Enforcement and Cooperation’ § 4.1 (2017). 49 OECD (2014b), p. 8. 47

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the State’s territory are subject to its jurisdiction, comity should ensure the reciprocal respect and mutual recognition by sovereigns of each other’s laws and judgments.50 Since then, the meaning of comity has been enriched. Generally speaking, comity can be stronger or weaker, and more or less institutionalised.51 Comity can also be negative or positive. Negative comity corresponds to unilateral restraint. Positive comity consists in asking and relying on another authority to provide assistance. Under it, one jurisdiction may ask its counterpart in another country to undertake enforcement activities in order to remedy allegedly anti-competitive conduct occurring in the latter jurisdiction that substantially and adversely affects the interests of the requesting country. In practice, positive comity has been associated with active cooperation, as embedded in bilateral cooperation arrangements,52 and will be discussed in the next section. It is the negative form of comity that most interests us here. Negative comity requires an authority that has prima facie competence to act under its laws voluntarily to refrain from intervening if such intervention would lead to a conflict with another jurisdiction. Unlike the formal and informal cooperation arrangements that typically govern positive comity, negative comity acts as a consideration in construing the legal tests that govern the (extra-)jurisdictional scope of competition law, as well as in prioritising certain cases or imposing certain types of remedies. Indeed, references to ‘international comity’ typically occur when discussing selfrestraints to the exercise of subject-matter jurisdiction over foreign conduct that produces substantial domestic effects—i.e. regarding enforcement against conduct over which a country or competition authority has jurisdiction.53 In circumstances where one country has jurisdiction over certain business conduct, comity nonetheless requires that country to take other countries’ important interests into account when pursuing its law enforcement activities, in return for their doing the same.54 In other words, negative or traditional comity involves abstaining from starting an enforcement procedure to avoid entering into conflict with another country’s priorities or imposing remedies that can interfere with a country’s sovereignty.55

50

Yntema (1966), p. 9. Bradley (2019). 52 OECD (2015c), Provisions on Positive Comity, www.oecd.org/daf/competition/competitioninventory-provisions-positive-comity.pdf. 53 OECD (2017a), pp. 14–15. 54 OECD (2014a). 55 Even though negative comity concerns do not typically arise as regards enforcement jurisdiction—since the principles governing enforcement jurisdiction are perceived to provide sufficient constraints to its exercise—some competition law remedies have been criticised for restricting business conduct in multiple jurisdictions, or even across the world. See, for example, the remedy imposed by the Korean competition authority against Qualcomm—KFTC’s decision of 20 January 2017 (Qualcomm), Case number 2015Sigam2118, translated by the American Consumer Institute Center for Citizen Research, www.theamericanconsumer.org/wp-content/uploads/2017/03/201701-20_KFTC-Decision_2017-0-25.pdf—and the international tension that it created as discussed in OECD (2017a), pp. 21–22. 51

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Comity and the Limits of Subject-Matter Jurisdiction

The most thorough discussions of negative comity as regards competition law can be found in the U.S., where the principle operates as a principle of legal construction, and hence has the ability to limit the scope of subject-matter jurisdiction itself. In the Timberlane case, the Ninth Circuit Court of Appeals established comity requirements for competition law enforcement.56 In particular, this court held that U.S. courts could refuse to apply the Sherman Act to conduct occurring outside the U.S. borders unless ‘the interests of, and links to, the United States—including the magnitude of the effects on American foreign commerce—are sufficiently strong, vis-à-vis those of other nations, to justify an assertion of extraterritorial authority’. In doing so, the Ninth Circuit articulated a jurisdictional rule of reasonableness that weighed domestic versus foreign interests when deciding whether a court should exercise jurisdiction.57 As already mentioned above, subsequently the U.S. Congress passed the 1982 Foreign Trade Antitrust Improvements Act (FTAIA). FTAIA regulates the Sherman Act's reach with respect to conduct involving trade or non-import commerce with foreign nations by establishing a two-part test for applying U.S antitrust law extraterritorially. In particular, the court is required to: (1) consider whether the conduct has a direct, substantial, and reasonably foreseeable effect on U.S. commerce; and (2) determine whether the conduct gives rise to a claim under the Sherman Act. The adoption of FTAIA blurred the role of Timberlane’s balancing test. Had comity been superseded by FTAIA, or did balancing still have a role? The matter appeared to be resolved by the Supreme Court’s decision in Hartford Fire, which held that comity considerations do not bar Sherman Act claims against foreign defendants when the foreign conduct produces a substantial effect in the United States.58 The Supreme Court therefore seemed to consider that FTAIA narrowed the application of international comity considerations while broadening the application of the substantial effects test. However, following Hartford Fire a circuit split emerged between the Fifth and Second Circuits about the interpretation of FTAIAs requirement that the conduct must give rise to a claim under the Sherman Act in order for US antitrust rules to have extraterritorial effect. At bottom, the question concerned what type of nexus between the injury—that is, the anticompetitive effect leading to loss—and the United States is required by FTAIA.59

Timberlane Lumber Co. v. Bank of Am., 549 F.2d 597, 613 (9th Cir. 1976). The court’s understanding of comity in Timberlane largely followed the Second Restatement of Foreign Relations, which was extended in the Third Restatement. See Ginsburg and Taladay (2017), p. 1082. 58 Hartford Fire Co. 509 U.S. 770, at 798-99. 59 Compare Den Norske Stats Oljeselskap As v. Heeremac VOF., 241 F.3d 420, 427-28 (5th Cir. 2001) (finding no jurisdiction existed because the injury did not “give rise’ to [plaintiff’s] (domestic) antitrust claim”), with Kruman v. Christie’s Int’l PLC, 284 F.3d 384, 399-400 (2d Cir. 2002) (concluding that a domestic injury is not required in order to meet the “‘give rise’” requirement). 56 57

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The Supreme Court address this split in a case where foreign plaintiffs had bought vitamins from foreign defendant-cartelists in foreign transactions.60 The Court relied, inter alia, upon principles of comity to interpret the FTAIA as excluding from the Sherman Act’s reach an “independently caused foreign injury”. While the Supreme Court rejected a Timberlane-like case-by-case comity balancing as unworkable, it took into account comity considerations in a more summary form, namely by interpreting restrictively the ambiguous language in the FTAIA that the direct, substantial, and foreseeable domestic effect must ‘give rise to a claim under the provisions of this Act’. The foreign plaintiffs claimed that, because other customers had purchased goods from cartel members in the US, the domestic effect had given rise to ‘a’ claim (namely by these domestic customers). Citing comity concerns, in particular interference with foreign leniency programmes and with the remedial mix in foreign jurisdictions, the Supreme Court rejected this interpretation of the ambiguous FTAIA language, and held that ‘a claim’ did not mean ‘any claim’, but ‘the plaintiff’s claim’, at least to the extent that the foreign purchasers’ claims were ‘wholly independent’ from the domestic effects. In doing so, the Supreme Court was seen as having returned towards international comity principles.61

3.3

Comity, Prioritisation and Enforcement

Beyond its ability to constrain subject-matter jurisdiction, comity is particularly relevant for competition enforcement in practice. The principle of comity has, in the past, been discussed and relied on mainly in terms of its application to enforcement co-operation in cross-border cartel cases—in particular, to ensure that international cartel enforcement is conducted in a manner that balances policy and enforcement differences among the countries involved. Of course, comity principles can also play a pivotal role as regards abusive practices, particularly when the substantive laws that govern unilateral conduct by businesses with market power differ across jurisdictions. The FTC and DOJ 2017 Antitrust Guidelines for International Enforcement and Cooperation state that: “In enforcing the federal antitrust laws, the Agencies consider international comity. (. . .) ‘A decision to take an investigative step or to prosecute an antitrust action under the federal antitrust laws represents a determination that the importance of antitrust enforcement outweighs any relevant foreign policy concerns.’ The Guidelines then go on to identify a number of considerations relevant to determining whether to start an investigation in light of comity. These include: ‘the existence of a purpose to affect or an actual effect on U.S. commerce; the significance and foreseeability of the effects of the anticompetitive conduct on the United States; the degree of conflict with a foreign jurisdiction’s law or articulated 60 61

F. Hoffmann-La Roche Ltd. v. Empagran S.A. 542 U.S. 155, 159 (2004). See Ginsburg and Taladay (2017), pp. 1084–1085.

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policy; the extent to which the enforcement activities of another jurisdiction, including remedies resulting from those enforcement activities, may be affected; and the effectiveness of foreign enforcement as compared to U.S. enforcement.’62 The OECD has recently set out that: ‘Authorities should consider comity and tailor their enforcement actions to minimise conflicts, taking into account not only hard conflicts of laws but also another sovereign country’s choices in regulating its own domestic commerce. (. . .) If businesses are required to follow the law of all jurisdictions where their conduct may have an effect, the most restrictive jurisdiction would de facto set the rules of global commerce. Businesses should be able principally to observe the law and policy choices of domestic jurisdictions in which they operate, while, at the same time, competition authorities should respect the law and policy choices of foreign jurisdictions where these do not undermine their own competition laws. Thus, extraterritorial remedies should be exceptional and imposed only when a domestic remedy cannot cure the majority of the harm.’63 In short, an agency may abstain from bringing a case when it has concluded that its interests are protected by another jurisdiction's actions, and act only if it believes that domestic consumers are not protected adequately. Remedies should avoid unwarranted extraterritoriality, so as to allow other countries to decide how to regulate their own markets.64

4 International Cooperation Outside the US, most references to comity in competition law focus on its positive dimension—i.e. cooperative engagements. Enhanced regulatory and enforcement co-operation is key to ensure effective competition enforcement as the volume of cross-border economic activities continues to rise. International cooperation is also important to ensure the effectiveness of enforcement. For example, without a territorial link the European Commission cannot take formal steps to demand documents or hear witnesses based on the powers it has. The best it can do is act through diplomatic channels, or by means of cooperation by foreign authorities.65 Finally, international cooperation is essential to avoid externalities flowing from increasing(ly effective) competition enforcement. For example, leniency applicants have to comply with multiple leniency regimes that are broadly similar amongst themselves, but which differ ever so slightly with regard to details such as the rules on markers, on finalising a marker, on the information required, etc. Conflicting

U.S. Department of Justice and Federal Trade Commission ‘Antitrust Enforcement Guidelines for International Operations’ § 4.1, at 27-28 (2017). 63 OECD (2017) Executive Summary of Roundtable on The Extraterritorial Reach of Competition Remedies DAF/COMP/WP3/M(2017)2/ANN1, p. 2. 64 Rill and Seidl (2017). 65 Monti (2016), p. 319. 62

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leniency conditions may lead would-be applicants to be unable to obtain leniency across all relevant jurisdictions—and to evaluate whether the overall expected sanctions and costs of applying for leniency are acceptable when deciding whether to apply for leniency.66 This has, reputedly, led to a decrease in the recent number of leniency applications, which could be avoided if there were increased levels of cooperation and regulatory alignment.67 In short, the legal and de facto limits to the exercise of extraterritorial subjectmatter and enforcement jurisdiction, and the overlaps created by the proliferation of unilaterally enforceable competition regimes in a globalised world, create a need for international cooperation—which are often predicated on agreements put in place to that effect.

4.1

Bilateral and Multilateral International Cooperation

International cooperation agreements serve to strengthen the scope and degree of inter-agency co-operation. These agreements are generally signed on a bilateral basis by: (1) two jurisdictions (inter-governmental agreements68), or (2) two agencies (inter-agency arrangements).69,70 Historically, formal coordination mechanisms in respect of international antitrust enforcement have tended to revolve around free trade agreements (FTAs) between countries. There are good reasons for this, as FTAs provide a via media between utopic and politically unfeasible global regulatory regimes and a Hobbesian world of competing sovereigns. FTAs are thus preferred means not only to promote trade, but also to articulate regulatory responses between countries in the face of increased cross-border economic activity—the very goal of international cooperation. An OECD review of 267 FTAs included in the WTO’s Regional Trade Agreements (RTA) database71 found that an increasing number of FTAs—90% of the 66

von Papp (2017), available at https://ssrn.com/abstract¼2961721, p. 18. See http://www.mlex.com/GlobalAntitrust/DetailView.aspx?cid¼887029&siteid¼190&rdir¼1, 10 May 2017: “The pace of leniency applications related to international cartels appears to be slowing, competition officials from Brazil, Japan, the EU and the US said today. This might be due to the burden and costs associated with filings in multiple jurisdictions, they said, adding that agencies should do more to target their investigations and coordinate witness interviews and document requests.” 68 OECD Inventory Of International Co-Operation Agreements On Competition (between governments), www.oecd.org/daf/competition/inventory-competition-agreements.htm. 69 OECD (2017c), www.oecd.org/competition/inventory-competition-agency-mous.htm. 70 OECD (2017a), pp. 17–18. 71 This database references the 283 FTAs that have either been notified, or for which an early announcement has been made, to the WTO as of 1 July 2019 (excluding agreements setting up customs unions or genuine regional organizations such as MERCOSUR or the Caribbean Community and Common Market [CARICOM]). The sample used included only 267 of these 283 FTAs. The reasons for this discrepancy are two-fold. First, the sample excludes three FTAs 67

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agreements currently in force (from ~60% before 1990)—devote specific provisions or even entire chapters to competition-related matters.72 At the same time, one can also discern a trend for competition authorities, rather than governments, entering into co-operation agreements. Complying with obligations under FTAs, building on separate initiatives of their respective governments or even acting on their own initiative, competition agencies have concluded numerous co-operation agreements to provide mutual technical assistance, notify enforcement proceedings that may have an impact on a party’s territory, exchange information, locate and secure evidence and witnesses, and ensure positive and negative comity.73 The number of bilateral co-operation agreements between competition authorities has grown in recent years, in tandem with the increasing number of competition regimes around the world. The OECD’s inventory of international co-operation agreements between competition agencies—which only goes to 2017—contains 145 Memoranda of Understanding, and 15 cooperation agreements between governments involving at least an OECD member.74 The EU provides a good example of the proliferation of these arrangements. The Commission has entered into specific agreements or understandings regarding competition law with the U.S. (1991 and 1998), Canada (1999), Japan (2003), Brazil (2009), the Republic of Korea (2009), the Russian Federation (2011), China (2012, revised in 2019ø following institutional changes in China), India (2013), Switzerland (2014), South Africa (2016) and Mexico (2018).75 The U.S. has entered into bilateral cooperation arrangements with Germany (1976), Australia (1982 and 1999), the European Union (1991 and 1998), Canada (1995, 2004 and 2014), Israel (1999), Japan (1999), Brazil (1999), Mexico (2000), Russia (2009), Chile (2011), China (2011), India (2012) Colombia (2014), Korea (2015) and Peru (2016).76 Cooperation arrangements vary in their content and strength. For example, only a limited number of agreements authorise a competition agency to request another agency’s co-operation to eliminate a specific anti-competitive practice which originates from the latter’s territory.77 Instead, these instruments are typically limited to

that could not be retrieved online (Chile-Vietnam; Iceland-Faroe Islands; and the Pan Arab Free Trade Area [PAFTA]). Second, the FTAs between the Central American countries (Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua), on the one hand, and Panama and Chile, on the other, were counted as two (rather than ten) agreements. Likewise, separate agreements for trades in goods and trades in services between the same parties were counted together. 72 Laprévote (2019), p. 5. 73 Id., pp. 23–24. 74 OECD Inventory Of International Co-Operation Agreements Between Competition Agencies (MoUs), www.oecd.org/competition/inventory-competition-agency-mous.htm; and OECD Inventory Of International Co-Operation Agreements On Competition (between governments), www. oecd.org/daf/competition/inventory-competition-agreements.htm. 75 https://ec.europa.eu/competition/international/bilateral/, accessed on 15 July 2020. 76 See Antitrust Cooperation Agreements, DEP’T OF JUSTICE, www.justice.gov/atr/antitrustcooperation-agreements (accessed 8 June 2020). 77 Laprévote (2019), p. 23.

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narrower co-operation and co-ordination provisions. Cooperation arrangements often include notification requirements, typically a duty to inform the other party of relevant enforcement activities in the field of competition law. While exchange of information requirements are typically also provided in cooperation agreements, these requirements tend to be limited to non-confidential and/or public information, or to apply only to the extent permitted by the parties’ respective domestic law. Cooperation arrangements that permit the systematic sharing of confidential information for investigatory purposes are relatively rare. In its stead, informal, piecemeal methods have developed, namely waivers provided by companies that allow information sharing, such as for merger cases or applications for leniency from prosecution for anticompetitive conduct.78

4.2

Regional Arrangements

The increasing proliferation of competition law and policy at national level has created a need for effective regional co-operation on competition, which over the years has resulted in a number of regional competition agreements being entered into. These regional competition agreements generally offer deeper levels of integration and a higher degree of co-operation on competition enforcement than bilateral agreements. They provide a platform for enabling regional convergence; can spur the adoption of competition laws in a region or their improvement over time; may facilitate regional information exchanges for the enforcement of crossborder competition cases; and contribute to building the capacity of younger authorities.79 The best-known example of a regional competition arrangement is the European Competition Network (ECN). In Europe, both the European Commission and the Member States can apply EU competition rules, but from 2004 to 2014 over 85% of all decisions applying EU competition rules were adopted by national competition authorities.80 To ensure coherence in enforcement, Regulation 1/2003 created the ECN, which is based on a system of parallel competences between national and regional authorities. This Regulation also establishes flexible work-sharing rules to let the best placed authority handle a case—usually the authority of the most affected territory, if this authority is able to bring the entire infringement to an end. Parallel action by multiple authorities may be appropriate where an agreement or practice has substantial effects on competition in their respective territories and the action of a single authority would not be sufficient to bring the entire infringement to an end

78

Regardless of the reason for this lack of systematic confidential information sharing (including legislative limitations and differing procedural safeguards), it may be hampering efforts to prevent, detect and punish cross-border cartels—see OECD (2017b), p. 147. 79 OECD (2018), p. 4. 80 https://ec.europa.eu/competition/antitrust/nca.html.

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and/or to sanction it adequately. If anticompetitive agreements or practices have effects on competition in more than three member states, the Commission is deemed well-placed to take up the case. Remedies can also be discussed and co-ordinated through the ECN. In this way, the ECN provides a vehicle for EU member states’ competition agencies and the European Commission to co-operate, enabling them to ensure coherence in pursuing enforcement actions and adopt measures against crossborder infringements in a coordinated way. The EU also has coordination mechanisms for merger control, regarding which is an allocation of competences between the European Commission and national competition authorities based on thresholds related to the size of the merging parties. Above a certain threshold, the European Commission reviews the merger; below those thresholds, merger review may fall to national competition authorities. Coordination is further enhanced by means of the European Competition Authorities (“ECA”) Notice system, an information system among national competition authorities whereby a notice is distributed to all other ECAs by the first competition authority to be notified of a multi-jurisdictional merger. Further efforts have taken place in the context of the ECN. In 2010, a EU Merger Working Group, comprising representatives of the European Commission and the national authorities of the European Union who have responsibility for merger review, was constituted with the objective of fostering increased consistency, convergence and cooperation among EU merger jurisdictions. This working group has published ‘Best Practices on cooperation between EU National Competition Authorities in Merger Review.’81 This system was reinforced in 2019 by means of Directive 2019/1, which seeks to ensure that national competition authorities have the appropriate enforcement tools in order to bring about a genuine common competition enforcement area within the EU.82 To that end, the Directive provides for minimum guarantees and standards so that national administrative competition authorities can be fully effective. These minimum guarantees and standards concern independence; adequate financial, human, technical and technological resources; and minimum enforcement and fining powers for applying competition law. Regional arrangements for the enforcement of competition law are not limited to Europe. They can also be found in the Americas,83 in Africa84 and in Asia.85 However, many differences exist in their implementation. Some evidence suggests

81

https://ec.europa.eu/competition/ecn/mergers.html. Directive 2019/1 of the European Parliament and of the Council of 11 December 2018 to empower the competition authorities of the Member States to be more effective enforcers and to ensure the proper functioning of the internal market OJ L 11, 14.1.2019, p. 3–33. 83 E.g. the Andean Community, MERCOSUR or CARICOM—the Caribbean Community. 84 E.g. CEMAC—the Central African Economic and Monetary Community, COMESA—Common Market for Eastern and Southern Africa, EAC—East African Community, ECOWAS—(CEDEAO) Economic Union of West African States and WAEMU (UEMOA)—West African Economic and Monetary Union. There is also an informal network of agencies: the African Competition Forum. See http://www.compcom.co.za/african-competition-forum. 85 Eurasian Economic Union or ASEAN. 82

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that the deeper the level of regional economic integration that parties aim to achieve, the more detailed and far-reaching the competition provisions included in the respective regional arrangements will be.86 The OECD has identified four models of ‘regional integration’ as regards competition. The first is the “Regional Referee” model, under which investigations of regional infringements are pursued at the national level by each relevant national competition authority, but the regional competition authority coordinates the investigations and has exclusive original jurisdiction to adopt decisions. An example of this can be found in MERCOSUR, where the Committee for the Defence of Competition, together with the Trade Commission of the MERCOSUR, is responsible for applying the regional competition provisions and has exclusive original jurisdiction to adopt decisions about potential cross-border anti-competitive practices. Another model is ‘Two-Tiered’, under which there are two independently operating levels: the regional competition authority has exclusive original jurisdiction over regional cases, while national authorities have exclusive jurisdiction over national cases. Examples of this include CEMAC—the Central African Economic and Monetary Community, and CARICOM—the Caribbean Community. A third model adopts ‘Joint Enforcement’, under which both national and regional authorities apply regional competition provisions in their respective competition cases (national and regional cases)—the paradigmatic example of which is the EU under the ECN system described above. Finally, there is also a ‘One-Tier’ Model, where the regional competition authority investigates and takes decisions on national and regional competition cases, while national competition authorities play a purely supporting role. An example of this is the WAEMU (UEMOA)—West African Economic and Monetary Union.87

4.3

Alignment Through International Standards Organizations

Competition authorities can also pursue practical alternatives to formal cooperation mechanisms. Improved informal investigation coordination and common approaches to emerging issues can be more effective than formal arrangements in achieving meaningful international cooperation. As a result, competition authorities benefit from having fora to share experiences and interact outside of formal investigation proceedings. International fora, including UNCTAD, the International Competition Network and the OECD Competition Committee have been leveraged to this effect. They

Cernat (2005), pp. 16–17, examines 300 Regional Trade Agreements and find that there is a direct correlation between the level of economic integration and inclusion of competition related provisions. 87 OECD (2018), pp. 7–11. 86

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provide opportunities for informal interactions and sharing of experiences, which have substantial value in terms of encouraging a common approach to competition principles and finding solutions to challenges requiring multijurisdictional cooperation. While many additional opportunities remain, international co-operation in competition enforcement has been a success. Building on broad agreement about the core concepts and design of competition legislation, standing competition fora promote meaningful discussions on outstanding substantive differences among jurisdictions, and enable the identification of additional areas for convergence.88 Further co-operation is still necessary, however, as regards the application of substantive legal concepts, addressing legislative barriers to co-operation and dealing with emerging market issues.89

4.4

Informal Cooperation

It follows from the above that there are many formal mechanisms to promote international cooperation in the field of competition law and policy. Yet, while important, such mechanisms do not tell the whole story. A recent joint ICN/OECD survey found that the majority of enforcement co-operation can occur informally or within pre-existing legal frameworks, and that the development of trust and relationships between authorities is crucial to improve the prospects and quality of competition enforcement cooperation.90 In cross-border enforcement cases, informal co-operation may include activities such as keeping each other informed of the progress of cases of mutual interest, discussions on investigation strategies, exchanging public information, sharing leads, and comparing authorities’ approaches to an issue in a case. Even in the absence of formal co-operation agreements, informal co-operation may enable the co-ordination of surprise inspections.91 Many of the key types of co-operation most valued by competition authorities can be largely achieved through informal co-operation. In effect, many competition authorities note that informal cooperation is often the most frequent and useful form of co-operation, because it can occur without burdensome formal processes, such as formal information or assistance requests, and can occur more easily at casehandler level.92

88

OECD (2017) Executive Summary of Roundtable on The Extraterritorial Reach of Competition Remedies DAF/COMP/WP3/M(2017)2/ANN1, p. 3. 89 OECD (2017b), p. 149. 90 OECD and ICN (2020), section 3.2.4. 91 An example is the co-ordinated investigation carried out in 2007 by the Competition Commission of South Africa (CCSA) together with the EU and the US DoJ, in relation to a cartel involving freight forwarding companies. The three authorities conducted simultaneous raids. 92 OECD and ICN (2020), section 4.1.1.

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5 The Three Body Problem: Is This As Good As It Gets? The analysis above identified three main factors that influence the extrajurisdictional scope of competition law in practice—the jurisdictional scope of municipal competition laws, comity and international cooperation. An attentive reader will have no doubt noted that, while the sections above flowed logically from one to another, they had very little overlap. This reflects the terms of the debate as found in the literature. Each factor is usually taken on its own, autonomously and independently from the others. Naturally, the legal test governing the jurisdictional scope of a country’s competition law will be the dominant element in any analysis of the extraterritorial reach of competition law. From a domestic law point of view, this is arguably the sole relevant criterion for establishing whether a country has jurisdiction over business conduct from a competition standpoint. After all, challenges to the validity of individual enforcement decisions will typically challenge whether a case fell within the jurisdiction of a competition authority or court, not whether principles of comity or international cooperation have been followed. Further, the legal tests to determine subject-matter jurisdiction set necessary thresholds for competition enforcement to occur. If these threshold are not met, then other non-legal factors do not matter, and the debate on their role becomes moot. In line with this approach, some have argued that only the internal, domestic perspective matters for discussions about extra-territoriality. From this perspective, negative comity only matters, if at all, as a consideration in construing the legal tests that govern the (extra-)jurisdictional scope of competition law; and bi-, pluri- and multilateral approaches operate mainly as complements to fill gaps and inform purely domestic legal assessments.93 This may well be right from a purely legal-formal perspective, even though this will obviously depend on the specific rules of each jurisdiction. However, in practice—and, particularly, in any attempt to understand how extra-jurisdictional competition enforcement occurs in practice—the devil is in the complementary details going beyond legal rules on subject-matter jurisdiction. After all, merely relying on rules governing subject-matter jurisdiction can give rise to multiple overlapping authorities having jurisdiction over the same conduct. That, in turn, can precipitate forum shopping, particularly where only some jurisdictions adopt restrained approaches to extraterritoriality.94 Expansive approaches to 93

Papp (2012), pp. 23–24. This may be particularly problematic as regards private enforcement, where no exercise of discretion as regards prioritisation and enforcement is allowed. We discussed above how the US courts incorporated elements of negative comity into its legal assessment of the jurisdictional scope of the Sherman Act and FTAIA, following complaints about the expansive interpretation of such jurisdictional scope in earlier decisions. On the other hand, some countries where private competition enforcement is more recent seem to be adopting expansive interpretations of their own. For example, the UK Court of Appeal recently held that it may, in principle, award damages in respect of cartel conduct that has taken placed entirely outside the EU for an infringement of EU

94

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jurisdiction can also result in parallel proceedings, conflicts of law, divergent outcomes on the same facts, and potentially multiple fines and/or awards for damages in respect of one and the same conduct, together with the potentially material political risk associated with asserting jurisdiction over foreign conduct.95 At the same time, unilateral restraint can only be a second-best solution to the problems created by the existence of multiple and diverse competition laws which are simultaneously applicable to the same conduct.96 In the absence of cooperation and effective coordination among those responsible for enforcement of competition laws around the world, the simultaneous application of various national competition rules is likely to give rise to conflicts and tensions, and to a number of significant negative externalities for international competition law. Importantly, what one observes in the real world is that instruments to manage these conflicts and tensions abound—and have significant practical implications on how cross-border cases and mergers are investigated and decided in practice. As such, an approach that looks at extra-territoriality by focusing solely on domestic/formal/legal rules governing subject-matter jurisdiction is incomplete from a descriptive standpoint. Similar objections can be levelled at interpretations of negative comity that see it as being limited to assisting in the interpretation of legal tests regarding subjectmatter jurisdiction. First, and as discussed above, negative comity also operates as an informal self-constraint mechanism on the part of public authorities acting within the scope of their subject-matter jurisdiction—independently of the applicable legal test. Second, and relatedly, it is impossible to understand the operation of negative comity from a purely domestic standpoint, since it is predicated on the international interaction of different sovereigns, and, in particular, in expectations of reciprocal exercises of self-restraint. In short, establishing subject-matter jurisdiction is not sufficient to understand whether enforcement is likely to occur in practice, or under what terms. While jurisdictional tests adopt an internal/domestic perspective that builds on purely legal constraints, both comity and cooperation require one to take into account external/international concerns. To understand how enforcement occurs in practice in an increasingly transnational context, one needs to consider these more informal constraints imposed by comity and international cooperation on competition enforcement and practice. The result is an apparently stable system—indeed, from a purely domestic legal perspective, a fully regulated system—that is nonetheless unpredictable to external observers whenever individual cases have a cross-border dimension. At the other extreme, one can find (normative) arguments for adopting a purely external/international perspective. From this standpoint, international cooperation

competition law—see iiyama (UK) Ltd and others v. Samsung Electronics Co Ltd and others [2018] EWCA Civ 220; [2018] 4 C.M.L.R. 23. 95 Shah et al. (2019), pp. 84–85, 87. 96 Wong-Ervin et al. (n.d.), https://ssrn.com/abstract¼2870505, pp. 4–5, accessed on 20 January 2017.

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and coordination should ultimately lead to a global/multilateral competition law regime in which the current externalities between jurisdictions are internalised through agreement on international standards and/or enforcement institutions. It is true that a global competition authority would require a large multilateral agreement to establish rules compatible with all involved states’ sovereignty claims. However, it would be optimal for enforcement in theory, though the cost and methods of doing so remain open questions.97 Yet, such moves towards a global competition law have, with the exception of some isolated and mostly sector-specific provisions, largely failed.98 In particular, there have been repeated attempts to bring competition matters into the WTO multilateral trading system. The first of these was Chapter V in the Havana Charter for an International Trade Organization (ITO), the precursor to the WTO. Chapter V provided disciplines on a range of restrictive business practices, including provisions for dispute settlement. The general policy was to mandate all members to take appropriate measures to prevent business practices affecting international trade which restrain competition, limit market access or foster monopolistic control. Section 46, para. 3, also listed various types of business practices that restrict competition.99 The ITO and the proposed disciplines in the Havana Charter never came into existence. However, efforts to incorporate competition policy and enforcement into a multilateral legal framework continued to take place in the context of discussions under the GATT system. In 1996, WTO members established a Working Group on the Interaction between Trade and Competition Policy (WGTCP) to study the interaction between trade and competition policy. After years of work, the majority of WTO Members rejected launching negotiations on a multilateral framework on competition policy at the fifth WTO Ministerial Conference in Cancun, Mexico, which took place in September 2003. In the subsequent official meeting of the General Council, the WTO members decided that no further work would be undertaken toward negotiations on competition, as part of the so-called “July package” of 2004.100 At present, the political feasibility of global competition approaches seems minuscule. Sovereign nations are not going to defer to the assessment of another

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Bradley (2019). von Papp (2017), available at https://ssrn.com/abstract¼2961721, pp. 18–19. 99 The practices include: (a) fixing prices, terms or conditions to be observed in dealing with others in the purchase, sale or lease of any product; (b) excluding enterprises from, or allocating or dividing, any territorial market or field of business activity, or allocating customers, or fixing sales quotas or purchase quotas; (c) discriminating against particular enterprises; (d) limiting production or fixing production quotas; (e) preventing by agreement the development or application of technology or invention whether patented or unpatented; (f) extending the use of rights under patents, trade marks or copyrights granted by any Member to matters which, according to its laws and regulations, are not within the scope of such grants, or to products or conditions of production, use or sale which are likewise not the subject of such grants. 100 Lee (2017), pp. 6–8. 98

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nation’s authority on the lawfulness of business conduct affecting their territory. Further, it should be noted that, despite the undoubted practical benefits of a ‘world government’ type of approach, it is not clear that a more centralised approach would be desirable even in theory. Among other things, a centralised regime would be less able to take local circumstances or preferences into account, and could lead to an ossification of the law, which would be problematic in an area of law as dynamic as competition law. Given these limitations, a ‘lead jurisdiction’ approach has been aired as an alternative. This approach would eliminate overlaps and avoid many of the drawbacks of centralisation. The mutual recognition of decisions by competition authorities has been identified as an opportunity to reduce the burden on investigators and enhance consistency. Possible approaches to promote this include: promoting positive comity in competition enforcement actions (e.g. competition authorities considering requests by other countries to open an investigation with respect to potential anticompetitive conduct); relying on a finding of guilt in other jurisdictions while calculating local damages; and the organisation of multi-authority investigations with a single authority designated as “lead authority.” This approach could, in particular, assist smaller, less well-resourced competition authorities in enforcing their competition laws. However, this approach faces significant practical and legal feasibility challenges.101 In practice, it seems unlikely that ‘lead jurisdictions’ will be adopted outside the scope of wider efforts to promote economic integration, as reviewed in our discussion of regional arrangements above. Realistically, then, the coordination of multiple competition law regimes needs to thread a middle way that builds both on self-restraint on the part of countries (undoubtedly in the expectation that it will be reciprocated), and on bilateral and plurilateral agreements that advance international cooperation. Such an approach can result in a system that combines the advantages of a decentralised approach with the benefits of reducing overall complexity in competition enforcement.102 An interesting analytical framework to understand how this middle way operates in practice has recently been developed by Von Papp. Building on the current regime of bi- and multilateral trade agreements, he argues that: The intermediate path between pure unilateral enforcement and a centralised global enforcer consists in unilateral enforcement tempered by cooperation and coordination of enforcement activities. Regional cooperation leads to internally relatively homogeneous clusters, and reduces complexity on the global scale. The extremely close cooperation in such regional cooperation agreements is supplemented by a second layer of reciprocal cooperation links, which are characterised by a slightly lower but still high degree of internal homogeneity, and accordingly cooperation that does not go quite as far as the one in the central region. As we move in concentric circles further away from the centre, heterogeneity of competitive conditions or interests increases and the depth of cooperation decreases.103

101

OECD (2017b), p. 148. von Papp (2017), available at https://ssrn.com/abstract¼2961721, pp. 18–19. 103 Id., p. 2. 102

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A focus on “concentrical circles of international cooperation” can have great explanatory power in describing the patchwork of rules governing cross-border competition enforcement and merger control. In effect,—and particularly if one starts from within an integrated trade zone—one can observe a set of concentric circles with intense cooperation at the centre that eliminates internal gaps and overlaps to the greatest possible degree, followed by gradually decreasing circles of cooperation with other areas of the world in which the competitive conditions and interests are not as homogeneous. This creates a global network of nodes and links that would, while not eliminating gaps and overlaps, arguably reduces them to a manageable level.104 Underlying these concentrical circles, one can find a common substratum regarding the need for competition law, and the form and goals of competition rules. These are apparent in the work of international organisations—particularly the OECD, the ICN and UNCTAD—which foster the adoption of common standards and promote the existence of a transnational competition community. This work reflects the existence of an epistemic community, i.e. a network of professionals with recognized expertise and competence in a particular domain and an authoritative claim to policy-relevant knowledge within that domain or issuearea.105 The basic assumptions of this community are, it is submitted, as important as the other factors we have discussed so far in this paper. However, they are strikingly ignored in discussions by members of that very community. The importance of epistemic communities to the convergence of competition law has been convincingly demonstrated in the past.106 Such communities are typically formed through systems of similar training (professional training), and the creation of channels for the exchange of information, ideas, solutions and arguments concerning competition law and its application (socialisation). The competition community (e.g. agency officials, lawyers, economists, academics) form an epistemic community that enjoy similar training, socialise in multiple venues—including in fora organised by international organisations—and share a number of common assumptions, such as that competition is beneficial, and helps to promote economic growth and welfare; that markets should be regulated to ensure they are fair; or that competition enforcement should be free from political interference and driven by economic criteria.107 The existence of such an epistemic community brings together those in the field and adds order to competition law and policy globally, including through international and transnational bodies.108 It is even likely that personal relations between members of this community play an important role in ensuring the smooth coexistence of multiple competition regimes. The existence of this community, and of

104

Id., p. 2. Haas (1992), p. 3. 106 van Waarden and Drahos (2002). 107 Id., p. 929; Wilks (2007), pp. 440–443; Townley (2018), p. 105. 108 Id., pp. 154–155. 105

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sub-communities within it, likely plays a very important role in avoiding conflicts and tensions, and in achieving consistency and coherence in practice. Differences within this epistemic community—caused by commonalities in background and training, and closer contacts between some members—can also go some way towards explaining why certain regions and members of this community share more similarities and enjoy closer relations between themselves than with those belonging to ‘circles’ further afield. A related point is that each municipal system of competition law is part of a larger legal system belonging to a wider legal tradition. Hence, the evolution of competition law can be affected by developments in an individual jurisdiction that have different impacts across jurisdictions, and that may influence levels of convergence around the world. Taking account of an international epistemic community formed around competition law is important for two reasons. First, it allows us to identify a substratum to discussions regarding the various factors governing the application of competition law to cross-border business conduct. It even provides the grammar in which we have these conversations are held, and is a necessary element in understanding how these apparently disparate factors gel together and interact with one another. Second, the existence and characteristics of this epistemic community—and its manifold subdivisions—inserts an additional layer to an already complex system. In doing so, a focus on epistemic communities lends force to arguments that informal arrangements play an important role in the cross-border coordination and enforcement of competition law in a way that makes it extremely difficult fully to explain how the international competition system operates in every instance, even if one were to agree on general principles that broadly govern it. Or, as a physicist would put it, the three-body problem is only the simpler version of the n-body problem, and the outcomes of such systems are always hard if not impossible to predict.

6 Conclusion There are a number of different and seemingly autonomous factors that govern the practice of the international competition community as regards cross-border anticompetitive practices and concomitant enforcement procedures. This paper identified a number of these factors—rules on subject-scope and enforcement jurisdiction; rules on comity; international cooperation mechanisms; epistemic competition communities—and pointed out that they are linked by a set of amorphous, tacit rules that govern how these factors interact with one another. At the same time, this paper has shown that these factors are continuously evolving—even those factors that one would expect to be more stable, such as legal tests governing subject-matter jurisdiction. The result is a flexible, evolving environment that governs cross-border competition practice around the world. While we are able to discern the main principles governing this environment, the very fluidity of the various factors at play, and of the way in which they interact, preclude the adoption of mechanistic or deterministic explanations. The outcome is a system

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(and community) that seems to operate rather well, but where surprising conflicts and tensions may arise from time to time in unpredictable manners. It is submitted we should not be surprised or disappointed by this. After all, it is in the nature of dynamic environments and communities to be works in progress.

References Born G (1996) International civil litigation in United States Courts. Kluwer Law International, Alphen aan den Rijn Bradley A (2019) Extraterritoriality and cooperation in competition policy. In: Papaconstantinou G, Pisani-Ferry J (eds) Global governance: demise or transformation? EUI, Fiesole Butterworths Competition Law Service Cernat L (2005) Eager to ink, but ready to act? RTA proliferation and international cooperation on competition policy. In: Brusick P, Alvarez AM, Cernat L (eds) Competition provisions in regional trade agreements: how to assure development gains. UNCTAD, Geneva Connor JM (2016) Cartel overcharges. Res Law Econ 26 Dabbah MM (2010) International and comparative competition law. Cambridge University Press, Cambridge Ezrachi A (2016) Sponge. J Antitrust Enforcement 1 Fugate WL (1996) Foreign commerce and the antitrust laws, 5th edn. Aspen Publishers Geradin D, Reysen M, Henry D (2010) Extraterritoriality, comity and cooperation in EU competition law. In: Guzman AT (ed) Cooperation, comity, and competition policy. Oxford University Press Ginsburg DH, Taladay JM (2017) The enduring vitality of comity in a globalized World. George Mason Law Rev (24):1069 Guzman AT (2004) The case for international antitrust. Berk J Int Law 22(3):355 Guzman AT (2010) Competition law and cooperation: possible strategies. In: Andrew Guzman A (ed) Cooperation, comity, and competition policy. Oxford University Press, Oxford Haas P (1992) Introduction: epistemic communities and international policy coordination. Int Organ 46(1):1 Huizing P (2017) Fining foreign effects: a new frontier of extraterritorial cartel enforcement in Europe? World Compet 40(3):365 Huizing P (2018) InnoLux v AU optronics: comparing territorial limits to EU and US public enforcement of the LCD cartel. J Antitrust Enforcement 6(2):231 Laprévote FC (2019) ‘Competition policy within the context of free trade agreements’ DAF/COMP/GF(2019)5 Lee HY (2017) ‘Applying competition policy to optimize International Trade Rules’ Korea Institute for International Economic Policy (KIEP) Staff Paper 2017/01 Monti G (2016) EU competition law in a global context. In: Patterson D, Sodersen A (eds) A companion to European Union Law and International Law. Wiley Blackwell, Hoboken, p 315 OECD (2014a) Recommendation concerning International co-operation on competition investigations and proceedings OECD/LEGAL/0408 OECD (2014b) International co-operation in competition law enforcement OECD (2015a) Roundtable on cartels involving intermediate goods, background paper OECD (2015b) Roundtable on cartels involving intermediate goods OECD (2015c) Inventory of international co-operation agreements on competition OECD (2017a) The extraterritorial reach of competition remedies DAF/COMP/WP3(2017)4 OECD (2017b) OECD Business and Finance Outlook 2017. OECD Publishing, Paris OECD (2017c) OECD inventory of international co-operation agreements between competition agencies (MoUs)

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OECD (2018) Regional competition agreements: benefits and challenges DAF/COMP/GF(2018)5 OECD (2019) Review of the recommendation of the council concerning effective action against hard core cartels [OECD/LEGAL/0294] OECD and ICN (2020) International enforcement co-operation Peale SJ (2006) Celestial mechanics – the three body problem. In: Encyclopaedia Britannica Popofsky MS “Extraterritoriality in U.S. Jurisprudence”, in 3 Issues in Competition Law and Policy 2417 (ABA Section of Antitrust Law 2008) Prete L (2018) On implementation and effects: the recent case-law on the territorial (or extraterritorial?) application of EU competition rules. J Eur Compet Law Practice 9(8):487 Rill JF, Seidl JI (17 February 2017) ‘A commitment to convergence’ Mlex Shah O, Renner C, Theodosiou L (2019) Intel, iiyama, power cables: A Revolution in the Treatment of Territoriality and Jurisdiction in EU Competition Law. J Eur Compet Law Practice 10(2):80 Townley C (2018) A framework for European competition law: co-ordinated diversity. Hart, Oxford van Waarden F, Drahos M (2002) Courts and (epistemic) communities in the convergence of competition policies. Eur Public Policy 9(6) von Papp FW (2012) Competition law and extraterritoriality. In: Ezrachi A (ed) Research handbook on international competition law. Edward Elgar, Cheltenham von Papp FW (2017) Competition law in EU free trade and cooperation agreements (and what the UK can expect after Brexit)’ Whish R, Bailey D (2015) Competition law, 8th edn. Oxford University Press, Oxford Wilks S (2007) Agencies, networks, discourses and the trajectory of European competition enforcement. Eur Compet J 3:437 Wong-Ervin K, Kobayashi BH, Ginsburg DH, Wright JD (n.d.) Extra-jurisdictional remedies involving patent licensing. https://ssrn.com/abstract¼2870505 Yntema HE (1966) The comity doctrine. Mich Law Rev 65(1):9

Pedro Caro de Sousa is a Competition Expert with the OECD since 2015, where he has been working on a variety of competition-related topics. He is a qualified lawyer in Portugal and a barrister of England and Wales, having worked for Linklaters LLP between 2005 and 2014. He obtained a DPhil from the University of Oxford in 2012, where he was a tutor in EU and competition law. Before joining the OECD, Pedro was a lecturer in Law at the University of Reading, and a tutor at King’s College, University of London. He was also a Visiting Scholar at the European University Institute and an Associate Research Fellow at New York University’s School of Law.

The Extraterritoriality of European Competition Law Under a Brazilian Perspective Daniel Favoretto Rocha

Abstract This paper explores the potential effects of European competition law’s extraterritoriality over Brazil, providing a Brazilian perspective of the phenomenon of the European Union’s growing regulatory power. This phenomenon can be approached from different angles, having this paper focused on (a) analyzing whether the Brazilian competition authority (CADE) operates under a European soft law and (b) identifying potential effects of EU extraterritoriality over the Brazilian market as a developing country. Thus, this paper first identifies whether European extraterritoriality can affect Brazil overall, based on international trade statistics and on the criterion of qualified effects, and, then, it explains how this could occur, without defining these effects as either positive or negative. Despite some legal uncertainty on the EU criteria of extraterritoriality, this paper asserts that it can affect Brazil, through an expected increase of common-jurisdiction cases. As to how it could affect Brazil, despite the European inspiration for the 2011 Brazilian legislative reform and CADE’s international agenda, CADE’s case law indicates that a European soft law is limited in Brazil, as both jurisdictions have been developing their respective competition policies in a relatively autonomous way. Considering these differences and the proximity through the EU-Mercosur trade agreement, one should expect closer dialogue between CADE and the Commission, challenges of harmonizing competition policies, and demand for Brazilian market players to increasingly consider European competition policy into their risk analysis.

Researcher at FGV Law School (Fundação Getúlio Vargas) and lawyer specialized in competition law. Former student in FGV’s Global Law Program and former trainee at São Paulo’s Appellate Court. The author is sincerely grateful to Professor Nuno Cunha Rodrigues and to the peer-reviewer for the comments given to this paper’s draft. D. Favoretto Rocha (*) Center for Research on Financial and Securities’ Markets, FGV Law School, São Paulo, Brazil e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 N. Cunha Rodrigues (ed.), Extraterritoriality of EU Economic Law, European Union and its Neighbours in a Globalized World 4, https://doi.org/10.1007/978-3-030-82291-0_8

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1 Introduction The recent European Court of Justice (“ECJ”) decision, in the Intel Corporation v. European Commission case (“Intel case”), has caused widespread debate in the international legal community. Since 2017, when the Grand Chamber issued its decision upon the case, the discussion about extraterritoriality resurfaced, even though this topic per se is not new, having been subject to many considerations in previous years.1 Such repercussion is due mainly to the fact that, through the Intel case, the ECJ affirmed the extraterritoriality of the European Union’s competition law and, therefore, of the European Commission’s (“Commission”) jurisdiction to adjudicate facts that took place outside the territory of its Member States.2 Many looked at the case under a public international law perspective, while others focused on the competition policy agenda behind it, although both perspectives are difficult to separate when it comes to the topic of extraterritoriality. The main discussion surrounding the outcome of this case concerned Europe as a growing global regulatory power. During the last two decades, the European Union (“EU”) enacted rules to regulate foreign conduct in various fields, with potential to affect foreign countries, reason why many have qualified this phenomenon as a result of the EU’s growing relevance in the global economy (Scott 2013, pp. 87–88). However, very little has been said about the relation between the expanding reach of European competition law and Brazil.3 Despite the repercussion mentioned above, few studies have attempted to analyze the potential effects of EU’s recently

1

A landmark in the legal debate about extraterritoriality is the famous Lotus case (1927), of the International Court of Justice. The theme of extraterritorial effects of European Union law has also been present in scholar research, especially when it comes to public procurement rules and human rights (Sanchez-Graells 2018, pp. 3, 5). Extraterritoriality has been widely debated in U.S. courts regarding the Alien Tort Statute and the Foreign Corrupt Practices Act. Extraterritoriality has also been particularly linked to antitrust issues due to U.S. courts’ extraterritorial application of their domestic antitrust laws, pursuant to case U.S. v. Aluminum Co. of America (148 F.2d 416, 443, 1945). 2 It is worth reminding that the competence to adjudicate is different from the competence to enforce. Under public international law, although the European Union has jurisdiction to legislate and judge certain extraterritorial matters, the Commission and the ECJ do not have jurisdiction to enforce their decisions extraterritorially, otherwise, the sovereignty of other nation-States would be violated, as pointed out in Advocate-General Mayras’ opinion (1972, p. 695). 3 Most references to Brazil in the topic of European extraterritoriality regard data protection rules only, leaving very little said about EU extraterritorial competition law vis-a-vis Brazil. This finding is based on research made in the following search engines, with the following terms: (i) Social Science Research Network (https://www.ssrn.com); ; (ii) Google Scholar (https://scholar.google.com.br/), ; (iii) Google’s general search (https://www.google.com.br/), , , ; (iv) Competition Policy International (https://www.competitionpolicyinternational.com/), (v) JStor (www.jstor.org), .

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framed extraterritorial competition law in Brazil,4 even more rarely with the approach adopted in this paper. These effects are, therefore, this paper’s object of study. A first question worth answering is: why Brazil? This clarification is important to understand the relevance of this paper for today’s debate and the context in which it is produced. Two main motives lead this paper to adopt a Brazilian perspective over EU extraterritorial competition law: Brazil’s trade relation with EU countries and Brazil’s growing relevance in terms of competition policy. Brazil is South America’s largest economy and a key trading partner for European countries, in exporting goods like soy and cellulose5 and importing manufactured products.6 Over the last years, Brazil has been considered one of “the EU’s biggest trade partners”.7 Behind China, the United States (U.S.), and Argentina, the Netherlands is among Brazil’s top five trade partners.8 Most of Brazil’s exports are destined to the Netherlands and Spain, while most of Brazilian imports come from Germany, behind China and the U.S. only.9 In other words, despite Brazilian international trades being significantly concentrated on China and the U.S., the economic relevance of Brazil to European countries and vice-versa should not be underestimated. A historical analysis of the trade relationship between Brazil and the EU demonstrates that, despite a few occasional setbacks and the diversity of Brazilian trade partners, both Brazil and the EU have managed to maintain relevant to one another’s trade balance (Thorstensen et al. 2013, p. 2). In addition, the recent international

4 Despite a few methodological differences in comparison with this paper, Ivo Waisberg (2006) has brought great contribution to the Brazilian legal study in this field, having analyzed the potential effects of developed countries’ extraterritorial competition policies over developing countries. However, considering today’s scenario, Waisberg’s work demands an updated support and a more jurisprudential approach. 5 In 2018, the total net value of Brazil’s exportation to the European Union reached a total of US$ 42.108.377.903,00, according to Brazil’s Trade Ministry’s database Comex. See more at . According to the MIT statistics platform Atlas Media OEC, in 2017, Europe was the second leading continent for which Brazil exported goods, with 20% of Brazilian exports. See more at . 6 In 2018, the total net value of Brazil’s imports from the European Union reached a total of US$ 34.763.077.822,00, according to Brazil’s Trade Ministry’s database Comex. See more at . According to the MIT statistics platform Atlas Media OEC, in 2017, Europe was the second leading continent from which Brazil imported goods, with 27% of Brazilian imports. See more at . 7 In the 2016 institutional publication Free trade is a source of economic growth, Brazil is listed among the top ten trade partners of the European Union and considered one of the “biggest trade partners” (2016, pp. 6, 7). See more at . 8 See more at the database World Integrated Trade Solution, at . 9 Statistics from July 2020, available at .

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trade agreement between the EU and Mercosur tends to lead Brazil and Europe closer together, in a broad economic partnership.10 This economic proximity between Europe and Brazil is essential for the perspective provided within this paper, since market conditions of one region may have effects over the other and the Intel case gave jurisdiction based precisely on effects. Another reason why a Brazilian perspective is crucial over this matter is the growing relevance of Brazil’s competition policy. A demonstration of this growing relevance is Brazil’s recent admission, in early 2019, as a permanent associate member of the Competition Committee of the Organization for Economic Co-operation and Development (“OECD”).11 In addition, the numerous recognitions Brazil’s competition authority (Conselho Administrativo de Defesa Econômica— “CADE”) received in recent years also indicate its growing relevance.12 Thus, with a Brazilian perspective of the European phenomenon described above, this paper will analyze the effects of European competition law’s extraterritoriality, as adopted by the ECJ, over Brazil, with no intention in qualifying those effects as either negative or positive. Specifically, this paper seeks to identify these extraterritorial effects over the Brazilian competition policy and the behavior of Brazilian companies. Therefore, the questions this paper aims to respond are (i) can the extraterritorial reach of European competition law affect Brazil, in particular? (ii) If so, how can it affect Brazil? By these conducting questions, it seems clear that this paper focuses on European extraterritoriality and its effects on Brazil, not the other way around. Brazil’s competition law extraterritoriality and its possible effects on the EU is not under this paper’s scope, reason why CADE’s case law regarding extraterritorial application of Brazilian law will not be addressed. Indeed, CADE, along with its territorial grounds, also reasons its jurisdiction on effects, due to explicit legislative provision.13 However, this issue is out of focus, since it is not a determinant of EU policy’s effects on Brazil. The effects studied in this paper are both EU competition law’s legal effects over the Brazilian competition policy—i.e. a potential role of EU law as soft law for Brazilian competition policymaking—and economic effects over Brazilian

10

According to then Commissioner for Trade, Cecilia Malmstrom, this EU/Mercosur agreement “brings Europe and South America closer together in a spirit of cooperation and openness. Once this deal is in place, it will create a market of 780 million people, providing enormous opportunities for EU businesses and workers in countries with whom we have strong historical links and whose markets have been relatively closed up to now”. Statement given on June 27, 2019. See more at . 11 To know more about Brazil’s adhesion to the Competition Committee, access and . 12 On August 2020, CADE was ranked among the ten best competition authorities worldwide for the eighth consecutive year. More at . 13 About this topic, see Jorge (2017), pp. 51–74; Jorge and Júnior (2018), pp. 53–79.

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companies’ behavior—i.e. to which extent will the Brazilian marketplace be affected by the extraterritorial reach of European law. In other words, EU’s alleged growing regulatory power can be approached from different angles, including its influence over other legal systems in the form of soft law and its effects over foreign markets through extraterritorial reach of its competition law. In order to verify whether any of these legal and economic effects are potential, this paper will analyse the Brazilian competition policy and marketplace based on the EU principle of extraterritoriality, measuring potential impacts according to how different EU case law turns out to be in comparison with CADE’s case law.14 The hypothesis initially set for this research was that the extraterritoriality of European competition law has side-effects in Brazil and will increasingly affect Brazil overall. This hypothesis is based on the researcher’s perception, as legal practitioner, that Brazil does some benchmarking toward European competition law and that many Brazilian companies operate on a multinational level. The comparative perspective adopted in this paper remains considerably unexplored by scholars who approached this topic, both in Europe and in Brazil.15 While the Brazilian competition policy has not been subject to inquiry by many European scholars, a day-to-day accompanying of CADE’s activities and of Brazilian competition law reviews also demonstrates that, even after the Intel case, EU extraterritoriality did not attract much attention of Brazilian scholars and practitioners.16 Thus, by acknowledging the relationship between both competition policies, this paper intends to contribute both to the European context and to the Brazilian one. It is worth pointing out that, although there will be use of some sources and references that fall outside the field of law, this paper adopts a mainly legal approach. To assert legal and economic effects, this paper will use the legal criteria of qualified effects adopted in the Intel case. As to the methodology used in this research, this paper adopts comparative and analytical methods. The comparative and analytical methods will be mainly based on case law analysis, both from the EU (Commission and the ECJ) and CADE. Attempting to provide an empirical approach, this paper analyzed trade statistics as well, to measure the impact of Brazilian corporate activity over the European 14

Measuring economic effects through comparative case law has certain methodological limitations, considering that case law is not the only influential factor over economic performance. However, this methodological approach was chosen for this paper due to its intention on maintaining a strictly legal approach, as well as to the convenience on focusing on only one influential factor. 15 Please find footnotes n. 03 and 04 above. In addition, we refer to the many academic works approaching the ECJ’s decision at the Intel case, demonstrating its widespread repercussion. However, these researches have not adopted the same perspective of the present paper, e.g. Sokol (2017), who used the ECJ’s decision to explore the impact of economic rationale over legal decisions of various jurisdictions. 16 This perception about the Brazilian context results from the day-to-day accompanying of, for example, the debates taken place between commissioners, during CADE’s judgement sessions, and publications of the two main Brazilian law reviews in this field, Revista de Defesa da Concorrênia and Revista do IBRAC.

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Economic Area (“EEA”), allowing us to determine whether Brazilian companies are exposed to the European extraterritorial policy and, therefore, its potential effects in Brazil. In order to provide answers to the conducting research questions, this paper has been divided in three main sections, beside this introduction and the concluding remarks. While the first section will address the first conducting question—i.e. whether the extraterritorial reach of EU competition law can affect Brazil’s market environment beyond singular players occasionally submitted to the EU’s jurisdiction—, the second and third sections will try to answer the other conducting question—i.e. how it can affect Brazil. This paper first explores EU competition law’s criteria for extraterritorial reach and how Brazil’s trade flows potentially fit into that criteria, making it a market potentially affected by EU extraterritoriality beyond singular cases occasionally submitted to EU jurisdiction. Depending on the intensity of the trade relation between EU countries and Brazil, the bigger the potential of Brazilian players affecting the EEA and, thus, the European competition authority will have jurisdiction over mergers and conducts involving Brazilian companies that took place outside EU territory, although it all depends on a case-by-case basis. Once Brazil can be considered a potentially affected market, the following section will explore how such effects could occur. There are many ways a country can be affected—positively or negatively—by another jurisdiction’s extraterritoriality, such as applying different policies and standards to that country’s market players. Thus, to analyze this aspect, the second section will focus on eventual key differences between the European and the Brazilian policies. Depending on how different these policies are, the more Brazilian players will have to adapt to a new scenario of extraterritorial reach of EU competition law. In order to assert these differences, one method is to analyze CADE’s case law and identify the precedents that appealed to European law as a guiding force. By such analysis, it is possible to determine whether Brazilian policymaking benchmarks, to a certain extent, European competition law and, therefore, whether there is an extraterritorial reach of European soft law. Finally, after asserting how different Brazil and EU competition policies differ from one another, the third section will point out to possible effects in Brazil, based on such differences of competition policies potentially being applied to Brazilian players. Among these effects, one should consider the increase of settlements’ spillover effects in foreign jurisdictions and the increase of private enforcement of competition law by European litigators against Brazilian companies. Although these effects can be taken naturally in a globalized economy, this paper intends to demonstrate that EU extraterritoriality can enhance these effects and provide the EU with an additional legal tool to shape the global economy. To conclude, the main ideas of the previous sections will be summarized and some research agenda will be proposed at the end. Additionally, considering the recent development in the EU-Mercosur agreement, this paper makes a final remark, as to the necessary caution in harmonizing Brazilian and European competition policies, without harming the independence of both jurisdictions, on the one hand, and not turning compliance to antitrust rules too costly, on the other hand.

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2 Criteria for Extraterritorial Application of EU Competition Law and Brazil’s Proximity Being this paper a result of legal research, the delimitation of relevant legal rules and case law is essential before providing answers to the conducting questions. Therefore, a brief explanation of the extraterritoriality of European competition law and its criteria of application will be made, in order to set the legal framework over which the conducting questions will be answered. During the last decades, the Commission’s and the ECJ’s case law regarding the extraterritorial reach of competition law has evolved (Behrens 2016), most notably, through the cases Béguelin Import v. GL Import Export (EU 1971, “Béguelin case”), ICI v. Commission (EU 1972, “Dyestuffs case”), Ahlstrom et al. v. Commission (EU 1993, “Woodpulp case”), Gencor Ltd. v. Commission (EU 1999, “Gencor case”), and, more recently, the 2017 Intel case (EU 2017). In these five leading cases, the European jurisdiction approached the extraterritoriality matter under different aspects of competition law, more specifically, in cases of collusion (Dyestuffs and Woodpulp cases), unilateral conduct (Intel case), merger control (Gencor case), and private litigation (Béguelin case). In the first cases involving this debate, namely, the Béguelin, Dyestuffs, and Woodpulp cases, the ECJ used legal reasoning that bypassed the challenge of asserting the extraterritoriality of European competition law. Two main doctrines were used to bypass this challenge, namely, the “single economic entity” doctrine and the implementation theory, as detailed below. In the Dyestuffs case, the fact that the defendant owned subsidiaries in territory of EU Member States gave enough ground for the Commission’s territorial jurisdiction. To assert that, the ECJ used the figure of the “single economic entity”, defining the defendant, located outside EU territory, and its subsidiaries, located in EU territory, as one single entity.17 In the Woodpulp case, considering that the infringing companies exported goods to the European Common Market, the differentiation between the formation of the cartel and its implementation was enough to set the Commission’s territorial jurisdiction over the foreign companies. Based on this theory, the export of goods to the Common Market, with prices influenced by the defendants’ collusion, was considered an implementation of the infringement in EU territory.18 The question of The following excerpt of ECJ’s decision in the Dyestuffs case can shed some light on this reasoning: “The actions for which the fine at issue has been imposed constitute practices carried on directly within the Common Market. By making use of its power to control its subsidiaries established in the Community, the applicant was able to ensure that its decision was implemented on the market.” 18 The following excerpt of the ECJ’s decision in the Woodpulp case can enlight this reasoning: “The producers in this case implemented their pricing agreement within the common market. It is immaterial in that respect whether or not they had recourse to subsidiaries, agents, sub-agents, or branches within the Community in order to make their contacts with purchasers within the Community. Accordingly the Community’s jurisdiction to apply its competition rules to such 17

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whether the defendants had subsidiaries in EU territory was, therefore, irrelevant. In the Béguelin case, both the location of one of the parties and the implementation of the agreement in the Common Market were used as ground for the ECJ’s jurisdiction. Through these doctrines, the ECJ managed to reason its jurisdiction on territorial grounds, despite the Commission and the ECJ’s advocate-generals having defended an extraterritorial reach of competition law based solely on the effects of the conduct on the Common Market (effects-doctrine). Therefore, over the decades, the ECJ did not have to decide whether European competition law adopted the effects-doctrine, at least not in an explicit way, since some consider these cases to have implicitly recognized the relevance of effects for EU jurisdiction (Jorge and Júnior 2019; Fiebig 2016, p. 2). However, nowadays, after the Intel case, it is reasonable to say that European competition law has an extraterritorial reach based on effects, giving the Commission a broad jurisdiction, reason why it could be an attractive tool for the EU as a global regulatory power. In this case, Intel appealed against the General Court’s decision and, among other arguments, stated that the Commission had no jurisdiction to apply article 102 of the Treaty on the Functioning of the European Union (“TFEU”)19 to the exclusivity rebates agreed between the appellant and Lenovo, in China, in 2006 and 2007. The criteria to apply EU competition law, as set by the ECJ and proposed by Advocate-General Wahl, is the existence of qualified effects resulting from foreign conduct over EU market and welfare. Accordingly, the Commission will have jurisdiction when the conduct at hand produces “immediate, substantial and foreseeable” effects in the EEA. Such specification is extremely relevant, considering that not any effect is legally sufficient to ground the Commission’s jurisdiction. Without reaching the threshold of immediate, substantial, and foreseeable effects, no conduct can be subject to the Commission. This jurisdictional “barrier” can serve both as a guide to Brazilian companies that do not want to be subject to European competition law and as a “criterion of relevance” to European competition policy.

conduct is covered by the territoriality principle as universally recognized in public international law.” 19 Article 102—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: (a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions; (b) limiting production, markets or technical development to the prejudice of consumers; (c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.

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As Advocate-General Wahl pointed out in the Intel case, a wide concept of effects could have serious policy implications. He mentions the potential harm to the principle of good administration, considering the Commission’s limited resources, as well as potential risk of violating other countries’ sovereignty and jeopardizing legal certainty for businesses.20 Interestingly, the ECJ did not provide further details on these policy implications, leaving some room to define, in future cases, to what extent an extraterritorial reach of EU competition law could be considered harmful. Thus, some legal uncertainty exists in regard to the limits of the Commission’s jurisdiction. In many jurisdictions, the limits imposed by the competition authority to the effects-doctrine has been subject to debate for decades (Samie 1982, pp. 24–27). These limits involve a trade-off between, on the one hand, protecting the domestic market in an economy where harm is not necessarily dependent on territorial links to such market and, on the other hand, avoiding inefficient use of limited public resources, bis in idem discussions, and reciprocity backlashes from affected countries (Pereira Neto and Casagrande 2016, pp. 48–49). As some might say, this interpretation of competition law and the adoption of the effects-doctrine are legal responses to the growing complexity of a globalized economy, considering that principles of public international law were initially conceived with physical conduct in mind and with less interlinked economies (Whish and Bailey 2015, pp. 518–519). In addition, while international trade increased over the last decades along with the number of competition authorities worldwide, competition law enforcement continued primarily domestic (Saurabh 2017, pp. 88–89). In this context, nations attempt to adapt the limits of domestic jurisdiction to the challenges of growing globalized markets. This complex economic scenario of the twenty-first century was briefly described above, at the introductory section of this paper, helping to understand how transactions and anticompetitive practices easily produce effects cross-border. Regarding Brazil, as partially anticipated above, the economic ties with the European Common Market suggest that the EU principle of extraterritoriality allows the Commission to adjudicate a wide variety of practices taken place in Brazil and, thus, potentially affect Brazil beyond a few specific players. Brazil and EU countries have significant trade flow between themselves. In 2016, EU’s trade with Brazil accounted to 30.8% of EU trades with Latin America (EU 2019a). Brazil is by far the “single biggest exporter of agricultural goods to the EU worldwide” (EU 2019a), while the EU is the “biggest foreign investor in Brazil”, with a total of € 324.4 billion outward stocks in 2017 (EU 2019a). According to the Commission’s Directorate-General for Trade report on Brazil, Brazil was ranked in 12th place among EU’s trading partners of goods for 2018, considering import and export flows (EU 2019b, p. 09). Though not one of the biggest trading partners, this rank demonstrates a significant trade flow between the 20

Paragraph 303 of Advocate-General Wahl’s opinion.

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two entities and will most probably be outdated over the next years, due to the EU-Mercosur trade agreement mentioned above. The current draft of the EU-Mercosur trade agreement demonstrates that various topics will be agreed upon, including goods and services, and many barriers will be minimized (EU 2019c), reason why occasional anticompetitive practices by Brazilian companies and individuals will likely cause “immediate, substantial and foreseeable” effects in the EEA. Additionally, the creation of an EU-Mercosur market tends to bring Brazilian players into the spotlight for EU competition policy, given that Brazil is the biggest economy of Mercosur and such market may growingly affect the EEA. The connectivity of the digital economy should also be considered, since it has become growingly global and, therefore, it facilitates cross-border effects of anticompetitive conducts.21 Considering this international trade framework, it is reasonable to conclude that the extraterritorial reach of European competition law may increase cases of common jurisdiction, i.e. cases where both Brazil and the EU have jurisdiction. The economic proximity between Brazil and the EU provides ideal ground for Brazilian companies to produce “immediate, substantial and foreseeable” effects in the EEA, although every conduct should be addressed on a case-by-case basis. Therefore, in addressing the first conducting question of this paper, one should conclude that the extraterritoriality of European competition law can affect Brazil. The way through which this country could be affected is a more complex question that will be addressed on the following sections.

3 European Soft Law and CADE’s Case Law The EU authorities’ jurisdiction is not the only relevant criteria to measure the alleged expansion of European regulatory power. Another form of expanding regulatory power is through an expansion of soft law. For the purposes of this paper, soft law can be understood as a set of rules and principles that serve as informal guidance to behavior and decision-making. Though the concept of the term “soft law” is subject to debate (Nasser 2006, pp. 23, 95–96), it is commonly used under public international law, to refer to international regulation with no formal treaties between States (Dunoff et al. 2006, p. 28).

“The digital economy is global, so an international agenda is needed to harness the full benefits of expanded competition. Doing this will require cross-border co-operation between competition authorities and governments in sharing best practice and developing a common approach to issues across international digital markets.” (Crown 2019, p. 118). “A globally coordinated approach to the challenges raised in competition law by the digital age remains important wherever possible. Not only are the substantive issues similar across jurisdictions, but remedies should be coordinated where possible to avoid undermining the very cross-border competition that the online world has facilitated.” (Jeffs 2019).

21

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Despite the controversy of whether soft law can really be considered law—since, for some, the concept of law resides on its binding and enforceable nature—, a general concept of this phenomenon is that soft law is not legally bidding, but may surround decision-making in ways that strongly influences concrete outcomes.22 In the present study, European soft law would be verifiable every time a non-European authority uses European law as guidance for legal interpretation and enforcement. Under a Brazilian perspective, an extension of EU soft law would be verified if Brazil’s competition authority (CADE) applied European competition rules and principles in its case law. Therefore, this paper mapped CADE’s case law and analyzed all cases in which this competition authority mentioned European law, in view of assessing whether there is any European soft law in CADE’s practice. In Brazil, lawyers who practice in the competition law field usually use comparative law to litigate. This use of comparative law is probably a result of four elements: first, CADE’s incipient case law in certain topics, leaving some legal uncertainty and, therefore, the need of comparative law as guidance; second, Brazil’s use of foreign legal systems as inspiration for the enactment of its national antitrust law and modeling its institutional framework; third, Brazilian attorneys’ attempt to gain reputation by demonstrating knowledge on foreign legal issues; and fourth, the fact that this field is highly selected in Brazil, reason why practitioners in this field usually have previous experience abroad, through L.L.M. courses. Due to this use of comparative law, European competition law is occasionally evoked by litigators, either in merger review or in antitrust investigations. However, despite some use of comparative law and European law by attorneys, CADE does not always address these arguments. In addition, despite CADE’s distinguished international agenda (OECD 2019, pp. 151–158), the commissioners’ references to foreign competition policies are limited when exercising their jurisdiction. These findings are mostly based on the author’s impression, from legal practice. Therefore, to adequately investigate the extent of European soft law, a research in CADE’s case law was made for this paper. The research was made on CADE’s database,23 by using different search-terms and filters.24

“Soft law instruments, though not enforceable by legal sanction, are often framed in legal language and in many respects may exhibit an authority comparable to that of treaties and customs.” (Dunoff et al. 2006, p. 36). 23 CADE’s database can be accessed through the following URL: . 24 CADE’s advanced research tool allows the use of filters to navigate in the database. The searchterms used were the following, with their respective translations: (”European law”); (“European regime”); (“European competition law”); (variant of “European competition law”). These terms were researched through the following filters, in CADE’s advanced research options: “Voto” (“Commisioners’ opinion”), “Nota Técnica” (“General-Superintendence’s technical statements”), “Parecer” (“General-Superintendence’s opinion”), “Parecer Jurídico” (“Advocate-General’s opinion”), “Parecer MPF” (“Ministério Público’s legal opinion”). These 22

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Considering that CADE is composed of different internal bodies, with different jurisdictions, this research analyzed the work and opinion of these bodies separately. A brief explanation of CADE’s internal structure is useful, in order to understand the material researched for this paper and its results. CADE is structured upon four main internal bodies: the GeneralSuperintendence, the Administrative Tribunal, the Federal Advocate’s Office, and the Department of Economic Studies. A fifth public body operates along the Brazilian competition authority, but does not integrate it, more specifically, the Ministério Público Federal (Federal Prosecutors’ Office). The jurisdictional competences of these bodies are detailed at federal Law n 12,529/2011 and at CADE’s internal regulation.25 The General-Superintendence (“GS”) is the authority’s investigative unit and initial merger reviewer, being responsible for conducting administrative antitrust investigations, exercising merger control in first instance, and accusing investigated parties before the Administrative Tribunal, for the practice of anticompetitive infringements.26 The Administrative Tribunal is the authority’s collective decision-making body, composed of seven commissioners who are appointed by the President, after the Senate’s approval, and have a four-year term in office. This tribunal is responsible for exercising merger control under appeal and deciding cases of anticompetitive conduct.27 Although the Administrative Tribunal’s decisions are definitive in the Executive branch, they are all subject to judicial review. The Administrative Tribunal is presided by CADE’s presidency, which is led by one of the commissioners. CADE’s third internal body, also known as “ProCADE”, is the Federal Advocate’s Office, which is an auxiliary body to CADE’s presidency and part of the Attorney-General’s Office. The Federal Advocate’s Office has the important role of giving legal advice to the GS and the commissioners, as well as representing CADE in judicial proceedings.28 Among known measures taken by this body are the auxiliary and non-bidding opinions before the Administrative Tribunal and the requests of judicial search-and-seizure warrants, to attend to the antitrust investigations conducted by the GS. The fourth internal body is the Department of Economic Studies, commonly known as “DEE” for its Portuguese acronym. This department provides expert opinion and technical reports on economics and statistics to the GS and the commissioners,29 allowing for a more scientific approach toward cases under the competition authority’s jurisdiction. search-terms were used twice in these filters, on the following dates: 21 April of 2019 and 29 June of 2019. 25 The English version of the Brazilian antitrust law (federal Law n 12,529/2011) can be accessed at . The English version of CADE’s internal regulation is available at . 26 Pursuant to article 10 of CADE’s internal regulation and article 13 of Law n 12,529/2011. 27 Pursuant to article 18 of CADE’s internal regulation and article 09 of Law n 12,529/2011. 28 Pursuant to article 08 of CADE’s internal regulation and article 15 of Law n 12,529/2011. 29 Pursuant to article 11 of CADE’s internal regulation and article 17 of Law n 12,529/2011.

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Finally, the fifth body that operates in Brazil’s antitrust framework is the Ministério Público Federal, known as “MPF” for its Portuguese acronym. The MPF is better understood as a Federal Prosecutors’ Office, integrating the independent and sui generis Brazilian institution called Ministério Público, whose role includes criminal prosecution and class action lawsuits. The MPF has a division specialized in competition law and criminal offenses related to economic behavior. This division operates before CADE, specifically, to render opinions in administrative proceedings for the imposition of administrative penalties over anticompetitive infringements.30 The interaction between CADE and the MPF is of great relevance, considering that cartels are both administratively sanctioned by CADE and criminally prosecuted by the MPF. This is a reason why the MPF usually opines in cartel cases and participates as an intervening third party to CADE’s leniency agreements. Though rare, the MPF can also give its opinion on cases of unilateral conduct and gun jumping. Given this institutional framework, the most relevant opinions and decisions for this research are those of the GS, the Administrative Tribunal, the Federal Advocate’s Office, and the MPF, since their work have a legal approach toward cases of competition concern, contrary to the Department of Economic Studies, whose approach is exclusively economic and mathematical. In this research, by using the methods specified on footnote n. 24 above, five technical statements of the GS, five decisions of the Administrative Tribunal, eleven MPF opinions, and no opinion of the Federal Advocate’s Office were found and analyzed, for the purposes of an alleged European soft law.31

Pursuant to article 31 of CADE’s internal regulation and article 20 of Law n 12.529/2011. The following search results appeared and were considered in this paper’s analysis: Technical statements n 56/2016 of Administrative Proceeding n 08012.009566/2010-50; Technical statements n 40/2018 of Administrative Proceeding n 08700.000211/2015-51; Technical statements n 02/2016 of Administrative Proceedings n 08012.000504/2005-15 and 08012.008142/2011-59; Technical statements n 83/2016 of Administrative Proceeding n 08700.004974/2015-71; Technical statements n 24/2016 of Administrative Proceeding n 08700.007888/2016-00; Opinion of Reporting Commissioner Paulo Burnier at Administrative Proceeding n 08700.005418/2017-84; Opinion of Reporting Commissioner Alexandre Cordeiro Macedo at Administrative Proceeding n 08012.000030/2011-50; Opinion of Reporting Commissioner Alexandre Cordeiro Macedo at Administrative Proceeding n 08700.001020/2014-26; Opinion of Reporting Commissioner Alexandre Cordeiro Macedo at Administrative Proceeding n 08012.007011/2006-97; Opinion of Commissioner Marcos Paulo Veríssimo at Administrative Proceeding n 08012.006923/2002-18; MPF’s opinion n 06/2016 at Administrative Proceeding n 08012.003321/2004-71; MPF’s opinion n 35/2015 at Administrative Proceeding n 08012.001600/2006-61; MPF’s opinion n 29/2016 at Administrative Proceeding n 08012.009645/2008-46; MPF’s opinion n 16/2016 at Administrative Proceeding n 08012.010744/2008-71; MPF’s opinion n 02/2017 at Administrative Proceeding n 08012.006667/2009-35; MPF’s opinion n 05/2016 at Administrative Proceeding n 08012.001127/2010-07; MPF’s opinion n 08/2016 at Administrative Proceeding n 08012.009606/2011-44; MPF’s opinion n 34/2015 at Administrative Proceeding n 08012.000030/2011-50; MPF’s opinion n 33/2016 at Administrative Proceeding n 08700.006551/2015-96; MPF’s opinion n 35/2016 at Administrative Proceeding n 30 31

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As the search results demonstrate, the references made by CADE’s internal bodies and by the MPF to European law, over the last decade, were not many and were mostly restricted to explaining the concept of infringement by object, in cases of anticompetitive conducts. In these occasions, European law was mentioned as a source of inspiration to the Brazilian legislator and a guide to interpreting Brazilian competition law, in this specific topic. Although, at a first glance, these references may appear to demonstrate a European soft law, a thorough analysis of these precedents indicates otherwise. European law is usually mentioned in CADE’s case law in relation to one specific topic (infringement by object), lacking further benchmarking in many other topics of crucial importance to the authority’s daily work. When looking at legal instruments that CADE frequently uses and mentions as its most important policy instruments, like the leniency agreements and cease-anddesist settlements, European law is rarely, if ever, mentioned. The references made to European law by the MPF and CADE’s internal bodies usually had the purpose of complementing the opinion’s legal reasoning and justifying the approach adopted toward the investigated conduct. In the analyzed documents, most references to European law were similar to one another, as if CADE’s civil servants used standardized excerpts to enhance procedural efficiency. Distinctively, among CADE’s case law, European law exercised a more decisive role in case n 08012.006923/2002-18, where former Commissioner Marcos Paulo Veríssimo extensively explored European competition law to define the right approach toward the investigated conduct, namely, the infringement by object. In this case, the Commissioner asserted how the Brazilian competition law was inspired by European law, indicating excerpts of Brazilian Law n 12,529/2011 that are basically translations of the TFEU. In addition, different from other precedents that referred to European law, this decision went as far as to use the ECJ’s case law, arguing that European jurisprudential considerations were directly applicable to Brazil, for purposes of interpreting Brazilian law.32 Other precedents, however, give certain relevance to European law, but in a very isolated reference, not being enough to assert that CADE’s internal bodies or the MPF applied European law in their jurisdiction. Usually, Brazilian Law n 12,529/ 2011 and CADE’s own precedents were used as legal reasoning, in a way that European law exercised a secondary and complementary role. In other words, in the

08012.007011/2006-97; MPF’s opinion n 36/2016 at Administrative Proceeding n 08700.002821/2014-09. 32 Commissioner Marcos Paulo Veríssimo’s opinion, at the Administrative Proceeding n 08012.006923/2002-18: “These same issues were later clarified in subsequent decisions of the ECJ, such as, for example, in case T-112/99, Metropole Television v. Commission [2001] (. . .). These are elements fully applicable to Brazilian law (also, because the writing of the corresponding rules is almost the same). (. . .) I want to emphasize, once again, that the same system of interpretation can and must be applied to the Brazilian law. And this is applicable not only because the European system inspired the Brazilian one or because the Brazilian legal text is almost the same as the European text.” (author’s translation).

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occasions where European law appeared in CADE’s case law, it had the nature of obter dictum, not of ratio decidendi to CADE’s decisions and to the MPF’s opinions.33 Indeed, CADE is well known for its international agenda, as demonstrated, for example, by the international awards it received34 and its admission on the OECD Competition Committee and on the International Competition Network (“ICN”) Framework on Competition Agency Procedures.35 In addition, CADE has evoked international cooperation with foreign authorities, including the EU, in leading cases like the Bayer/Monsanto and the Suzano/Fibria mergers, in 2018 (CADE 2019, p. 31). This type of international cooperation is key to CADE’s role, especially in cases of international cartels, for serving the summons and discovery purposes, and complex global mergers, where CADE seeks to minimize remedies’ cross-border adverse effects (OECD 2019, pp. 151–152). This international agenda, however, does not necessarily implicate a European soft law in CADE’s case law. Specifically, in the field of competition law, Brazil has been a growing distinction in the international scenario, as the recognitions mentioned above demonstrate. This growing distinction results from a relatively autonomous development of competition policy. The limited references to European law in CADE’s case law, as seen above, demonstrate this relative autonomy. Another indication that CADE has been developing its competition policy in a relatively autonomous manner—i.e. without strong guidance from European competition law—is the BRICS working group on digital economy, gathering Russian, Chinese, Indian, South African, and Brazilian competition agencies.36 Brazil initiated this project at the V BRICS Competition Conference in Brasília, in 2017, and currently shares the working group’s coordination with Russia (BRICS 2019, p. 03; CADE 2020, p. 31). Additionally, Brazil appears to have been enforcing competition law more vigorously than other developing countries.37 Naturally, one should always recognize the fact that European law and even other jurisdictions served as important guidance to the structuring of the Brazilian

To know more about the difference between ratio decidendi (the rationale and main arguments of the decision that create biding precedent) and obter dictum (secondary reinforcing arguments), see . 34 Among the awards CADE received over the last years, important note must be made to the Concurrences’ Antitrust Compliance Awards in 2021, the Global Competition Review (GCR) award in 2019 and the Antitrust Writing Awards in 2016. 35 See more at . 36 For more about this working group’s report, see . 37 “To date only a few countries have taken action to penalise transgressing companies or recover compensation. No developing country, except Brazil, has taken action against [international] cartels.” (Saurabh 2017, p. 98). 33

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competition law system, considering European competition law’s inspiration for Brazil’s legislative reform. This guidance is evident in the 2007 legislative report of Representative Ciro Gomes, regarding the bill that later resulted in Law n 12,529/2011 and restructured the Brazilian competition law system, currently in force. In this report, where the legislative justifications are presented together with the proposed bill, the European legal framework was mentioned in some occasions, as benchmarking for the proposed legislative changes.38 In addition, the resulting 2011 legislative reform of the Brazilian competition law system implemented the ex-ante merger control, strongly influenced by the models of merger control adopted in foreign jurisdictions, like the European one (Pereira Neto and Casagrande 2016, pp. 59–60). Therefore, some level of influence of European competition law in Brazil is undeniable. However, over the last years, the development of the Brazilian competition policy took a more autonomous route, with few references to European law in CADE’s case law. Despite the use of European competition law by scholars and litigators, the existence of a European soft law is, at most, limited in Brazil, considering CADE’s institutional practice.

4 Extraterritorial Effects in Brazil According to the previous sections, the Commission’s and the ECJ’s criteria of extraterritoriality can affect Brazil beyond singular cases, while CADE’s case law has limited, if any, European soft law. In other words, there will be potential common-jurisdiction cases where the legal approach and outcome might diverge between both jurisdictions. Thus, having these findings in mind, it is worth continuing to investigate the potential effects of European competition law extraterritoriality in Brazil. The study of extraterritoriality was intense in the last decades, due to the globalization that characterized the shift of the twenty-first century. Globalization is a phenomenon that, though it may be focused on economic aspects, also involves social and cultural elements, reason why so much interest was put into studying it. With these studies on extraterritoriality, some usual effects of this phenomenon have been previously identified. Typically, extraterritoriality affects countries in different ways, depending, for example, on whether the affected country is a developed or a developing country. Some say that the application of competition law can be highly influenced by economic and political decisions and, therefore, the extraterritoriality of a developed

Bill n 3.837/2004 proposed by sponsoring Representative Carlos Eduardo Cadoca. Legislative records available at .

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country’s competition law is abusive for developing countries (Waisberg 2006, p. 95). Under this view, developed countries’ competition law extraterritoriality could be a tool to shape the international economy in favor of those domestic markets in detriment of developing countries. Such could be especially true when the criteria of extraterritorial reach of competition law lacks legal certainty. Extraterritoriality with harmful effects to other countries can lead these nations to enact blocking statues, i.e. statutes that prevent foreign discovery of evidence and refusal to recognize foreign antitrust judgements, similar to what happened in European countries unsatisfied with U.S. extraterritoriality in the twentieth century (Fiebig 2016, p. 1). However, developing countries should have greater concern about the economic harm blocking statutes may cause to their own economies, especially in the case of developing liberal economies that wish to growingly open their domestic markets to foreign investment. In addition, extraterritoriality can define standards on internal market access for foreign companies and individuals, favoring performance optimization and European norm catalyzation (Sanchez-Graells 2018, p. 03). In this sense, extraterritoriality can also shift incentives of developing countries’ players to comply with developed countries’ laws, occasionally favoring developing countries that lack effective antitrust laws. As some of these effects demonstrate, extraterritorial effects on developing countries are not simple to identify neither to qualify as positive or negative. Moreover, developing countries are not the same among themselves, demanding a case-by-case analysis. In the case of Brazil, not all of these effects are necessarily applicable. Based on the previous sections, some possible effects are addressed below. Considering that EU internal market is highly attractive to Brazilian companies and investors, as demonstrated on Sect. 2 of this paper, European law standards tend to influence the behavior of Brazilian market agents. Such influence would occur even if these agents do not enter the EU market through exports or subsidiaries, being sufficient for the foreign agents to produce “immediate, substantial and foreseeable” effects. Naturally, some uncertainty exists as to (a) the limits of European extraterritoriality based on the effects-doctrine, as indicated on Sect. 2 above, and (b) a player’s predictability on the exact cross-border effects of its conduct. Even though, when Brazilian companies engage in behavior with probable cross-border effects, those companies would be legally advised to include European standards into their risk analysis and, therefore, such companies should adopt measures of compliance to such standards. When Brazilian companies and individuals become more exposed to the Commission’s jurisdiction, they become subject to standards not necessarily equivalent to those set in Brazilian law. The previous section indicated that European soft law is limited in Brazil, despite the Brazilian authority’s international agenda and benchmarking. Competition authorities in different jurisdictions use economic reasoning and similar legal approaches to address cases of antitrust concern. Despite these

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similarities, the differences between jurisdictions should not be overlooked, since competition law enforcement varies according to cultural and political elements in each legal system (Lancieri 2017, pp. 10–11). Competition authorities have different priorities, due to their different policy objectives, as well as different standards of proof for certain infringements (Saurabh 2017, p. 93). The legal standards of economic behavior, therefore, are not the same in both jurisdictions and some adaptation will be required, as European law becomes firmly extraterritorial and Brazil’s market comes closer to the EU through the Mercosur agreement. The relatively autonomous development of the Brazilian competition law system, as indicated in the previous section, helps to understand how cases of common jurisdiction will not necessarily be addressed with the same legal approach. To illustrate these different approaches, a recent case of unilateral conduct can help elucidate the matter, in more concrete terms.39 The Google AdSense case was one of the Commission’s investigations toward Google, for alleged abuse of dominance. The case was submitted both to the Brazilian and the European jurisdictions, not to mention other jurisdictions, such as the U.S. The case consisted of an alleged abuse of dominant position by Google, in online advertising, through abusive restrictions to rivals in its online search advertising intermediation platform. In 2019, the case was decided in both jurisdictions. Under the European jurisdiction, Google was convicted and fined in the total value of €1.49 billion,40 while, in Brazil, the case was dismissed, since the Administrative Tribunal saw no consumer harm and expressively adopted a more cautious approach toward digital markets.41 This disparity in analyzing the same case helps to understand the differences between both jurisdictions. Despite these differences, the concern on multijurisdictional cases and occasional contradicting decisions is not new in public international law (Nasser 2015, p. 105). The known cases Yukos v. Russia and Chevron and TexPet v. Republic of Ecuador illustrate multijurisdictional cases. One could argue, the extraterritorial reach of European competition law, after the Intel case, may intensify this concern, but the concern itself is not new for law practitioners and scholars. Indeed, some evidence shows that this concern should not be as intense as it appears, in relation to Brazil. The recently celebrated EU-Mercosur trade agreement

39

We chose not to use a cartel case, considering that differences in approaching cartel cases are less clear and usually regard different investigative outcomes. Cases of unilateral conduct, on the other hand, usually demand a more economic approach and, by involving only one conduct, can illustrate different approaches more clearly. 40 European Commission, Case n 40411, ruled on 29 March of 2019. See more at . 41 CADE, Administrative Proceeding n 08700.005694/2013-19, ruled on 19 June of 2019. See more at .

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has a clause to regulate competition policies.42 According to this clause, the EU and Mercosur commit to adopt similar principles in competition law and have agreed to strengthen the exchange of non-confidential information. In addition, both economic blocs may use bilateral consultations to avoid harmful spillover effects in each other’s interests. The inclusion of such a clause in the EU-Mercosur agreement should not be interpreted out of context. The concern to harmonize competition policies is not only important for the promotion of a predictable and business-friendly environment, but, also, growingly called for when an extraterritorial policy is involved. Although the draft of the agreement is still not definitive, such clause demonstrates the concern of harmonizing competition policies, not coincidently, few years after the ECJ finally applied the effects-doctrine. This type of provision is typically known in international law as comity. Comity is a legal principle that demands a country to temper the effects of its extraterritorial jurisdiction over other countries when enforcing its law (OECD 2015, p. 01; Fiebig 2016, p. 2). Various political entities have agreed upon treaties and cooperation agreements, in order to balance comity in competition law issues, such as the EU and US, in 1991, and EU and Switzerland, in 2013. Many of these agreements have some aspects in common, notably a broad language and generic terms—“best endeavours”, “take into consideration”, “important interests”, among others.43 Generally, these agreements have limited legal effect and serve to reassure a preexisting understanding between the parties (Brazil 2010, pp. 5–6). Brazil and the EU already have a comity agreement since 2009, when the extinct Brazilian competition agencies celebrated a Memorandum of Understanding with the Commission’s Directorate-General. However, the context and provisions are different from those of the current EU-Mercosur agreement, which has a broader scope and indicates stronger commitment to comity. Therefore, despite the differences between the Brazilian and the European policies and the expected common-jurisdiction cases, some strength has already been put

“Clause n. 10, of the July 1st agreement in principle: “The agreement is another step forward in the creation of a stringent set of international rules on competition. State-of-the-art provisions in this area will help ensure a level playing field for companies on both sides when they carry out activities in the territory of the other Party. Regarding antitrust and mergers, regulated anticompetitive practices include agreements between undertakings, concerted practices and abuse of dominant position. Both sides commit to maintaining comprehensive competition laws that follow similar principles. These include notably the existence of Competition Authorities. The agreement stipulates that Competition Authorities must treat companies from both sides equally, especially in terms of procedural fairness and rights of defense. In case of anticompetitive practices that may harm the interests of the other Party, the competition authorities may call for bilateral consultations under the agreement to resolve the situation. The Parties have agreed to strengthen the exchange of non-confidential information between competition authorities on both sides.” 43 These terms can be found at article VI of the EU-US of 1991, article 5 of the EU-Korea of 2009, and article 5 of the EU-Switzerland of 2013. 42

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to avoid harmful divergences. Naturally, both jurisdictions are still independent, while the effectiveness of this trade agreement can only be judged in the forthcoming years.44 As both jurisdictions prepare for an enhanced proximity, possible effects in Brazil should already be considered. Some suggestions are made below. Firstly, when companies are subject to various jurisdictions, either due to extraterritoriality or to the company’s cross-border presence, the celebration of a settlement or leniency agreement in one jurisdiction may draw attention and increase the possibility of antitrust investigations in another jurisdiction (Forrester 2016, pp. 177–178).45 In a public hearing held by CADE and MPF, on June 20 of 2017, in São Paulo, the exposing individuals pointed out to the challenge of incentivizing leniency agreements in multijurisdictional cases, although no reference was made to European extraterritoriality.46 Thus, this is a first possible effect over Brazilian companies and CADE, notwithstanding the fact that the cost of administrating multiple leniency notifications and negotiations worldwide can be mitigated by headquartering a law firm and using it to negotiate the procedure with partnering law firms, while centralizing all information disclosed to competition authorities. Similarly, a second relevant effect over Brazil is the potential increase of private enforcement of competition law by European litigators. In Brazil, private enforcement of competition law is still incipient compared to Europe (OECD 2019, pp. 123–124; Gabbay and Pastore 2014, p. 03). With an extraterritorial application of competition law and considering the incentives brought forth by the Damages Directive (Directive 2014/104/EU), European litigators may enforce competition rules against Brazilian market players, who are not used to facing stakeholders’ litigation for damages.47

44

Despite the current doubts about the implementation of the EU-Mercosur agreement, especially after German Chancellor Angela Merkel’s comments on the Amazon’s deforestation, we assume that the agreement will proceed as planned, for research purposes only. See more at and . 45 “(. . .) a confession in one jurisdiction may mean the company becomes a potential target of investigations by competition authorities around the world. Immunity in Europe does not equate to immunity in the United States. It may therefore be prudent to consider worldwide leniency initiatives.” (Forrester 2016, p. 177). 46 References of field study: all references to this public hearing are exclusively based on the author’s presence in such event. 47 Fiebig (2016, p. 3) affirmed U.S. companies’ interest on EU jurisdiction as an alternative to private enforcement in U.S. courts, since “the expansive extraterritorial application of EU competition law together with contracting U.S. extraterritorial jurisdiction will facilitate increased private litigation in Europe commensurate with the objectives of the European Commission”. However, a similar approach by Brazilian companies toward EU jurisdiction, in a wide scale, does not seem likely.

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A greater vulnerability of Brazilian players to European litigators may increase the costs of breaching competition rules, but, on the other hand, it may also increase the costs of settlement or leniency in the Brazilian jurisdiction, considering that such agreement may give criminal and administrative immunity only in Brazil, but, depending on the dimensions and effects of the infringement, it could draw the attention of European litigators. The third potential effect is the growing importance of European competition policy for Brazilian market players’ legal risk analysis. Consequently, it is reasonable to expect a greater demand for European law expertise in Brazil. One could argue that, by including the Commission’s competition policy into risk analysis, anticompetitive behavior with potential cross-border effects may become costlier for Brazilian market players. Finally, as already indicated above, the fourth potential effect, especially over CADE, is a closer institutional dialogue with the Commission, through the exchange of information and bilateral consultations of the EU-Mercosur trade agreement. By such dialogue, both jurisdictions may try to harmonize certain aspects of their respective competition policies, in the following years.

5 Concluding Remarks The growing importance of EU law to other countries is a phenomenon demonstrated by the Intel case and, therefore, by its competition law’s extraterritoriality. The trade relation between the EU and Brazil indicates a growing legal and economic proximity between both jurisdictions. The international trade transactions indicate that Brazilian economic activity may affect the European common market and, therefore, increase cases of common jurisdiction, based on the legal criteria of qualified effects, used by the ECJ. Thus, European extraterritoriality can affect Brazil beyond singular players occasionally submitted to the EU’s jurisdiction. To have a clearer vision on possible effects to Brazil as a developing country, it would be worth having more explicit limits on the ECJ’s interpretation of qualified effects. CADE’s case law indicates that, despite its distinguished international agenda and the European inspiration for the Brazilian 2011 legislative reform, there is limited European soft law in Brazil. Its greater presence is on CADE’s approach toward infringements by object, yet usually mentioned as obter dictum in the agency’s legal reasoning. This limited presence of European soft law is one indicator, among others, that Brazil has been developing its competition policy in a relatively autonomous way. The approaches of both jurisdictions are not the same and, therefore, some adaptation will be required by Brazilian market players. Despite these differences, the recent EU-Mercosur trade agreement indicates an intention between both parties to strengthen harmonization on competition policy,

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with instruments of policy proximity and comity. Beside this trade agreement, CADE and the Commission may still proceed to bilateral agreements. Considering these elements, four potential effects have been suggested in this paper: (i) challenges for incentivizing leniency applications in Brazil, (ii) increase of European private enforcement over Brazilian market players, (iii) growing importance of European competition policy for Brazilian market players’ legal risk analysis, and (iv) greater institutional dialogue between CADE and the Commission. Many of these challenges are not per se new, but they are being enhanced, reason why more debate should be made over this matter. This paper seeks to provide an initial overview of this matter and contribute with initial findings, based on a Brazilian perspective of the phenomenon of Europe’s growing regulatory power. For further research agenda, it would be worth analyzing possible effects of EU extraterritoriality over Brazil under different angles, including empirical research on Brazilian companies’ perception about the impact of EU policy.

References Behrens P (2016) The extraterritorial reach of EU competition law revisited: the “effects doctrine” before the ECJ. University of Hamburg, discussion paper 03/16. See at Brazil (2010) Comentários à proposta de alteração do Protocolo de Fortaleza. Technical Note n GTI/002/2010 in CADE’s institutional proceeding n 08700.003839/2010-02. 10 Aug 2010 BRICS (2019) BRICS in the digital economy: competition policy in practice. 18 Sep. 2019. See at

CADE (2019) Anuário CADE 2018. 30 Jan. 2019. See at CADE (2020) Anuário CADE 2019. 05 Feb. 2020. See at Crown (2019) Unlocking digital competition: report of the digital competition expert panel. Mar. 2019. See at Dunoff JL, Ratner SR, Wippman D (2006) International law: norms, actors, process: a problemoriented approach, 2nd edn. Aspen EU (1971) European Court of Justice. Béguelin Import v. G.L. Import Export (Case C-22/71), 25 November 1971 EU (1972) European Court of Justice. ICI v. Commission (Case C-48/69), 14 July 1972 EU (1993) European Court of Justice. Ahlstrom Osakeyhtio et al. v. Commission (Case C-89/85), 31 March 1993 EU (1999) European Court of Justice. Gencor Ltd. v. Commission (Caso T-102/96), 25 March 1999 EU (2017) European Court of Justice. Intel Corp. v. European Commission (Case C-413/14), 06 September 2017 EU (2019a) Brazil (Policies, information and services). Ec.europa. Last update 07 May 2019. See at

EU (2019b) European Union, Trade in goods with Brazil. Directorate-General for Trade, 03 Jun. 2019. See at EU (2019c) New EU-Mercosur trade agreement in principle. Brussels, 01 Jul. 2019. See at

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Fiebig A (2016) The increasing importance of EU competition law for US companies. Business Law Today. American Bar Association, pp 1–3 Forrester IS (2016) To seek leniency or not to seek leniency: that is the General Counsel’s question. Rodas, João Grandino; Carvalho, Vinícius Marques de. (Org.). Compliance e concorrência. 2ª ed. São Paulo: Ed. Revista dos Tribunais, 2016, pp 169–182 Gabbay DM, Pastore RF (2014) Demandas indenizatória por danos causados por cartéis no Brasil: um campo fértil aos mecanismos consensuais de solução de conflitos. Revista de Arbitragem e Mediação 43:171–207 International Court of Justice (1927) The case of the S.S. “LOTUS”. Publications de la Cour Permanente de Justice Internationale. See at Jeffs C (2019) E-Commerce Competition Enforcement Guide – second edition. Introduction: why e-commerce? 15 Oct. 2019. See at Jorge (2017) Revista de Defesa da Concorrência 05(02):51–74 Jorge, Júnior (2018) Evolução histórica da aplicação extraterritorial do direito da concorrência brasileiro. In: Evolução do antitruste no Brasil, pp 53–79 Jorge MS, Júnior AJ (2019) O caso Intel: o impacto na evolução da teoria dos efeitos no direito da concorrência da União Europeia. Revista de Direito Internacional, Uniceub 16(1):270–287 Lancieri FM (2017) Digital proteccionism? Antitrust, data protection and the EU/US transatrantic rift. Stockholm University Research Paper n. 41, 25 Nov. 2017. See at Nasser SH (2006) Fontes e normas de direito internacional: um estudo sobre a soft law, 2nd edn. Atlas Nasser SH (2015) Direito global em pedaços: fragmentação, regimes e pluralismo. Revista de Direito Internacional 12(2):98–126. See at OECD (2015) Inventory of co-operation agreements: inventory of co-operation agreements. See at

OECD (2019) OECD peer reviews of competition law and policy: Brazil. See at Pereira Neto CMS, Casagrande PL (2016) Direito Concorrencial: doutrina, jurisprudência e legislação. Ed. Saraiva Samie N (1982) The doctrine of “effects” and the extraterritorial application of antitrust laws. Univ Miami Inter-Am Law Rev 14:23–59. See at Sanchez-Graells A (2018) Territorial extension and case law of the Court of Justice: good administration and access to justice in procurement as a case study. Europe and the world: a law review. UCL Press. See at Saurabh S (2017) The economics of antitrust competition: an international perspective. World Aff: J Int Issues 21(2):86–111 Scott J (2013) Extraterritoriality and territorial extension in EU law. Am J Comp Law 62:87–125. See at Sokol D (2017) European competition law: enforcement or regulation after Intel? Competition policy international antitrust chronicle, vol 02, Nov. 2017. See at Thorstensen V, Ramos D, Nogueria T, Gianesella F (2013) Brasil e União Europeia na OMC: relações econômicas, disputas comerciais, crise financeira e câmbio. FGV. See at Waisberg I (2006) Direito e política da concorrência para os países em desenvolvimento. Lex Editora Whish R, Bailey D (2015) Competition law, 8th edn. Oxford University Press

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Daniel Favoretto Rocha LL.M. researcher and Bachelor of Laws (LL.B.) from FGV Law School (Fundação Getúlio Vargas). Peer-reviewer of the Brazilian Competition Authority’s law journal. Assistant lecturer on economic law and regulation at FGV Law School. 2020 ANBIMA Prize winner for his Master’s research on securities market regulation. Attorney in merger control cases and antitrust investigations handled by CADE. Former student of FGV’s Global Law Program and former cabinet trainee at São Paulo’s Appellate Court (Tribunal de Justiça de São Paulo).

Part II

Foreign Investment and Internal Market

EU, China, and Technical Standards in the Belt and Road Initiative (BRI): Extraterritoriality or Transnational Governance? Francis Snyder

Abstract This chapter analyses relations between the EU and China concerning railway standards in China’s Belt and Road Initiative (BRI). After the introduction, a first main part explores the interconnections between social and legal fields, standards, and soft law in the BRI. A second part focuses on institutions, processes, and actors in standard setting in the EU and China. A third part presents the example of railway transport, a key element of the BRI. A brief conclusion summarizes the discussion and identifies subjects for further research. The chapter argues in favour of building bridges, figuratively as well as literally, and for regulatory cooperation and the use of international standards.

1 Introduction This chapter explores relations between the European Union (EU) and China in China’s Belt and Road Initiative (BRI, or One Belt, One Road (OBOR)). It focuses on technical standards, which are an integral part of BRI. Standards are norms that seek to translate general objectives into specific technical requirements. BRI is a normative meeting ground, a crucible of legal pluralism and potential extraterrito-

The author is grateful to Wu Yanbin, Yuan Ye, Zhang Hui, and Zhu Mengting for excellent research assistance. This chapter draws freely on our numerous discussions. The author is also grateful to Danny Friedmann, Phil McConnaughay and Anne-Lise Strahtmann for their help. He is grateful to Peking University School of Transnational Law (STL) and Peking University Shenzhen Graduate School for their support. Responsibility for the contents, however, is entirely his own. F. Snyder (*) Peking University School of Transnational Law, Shenzhen, China Aix-Marseille University, Aix-en-Provence, France College of Europe, Bruges, Belgium University of Macau, Macau, China © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 N. Cunha Rodrigues (ed.), Extraterritoriality of EU Economic Law, European Union and its Neighbours in a Globalized World 4, https://doi.org/10.1007/978-3-030-82291-0_9

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riality. For instance, EU standards may be extraterritorial from an EU perspective if they apply outside the EU; from a Chinese perspective, they may amount to an imposition. From the Chinese perspective, however, standards may be extraterritorial if Chinese standards apply outside China; from a European perspective, this may be deemed to be an imposition. Such a situation of legal pluralism thus inevitably involves normative conflict and competition, but it also opens up new possible forms of cooperation. In approaching such a complex subject, it is necessary to be modest, and it is essential to recall Wolf Lepenies’ argument that ‘Le fondamentalisme occidental est dépassé’.1 This chapter draws on law and other disciplines to consider these issues. It builds on a recent companion article on relations between European legal pluralism and BRI soft law.2 The chapter argues in favour of building bridges, figuratively as well as literally, and for regulatory cooperation and the use of international standards. It is divided into three main parts. The first main part explores the interconnections between social and legal fields, standards, and soft law in the BRI. A second part focuses on institutions, processes, and actors in standard setting in the EU and China. A third part presents the example of railway transport, a key element of the BRI. A brief conclusion summarizes the discussion and identifies subjects for further research.

2 Standards, Legal Fields, and Soft Law in the BRI This chapter focuses on a specific set of continuing bilateral relations, namely relations between the EU and China, not on a one-off event or process, such as transfer and reception of law. Leaving aside the long history of relations between Europe and China along the original Silk Roads, relations between the EU and the People’s Republic of China (PRC, or China) can be traced back to the late 1940s. Following the creation of the PRC in 1949, numerous European countries established diplomatic relations with the PRC. The EEC established diplomatic relations with the PRC in 1975. This bilateral relationship, now involving the EU rather than the EEC, has developed enormously since then. Though still based legally on the outdated 1985 Agreement on Trade and Economic Cooperation (TECA), its dynamic elements today comprise mainly annual summits, political and sectoral dialogues, and platforms of cooperation, on which the two parties seek to build a broader regional trade agreement.3 Both the bilateral character and the continuing nature of EU-China relations provide constraints, challenges, and opportunities for both parties, which might remain invisible or be neglected if one looks at a single party alone.

1

Lepenies (1996), p. 13. Snyder (2020b). 3 See Snyder (2009). 2

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The BRI conjoins many overlapping semi-autonomous social and legal fields. Kurt Lewin in 1951 defined a ‘field’ as ‘the totality of co-existing facts that are conceived of as mutually interdependent’.4 Since then this basic idea has been applied and developed by scholars in anthropology, sociology, and law. Based on research in Tanzania and in New York’s garment district, Sally Falk Moore elaborated a conception of ‘semi-autonomous social fields’, which showed that social fields could be imbricated in each other yet nevertheless maintain a degree of autonomy.5 The French sociologist Pierre Bourdieu used the concept of social fields in research in North Africa and applied it to law in his concept of ‘legal fields’.6 David Trubek and colleagues and my own scholarship on China have applied the idea of social and legal fields to transnational law.7 More recently, the sociologists Neil Fligstein and Doug McAdam proposed a general theory of social organization and strategic action in terms of social fields.8 This chapter highlights five overlapping semi-autonomous social and legal fields. Geographically, the chapter concentrates on the ‘Silk Road Economic Belt’, the land-based connection between China and Europe through Central Asia, and in particular the “New Eurasian Land Bridge (or Continental Bridge) Economic Corridor”, which runs from northwest China through Central Asia and Russia to western Europe, including the EU and passing through countries in the 17+1 grouping.9 In this space, the first social and legal field is the EU, including the 12 EU Member States in the 17+1 grouping, namely Bulgaria, Croatia, Czech Republic, Estonia, Greece, Hungary, Latvia, Lithuania, Romania, Poland, Slovakia, and Slovenia. The second is composed of the non-EU countries in the 17+1 grouping: Albania, Montenegro, North Macedonia, and Serbia, which are candidates for EU membership; and a third consists of Bosnia and Herzegovina, and Kosovo, which are potential candidate countries.10 The fourth is Russia, Belarus, and Central Asia, for which Kazakhstan is used as a proxy. The fifth is China. Such a complex configuration of social and legal fields is typical of the BRI; there is no reason to think that the New Eurasian Land Bridge Economic Corridor, despite its specific features, is unique. These overlapping social and legal fields are unequal politically and economically. In terms of purchasing power parity (PPP), the municipalities of Beijing, Shanghai, and Tianjin, and the provinces of Fujian, Guangdong, Jiangsu, Shandong

4

Lewin (1951), p. 240. Moore (1973). 6 Bourdieu (1987). 7 Trubek et al. (1994) and Snyder (2016). 8 Fligstein and McAdam (2012). 9 Wang (2019). Wikipedia, ‘Belt and Road Initiative’ states that it ‘runs from Western China to Western Russia through Kazakhstan, and includes the Silk Road Railway through China’s Xinjiang Autonomous Region, Kazakhstan, Russia, Belarus, Poland and Germany. https://en.wikipedia.org/ wiki/Belt_and_Road_Initiative, accessed 15 June 2020. 10 European Union, About the EU. 5

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and Zhejiang have a per capita GDP that is greater than or similar to those of Bulgaria, Croatia, Czech Republic, Estonia, Greece, Hungary, Latvia, Lithuania, Poland, Portugal, Romania, Slovakia, and Slovenia. These Chinese administrative units plus Guangdong Province and Shandong Province have a per capita GDP that is greater than those of Albania, Bosnia and Herzegovina, Montenegro, North Macedonia, and Serbia.11 These economic differences are likely to have a powerful effect on the adoption and application of standards, because standards accompany, create and sustain markets, and in the wider context that will be so important to the role of standards in EU-China relations. This chapter focuses mainly on soft law. The term ‘soft law’ means ‘rules of conduct which, in principle, have no legally binding force, but which nevertheless may have practical effects, and also legal effects’.12 The chapter briefly discusses memoranda of understanding (MoU) relating to BRI; such normative instruments are also usually soft law, though this depends on the intentions of the parties. However, it is concerned principally with standards, in the terms of the World Trade Organization (WTO) Agreement on Technical Barriers to Trade (TBT Agreement). The TBT Agreement defines standard as Document approved by a recognized body, that provides, for common and repeated use, rules, guidelines or characteristics for products or related processes and production methods, with which compliance is not mandatory. It may also include or deal exclusively with terminology, symbols, packaging, marking or labelling requirements as they apply to a product, process or production method.13

It specifically mentions the International Organization for Standardization (ISO) and the International Electrotechnical Commission (IEC) as international standardization bodies.14 In WTO law, standards are soft law; legally binding measures are called ‘technical regulation’. Our everyday use of the word ‘standards’ does not usually distinguish between legally binding measures and measures that are not legally binding. However, this chapter follows the more precise WTO terminology, because in the standards field WTO law in effect serves as a kind of global administrative law.15 This chapter thus differs from recent research that is devoted primarily to legally binding measures, such as international treaties or domestic legislation, including situations of legal pluralism.16 A recent book on inter-legality also looks beyond a

11

Calculated by Yuan Ye from International Monetary Fund, World Bank, and China National Bureau of Statistics data. For European countries’ data up to 2010, see https://en.wikipedia.or/wiki/ List_of_sovereign_states_in_Europe_by_GDP_(PPP)_per_capita. For China data up to 2018, see https://en.wikipedia.org/wiki?List_of_Chinese_administrative_divisions_by_GDP_per_capita, accessed 10 March 2020. 12 Snyder (1993), supplemented by Snyder (2007) as summarized by Stefan et al. (2018). 13 World Trade Organization (1999), TBT Agreement, 137, Annex I:2. 14 Ibid. 137, Annex I, Terms and Their Definitions for the Purpose of this Agreement. 15 Cassese (2016). 16 Berman (2012).

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single self-contained system, but it focuses on legally binding rules, legal orders, and legal solutions in ‘situations where actors are confronted with a variety of norms stemming from a variety of legal orders or spaces, and all are valid and applicable in principle’.17 Due to their flexibility, at least in principle, soft law measures raise different questions, in both theory and practice, from those posed by legally binding measures.18 This chapter aims to build bridges between EU and Chinese standards throughout the BRI. It thus differs from other scholarship that looks at the extraterritorial reach of EU law19 or treats the EU alone as the source of the ‘Brussels effect’,20 as a global regulator21 or as a global actor in the construction of an international normative repertoire.22 It is concerned with reconciling standards that already exist or that are proposed by either side, rather than beginning with one side’s view and examining the other side’s response, as in the many studies about the reception of foreign law. Such a research strategy would seem to point inevitably toward the development of shared or international standards.23 This chapter seeks to contribute to this discussion and the search for new forms of transnational governance.24

3 Standard Setting in the EU and China Recent research has revised our ideas about how standards are made. In the past, regulation by standards was often assimilated to a command-and-control model of regulation, involving two actors, namely the state (regulator) and the citizen/resident/organization (regulatee). Standards concerning engineering, education, environment, or public health for example, were frequently considered to be based solely on scientific knowledge and designed only to protect the public. Studies of globalization and law show, however, that globalization has accentuated the importance of international standards-setting bodies and their use of soft law.25 Recent research has also transformed our understanding of the ways in which standards are set. It shows firstly that standard-setting is often a highly political activity, involving competing actors, objectives, interests and strategies.26 A standard is a double-edged sword: it is intended to benefit the public, but inevitably it is also a barrier to market entry and

17

Klabbers and Palombella (2019), pp. 1, 9–10 (quotation is from 9–10). See also de Sousa Santos (2002). 19 Cremona and Scott (2019). 20 Bradford (2012). 21 Hadjiyianni (2019). 22 Snyder (2001) and Snyder and Kim (2018). 23 For an overview of EU-China relations concerning standards, see Snyder (2021). 24 See, also, Hale and Held (2011). 25 Braithwaite and Drahos (2000) and Snyder (2004). 26 Delimitatis (2015). 18

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indeed sometimes even creates markets.27 The command-and-control model has been reformed by theories that develop a tripartite model of regulator-intermediarytarget (RIT).28 Setting standards involves a regulator, often a domestic or international public authority; an intermediary, which usually is a specialist in the field; and a target, which comprises those to whom the standard is addressed. In addition, standards may be adopted by private bodies as well as domestic public authorities or international organisations. Büthe and Mattli argue that the privatization of regulation has created ‘new global rulers’.29 For example, concerning organic food in China, the Codex Alimentarius Commission and the international NGO International Federation of Organic Agricultural Movements (IFOAM) represent what Mattli and Seddon call a ‘regulatory partnership’,30 in which the rules are adopted by Codex but in fact come from IFOAM.31 Harmonisation may result in private regulatory capture.32 In the EU and China, the process of standard setting involves analogous institutions, processes, and actors, but the actors are influenced considerably by differences in the economic and political structures of these two social and legal fields. In the EU, standards are adopted by the European Committee for Standardization (CEN), the European Committee for Electrotechnical Standardization (CENELEC) or the European Telecommunications Standards Institute (ETSI), depending on the subject matter. CEN, for example, consists of 34 national standardization bodies;33 15 other organizations with the status of Companion Standardization Body (CSB), which are members or corresponding members of the International Organization for Standardization (ISO); and three affiliates from EU candidate countries.34 National bodies include the Association Française de Normalization (AFNOR) in France35 and the Instituto Português da Qualidade (IPQ) in Portugal.36 The technical committees of CEN, with delegates representing their national viewpoint within the scope of each substantive committee, are responsible for preparing standards, which are developed by experts in working groups who work in a personal capacity.37 For instance, CEN/TC Scope is responsible for all

27

Snyder (2020a). Abbott et al. (2017a, b). 29 Buethe and Mattli (2011). 30 Mattli and Seddon (2015). 31 Snyder (2020a). 32 Marques (2019). 33 European Committee for Standardization, CEN Members, https://standards.cen.eu/dyn/www/f? p¼CENWEB:5:::NO:::, accessed 11 June 2020. 34 CEN European Committee for Standardization, CEN Community, https://www.cen.eu/about/ community/pages/default.aspx, accessed 11 June 2020. 35 http://www.afnor.org/, accessed 11 June 2020. 36 http://www1.ipq.pt/, accessed 11 June 2020. 37 CEN European Committee for Standardization, Technical Bodies, https://standards.cen.eu/dyn/ www/f?p¼CENWEB:6:::NO:::, accessed 11 June 2020. 28

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applications concerning railways. It has numerous subcommittees and working groups.38 The CEN website shows its work programme and its published standards. CEN/CLC/WS SEP2 deals with Industry Best Practices and an Industry Code of Conduct for Licensing of Standard Essential Patents in the field of 5G and the Internet of Things.39 The CEN-CENLEC Management Centre is located in Brussels.40 European companies, such as Siemens and the French railway company SNCF,41 participate actively and decisively in EU standardization in their fields of activity. Consumers, workers, and environmental groups participate in CEN’s standardization activities.42 European standards are not legally binding, though they may be incorporated into legislation by reference. The Internal Regulations of CEN and CENELEC define a standard as follows: a Document, established by consensus and approved by a recognized body that provides for common and repeated use, rules, guidelines or characteristics for activities or their results, aimed at the achievement of the optimum degree of order in a given context. Standards should be based on consolidated results of science, technology and experience, and aimed at the promotion of optimum community benefits.43

The EU definition differs from the WTO TBT definition primarily in that consensus is required for the adoption of standards in the EU but not under the WTO TBT Agreement.44 The EU consensus approach was continued after the EU (then EEC) adopted the New Approach to Technical Harmonization in 1985,45 under which voluntary European standards were to be treated as essential requirements and referenced in the so-called New Approach Directives. Compliance with standards remained voluntary, but ‘[o]nly products fulfilling the essential requirements may be placed on the market and put into service’46 and were presumed by Member States to conform to the directives. This method, which effectively gave teeth to soft law

38

CEN European Committee for Standardization, Technical Bodies, CEN TC/256, Subcommittees and Working Groups, https://standards.cen.eu/dyn/www/f?p¼204:29:0::::FSP_ORG_ID,FSP_ LANG_ID:6237,25&cs¼1B006FA5DCF161D6A4FAD3D5A0DED08BB#1, accessed 11 June 2020. 39 EN/CLC/WS SEP2 - Industry Best Practices and an Industry Code of Conduct for Licensing of Standard Essential Patents in the field of 5G and Internet of Things, https://standards.cen.eu/dyn/ www/f?p¼204:7:0::::FSP_ORG_ID:2409601&cs¼17E0C367EB849E852A95AA9F3167B830A, accessed 11 June 2020. 40 https://www.cencenelec.eu/aboutus/MgtCentre/Pages/default.aspx, accessed 11 June 2020. 41 See Lacôte (2002). 42 CENELEC. Making standards for Europe, https://www.cencenelec.eu/societal/Pages/default. aspx, accessed 11 June 2020. 43 CENELEC (2002), p. 15. 44 DS 231 European Communities – Trade Description of Sardines, Appellate Body Report adopted 23 October 2002, Mutually Agreed Solution notified 25 July 2003. 45 Council Resolution of 7 May 1985 on a new approach to technical harmonization and standards, OJ 4.6.85, C136/1. Document C:1985:136:TOC. 46 CENELEC (2002), p. 32.

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standards, is confirmed in the currently applicable European standardization regulation.47 Though not legally binding in themselves, EU standards are part of EU law and fall under Article 267 TFEU and the interpretative jurisdiction of the Court of Justice of the European Union (CJEU). In Case C-613/14 James Elliot Construction, the CJEU held that harmonized standards formed part of EU law that could be interpreted by the CJEU in a preliminary ruling (para 47). The case was a contractual dispute between two companies that disputed the legal status of an Irish national standard that transposed a harmonized EU (then EEC) construction standard adopted by CEN and referenced in a Council directive. The CJEU recalled that it had jurisdiction ‘to interpret acts which, while indeed adopted by bodies which cannot be described as “institutions, bodies, offices or agencies of the Union”, are by their nature measures implementing or applying an act of EU law’. It found that ‘such a solution was justified by the very objective of Article 267 TFEU, which is to ensure the uniform application, throughout the European Union, of all provisions forming part of the European Union legal system’ (para 34). It confirmed ‘the fact that a measure of EU law has no binding effect does not preclude the Court from ruling on its interpretation in proceedings for a preliminary ruling’ (para 35). It concluded that a harmonized standard such as that involved in the case ‘forms part of EU law, since it is by reference to the provisions of such a standard that it is established whether or not the presumption [of fit for use and conformity with essential requirements] laid down in Article 4(2) of Directive 89/106 applies to a given product’ (para 60). It also found that ‘while the development of such a harmonized standard is indeed entrusted to an organization governed by private law, it is nevertheless a necessary implementation measure which is strictly governed by the essential requirements defined by . . . [Directive 69/106], initiated, managed and monitored by the Commission, and its legal effects are subject to prior publication by the Commission of its references in the “C” series of the . . . [ OJEU]’ (para 43). Clearly, as part of EU law, EU standards are subject to the EU’s legal obligation to promote its values according to Article 3 (5) TEU.48 Research by Falkner and Mueller shows that the EU has been a major exporter of standards.49 It has been more successful in areas such as environment policy than in areas such as financial regulation.50 CEN has license agreements regarding European standards with standardization organizations in non-European countries, including

47

Regulation (EU) No 1025/2012 of the European Parliament and of the Council of 25 October 2012 on European standardisation, amending Council Directives 89/686/EEC and 93/15/EEC and Directives 94/9/EC, 94/25/EC, 95/16/EC, 97/23/EC, 98/34/EC, 2004/22/EC, 2007/23/EC, 2009/23/ EC and 2009/105/EC of the European Parliament and of the Council and repealing Council Decision 87/95/EEC and Decision No 1673/2006/EC of the European Parliament and of the Council, OJEU 14.11.2012, L316/12. 48 These values include respect for human dignity, freedom, democracy, equality, the rule of law and respect for human rights, including the rights of persons belonging to minorities: Article 2 TEU. 49 Falkner and Mueller (2014). 50 Compare Holzinger and Sommerer (2014) with Davies (2019).

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the Standardization Administration of China (SAC), with which CEN has 10 agreements in the field of transport, 17 in the field of construction, though none in the fields of digital society or electrotechnology.51 In September 2016 CEN, CENELAC and SAC renewed a cooperation agreement; in May 2018, CEN and CENELEC established a China Task Force; and the Seconded European Standardization Expert in China (SESEC) Project, which began in 2016, is now in its fourth phase.52 In China, standardization is governed by the 2017 Standardization Law of the People’s Republic of China.53 This Law is the first legislative reform of the 1988 Standardization Law,54 which provided that ‘The State shall encourage the active adoption of international standards’.55 This international orientation was given less prominence in the 2017 Standardization Law, which entered into force on 1 January 2018. It provided: Standards shall be developed based on scientific & technological achievements and social practice experience. Investigations and tests shall be performed and comments shall be solicited from all sides in order to ensure the standards are scientific, normative and with timeliness and to improve the quality of standards. (Article 4)

It also provided that ‘[t]he State encourages participation in international standardization events, external cooperation and communication about standardization, participation in the formulation of international standards, adoption of international standards in combination of national conditions and conversion and application between standards internal and external’ (Article 8). Moreover, it strengthened the orientation toward Chinese standards by providing that ‘[t]he State supports the use of indigenous innovative technology to develop association standards and enterprise standards in the field such as key sectors, strategic emerging industries and critical & generic technology’ (Article 20). These legislative reforms were entirely consistent with China’s ‘Made in China 2025’ strategy.56 Within this framework, Chinese standards are adopted by the Standardization Administration of China (SAC),57 which is now part of the State Administration for Market Regulation (SAMR). The ISO website describes SAC’s role as follows:

51

CEN (2019), pp. 10, 13, 14, 22. CEN (2019), p. 23. 53 Standardization Law of People’s Republic of China, Issued on 4 November 2017, translated by the Seconded European Standardization Expert in China Project (SESEC), https://www.sesec.eu/ app/uploads/2018/01/Annex-I-China-Standardization-Law-20171104.pdf, visited 9 June 2020. 54 Standardization Law of the People’s Republic of China 现行有效] 【法规标题】中华人民共和 国标准化法 (Effective) (Adopted at the Fifth Meeting of the Standing Committee of the Seventh National People’s Congress on December 29, 1988, promulgated by Order No. 11 of the President of the People’s Republic of China on December 29, 1988, and effective as of April 1, 1989). 55 Development Strategy for Establishing National Standardization (2016–2020). (State Council, December 17, 2015, http://www.gov.cn/zhengce/content/2015-12/30/content_10523.htm). 56 See Wuebbeke et al. (2016) and Zenglein and Holzmann (2019). 57 http://www.sac.gov.cn/, accessed 11 June 2020. 52

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The functions of the SAC authorized by the State Council are to exercise administrative responsibilities by undertaking unified management, supervision and overall coordination of standardization work in China. The SAC represents China within the International Organization for Standardization (ISO), the International Electrotechnical Commission (IEC) and other international and regional standardization organizations; the SAC is responsible for organizing the activities of the Chinese National Committee for ISO and IEC; the SAC approves and organizes the implementation of international cooperation and the exchange of projects on standardization.58

Within the SAC, numerous stakeholders contribute to the development of standards, some under the supervision of industry associations and some under ministries or departments of the State Council. ‘For example, TC 485, the committee in charge of drafting mobile communications standards, falls under the Ministry of Industry and Information Technology’.59 State-owned enterprises (SOEs) play an essential role. Liebman and Milhaupt argue that ‘[m]any SOEs have effectively become powerful interest groups, writing the rules of the State rather than the other way around’.60 (206) Privately owned firms such as Huawei, which in the Made in China 2025 strategy is a leader of key industries in telecommunications, semiconductors and consumer electronics,61 dominate the setting of standards in their fields. SOEs, private companies and chambers of commerce are significant players in China’s plan for ‘China Standards 2035’ to influence world standards in high tech areas for the future.62 One author has argued that the 2017 Standardization Law promotes the application of Chinese standards instead of international (ISO or IEC) standards;63 Seaman refers to China’s ‘dual track’ approach to standardization.64 Within the BRI, however, China’s vision is to upgrade its own standards, promote them as international standards, and participate very actively in international standard setting bodies, such as ISO.65 Concerning railways, for example, the American Chamber of Commerce refers to China’s goal to include ‘main products reaching internationally advanced levels. . ., leading to revisions to international standards on advanced rail equipment’.66

58

ISO, Members: SAC China, https://www.iso.org/member/1635.html, accessed 11 June 2020. Kamensky (2020). 60 Zhang et al. (2016), p. 206. See also Kennedy (2005). 61 Wikipedia, Made in China 2025, https://en.wikipedia.org/wiki/Made_in_China_2025, accessed 27 March 2020. 62 Kharpal (2020). For a report on Huawei lobbying in France, see Benyahia-Kouider (2019). 63 Chen (2018). 64 Seaman (2020). 65 Wuebbeke et al. (2016), Zenglein and Holzmann (2019), U.S. Chamber of Commerce (2017) and Lewis (2019). 66 U.S. Chamber of Commerce (2017), pp. 73–74. 59

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4 Railway Transport Railway transportation and its infrastructure are essential components of relations between Europe and China in the BRI. The very name, ‘Belt and Road Initiative’, or ‘One Belt, One Road’ shows that transportation links, notably railways and ports, are at the material heart of the BRI project. This is the vision of BRI that is central to government and popular conceptions of BRI in both Europe and China. Both within and between the EU and China, railways and ports connect goods and services, concern intellectual property rights, and involve relations of cooperation and competition. They underpin people-to-people links that are given so much emphasis in EU-China 2020 Strategic Agenda for Cooperation,67 and literally provide bridges between the EU, its Member States, the European 17+1 grouping, and China and its provinces. They serve as key elements in the EU’s Single European Market and in both Chinese economic integration and the shift in the Chinese growth model from an emphasis on trade to an emphasis on an integrated domestic market and domestic consumption. Moreover, transportation links are a key element in trade and foreign direct investment (FDI). Chinese FDI into Europe and other forms of financial transfers into Greece, Italy, Germany and Poland offer numerous examples. The COSCO investment in the port of Piraeus, the Chongqing-Duisberg railway, the Duisberg port that is now the logistic hub for central Europe, the COSCO 35% stake in the Euromax terminal in Rotterdam, the Lodz-Chengdu-Xiamen railway connection and the 2013 MoU between Polish State Railways and China Railways on Further Cooperation on China-Europe Container Block Trains are among numerous such arrangements.68 Moreover, transport is part of the trade imbalance between Europe and China, hence significant in each party’s overall trade and investment strategy. It is estimated that BRI will increase rail traffic dramatically, mostly through Kazakhstan, Russia and Belarus to northern Europe. Standards are therefore essential elements in opening or protecting markets. Agreement between the EU and China on standards is potentially complicated by legal arrangements within the EU and by the finely graded legal obligations in the EU’s enlargement process. China is a sovereign state. In contrast, in part of the transport field the EU shares competence with its Member States. For the EU, transport lies outside the Common Commercial Policy (see Article 207(5) TFEU) and is governed by the Common Transport Policy (Articles 90–100 TFEU), which includes rail transport (Article 100(1) TFEU). According to Opinion 2/15 of the CJEU, the EU and its Member States share competence concerning maritime transport, but the EU has exclusive competence concerning rail transport. Regarding rail transport, the EU also has exclusive competence for international agreements, because, following the logic of the CJEU in Opinion 2/15 (para 171), it has many

67 68

EU-China 2020 Strategic Agenda for Cooperation (2020). Snyder (2020b).

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common rules whose scope may be affected or altered by such agreements.69 Through judicial interpretation, the EU has regained negotiating authority concerning international agreements on rail transport which otherwise might belong to shared competence. Consequently, we might expect the EU to require the use of EU standards in EU-initiated international rail transport agreements, just as China would be expected to promote its own standards. Rail transport within the EU is governed by a mass of legislation. Directive 2008/ 5770 aims to create a single European railway area by providing for interoperability within the EU.71 It is part of a very dense set of norms that apply only to EU Member States. Rail transport in the EU is governed by EU Directive 2012/34 on rules for the single European railway area.72 The Directive also applies only within the EU. However, it offers the EU the possibility to try to apply to its standards extraterritorially. Major issues concern the railway gauge, management according to commercial principles, relations with third countries, responsibility for standards, impact on public service contracts, and national regulatory bodies. For example, the railway gauge is the same throughout the EU, with minor exceptions, and the Directive provides for exclusion from certain infrastructure requirements, such as the cost of environmental effects, in the event of differences.73 This is not true along all the BRI. For example, to compensate for gauge differences, so-called ‘bogie exchanges’ have been installed between several EU Member States and Russia or Ukraine and also at the German port of Mukran to deal with ferried trains from Russia and certain Baltic countries;74 an automatic gauge changer has been installed at the border between Poland and Belarus.75 The EU Directive also requires management according to commercial principles, particularly in the form of the separation of accounts for transport infrastructure and the operation of infrastructure,76 and equitable, non-discriminatory and transparent conditions of access to railway infrastructure.77 In relations with non-EU countries, the Preamble of the Directive states that ‘special consideration should be given to the existence of reciprocal access for Union railway undertakings to the rail market of those third countries and this should be facilitated through the cross-border agreements.78 Most importantly, it provides 69

This paragraph draws on Snyder (2020b). Directive 2008/57/EC of the European Parliament and of the Council of 17 June 2008 on the interoperability of the rail system within the Community (Recast), OJEU 18.7.2008, L191/1. 71 European Parliament (2020). 72 Directive 2012/34/EU of the European Parliament and of the Council of 21 November 2012 establishing a single European railway area (recast), OJ L343/32 14.12.2012 (consolidated version). 73 See Article 2(5)–(8). See also Preamble, 4th recital. 74 Wikipedia, Bogie exchange, https://en.wikipedia.org/wiki/Bogie_exchange, accessed 17 June 2020. 75 Railway Gazette International (2015). 76 Directive 2012/34/EU, Preamble, 6th recital, Articles 5, 6. Annex I provides a list of infrastructure items. 77 Directive 2012/34/EU, Article 10(1). 78 Directive 2012/34/EU, Preamble, 29th recital. 70

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that ‘Member States shall be authorised to provisionally apply and/or to conclude new or revised cross-border agreements with third countries, provided that they are compatible with Union law and do not harm the object and purpose of the transport policy of the Union.’79 The Directive states that ‘Member States may require railway undertakings to be involved in assuring the enforcement and monitoring of their own compliance with the safety standards and rules.’80 It also requires each Member State to establish ‘a single national regulatory body for the railway sector’. The regulator must be ‘legally distinct and independent from any other public or private entity’; this includes funding and potential instructions from government.81 In Europe, each Member State has its own regulator for railways, such as the public regulator Autorité de régulation des activités ferroviaires in France, the 100% state-owned Comboios de Portugal (CP E.P.E.) in Portugal, or Deutsche Bahn in Germany, a private joint stock company in which the German Federal Government owns 100% of the shares.82 Railway regulation in China has followed a different process. National railways are regulated under the State Council and its department, the Ministry of Finance, by the China State Railway Group Company (CSRGC), now a joint-stock company that resulted from its conversion from an SOE that emerged from the former Ministry of Railways.83 To these differences in regulators there are differences in intermediaries. Intermediaries in the EU are nationally based, such as SNCF, Comboios do Portugal or Deutsche Bahn, or other major railway-related companies, such as Siemens, but certain activities are brought together under the EU harmonized Railway Directive. In China, the main intermediary for regulation of railways is the publicly traded CRCC Corporation Limited (CRCC), one of the leaders of key industries in the Made in China 2025 strategy.84 Its parent company is the CRCC Group, a large SOE which is supervised by the powerful State-owned Assets Supervision and Administration Commission (SASAC), directly under the State Council.85 CRCC is reported

79

Directive 2012/34/EU, Article 14(5). Directive 2012/34/EU, Article 54(3). 81 Directive 2012/34/EU, Article 55. The quotation is from Article 55(1). 82 Autorité de régulation des activités ferroviaires, now part of the Autorité de régulation des transports, https://www.autorite-transports.fr/le-ferroviaire/, accessed 17 June 2020; https://www. sncf.com/en/group/profile-and-key-figures/about-us/sncf-2020-new-group#:~:text¼SNCF%20is% 20wholly%20owned%20by,SN, accessed 5 May 2021; Comboios de Portugal, The Company, https://www.cp.pt/institucional/en/the-company, accessed 17 June 2020; https://www. deutschebahn.com/en/group/history/topics/foundation-1210924, accessed 5 May 2021. 83 Wikipedia, Rail transport in China, https://en.wikipedia.org/wiki/Rail_transport_in_China, accessed 17 June 2020. 84 Wikipedia, Made in China 2025, https://en.wikipedia.org/wiki/Made_in_China_2025, accessed 27 March 2020. 85 Wikipedia, CRCC, https://en.wikipedia.org/wiki/CRRC, accessed 17 June 2020. 80

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to be ‘the largest rolling stock manufacturer in the world eclipsing Alstom and Siemens.’86 EU and Chinese railway standards potentially compete in specific social and legal fields in the BRI. Leaving aside the EU and China, each of which will apply its own standards, these fields are, firstly, the 12 EU Member States in the 17+1 grouping; secondly, participants in the 17+1 grouping that are not EU Member States but are candidates for EU membership (Albania, Montenegro, North Macedonia, and Serbia; thirdly, the potential EU candidate countries of Bosnia and Herzegovina and Kosovo); and fourthly, Russia, Belarus, and Central Asia, for which Kazakhstan may serve as a proxy if these countries are treated as a single group for the sake of convenience. The 12 EU Member States in the 17+1 grouping are legally required to follow EU standards. So also, are the candidate countries.87 The positions of the other 17+1 participants, which are neither EU Member States nor candidate countries, are less certain. Sometimes refused railway financing by the EU, they are fundamentally dependent on Chinese foreign direct investment.88 However, they are likely to seek to balance their need for Chinese FDI with their desire for EU membership. It is likely that they will follow EU standards and hope that Chinese FDI will not be affected negatively. Much depends on domestic politics and international pressure. Their decision would also be affected by the quality of Chinese railway standards. In a book published in English in 2018, a distinguished Chinese authority on highspeed railways (HSR) described China’s HSR standards as not yet technologically equal to those of the US or EU, lacking a complete standards system, insufficiently detailed and precise, not sufficiently based on advanced R&D, uneven in coverage, lacking in brand recognition, and not available in translation.89 Nevertheless, with its geographical proximity and existing close ties to China, Kazakhstan is most likely to follow Chinese standards. This diversity encompasses examples of extraterritoriality from both EU and Chinese perspectives, respectively concerning the 17+1 participants which are not EU Member States or candidate countries, on the one hand, and Kazakhstan, on the other hand. Given the technical context, this calls out for regulatory cooperation and the use of international standards.

86

Wikipedia, CRCC, https://en.wikipedia.org/wiki/CRRC, accessed 17 June 2020. European Commission (2020). 88 See also Pavlićević (2014). 89 Xu (2018), pp. 104–105. Professor Fei Xu is President of Southwest Jiao Tong University and Vice-President of the China Railway Society. 87

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5 Conclusion This chapter explored relations between the EU and China concerning technical standards in the BRI. It examined these relations from both EU and Chinese perspectives. Its purpose was to move beyond a discussion of extraterritoriality, a historical legacy in our legal lexicon that emphasizes relations between active sender/passive receiver, despite legal scholarship on ‘denationalisation’, ‘vernacularisation’ and the internationalization of legal fields,90 and to focus on challenges, conflicts, cooperation, and potential transnational governance in the context of continuing international and transnational relations. To sharpen the contrast between the EU and China, it introduced two theoretical frameworks. The first, which was drawn from anthropology, sociology, and law, dissected EU-China BRI relations into overlapping, semi-autonomous social and legal fields. This made it possible to identify and clarify potential fields of cooperation or conflict regarding standards in the BRI. The second, which was drawn from contemporary theories about regulation, identified three actors involved in regulation: the regulator, intermediary, and target (RIT). This framework revealed major differences between the EU and China concerning regulators and especially concerning intermediaries, and indeed the very process of sectoral regulation. As an example, the chapter focused on railway transport, a key economic sector in the BRI. Potential conflicts between railway standards in the BRI so far have been dealt with normatively by two forms of public governance: MoUs and online platforms. MoUs are a well-known form of international and transnational soft law. A model MoU based on several examples provides for cooperation in transport, logistics and infrastructure, states that the participants ‘will promote cooperation on . . . quality standards, especially international standardization’, and to ‘facilitate easier access of Chinese exports’,91 an expression that one commentator has interpreted as ‘encourag [ing] the joint development of integrated standards with China’.92 The MoU between Italy and China provides for cooperation between the parties concerning ‘infrastructure connectivity, including . . . interoperability . . ., in areas of mutual interest (such as . . . railways. . .) and for possible conclusion of ‘arrangements for collaboration in specific fields’.93 MoUs between European countries and China are not legally binding and most have still not been implemented. In practice, however, their implementation will depend fundamentally on market actors, or regulatory 90

See Snyder (2004), pp. 12–16, and sources cited there. Devonshire-Ellis (2018). 92 Memorandum of Understanding between the Government of [Country] and the Government of the People’s Republic of China on Cooperation within the Framework of the Silk Road Economic Belt and the 21 [sic] Century Maritime Silk Road Initiative, in Devonshire-Ellis (2018). 93 Memorandum of Understanding Between The Government Of The Italian Republic And The Government Of The People’s Republic Of China On Cooperation Within The Framework Of The Silk Road Economic Belt And The 21st Century Maritime Silk Road Initiative, Paragraph II(2) and Paragraph III(4), http://www.governo.it/sites/governo.it/files/Memorandum_Italia-Cina_EN.pdf, accessed 8 May 2020. 91

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intermediaries, whether private companies or SOEs, that will decide on when and with whom to cooperate. Secondly, online platforms are a novel form of transnational governance; they may be considered as an analogue of EU-China sectoral dialogues. The EU and China participate in the EU-China Connectivity Platform, which held its fourth meeting alongside the 2019 EU-China Summit Meeting in Brussels.94 The EU delegation consisted of representatives of the Commission’s DG Mobility and Transport, other Commission officials and the European External Action Service. The Chinese delegation was composed of officials from the NDRC Department of Infrastructure Development, the NDRC and the China Development Bank. Each delegation was led by a Deputy Director General (DG MOVE for the EU, and NDRC Department of Infrastructure Development for China). It focused partly on transport and the possible creation of synergies between the EU Trans-European Transport Network (TEN-T) and the BRI. The minutes of the meeting reported agreement about the importance of the connectivity of infrastructure, agreement on ‘the outline of the key elements for the Joint Study on Sustainable Railway-based Comprehensive Transport Corridors between the EU and China,’ and agreement ‘to work on the basis of market-based principles and international standards’.95 The EU and China also cooperate in the framework of the China-Europe Standardization Information Platform (CESIP), which is based on an MoU and provides information about standards in Europe and China.96 It includes ‘railway-related products’, the sole entry of which is Directive 2008/57/EC, known as the European Railway Law, in its current consolidated version.97 It contains a list of standards that have been harmonized within the EU and a list of special standards for railway-related products.98 These platforms enable dialogue and potential cooperation between partners that differ in technical capacity, political strength, or economic power. They provide a

94 https://ec.europa.eu/transport/themes/international/news/2019-04-09-eu-china-summit_en, accessed 4 June 2020. 95 Minutes Meeting of the 4th Chairs’ Meeting of the EU-China Connectivity Platform, https://ec. europa.eu/transport/sites/transport/files/4th_chairs_meeting_minutes_en.pdf, accessed 4 June 2020. See also Railway Pro (2019). 96 The China-Europe Standardization Information Platform, https://webgate.ec.europa.eu/cesip/, accessed 18 June 2020. 97 Directive 2008/57/EC of the European Parliament and of the Council of 17 June 2008 on the interoperability of the rail system within the Community (Recast) (Text with EEA relevance), OJ L 191, 18.7.2008, pp. 1–45. 98 https://ec.europa.eu/growth/single-market/european-standards/harmonised-standards/interopera bility-rail-system_en#startHASData, accessed 18 June 2020. For a summary list of harmonised standards, see Summary of references of harmonised standards published in the Official Journal – Directive 2008/57/EC 1 of the European Parliament and of the Council of 17 June 2008 on the interoperability of the rail system within the Community, Brussels, 7 April 2020, accessed 18 June 2020. For a summary list of special standards for railway-related products, see https://webgate.ec. europa.eu/cesip/manual/eu/Railway_reltd_prd_page_for_Specific_Standards_TSI.pdf, accessed 18 June 2020.

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space for the parties (governments or companies) to mitigate or overcome potential extraterritoriality or the territorial extension99 of EU standards. These standards began as soft law but have been incorporated by reference into EU directives, hence they are technically non-divisible and, as Scott points out, allow territorial extension.100 It is important, however, to place the use of EU railway standards in their broader context of continuing EU-China relations. In the railway sector at least, this points in the direction of using EU and/or international standards that are shaped by the EU, especially France and Germany,101 and of participating actively in the International Union of Railways (UIC)102 and the Organization for Co-operation between Railways (OSJD, or Railway Cooperation Organization (RCO)),103 the two international organizations for developing railway standards.104 China can use foreign and international standards to upgrade its domestic standards. which are likely to be adopted in central Asia, and which China may eventually use as a basis for promoting its own international standards. They are a part of a broader set of EU-China relations that are shaped not only by norms but also by political power and economic strength in the context of continuing EU-China relations, which in the longer term are likely to influence norms such as railway standards. In European Year of the Rail 2021,105 and in any Green Deal future, transnational cooperation is essential for building transnational railways. For this reason, technical standards provide pertinent examples to support Lenz and Nicolaïdis’s argument for greater reflexivity and mutual recognition on the part of Europeans,106 for example concerning the structure of the Chinese economy. MERICS reports that SAC and AQSIQ, now part of SAMR, have ‘commissioned research on how to increase China’s influence on international standards’ and that the Chinese Academy of Engineering in 2018 started ‘consultative work on China Standards 2035’.107 The railway sector differs from other sectors in the BRI, such as traditional Chinese medicine (TCM) or 5G telecommunications, where Chinese standards can supply international standards or compete on an equal footing with other providers. Each area offers different forms of cooperation: railways through MoUs and online platforms, TCM by Chinese FDI and educational cooperation, and 5G by FDI and cooperation between European and Chinese companies. These fields deserve further comparative research, which for reasons of space is not possible here. Even preliminary research suggests, however, that relations between the EU and

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Scott (2019). Scott (2019), pp. 34–35. 101 Xu (2018), p. 100. 102 https://uic.org/, accessed 26 June 2020. 103 https://en.osjd.org/, accessed 26 June 2020. 104 Xu (2018), pp. 134–135. 105 Ruete (2021). 106 Lenz and Nicolaïdis (2019). 107 Zenglein and Holzmann (2019), p. 30. 100

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China in the BRI are addressed most fruitfully, not by the concept of extraterritoriality, but instead by ideas of regulatory cooperation and transnational governance.

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Falkner G, Mueller P (eds) (2014) EU policies in a global perspective: shaping or taking international regimes? Routledge, London Fligstein N, McAdam D (2012) A theory of fields. Oxford University Press, New York Hadjiyianni I (2019) The EU as a global regulator for environmental protection: a legitimacy perspective. Hart Publishing, Oxford Hale T, Held D (eds) (2011) Handbook of transnational governance: institutions and innovations. Polity Press, Cambridge Holzinger K, Sommerer T (2014) EU environmental policy: greening the world? In: Falkner G, Mueller (eds) EU policies in a global perspective: shaping or taking international regimes? Routledge, London, pp 111–129 Kamensky J (2020) Standards setting in China: challenges and best practices. The U.S.-China Business Council, February, p 5. https://www.uschina.org/sites/default/files/standards_setting_ in_china_challenges_and_best_practices.pdf. Accessed 11 June 2020 Kennedy S (2005) The business of lobbying in China. Harvard University Press, Cambridge Kharpal A (2020) Power is ‘up for grabs’: behind China’s plan to shape the future of nextgeneration tech, CNBC, Sunday, 26 April, https://www.cnbc.com/2020/04/27/china-stan dards-2035-explained.html. Accessed 11 June 2020 Klabbers J, Palombella G (eds) (2019) The challenge of inter-legality. Cambridge University Press, Cambridge Lacôte F (2002) Le rôle de la SNCF dans le mouvement de la normalisation. Revue de l’histoire des chemins de fer 26:124–125. https://doi.org/10.4000/rhcf.1954 Lenz T, Nicolaïdis K (2019) EU-topia? A critique of the European Union as a model. Cult Pract Europeanization 4(2):78–101 Lepenies W (1996) Le fondamentalisme occidentale est depasse. Le Monde, samedi, 17 février, p 13 Lewin K (1951) In: Cartwright D (ed) Field theory in social science: selected theoretical papers. Harper and Row, New York Lewis B (2019) As smooth as silk, 5. ISO Focus, September–October, 43–45, https://www.iso.org/ files/live/sites/isoorg/files/news/magazine/ISOfocus%20(2013-NOW)/en/2019/ISOfocus_136/ ISOfocus_136_en.pdf Marques JC (2019) Private regulatory capture via harmonization: an analysis of global retailer regulatory intermediaries. Regul Gov 13:157–176 Mattli W, Seddon J (2015) The power of the penholder: the missing politics in global regulatory governance analysis. In: Delimatsis P (ed) The law, economics and politics of international standardisation. Cambridge University Press, Cambridge, pp 169–198 Moore SF (1973) Law and social change: the semi-autonomous social field as an appropriate subject of study. Law Soc Rev 7(4):719–746. Reprinted in Falk Moore S, Law as process: an anthropological approach. Routledge & Kegan Paul, London, 1978 Pavlićević D (2014) China’s railway diplomacy in the Balkans. China Brief, vol XIV, Issue 20, October 23, pp 9–12 Railway Gazette International (2015) Gauge changer installed at Belarus-Poland border, 27 January 2015, https://www.railwaygazette.com/infrastructure/gauge-changer-installed-at-belaruspoland-border/40450.article. Accessed 17 June 2020 Railway Pro (2019) EU-China agreement on railway corridors study, 11 April, https://www. railwaypro.com/wp/eu-china-agreement-on-railway-corridors-study/. Accessed 18 June 2020 Ruete M (2021) Challenges for European Rail: getting solutions on track, European Energy Policy, Policy Paper No. 261, March, Jacques Delors Institute, Paris, https://institutdelors.eu/wpcontent/uploads/2021/03/PP261_210329_Rail-europeen_Ruete_EN.pdf. Accessed 5 May 2021 Scott J (2019) The global reach of EU law. In: Cremona M, Scott J (eds) EU law beyond EU borders: the extraterritorial reach of EU law. Oxford University Press, Oxford, pp 21–63 Seaman J (2020) China and the new geopolitics of technical standardization, Notes de l’Ifri, January, https://www.ifri.org/en/publications/notes-de-lifri/china-and-new-geopolitics-techni cal-standardization. Accessed 10 June 2020

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Snyder F (1993) The effectiveness of European community law: institutions, processes, tools and techniques. Mod Law Rev 56:19–54 Snyder F (2001) The origins of the nonmarket economy: ideas, pluralism and power in EC antidumping law about China. Eur Law J 7(4):369–424 Snyder F (2004) Economic globalisation and the law in the 21st century. In: Sarat A (ed) The Blackwell companion to law and society. Blackwell Publishers, New York and Oxford, pp 624–640 Snyder F (2007) Comments at the 6th international workshop for young scholars, the evolution of European courts: institutional change and continuity, Dublin, 16–17 November Snyder F (ed) (2009) The European Union and China: basic documents and commentary. Hart Publishing, Oxford Snyder F (2016) Food safety law in China: making transnational law. E. J. Brill for the Xiamen Academy of International Law, Leiden Snyder F (2020a) Understanding the regulation of ecological food in China: regulatory intermediation, path dependence and legal pluralism. In: Goh BC, Price R (eds) Regulatory issues in organic food safety in the Asia Pacific. Springer Nature, Zug, Switzerland, and Singapore Snyder F (2020b) The BRI Kaleidoscope: European legal pluralism and BRI soft law. In: Minas S, Ntoussas V (eds) The European Union and China’s Belt and Road: impact, engagement and competition. Routledge, London, in press Snyder F (2021) The EU, China and product standards. In: Shen W, Gottwald J-C, Cottey A (eds) The Routledge handbook of EU-China relations. Routledge, London Snyder F, Kim YS (2018) China’s 2015 food safety law: crossing the river, but feeling the stones and avoiding low-hanging branches? Chin J Comp Law 6(1):1–49 Stefan O, Avbelj M, Eliantonio M, Hartlapp M, Korkea-Aho E, Rubio N (2018) EU soft law in the EU legal order: a literature review. King’s College London Law School Research Paper, https:// www.researchgate.net/publication/332114834_EU_Soft_Law_in_the_EU_Legal_Order_A_Lit erature_Review. Accessed 19 June 2020 Trubek D, Dezlay Y, Buchanan R, Davis JR (1994) Global restructuring and the law: studies of the internationalization of legal fields and the creation of transnational arenas. Case West Law Rev 44:407–498 Wang J (2019) The New Eurasian Continental Bridge Economic Corridor. In: Cai F, Nolan P (eds) Routledge handbook of the Belt and Road. Routledge, London, pp 202–206 Wikipedia, Belt and Road Initiative, https://en.wikipedia.org/wiki/Belt_and_Road_Initiative. Accessed 15 June 2020 Wikipedia, Bogie exchange, https://en.wikipedia.org/wiki/Bogie_exchange. Accessed 17 June 2020 Wikipedia, CRCC, https://en.wikipedia.org/wiki/CRRC. Accessed 17 June 2020 Wikipedia, List of Chinese administrative divisions, https://en.wikipedia.org/wiki?List_of_ Chinese_administrative_divisions_by_GDP_per_capita. Accessed 18 June 2020 Wikipedia, List of sovereign states in Europe by GDP (PPP) per capita, https://en.wikipedia.or/ wiki/List_of_sovereign_states_in_Europe_by_GDP_(PPP)_per_capita. Accessed 18 June 2020 Wikipedia, Made in China 2025, https://en.wikipedia.org/wiki/Made_in_China_2025. Accessed 27 Mar 2020 Wikipedia, Rail transport in China, https://en.wikipedia.org/wiki/Rail_transport_in_China. Accessed 17 June 2020 World Trade Organization (1999) The Uruguay Round multilateral trade negotiations: the legal texts. Cambridge University Press, Cambridge Wuebbeke J, Meissner M, Zenglein MJ, Ives J, Conrad B (2016) Made in China 2025, Mercator Institute for China Studies (MERICS), MERICS Papers on China, No. 2, December 2016 Xu F (2018) The Belt and Road: the global strategy of China high-speed railway. Springer Verlag, Singapore Zenglein MJ, Holzmann A (2019) EVOLVING MADE IN CHINA 2025: China’s industrial policy in the quest for global tech leadership, MERICS Papers on China, No. 8, Berlin

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Francis Snyder Starr Professor of Law and EU Jean Monnet Chair ad personam, Director, Centre for Research on Transnational Law, Peking University School of Transnational Law, Peking University Shenzhen Graduate School Shenzhen, China. Visiting Professor, College of Europe, Bruges, Belgium Adjunct Professor, University of Macau. Member of the Working Group coordinated by Claus-Dieter Ehlermann and Yves Mény and based at the Robert Schuman Centre for Advanced Studies, European University Institute, Florence. Founder and Editor-in-Chief, European Law Journal, published by Basil Blackwell, Oxford; Co-Founder and Co-Director, Academy of International Trade Law (Macao, China). Member of the Editorial Advisory Board, Modern Law Review; Member of the Editorial Advisory Board, Revista Juridica, Faculdade de Direito de Universidade de Lisboa. Member of the Scientific Committee, Institute of European Studies, Chinese Academy of Social Sciences, Beijing (the only non-Chinese member). Special Advisory, Institute of EU Law, Southwest China University of Politics and Law, Chongqing.

Filling the Regulatory Gap to Address Foreign Subsidies: The EC’s Search for a Level Playing Field Within the Internal Market Nuno Cunha Rodrigues

Abstract The paper starts from EU legal treatment of foreign subsidies and the anticipated conclusion of filling existent gaps in this area. In Sect. 2, breaches in EU competition law are scrutinized, particularly in the light of the EU merger control regime and articles 101 and 102 of the TFEU. In Sect. 3, the effects of foreign subsidies in the EU internal market are studied from the point of view of state aid rules. Finally, in Sects. 4 and 5 the new EU FDI-screening Regulation, the White Paper on levelling the playing field as regards foreign subsidies and the proposal of a new EU Regulation to address distortions caused by foreign subsidies in the Single Market are examined. It is concluded that the EU is gradually becoming more proactive and equipped with legal instruments that welcome the effects theory and which will allow the EU to evaluate economic policies followed by third countries, especially related to investments in the EU when associated with foreign subsidies. Here, it remains to be seen how third countries will react to those EU instruments particularly considering the reciprocity principle and possible negative reaction from those countries.

1 Introduction Due to the Covid-19 situation, the world faces disrupting challenges that can only be compared with the ones that were tackled after the World War II. The biggest world crises since 1945 stands in front of us and it can only be overcome if world leaders work together. Fear and populism has brought back the assumption, in several countries, of neo-protectionist measures, as opposed to a multilateral approach to world

The original version of this chapter was revised. A correction to this chapter can be found at https://doi.org/10.1007/978-3-030-82291-0_19

N. Cunha Rodrigues (*) Faculty of Law – University of Lisbon, Lisbon, Portugal e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021, corrected publication 2021 N. Cunha Rodrigues (ed.), Extraterritoriality of EU Economic Law, European Union and its Neighbours in a Globalized World 4, https://doi.org/10.1007/978-3-030-82291-0_10

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trade that was historically followed by most of worldwide countries and recognized in the work of different international organizations such as the WTO or the WHO. This different political approach to world trade has become clearer in recent years, especially considering the slow but consistent return of protectionist measures since the 2008 financial crisis1 and the paralysis of the Doha Round of WTO trade negotiations.2 Up until recently, the EU has been reluctant to adopt trade reciprocity policies which could address the negative effects associated with the use of “beggar-thyneighbour” policies.3 Furthermore, the EU has traditionally been an open economy and an advocate of free trade which means a low degree of protectionism. Yet a change can be perceived in the external trade policy of the EU, particularly by assuring that reciprocity is used when faced with protectionist measures taken by third countries. The perception of this change is clear if one follows EU reports in recent years on international trade;4 the several communications5 and proposals for regulations that have appeared;6 claims submitted by the EU to the WTO7 and public statements issued by the European Commission.8 Moreover, following the 2020 New Industrial Strategy for Europe,9 the EC has recently explained that, in order to reap the full

1

See the data collected by the Global Trade Alert available at https://www.globaltradealert.org/ global_dynamics (last accessed in October 2020). 2 Rodrigues (2017), p. 135. 3 This idea is aligned with international economic theories that start from game theory. According to those theories, the main reason why states have kept commitments, even those that have produced a lower level of returns than expected, was because they fear that any evidence of unreliability would damage their cooperative relationships and, if that happens, lead other states to reduce their willingness to enter future agreements. In the past, those economic theories arguing that reputational concerns helped to ensure states maintained their agreements were questioned because (1) states have different levels of reliability about different agreements, and (2) there is considerable evidence that states possess multiple or segmented reputations. Downs and Jones (2002), p. S95. 4 See 38th Annual Report from the Commission to the Council and the European Parliament on the EU's Anti-Dumping, Anti-Subsidy and Safeguard activities and the Use of trade defence instruments by Third Countries targeting the EU in 2019, Brussels, 30.4.2020, COM(2020) 164 final, available at https://trade.ec.europa.eu/doclib/docs/2020/may/tradoc_158733.PDF (last accessed in October 2020). 5 See Communication from the Commission: Guidance on the participation of third country bidders and goods in the EU procurement market, Brussels, 24.7.2019 C(2019) 5494 final. 6 See the International Public Procurement Initiative (IPPI) available at https://trade.ec.europa.eu/ doclib/docs/2019/november/tradoc_158432.pdf (last accessed in October 2020) or Regulation 2019/452 of the European Parliament and of the Council of 19th March 2019 concerning foreign direct investment. 7 Data concerning cases launched by EU are available at https://trade.ec.europa.eu/wtodispute/ search.cfm?code¼1 (last accessed in October 2020). 8 In February 2020, the position of Chief Trade Enforcement Officer of the EU was created (“will ensure compliance with the provisions in the agreements concerning the environment, climate and workers’ rights.”). See EC press release IP/20/1409. 9 See Communication from the Commission—A New Industrial Strategy for Europe, Brussels, 10.3.2020, COM(2020) 102 final.

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benefits of global trade, Europe will pursue a model of open strategic autonomy, shaping the new system of global economic governance and developing mutually beneficial bilateral relations, “while protecting ourselves from unfair and abusive practices.” As was stated by the EC, “openness to trade and investment is part of the economy’s resilience, but it must go hand in hand with fairness and predictable rules.”10 It is also noteworthy that changes caused by the pandemic situation will also impact the way global trade will be perceived by the EU. Following the new approach to external trade policy, the EU has signed different bilateral and regional agreements (Preferential Trade Agreements—PTAs) which have tried to push itself as a key player in the international trading system. By doing so it also aims to relaunch a multilateral approach to world trade. Until 2006, bilateral agreements principally served non-economic purposes (neighbourhood and development objectives), while EU economic interests were served by multilateral agreements. Since then, PTAs have largely been justified on the basis of economic interests.11 Some of the PTAs—such as CETA (Comprehensive Economic and Trade Agreement) or JETA (EU-Japan Trade Agreement)—are considered to be deep rather than shallow agreements,12 as they involve a wide range of issues beyond tariffs, including domestic regulations (or behind-the-border measures), such as services, investment, intellectual property protection, competition policy and public procurement rules. At the same time, in many other third countries, more and more EU investors and companies face obstacles when investing, while non-EU companies enjoy the benefits of the liberal EU-market when dealing with foreign direct investment (FDI). In fact, the EU is the world’s leading destination for FDI and, in 2017, accounted for more than one third (35%) of the world’s inward investment positions.13 In this regard, it is known that some non-EU companies and investors can benefit from the regulatory and financial support given by non-EU countries that can hardly be scrutinized according to existing EU rules.

10 See White Paper on levelling the playing field as regards foreign subsidies, Brussels, 7.6.2020, COM(2020) 253 final, p. 5. 11 Garcia-Duran and Eliasson (2018), pp. 7–32. 12 On the distinction between “deep” and “shallow” agreements, see World Trade Organization, “World Trade Report: The WTO and preferential trade agreements: From co-existence to coherence”, 2011 available at https://www.wto.org/english/res_e/booksp_e/anrep_e/world_trade_ report11_e.pdf (last accessed in October 2020). Two distinct dimensions of deep integration are the “extensive” and the “intensive” margin. The extensive margin refers to an increase in the policy areas covered by an agreement, while the intensive margin refers to the institutional depth of the agreement. The extensive and intensive dimensions of deep agreements may be related, as an extension of the coverage of an agreement may require the creation of common institutions for its proper functioning. See also Melo Araujo (2017), pp. 164–168. 13 See Eurostat, World direct investment patterns, July 2018, available at https://ec.europa.eu/ eurostat/statistics-explained/index.php/World_direct_investment_patterns (last accessed in October 2020).

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That is the result, in many cases, of different approaches from non-EU jurisdictions to regimes such as merger control, public procurement and state aid. In some countries, those regimes are clearly protectionist and, in others, although they appear to be neutral towards national and non-national companies, are surrounded with additional regulations that carry out protectionist measures.14 However, these non-EU companies and investors compete with EU companies inside the EU internal market according to the same rules. Against this backdrop, this paper aims to analyse gaps in EU law, especially concerning the EU legal treatment of foreign subsidies, and how the EC is trying to fill those gaps seeking, at the same time, some degree of connection or link with the EU internal market. In doing so, the EC recognizes the importance of the effects theory in EU economic law. Accordingly, in Sect. 2, breaches in EU competition law are scrutinized, namely in the light of the EU merger control regime and articles 101 and 102 of the TFEU. In Sect. 3, the effects of foreign subsidies in the internal market from the point of view of state aid rules will be studied. Finally, in Sects. 4 and 5, the new EU FDI-screening Regulation, the White Paper on levelling the playing field as regards foreign subsidies and the subsequent proposal for an EU Regulation are examined.

2 Distortion of the Functioning of the Internal Market Caused by Extra-Territorial Effects 2.1

General Overview

Extraterritorial effects occurring outside the EU can distort or threaten to distort competition in the internal market. However, in the past, neither EU primary law nor ECJ jurisprudence recognized the possible application of the so-called “effects theory” in order to make EU law applicable to those situations. One can say that this was due to the recognition of the territoriality principle in EU law as a general principle enshrined in public international law.15

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Rodrigues (2017). This means that a State cannot take measures in the territory of another State, through the application of national laws, without the latter’s consent. This is, of course, the case of EU law, the application of which presupposes an adequate link with the territory of the Union, in order to respect that basic principle.

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Nevertheless, according to public international law, States can exercise their jurisdiction extraterritorially, namely when considering special circumstances that may occur outside their respective territorial realm.16,17 In any case, the possible extraterritorial application of EU law is achieved by seeking some degree of connection or link with the EU territory,18 or through the so-called “territorial extension” technique.19 There are several examples of EU law use of this technique, for example in the field of environmental20 and animal protection;21 financial markets;22 rating agencies23 or Data Protection.24 At the same time, the EU has approved legal instruments

16

This is the case, for example, when a particular action is committed in a State’s territory, even if part of that action has been carried out in another State (objective territoriality) (e.g. in cases resulting from the application of criminal law or commercial law); when jurisdiction is established on the basis of the need to prosecute and sanction certain types of crime which are internationally recognized (e.g. criminal law and actions related to the repair of damages in civil law) (Principle of universality); according to the effective control exercised by a State over the territory or individuals of another State (e.g. in situations where it is necessary to ensure respect for human rights) (Principle of “effective control”); when jurisdiction derives from the nationality or national character of the person who committed the offence or the person or national interest injured by the offence which will determine the application of national law (e.g. criminal law) (Principle of nationality); arising from the existence of a real and substantial connection between companies or persons in different jurisdictions (e.g. vis-à-vis subsidiaries of foreign companies). Scott (2014b). With examples considering the extraterritorial application of the European Convention on Human Rights, Ryngaert (2012), pp. 57–60. 17 The application of these principles should not, however, make us forget that, in determining extraterritorial competence, even when according to the exceptions allowed by Public International Law, some moderation is required, given the so-called “international comity”. This moderation results, in some cases, from the application of norms of international law (or, as will be analysed below, EU law) or even of domestic law that aim to mitigate or prevent the production of extraterritorial effects of the law of a third country. See Geradin et al. (2011). 18 Prete (2018). 19 Scott (2014a), p. 87; Scott (2014b), pp. 1343–1380. 20 See article 4 of Regulation (EU) 995/2010 of 20 October 2010 laying down the obligations of operators who place timber and timber products on the market. See article 3/1/(f) of Directive 2012/ 19/EU of 4 July 2012 on waste electrical and electronic equipment. See article 25-A of Directive 2008/101/EC of 19 November 2008 amending Directive 2003/87/EC so as to include aviation activities in the scheme for greenhouse gas emission allowance trading within the Community. Concerning the application of this Regulation, see Judgement of 21 December 2001, ATA, C-366/ 10, EU:C:2011:864. Commenting on this case, see de Geert and Cedric (2013), p. 410. 21 See Regulation 1007/2009 of 16 September 2009 on trade in seal products. Concerning seal products, see also the WTO panel European Communities – measures prohibiting the importation and marketing of seal products—WT/DS400/R—WT/DS401/R, available at https://www.wto.org/ english/tratop_e/dispu_e/400_401r_e.pdf (last accessed in October 2020). 22 See article 4/1/(c) of Regulation 648/2012 of 4 July 2012 on OTC derivatives, central counterparties and trade repositories. 23 See article 4/3/(c) of Regulation 1060/2009 of 16 September 2009 on credit rating agencies. 24 See Regulation 2016/679 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data. Although prior to the GDPR, Svantesson (2014), p. 102. Commenting on extraterritorial effects after the GDPR, Kuner (2019), pp. 112–144.

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in order to neutralize non-EU legislation that aims to produce extraterritorial effects whenever that legislation affects the interests of EU natural or legal persons.25 Beyond territorial connections, EU courts have over the years moved towards an effect-based approach,26 namely in the context of competition law. This approach is to minimize competing or overlapping claims to exercise subject matter jurisdiction over the same conduct. Otherwise, identical activities would be governed by the law of the place where the activity occurred (i.e. the local jurisdiction), as well as by the law of the ‘foreign’ place which decided to exercise extraterritorial jurisdiction.27 In this matter, the application of the effects-theory under the umbrella of EU competition law has only recently been confirmed by the ECJ. The Court of Luxembourg has developed a jurisprudence based on specific links that try to attract law situations occurring outside the EU to EU competition. The Dyestuffs case28 can be considered as the landmark case. Here, the ECJ recognized the “single economic entity” theory, according to which parent companies established outside the Union may be assigned the conduct of their subsidiaries located in the Union under certain circumstances.29 This case law was later developed in the Woodpulp case, where the ECJ established the “implementation” theory according to which competition law was also applicable to worldwide agreements as long as they were implemented in EU territory.30 In the late 1990s, the effects theory was recognized in the Gencor case31 which concerned a transnational merger operation (between companies based in the UK and in South Africa). In this regard, the General Court of the European Union (GCEU) considered that the extraterritorial application of European rules dealing with concentration operations would be “justified under public international law when it is foreseeable that a proposed concentration will have an immediate and substantial effect in the Community.”32 The “effects theory” was further advanced in the Intel case,33 first by the General Court,34 and then confirmed by the ECJ that stated that it would be possible to apply

25

See Council Regulation (EC) No 2271/96 of 22 November 1996. Behrens (2016), p. 8. 27 See UNDP, Using Competition Law to Promote Access to Health Technologies, 2014, p. 94, available at https://hivlawcommission.org/wp-content/uploads/2017/06/UNDP-Using-Competi tion-Law-to-Promote-Access-to-Medicine-05-14-2014-1.pdf (last accessed in October 2020). Discussing the application of the effects-theory in Gal (2009), Available at SSRN: https://ssrn. com/abstract¼1333151 (last accessed in October 2020). 28 Judgment of 14 July 1972, ICI v. Commission, C-48/69, EU:C:1972:70. 29 Judgment of 14 July 1972, ICI v. Commission, C-48/69, EU:C:1972:70, paras. 128–135. 30 Judgment of 20 January 1994, Ahlström Osakeyhtiö and Others v Commission, C-89/85, EU: C:1988:447, para. 16. 31 Judgment of 25 March 1999, Gencor Ltd v. Commission, T-102/96, EU:T:1999:65. 32 Judgment of 25 March 1999, Gencor Ltd v. Commission, T-102/96, EU:T:1999:65, para. 90. 33 Judgment of 6 September 2017, Intel v Commission, C-413/14 P, EU:C:2017:632. 34 Judgment of 12 June 2014, Intel v Commission, T-286/09; EU:T:2014:547. 26

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EU competition law to a conduct “which, while not adopted within the EU, has anticompetitive effects liable to have an impact on the EU market”.35 The abovementioned evolution of the ECJ jurisprudence towards the “effects theory” represents a sign of convergence with US antitrust law. In fact, the possibility of the so-called extraterritorial application of US antitrust law was historically recognized by the US Supreme Court in the famous Alcoa case, in 1945.36 Later, in 1982, the US Congress approved the Foreign Trade Antitrust Improvement Act (“FTAIA”), with the purpose of clarifying the extraterritorial application of the Sherman Act.37 Under this legislation, US competition law was applicable to behaviours practiced abroad, provided they had a direct, substantial and reasonably predictable effect in the USA. Moreover, in April 1992, the US Department of Justice announced that it would begin to oversee compliance with US extraterritorial competition law in relation to anti-competitive practices that restricted US exports, regardless of whether the practice actually harmed competition in the US domestic market. This understanding of the Department of Justice was widely criticized, as it represented an attempt to apply extraterritorial US antitrust law to actions carried out outside the State, knowing that they did not have a direct and substantial impact on competition in the domestic market, which was understood as overcoming the international consensus on the extraterritorial application of competition laws in the light of the “doctrine of effects”.38 Furthermore, the FTAIA did not make it illegal

Judgment of 6 September 2017, Intel v Commission, C-413/14 P, EU:C:2017:632, para 45. V. US v. Aluminum Company of America and others, 44 F. Supp. 97; 148 F. 2d 416. At stake was a cartel composed of foreign companies that agreed among themselves that each company would pay royalties to the others if its own aluminum production exceeded a certain level. Aluminum production was limited to the level set in the agreement, which resulted in the lack of aluminum in the USA due to the reduction in imports to this country. In this case, the US court applied national competition law because it considered that “any state can impose responsibility for conduct that occurs outside its borders that has consequences within its borders”. This judicial understanding was supported by the Sherman Act. There was a general prohibition on the violation of competition law without any geographical limits. 37 Ryu (2016), pp. 88–93; Phan (2016), p. 478. 38 This doctrine is recognized by the Association of International Law that identified it as a principle of international law at the 55th Conference held in New York, in 1972. The Association recognized that the extraterritorial application of domestic laws is legitimate if the following conditions are met: 35 36

(a) the actions and their effects constitute activities that fall within the scope of the law; (b) there are significant domestic effects; and (c) these domestic effects are the direct and main result of extraterritorial actions. In 1977, the Institut de Droit International also declared that the jurisdiction over the rules that regulate the anti-competitive activities of multinational companies can be determined by the doctrine of effects and may lead to the extraterritorial application of domestic law if the actions

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for US domestic companies to engage in anti-competitive activity that only the affects export market which was seen by some as rather shocking.39 Nevertheless, the same understanding led the USA to be considered as the “world competition police”, especially since the American judicial system allowed consumers to be compensated for the damages caused by violation of competition law. This happened, for example, in the case of Hoffmann-LaRoche v. Empagran,40 where foreign buyers of products that had been injured in countries outside the USA by the cartel discovered in the meantime filed actions in the USA and not in the country where they had suffered losses. It is noteworthy that US courts have recently gradually begun to refuse actions founded on anti-competitive behaviour by companies based outside the United States. Thus, in the case of Motorola Mobility v. AU Optronics,41 the Sherman Act was not considered to be applicable to a cartel involving price fixing by foreign manufacturers of LCD screens that had agreed prices applied to Motorola’s mobile phones. These were later sold in the USA. In this case, the famous judge Richard Posner stated that “no longer is the United States the world’s competition policeman”. In this vein, US courts have pointed out the need to mitigate the “doctrine of effects” through a “rule of reason” that involves considering the interests of other states and the complex nature of the relationships between the actors—states— involved and the USA. This was an appeal to the so-called principle of balancing national interests which is now linked to comity.42 What remains from this (brief) analysis of US competition law is the relevance that the “doctrine of effects” or the effects theory has had with a view to the application of competition law on both sides of the Atlantic. If, on the one hand, the application of the effects theory it is nowadays more clear, within the EU, when dealing with situations falling under the scope of articles 101 and 102 of the TFEU, on the other hand, it gets more complicated for worldwide NCAs, forced to cooperate among themselves when dealing with international cartels. Finally, the application of the effects theory to EU and non-EU companies that benefit from foreign subsidies and, at the same time, act in the internal market remains less clear. This can be better understood when looking in particular at the EU merger control regime or the EU state aid regime which will be analysed in the following section.

carried out produce intentional effects or are, at least, predictable, substantial, direct and immediate within a territory. 39 UNDP (2014), p. 95, available at https://hivlawcommission.org/wp-content/uploads/2017/06/ UNDP-Using-Competition-Law-to-Promote-Access-to-Medicine-05-14-2014-1.pdf (last accessed in October 2020). 40 Hoffmann-LaRoche v. Empagran, 542 US 155, 165 (2004). 41 Motorola Mobility LLC v. AU Optronics Corp., No. 14-8003 (7th Cir. 2014). 42 See supra footnote 16.

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Current Gaps in EU Competition Law. The Case of the Merger Control Regime

As explained above, the ECJ has recognized the role of the effects theory in the application of EU competition law. As a result, anti-trust behaviour that occurs outside the territory of the EU but produces anti-competitive effects inside the internal market can be attracted to the orbit of EU law. Somehow this is one of the consequences of the so-called externalization of the internal market which works both from and to the EU.43 Despite the application of the effects theory, some gaps related to the possible application of EU law remain to be filled. One can identify several gaps when addressing competitive imbalances within the EU internal market arising from foreign subsidies granted by non-EU governments. The existing breaches in the EU law—such as in the case of the merger control regime—do not assure a level playing field among EU and non-EU companies and investors within the internal market. It is known that the number of cross-border merger operations involving different jurisdictions has been increasing. Similar to the GCEU Gencor case, non-EU jurisdictions can be called upon to intervene when the effects of cross-border merger operations are materialize on domestic markets. Accordingly, different merger control regimes can become applicable in a single transnational merger operation. Here, due to the involvement of different NCAs similar problems may arise, for example concerning access to information or possible enforcement of remedies.44 Moreover, as is generally recognized, worldwide NCAs do not have the same global power. Put differently, some competition authorities such as the European Commission, the Department of Justice,45 the Japan Fair Trade Commission46 or the Chinese State Administration for Market Regulation47 represent large economies and thus markets. As such, their final opinion on cross-border mergers is decisive and can represent a substantial veto for global operations if that specific competition authority does not authorize the operation due to the importance that the specific market might have for the companies involved.48

43

Fahey (2016), p. 31. Some of these problems could be solved through international cooperation between NCAs. See OECD working party no. 3 on Co-operation and Enforcement - Roundtable on the Extraterritorial Reach of Competition Remedies DAF/COMP/WP3(2017)4. Becker (2016), pp. 99–122. 45 See https://www.justice.gov/atr/merger-enforcement (last accessed in October 2020). 46 See https://www.jftc.go.jp/en/ (last accessed in October 2020). 47 See https://en.nim.ac.cn/node/647 (last accessed in October 2020). 48 This is similar to the argument presented by Michal Gal concerning small economies: “the main problem is that small economies can rarely make a credible threat to prohibit the conduct of a foreign firm, especially if it has positive effects elsewhere that do not result only from the negative effects in the small jurisdiction.” Gal (2009), Available at SSRN: https://ssrn.com/ abstract¼1333151 (last accessed in October 2020). 44

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Here, one has to also consider that the different authorities involved will consider different national or regional competition policies, as reflected in the applicable legal regimes. In the end, those policies might represent different angles of intervention, sometimes considered to be protectionist,49 before the same merger operation.50 Furthermore, national or regional public interest may interfere with the strict application of merger control rules. This is the case of the EU and China. In the former—EU—it is known that Council Regulation 139/2004 of 20 January 2004 on the control of concentrations between undertakings authorizes Member States to take appropriate measures to protect legitimate interests other than those taken into consideration by the Regulation. Public security, plurality of the media and prudential rules are regarded as examples of legitimate interests.51 In the second case—China—the recent approval of specific foreign investment screening regulations emerges as an example of neo-protectionist measures that can be taken into account, in parallel, when investigating a merger operation.52 The case of China is quite interesting as it represents an example of FDI screening mechanisms that seem to have inspired the EU when approving the recent EU-FDI screening Regulation as we will see in Sect. 3 of this paper.

49

This is the case with Chinese merger control, considered by many to be protectionist. See Petit (2016), p. 69 ff.; Arnaudo (2017), pp. 1–11, available at SSRN: https://ssrn.com/abstract¼3102370, pp. 5–7; Heim (2011), p. 45. 50 See, for example, the merger operation UTC/Goodrich in 2009. The EC decided that the operation would not have significant impediments to effective competition regarding aircraft lighting, provided that the companies involved accepted the remedies imposed by the EC. At the same, the FTC approved the transaction with non-conflicting remedies of divestitures of assets located in several jurisdictions, after working closely with other competition authorities such as the Canadian Competition Bureau (CCB), the Mexican CFC and the Administrative Council for Economic Defence in Brazil (CADE). Similarly, see the merger operation between Panasonic and Sanyo which was approved by the Chinese Competition Authority by the (then) Ministry of Commerce on October 31, 2009 with remedies, after a 9-month review period, different from that which occurred in other jurisdictions. 51 Article 21/4 of the Merger Regulation. Jones and Davies (2014), p. 453 ff., available at http:// www.tandfonline.com/doi/pdf/10.5235/17441056.10.3.453?needAccess¼true and Fountoukakos and Herron (2017), available at https://www.competitionpolicyinternational.com/wp-content/ uploads/2017/12/Europe-Column-December-Full.pdf (last accessed in October 2020). Similarly, defining an EU privilege for owning more than 50% of airlines companies, see article 4 (f) of Regulation 1008/2008 of 24 September 2008 on common rules for the operation of air services in the Community. 52 See Foreign Investment Law (approved on 15 March 2019) (available at http://www.fdi.gov.cn/ 1800000121_39_4872_0_7.html) which includes two negative lists which enumerate the industries where foreign investment will either be prohibited or restricted. In China, see also the National Security Review Regime Under The New Foreign Investment Law, that came into effect on 1 January 2020. Referring to 2016, see the sixth WTO Trade Policy Review of China Report WT/TPR/S/342 available at https://www.wto.org/english/tratop_e/tpr_e/s342_e.pdf (last accessed in October 2020).

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In the context of merger control operations, the effects theory is called upon not only to determine the competence of the competition authorities—as was decided in the Gencor case—but also in order to allow competition authorities to appreciate possible impacts on effective competition that the merger operation may produce due to extraterritorial considerations such as foreign subsidies that the evolved parties might have benefited from in non-EU countries. In the past, the need for evaluation of foreign subsidies given to undertakings when considering merger operations became evident on two occasions that considered concentrations between US-based firms. In the merger operation between Boeing and McDonnell Douglas, the EC cleared the operation after the acceptation of remedies by the parties involved.53 In a second merger—between General Electric and Honeywell—remedies were not accepted and the merger operation was blocked by the EC.54 The evaluation of foreign subsidies in the context of merger operations was also appreciated, in the past, by the EU courts. In the 2001 RJB Mining case,55 the Court of First Instance (CFI) considered that the Commission had not analysed the effect of supposed state aid promised by the German government on the merged entity’s financial strength. Accordingly, the CFI annulled the Commission’s decision in the case RAG/Saarbergwerke/Preussag Anthrazit,56 which had been assessed under the Treaty establishing the European Coal and Steel Community (ECSC). Although Article 2/1/(a) of the EC Merger Regulation57 can be understood as wide enough when considering facts that the Commission should appraise in a concentration operation, the truth is that those objectives do not clearly include foreign subsidies granted to undertakings but only the “market position of the undertakings concerned and their economic and financial power”. This allows the EC not to consider foreign subsidies when analysing an operation. Nevertheless, after the RJB Mining case the evaluation of foreign subsidies in the context of merger operations was once again analysed by the EC, in the 2008 STX/ AKER YARDS case, this time with more detail.58 In this merger operation, there was a claim that the merged entity would benefit from state subsidies from South Korea, such as low labour, energy and steel costs. The merged entity would, therefore, be able to use such unfair subsidies to undercut

53

Case no IV/M.877—Boeing/McDonnell Douglas. Case COMP/M.2220—General Electric/Honeywell. Monti (2019), p. 177; Lim (2017), pp. 434–437. Concerning these two cases and concluding that the EU's exercise of extraterritorial competition policy derives from reasonable objections to the merger, the practical desire co-ensures market access opportunities for European firms and the need to enhance Union credibility in the eyes of member states, see Damro (2001), pp. 208–226, DOI: 10.1080/13501760110041550. 55 Case T-156/98 RJB Mining plc v Commission of the European Communities [2001] ECR II-337. 56 Case IV/ECSC.1252. 57 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings. 58 Case No COMP/M.4956. 54

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prices, with the result of marginalising the existing competitors and driving them out of the cruise ship business, monopolising it and creating thus a dominant position on the market for cruise ships.59 In the decision, the EC explained how state aid could potentially increase a company’s financial strength if financial means were allocated to the company, for example by a reduced price for a state-owned target, by a simple transfer of money or in the form of loans or guarantees provided at conditions which do not correspond to market terms. After, the EC went back to the RJB Mining judgement and clarified that, contrary to what was claimed, that ECJ’s case law didn’t provide grounds for imposing a general obligation on the Commission in a merger control procedure to carry out an independent analysis—comparable to a state aid procedure—in order to establish whether financial measures extended by third countries were granted on non-market terms and therefore constitute subsidies. The EC considered that the RJB Mining judgment related to very specific circumstances, in which the alleged state aid was directly linked to, and indeed triggered by, the merger which was not the similar to the merger under scrutiny. Finally, one key question referred by the EC in the 2008 STX/AKER YARDS case related to the adequacy of WTO-procedures. In the case, the complainant argued that the Commission should not leave the assessment of foreign subsidies to the ex post control exerted by the WTO but instead it should use merger control and its ex ante assessment to efficiently address foreign subsidies. The EC explained that the conclusion on serious prejudice or injury to the domestic industry, which are tests used in the Agreement on Subsidies and Countervailing Measures Agreement (SCM), would not be sufficient to ‘block’ a merger,60 as it would be necessary to find a significant impediment of effective competition, which is the (stricter) test applicable under Article 2 of the Merger Regulation. Furthermore, the EC concluded that any alleged difference or alleged inadequacy in the WTO procedure would not be a sufficient reason to consider that the Commission could extend the limits of merger control proceedings in order to “correct” allegedly inadequate WTO procedures.61 Nevertheless, the EC proceeded to consider whether the alleged subsidies could have an impact on the competitive assessment and concluded that the facts didn’t confirm that the financial strength of the merged entity would be significantly increased. Following the STX/AKER YARDS decision, and more recently, the EC has recognized, once again, that the EU merger control does not directly take into account whether an economic operator may have historically benefited from foreign subsidies (even if in principle it could form part of the assessment) and does not

59

See paragraph 70 of the decision. See paragraph 82. 61 See paragraph 84. 60

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allow the Commission (or Member States) to intervene and decide solely or even mainly on this basis.62 Put it differently, the fact that a firm has been granted subsidies by a third country may not be enough to trigger an intervention under EU merger rules.63 This reveals the insufficiency of the EU merger control regime and the need to consider other EU instruments in order to fill the perceived gap when dealing with foreign subsidies.

2.3

EU State Aid Rules

The application of the “effects theory” is still unclear when it comes to applying the EU state aid regime to subsidies given by third countries to companies ( foreign subsidies). EU state aid rules were defined in order to ensure that competition in the internal market is not distorted or threatened to be distorted through economic advantage somehow granted by Member States to companies. Interestingly, the general prohibition of state aid defined in article 107/1 of the TFEU and the exceptions stated in article 107/2 and 3 have provided for the creation of a level playing field for Member States and undertakings inside the EU. Paradoxically, the EU is the only territory in the world that has a system of control of public subsidies—state aid control—that creates a level playing field among undertakings inside the internal market but, at the same time, makes it much more difficult for EU companies to compete with non-EU companies both inside and outside the internal market. The truth is that the effects of foreign subsidies can be felt within the internal market and may distort competition between EU and non-EU companies. However, financial support granted by non-EU authorities to undertakings that act in the EU, either directly or through their parent companies outside the EU, are not covered by EU State aid rules64 and cannot be scrutinized by the EC. In this matter, one can recall the role of the WTO system in order to ensure the maintenance of a certain level playing field among all companies. According to article 1 of the SCM, governments are prohibited from granting subsidies. Nonetheless, the SCM Agreement only covers subsidised imports of goods from third countries and does not apply to subsidies related to trade in services and in relation to the establishment and operation of undertakings in the EU which are backed by foreign subsidies and which do not entail any trade in goods.65

See White Paper on levelling the playing field as regards foreign subsidies, p. 9. Carpi (2020), p. 25. 64 See White Paper on levelling the playing field as regards foreign subsidies, p. 9. 65 See White Paper on levelling the playing field as regards foreign subsidies, pp. 40–41. 62 63

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The definition of subsidy, stated in article 1 of the SCM agreement, only considers “financial contribution” given by governments “within the territory of a Member”. Apparently, this definition narrows the concept of subsidy and refrains its application to situations where subsidies that have an effect over the EU internal market are given with the intermediation of other countries besides the original donor. Consequently, a gap can be found in the WTO system besides the perceived breach in EU law when dealing with the effects of foreign subsidies that are felt within the internal market. This question was one of several asked in a case that involved the Public Republic of China (PRC), Egypt and the EC in 2019, decided in June 2020 (“the GFF case”).66 The facts were as follows. On 16 May 2019, based on Article 10 of Regulation (EU) 2016/1037 of the European Parliament and of the Council of 8 June 2016 on protection against subsidised imports from countries not members of the European Union, the EC initiated an anti-subsidy investigation with regard to imports into the Union of certain woven and/or stitched glass fibre fabrics (‘GFF’) originating in China and Egypt. A particular element of this case was that the alleged subsidisation in Egypt concerned two companies in the China-Egypt Suez Economic and Trade Cooperation Zone (‘SETC-Zone’), a special economic zone which was set up together by the PRC and Egypt, the two countries targeted by the complaint. The subsidisation occurred due to financial contributions made by Chinese banks to the companies operating in Egypt. The Chinese and the Egyptian governments alleged a long series of arguments against the EC’s opinion which were not accepted. One, in particular, is especially relevant for the purpose of this paper. It dealt with the concept of territoriality under the definition stated in the SCM agreement and Regulation (EU) 2016/1037 of the European Parliament and of the Council of 8 June 2016, on protection against subsidised imports from countries not members of the European Union (EU Regulation).67 According to article 1 (a)(1) of the SCM Agreement, a subsidy shall be deemed to exist if, among other conditions, “there is a financial contribution by a government or any public body within the territory of a Member”. Moreover, Article 2 (b) of the Regulation defines “government” as a government or any public body within the territory of the country of origin or export. In light of the aforementioned, the Chinese and the Egyptian governments argued that there was no room for attributing the conduct of the Chinese government to 66

See EC implementing Regulation (EU) 2020/776 of 12 June 2020 imposing definitive countervailing duties on imports of certain woven and/or stitched glass fibre fabrics originating in the People's Republic of China and Egypt and amending Commission Implementing Regulation (EU) 2020/492 imposing definitive anti-dumping duties on imports of certain woven and/or stitched glass fibre fabrics originating in the People’s Republic of China and Egypt. 67 OJ L 176, 30.6.2016.

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Egypt under the EU’s Regulation as the definition of “government” was expressly linked to the territory of the granting authority. According to those countries, the words “within the territory” were aimed at providing legal security and could not be interpreted in a different way in the light of WTO or international law.68 The Chinese government claimed that, according to Article 1.1(a) of the SCM Agreement, a subsidy only exists where there is a financial contribution by a government—or a public body—within the territory of the WTO member.69 Thus, any alleged direct transfer of funds by a financial institution operating in China to producers/exporters of GFF in third countries “cannot be attributed to China or considered a financial contribution given by the GOC”. In the Chinese Government’s view, the Commission itself had supported a “territorial limit of subsidization” in the HRF case,70 when it declared “that there must be a financial contribution by a government or a public body within the territory of the subsidizing country” under recital 5 of the Regulation. Moreover, the context of Article 1.1(a)(1) of the SCM Agreement, such as Articles XVI GATT, 2.1 and 2.2. SCM Agreement on specificity, Article 14 of the SCM Agreement on benefit calculations, Article 25.2 of the SCM Agreement on notification requirements all contain references that the beneficiary should be located in the territory of the subsidizing WTO Members. Finally, the negotiating history of the Agreement demonstrated—in the PRC’s view—that payments given by a government outside its territory would not be covered by the agreement. Hence, the Chinese Government claimed that, even if there was a subsidy, it was given to companies located in Egypt and not in China and, as such, part of the definition of subsidy under article 1, 1.1. (a) (1) of the SCM Agreement—“within the territory of a Member”—was missing. This argument was accepted by the EC. The consensus reached in this argument allows us to recognize the existence of a gap in WTO law when dealing with subsidies for the production of goods overseas which are then exported to third WTO members.71 However, in this case, the EC considered that Egypt was accountable under the SCM Agreement for having actively sought, acknowledged and adopted such foreign subsidies for the benefit of the products made therein.72 The EC claimed that Article 2(b) of the EU Regulation 2016/1037 did not refer to the separate 68

See paragraph 715 of the GFF case. See paragraph 671 of the GFF case. 70 See Commission Implementing Regulation (EU) 2017/649 imposing a definitive anti-dumping duty on imports of certain hot-rolled flat products of iron, non-alloy or other alloy steel originating in the People's Republic of China (OJ L 146, 9.6.2017, p. 17) (‘HRF case’). 71 In the same direction, see paragraph 672 of the GFF case. 72 According to paragraph 684 of the decision, “the Commission considered that the term ‘by the government’ in Article 3(1)(a) of the basic Regulation should include not only measures directly emanating from the GOE but also those measures by the GOC which can be attributed to the GOE on the basis of the available evidence.” 69

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question of what action the government may authorize on its territory and acknowledges as its own. In other words, the EC argued with a wide interpretation of Article 2(b) of the Regulation 2016/1037 as, according to it, the notion of “government” was open to interpretation, taking into account its context, object and purpose, similar to the notion of “public body”. Thus, the actions attributable to the government of the country of origin or export may not only be actions directly emanating from such a government but also actions imputable to such a government. Put it differently, the claim of the Egyptian and Chinese government derived from an alleged strict notion of territoriality under Article 2(b) of the EU Regulation and Article 1.1(a)(1) of the SCM Agreement. Still, for the EC, while it is true that the EU Regulation “must be interpreted, as far as possible, in the light of the corresponding provisions of the SCM Agreement”, these provisions do not go against the proposition that a financial contribution may be provided by another state which the territorial government of the country of origin or export acknowledges and adopts as its own.73 This argument would be further confirmed by the terms in Article 3(1)(a) of the EU Regulation when referring to a financial contribution “by” a government. For the same reasons, the arguments invoked by the PRC, supported in several provisions of the SCM Agreement (e.g. Articles 1.1(a)(1), 13, 18.1(a)) were not considered. Accordingly, the EC was entitled to verify whether the resources provided to the Egyptian companies were be qualified as countervailable subsidies granted within the meaning of Articles 2, 3 and 4 of the EU Regulation. As such, the argument of the Egyptian and Chinese government derived from the alleged strict notion of territoriality under Article 2(b) of the basic Regulation and Article 1.1(a)(1) of the SCM Agreement, although understood in a literal way by the EU, was rejected.74 The EC’s understanding made clear two points: 1. The concept of subsidy for the purposes of the ASM agreement and the EU Regulation is linked to a territory of the country where this is granted by the government; 2. The definition includes cases where national governments do not grant the subsidy directly but acknowledge and adopt foreign subsidies as their own; In our view, this later conclusion (see ii) supra) cannot be taken as definitive as it is based on interpretation principles that are to be discussed according to public and economic international law in the following terms. The WTO Dispute Settlement Understanding requires that agreements must be interpreted in accordance with the customary rules of the interpretation of public international law as codified in the Vienna Convention. Article 31 of this Convention provides the following under the heading ‘General Rule of Interpretation’: 73 74

See paragraph 716 of the GFF case. See paragraph 717 of the GFF case.

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1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.

This means that interpretation cannot be used to create new obligations or to resolve a true conflict of treaty norms by choosing one norm over another.75 As such, one can discuss if article 1 of the ASM agreement was interpreted, by the EC in the “GFF case”, in good faith and in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. If the EC’s argument is understandable—the concept of subsidy should include cases where national governments do not grant the subsidy directly but acknowledge and adopt foreign subsidies as their own—it is also true that there is room to discuss this interpretation in the light of the subsidy concept stated in the SCM agreement, especially when it considers the need for the subsidy to be granted “within the territory of a Member”. If we consider this latter option then one can conclude the EC’s argument had no support in the ASM agreement and consequently no specific action could have been taken, according to Article 32.1 of the SCM Agreement.76 In any scenario, as seen, is clear the existence of a gap in EU law and, furthermore, in the WTO system when dealing with the possible scrutiny of financial support given by non-EU governments to undertakings that operate within the EU internal market. This breach was not solved either by anti-dumping or countervailing regulations [Regulation 2016/1036 and Regulation 2016/1037, respectively], which apply to imported goods and do not cover services, foreign investment or foreign purchases of assets in the EU, nor by the FDI-screening Regulation (as will be explained later). Until now, the EU has tried to fill this gap in the context of bilateral PTAs, such as CETA or the Singapore Agreement, where rules on subsidization similar to state aid were defined. Here, the EU broadly applies two different approaches to subsidies: the “WTO+ approach” (SCM Agreement with an additional prohibition of the most harmful subsidies, transparency obligations and bilateral consultation) and the “State aid approach” (rules similar to the EU State aid rules).77 Recently, the EC proposed that, in the case where a PTA does not exist, the above identified gap could be covered by a new EU legal instrument that could define a level playing field for the possible scrutiny of financial support given by non-EU governments to undertakings that operate within the internal market (see Sect. 4 infra).78 75 See Frankel (2005), Victoria University of Wellington Legal Research Paper No. 2/2014, Available at SSRN: https://ssrn.com/abstract¼795986 (last accessed in October 2020). For a general discussion of the conflict of norms in public international law and the WTO, Pauwelyn (2003). 76 Considering possible EU liability and protection of individual rights for breaches of WTO law, see Micklitz and Wechsler (2018). 77 See the White Paper on levelling the playing field as regards foreign subsidies, p. 43. 78 Here, it may happen that if a new legal EU instrument is approved, overlaps may occur due to the aforementioned bilateral approach. In this scenario, the EU proposes, in the White Paper, that the action under a new instrument could be suspended.

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3 The FDI Screening Regulation:79 As seen above, China approved specific foreign investment screening regulations.80 This was possible because according to several international instruments—such as the WTO rules or bilateral trade and investment agreements—countries can adopt restrictive measures relating to FDI on the grounds of security or public order. However, in some countries the scope of FDI screening is based on a general national interest or even a net benefit test.81 Being a “systemic rival” of the EU as defined by the EC,82 the case of China is quite interesting as it seems to have inspired the EU when approving EU Regulation 2019/452 that established “a framework, for the screening by Member States of FDI into the Union, on the grounds of security or public order”.83 After that, in 2020, the EC issued a communication providing guidance to Member States concerning foreign direct investment and free movement of capital from third countries, and the protection of Europe’s strategic assets, ahead of the FDI Screening Regulation (2020 FDI Communication).84 The Regulation defines a cooperation method between the EC and Member States when screening FDI. Member States are not obliged by the FDI-Regulation to keep a screening mechanism85 but it empowers and encourages Member States to provide comments between each other in respect of the FDI undergoing screening. A reason for the voluntary nature of the FDI-Regulation is that the screening of FDI on the grounds of security or public order mainly falls within the scope of Art. 4 (2) TEU and the sole responsibility of Member States for their national security. The framework constitutes basic requirements that screening mechanisms have to ensure, for example the possibility to seek judicial recourse against a decision.

79

Regulation (EU) 2019/452 of the European Parliament and of the Council of 19th March 2019. See the Foreign Investment Law (approved in 15 March 2019) (available at http://www.fdi.gov. cn/1800000121_39_4872_0_7.html) which includes two negative lists enumerating the industries where foreign investment will either be prohibited or restricted. In China, see also the National Security Review Regime under the New Foreign Investment Law, that came into effect on 1 January 2020. 81 See Striebel (2019), p. 252. 82 See European Commission and HR/VP contribution to the European Council EU-China—A strategic outlook, 12 March 2019, p. 1, available at https://ec.europa.eu/commission/sites/betapolitical/files/communication-eu-china-a-strategic-outlook.pdf (last accessed in October 2020). 83 For the purposes of the Regulation FDI means an investment of any kind by a foreign investor aiming to establish or to maintain lasting and direct links between the foreign investor and the entrepreneur to whom or the undertaking to which the capital is made available in order to carry on an economic activity in a Member State, including investments which enable effective participation in the management or control of a company carrying out an economic activity. See article 2 of Regulation 2019/452 of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union. 84 See Brussels, 25.3.2020 C(2020) 1981 final. 85 See article 3/1 of the Regulation. 80

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At this point, the lack of a “one-stop shop” mechanism, similar to the EU merger control, may harm a coordinated and harmonized application of the Regulation. It goes without saying that, according to the Regulation, the Commission itself cannot decide on the admissibility of FDI. In the case of FDI likely to affect projects or programmes of Union interest, Member States are obliged to take note of the opinion of the Commission and provide an explanation if they do not follow it.86 The FDI-Regulation offers a non-exhaustive list of factors that may be considered by Member States or the Commission, when determining whether a FDI is likely to affect security or public order. This includes all relevant factors, such as the effects on critical infrastructure, technologies (including key enabling technologies) and inputs which are essential for security or the maintenance of public order, the disruption, failure, loss or destruction of which would have a significant impact in a Member State or in the Union. Later, the 2020 FDI Communication has provide specific explanation on possible justifications to restrictions on capital movements.87 Accordingly, opposite to that which happens with other similar regimes, the FDI Regulation has a more restrictive scope than it would apparently appear. Screening can only happen on the grounds of security or public order. However it is still unclear how the concepts of security or public order established in the Regulation will be interpreted both by the EC and national authorities since no definition is provided and different ranges of interpretation— one, more restrictive, following ECJ jurisprudence when dealing with TFEU (e.g. Articles 46 and 65/1/(b)),88 and another, more literal, according to the decisions taken by the WTO panels89—are known.90 Some scholars say that due to the voluntary nature and the broad provisions of the FDI-Regulation, the circumstances for investors from outside the EU will not change significantly. However, the FDI-Regulation stands as a sign of the new approach of the EU to international trade and can have an equivalent effect to a possible exercise of a veto power that, although never used, will be previously red-flagged by foreign investors before deciding to invest in the EU.

86

See Article 8/2/c) of the FDI-screening Regulation. See page 3 of the 2020 FDI Communication referring for instance whether investments may lead to over-reliance on foreign investors from third countries for the provision of essential supplies or essential services. 88 Judgment of 4 June 2002, Commission / Belgium, C-503/99, paragraph 47: “the Court has also held that the requirements of public security, as a derogation from the fundamental principle of free movement of capital, must be interpreted strictly, so that their scope cannot be determined unilaterally by each Member State without any control by the Community institutions.” See Kessedjian (2007), pp. 25–36. 89 Diebold (2007), pp. 43–74, doi:10.1093/jiel/jgm036; Burke-White and Von Staden (2008), pp. 357–368. 90 This argument can be perceived after reading Recital 4 of the Regulation, according to which this is without prejudice to the right of Member States to derogate from the free movement of capital as provided for in point (b) of Article 65(1) TFEU. 87

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In our opinion, the FDI-screening Regulation aims to send a clear message to countries such as China saying that investment in the EU—such as 5G technology— can be scrutinized so that, in the end, EU reciprocity is indirectly assured. However, the concepts of security or public order cannot be confused with that of reciprocity. Nevertheless, it is clear that the FDI-screening Regulation is insufficient in order to create a level playing field between EU and non-EU companies when dealing with foreign subsidies. This led the EC to issue the White Paper on levelling the playing field as regards foreign subsidies that once more will be analysed in the next section.

4 The White Paper on Levelling the Playing Field As Regards Foreign Subsidies and the Proposal of a New Regulation to Address Distortions Caused by Foreign Subsidies in the Single Market As stated above, gaps can be found in EU law when considering foreign subsidies given by third countries as this may cause distortions in the internal market. Knowing this the EC issued the White Paper on levelling the playing field as regards foreign subsidies91 on 17 June 2020 and launched a public consultation about it. Later, on the 5th may 2021, the EC presented a formal proposal for a new Regulation to address distortions caused by foreign subsidies in the Single Market.92 In a changing global arena, the EU is preparing itself with new legal instruments that will enable it to offer prompt responses to challenges that a new approach to globalization will produce in a near future. The White Paper represents a sign of this new approach. Some even identify it as a sign that the EC is willing to face China, and respond to the Chinese “Belt and Road initiative” and “Made in China 2025” programmes in a competition among systems.93 This was not the first time the subject was addressed within the EU. The Dutch government had already issued a similar document where possible answers to threats from unfair foreign competition were raised.94 Similarly three Ministers of the Economy—from Germany, France and Italy—expressed their worry

Brussels, 17.6.2020 COM(2020) 253 final. Brussels, 5.5.2021 COM(2021) 223 final. 93 This was recognized by the European Court of Auditors in a recent paper published in 2020 entitled The EU's response to China's state-driven investment strategy, available at https://www.eca. europa.eu/en/Pages/DocItem.aspx?did¼54733 (last accessed in October 2020). 94 See Non-paper - Strengthening the level playing field on the internal market, available at https:// www.permanentrepresentations.nl/documents/publications/2019/12/09/non-paper-on-levelplaying-field (last accessed in October 2020). 91 92

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with the lack of reciprocity that EU faced in global trade in a joint letter to Commissioner Malmström sent in February 2017.95 In order to fill regulatory gaps, the White Paper proposes a number of legal solutions and tools called “Modules”. This includes the possibility of reviewing acquisitions facilitated by foreign subsidies and/or market behaviour by a subsidized bidder in public procurement. Foreign subsidies would be actionable if they benefit an undertaking established in the EU or an undertaking “active” in the EU as when, for example, it seeks to acquire a controlling interest in an EU company. The following three Modules were detailed in the White Paper, each tackling three distinctive issues which the EC had identified as being potentially negatively impacted by foreign subsidies. As in May 2021 it was proposed a new EU Regulation following the White Paper, correspondence of the modules with the chapters of the proposal is made accordingly: 1. The EU internal market generally (module 1 and chapter 1 and 2 of the proposed new EU Regulation) 2. Acquisitions of EU companies (module 2 and chapter 3 of the proposed new EU Regulation); and 3. Public procurement procedures (module 3 and chapter 4 of the proposed new EU Regulation); Module 1 has a broad material scope and aims to address distortive foreign subsidies in all market situations. The suggested notion of “foreign subsidies” builds on the subsidy definition set out in the EU Anti-subsidy Regulation;96 the EU Regulation on safeguarding competition in the air transport sector97 and the SCM Agreement. It is considered to be “a financial contribution by a government or any public body of a non-EU State, which confers a benefit to a recipient and which is limited, in law or in fact, to an individual undertaking or industry or to a group of undertakings or industries.” The concept “foreign subsidy” focuses on “financial contributions” and includes grants given by a private body when entrusted with functions normally vested in the government or directed by the non-EU government. This large scope can make it difficult to identify if, for example, loans given by state-owned banks fall within the concept of foreign subsidies.98 As such, the EC should work on a more precise definition of “foreign subsidy”. 95

The letter is available at https://www.bmwi.de/Redaktion/DE/Downloads/S-T/schreiben-de-fr-itan-malmstroem.pdf?__blob¼publicationFile&v¼5 (last accessed in October 2020). 96 Regulation 2016/1037 of the European Parliament and of the Council of 8 June 2016 on protection against subsidised imports from countries not members of the European Union, OJ L 176, 30.6.2016, p. 55. 97 Regulation 2019/712 of the European Parliament and of the Council of 17 April 2019 on safeguarding competition in air transport. 98 This is clearly the case with China. As is recognized by the European Court of Auditors in the EU's response to China's state-driven investment strategy document, p. 5, “State-Owned Enterprises benefitting from Chinese public financing form part of this Chinese investment strategy. Under EU

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The White paper classifies subsidies likely to distort the internal market into the following categories:99 a) Export financing not in compliance with the OECD rules on export credit; b) Subsidies (such as debt forgiveness) to “ailing undertakings” without a prior restructuring plan; c) Unlimited state guarantees; d) Operating subsidies in the form of tax reliefs, outside general measures; e) Foreign subsidies directly facilitating an acquisition; f) Other foreign subsidies according to a non-exhaustive list of relevant indicators that includes (1) the size of the subsidy; (2) the situation of the beneficiary; (3) the situation on the market concerned; (4) the market conduct in question and (5) the level of activity in the internal market of the beneficiary; Once it is established that a foreign subsidy is capable of distorting the internal market, and where there is evidence of a possible positive impact that the supported economic activity or investment might have within the EU or on public policy interests recognised by the EU, the distortion should be weighed against such possible positive impact. This is what the White Paper defines as the “EU interest test”. Action would be taken against foreign subsidies if they frustrated the achievement of EU policy objectives such as job creation, climate neutrality and environmental protection, digital transformation, security, public order and public safety and resilience. To apply the “EU interest test” the effects theory would be called upon again as the analysis is based on the possible positive impact that the supported economic activity or investment might have within the internal market or on public policy interests recognized by the EU. For this reason, the White Paper proposes a different and wider approach than the one used in the FDI-screening Regulation. In the latter, it is suggested to take into account “whether the foreign investor is directly or indirectly controlled by the government, [...] including through ownership structure or significant funding (Art.4 II lit. a))” under its effects on security or public order. In the White Paper the effects theory is called based on the impact of foreign measures in internal market functioning and competition. The criteria for defining the scope of potential beneficiaries is based on the country granting subsidies, independently of where the beneficiaries are based. This means that an EU company can be caught in this instrument if it receives any type of subsidies from non-EU countries that have an effect in distorting the internal market. rules such subsidies, if granted by Member States, would be treated as state aid. This difference in treatment makes it difficult for the EU to achieve a level playing field vis-à-vis China.” The same document (p. 54) recognizes that the Chinese “Belt and Road Initiative” (BRI) is mainly financed by the Chinese state (in 2018, the funding was calculated to be more than US$750 billion). 99 See White Paper on levelling the playing field as regards foreign subsidies, p. 16.

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For this, the White Paper defines a two-step system, similar to the known phase 1 and phase 2 in the merger control regime.100 The EC and the relevant Member State authorities would initiate a case with a “preliminary review” to establish whether there is evidence that a foreign subsidy distorts the internal market. Information could be gathered from market operators or Member States. In this matter the concept of distortion in the internal market will depart from that used in state aid rules. However, not only is the scope of Article 107(1) TFEU extremely wide but the exceptions that can consider state aid to be compatible with the internal market are relatively discretionary (see, for example, Article 107(3) (c) TFEU). Furthermore, the EC has single competence to enforce state aid rules which allows it to have a significative track-record in this area, as opposed to Member States that are excluded from this analysis. Moreover, the White Paper proposes a system where Member States will also be able to investigate foreign subsidies and take remedial action following, mutatis mutandis, state aid rules. Accordingly, it remains to be seen how coherence will be kept across the EC and all the Member States involved, knowing that some Member States may opt against the instrument to keep national FDI attractive. A possible solution would be to concentrate on the EC exclusive competence to enforce module 1. If there are no indications of a distortion in the internal market, they would close the case. If there is evidence of distortion, the preliminary review would be followed by an “in-depth investigation”. The competent authority would request the company under investigation to provide it with all the relevant information. In the event the company does not comply with that request, the competent authority can take a decision on the basis of the available facts. If the investigation confirms that the “proper functioning” of the internal market “may have been or may be distorted”, the competent authority would be able to impose “redressive measures” to eliminate those distortions or accept “commitments” by the company in question. Since it cannot be ensured that prohibited subsidies would be recovered with interest by the granting authority, the White Paper establishes that the EU may accept other remedies such as divestment, prohibition of the intended acquisition, prohibition of conduct linked to the subsidy, licensing of IPRs, publication of R&D results, payments to the EU or Member States. Here, a similar key issue related to transnational public enforcement of competition law101 emerges since it is unclear if foreign companies will accept, on a voluntary basis, to transfer technology or to make payments to the EU or Member States, as is proposed. Some of the companies may simply decide to leave the EU

100

See paragraph 4.1.5. of the White Paper. Phase 1 is equivalent to a preliminary review of a possible distortion on the internal market arising from the existence of a foreign subsidy and phase 2 an in-depth investigation. 101 See Demedts (2019); Cseres (2018), pp. 319–339.

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market.102 These remedies can also produce, in themselves, distortions between EU and non-EU companies inside the internal market that should be balanced in advance, and it is also not clear how this will be achieved. The supervision of this module would be shared between multiple enforcers, namely the EC and Member States, based on the EU interest test, as seen above. There is a range of prosecutorial discretion for both the EC and Member States or the status and rights of complainants, beneficiaries or foreign investors, namely when compared to the rights of defence established in EU state aid rules.103 In such a context, the EC may be tempted to create a legal instrument where third countries have fewer and stricter rights than Member States or EU companies. This would not be compatible with the non-discrimination principle stated in the WTO agreements—such as GATS; SCM or the Agreement on Trade-Related Investment Measures (TRIMs)—nor with several existing trade and investment agreements between the EU and third countries. The instruments under module 2 are intended to specifically address distortions caused by foreign subsidies that facilitate the acquisition of EU companies. The same test, procedure and redressive measures are envisaged as for module 1. According to the White Paper, the percentage threshold of shares above which action would be taken should be determined at a later stage. Here, an alignment with the EU merger control regime seems to be desirable. The EU legal instrument should work in parallel with ongoing investigations on merger operations. Moreover, this may overlap with the application of competition law.104 However, in this case, the possible concentration of powers in the EC (“onestop shop”) is desirable as it can increase transparency and dissipate tensions that could emerge from the different entities evolved. Here, implementation of Chinese walls inside the EC would be desirable as it could be tempted to use module 2 as a way to circumvent possible obstacles regarding the application of competition law.

In June 2014, the Lithuanian Competition Authority imposed a fine of almost 36 million euros, the largest anti-trust fine ever in the country, on Gazprom for its refusal to negotiate. Bailiffs were tasked with enforcing the payment after the Russian company missed a deadline for paying the fine, but they failed to find any Gazprom assets in Lithuania. See https://www.baltictimes.com/ lithuanian_anti-trust_body_says_recovering_fine_from_gazprom_is_difficult/ (last accessed in October 2020). 103 Under EU State aid rules, this status (and corresponding due process rights, such as access to information) is traditionally limited because the EU Member State granting the aid is the main defending party and is bound by a duty to cooperate with the EU institutions. This might not be possible here, even in cases where the beneficiary faces sanctions in the form of fines or a prohibition from acquiring a company. 104 The White paper recognizes this possibility (p. 9, footnote 12). Nevertheless, it states that in the case of parallel procedures under the FDI Screening Regulation, Merger rules and/or any new legal instrument, those instruments will include a mechanism to address any overlap and ensure that procedures are efficient. 102

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Module 3 deals with distortions in public procurement procedures. For the moment, EU public procurement directives do not lay down specific rules regarding bidders benefitting from foreign subsidies.105 This module differs from the other two modules as it is proposed that companies participating in tender procedures should notify the procuring authorities of subsidies exceeding 250 million €106 thresholds that they received in the previous 3-year period.107 If it is found that a bidder has benefited from subsidies, it would be excluded from the related public procurement procedure. It is still unclear how this will work for public authorities, due to the administrative burden created, and for companies that can try to dissimulate possible foreign subsidies granted. Moreover, access to EU funds can also be scrutinized, according to the White Paper, following the same procedure as in modules 1 and 3 for funds that are under shared or direct management by Member State authorities.108 Following the publication of the white paper, on the 5th may 2021, the EC proposed a Regulation to address distortions caused by foreign subsidies. The proposed Regulation has 48 articles, divided in the following six chapters: Chapter 1: sets out general provisions, including the subject matter and scope of the regulation (Article 1); when a foreign subsidy is deemed to exist (Article 2); under what conditions it is considered to distort the internal market (Article 3); what types of subsidy are most likely to have a distortive effect (Article 4); describes the balancing that the Commission performs (Article 5) before imposing any redressive measures, and the possible types of redressive measure and commitment (Article 6). Chapter 2: governs the ex officio review of subsidies, by the EC (Articles 7 to 16). Chapter 3: lays down the conditions under which a foreign subsidy in a concentration is considered to distort the internal market (Articles 17 to 25). Chapter 4: contains the conditions under which a foreign subsidy is considered to distort the internal market in a public procurement procedure (Articles 26 to 32). Chapter 5: describes common procedural provisions (Articles 33 to 39). Chapter 6: describes the relationship between the regulation and other legal instruments (Article 40).

105 Article 69 of Directive 2014/24 on public procurement allows procuring authorities to reject “abnormally low tenders” due to State aid. 106 See article 27 (2) of the proposal for a new Regulation to address distortions caused by foreign subsidies in the Single Market. The White Paper had undefined thresholds. 107 See article 26 of the proposal for a new Regulation to address distortions caused by foreign subsidies in the Single Market. 108 The possible scrutiny of EU funds can be exemplified with the construction of the Pelješac bridge in Croatia. In 2017, the Commission allocated €357 million of Cohesion Policy funds to cover 85% of the cost of the bridge in order to connect the area in the South around Dubrovnik to the rest of mainland Croatia. In 2018, the Croatian authorities awarded a major construction contract for this bridge to a Chinese consortium led by the SOE China Road and Bridge Corporation, thereby financing a project which is part of the Chinese investment strategy. See European Court of Auditors, The EU’s response to China’s state-driven investment strategy, p. 39.

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Chapter 7: contains further general provisions (Articles 41 to 48), such as the committee procedure for decisions (Article 41), as well as the possibility of adopting implementing provisions (Articles 42, 43) and delegated acts (Article 44), in accordance with specific rules on the delegation of powers (Article 45). This proposal will face some hurdles. One comes from the fact that the SCM Agreement only covers subsidised imports of goods from third countries. As such, the existing breach in the WTO system has primarily to do with subsidies related to trade in services and in relation to the establishment and operation of undertakings in the EU which are backed by foreign subsidies and which do not entail any trade in goods. This legal instrument created by the EU will have to differentiate these two categories of subsidies in order to respect the ASM agreement. If not, the definition of subsidy would have to be similar to that of the ASM agreement which might create a risk of overlap and possible infringement of the non bis in idem principle.109 Another hurdle comes from knowing that the screening of foreign subsidies should follow the same rules and exceptions applicable to EU state aid law. Apparently this is recognized by the EC in the White Paper document as it says that, similar to de minimis state aid rules, foreign subsidies below a threshold of EUR 200,000 to an undertaking over a period of 3 years do not create distortions in the internal market.110 Moreover, the proposal of EU Regulation on foreign subsidies establishes a quite higher de minimis threshold by defining, in article 3 (2), that a foreign subsidy is unlikely to distort the internal market if its total amount is below EUR five million over any consecutive period of three fiscal years. Furthermore, considering the possible equivalence between foreign subsidies and EU state aid, some questions remain to be answered. Firstly, it is known that State measures take diverse forms and must be analysed in terms of their effects, for example when advantages are given in the form of a State guarantee.111 This means that a borrower who has subscribed to a loan guaranteed by the public authorities of a Member State normally obtains an advantage inasmuch as the

109 In the White Paper, the EC is silent on whether the same subsidy (with respect to a company manufacturing goods) might be caught both by anti-subsidy duties and by measures of redress under Modules 1 or 2. The White Paper interestingly contemplates the possibility of suspending actions under the new legal instruments if it appears “more appropriate” to use the relevant agreement’s dispute settlement provision to tackle the foreign subsidy. It remains to be seen how the EU will attempt to implement these principles while complying with its international commitments. 110 See White Paper on levelling the playing field as regards foreign subsidies, p. 46. 111 See Judgement of 3 April 2014, French Republic v European Commission, C-559/12 P, EU: C:2014:217, paragraph 95. Judgement of 1 December 1998, Ecotrade, C-200/97, EU:C:1998:579, paragraph 43. Judgement of 19 March 2013, Bouygues et Bouygues Télécom v Commission and Others, Joined Cases C-399/10 P and C-401/10 P, EU:C:2013:175, paragraph 107.

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financial cost that it bears is less than that which it would have borne if it had had to obtain that same financing and that same guarantee at market prices.112 If this wide concept of financial contribution was included in Articles 2 and 4 of the proposed EU Regulation, it remains uncertain how this will be analysed when dealing with different third country measures. Secondly, it is unclear how the burden of proof will be established when dealing with foreign subsidies. In the past, the ECJ decided that Article 13(1) of Council Regulation (EC) No 659/1999 of 22 March 1999 empowers the Commission, once it finds that aid has been granted or altered without notification, to adopt a decision on whether the aid is compatible or not with the common market on the basis of the information available, where it is faced with a Member State which does not fulfil its duty to cooperate and has not provided the Commission with the information requested.113 As it is recognized by the ECJ at the same time, the possibility which is granted to the Commission cannot be interpreted as releasing that institution entirely from the obligation to base its decisions on reliable and coherent evidence to support the conclusions which it arrives at. In this regard, it is blurred how the EC will deal with a situation where a third country does not provide information regarding foreign subsidies.114 In this scenario the White Paper mentions that information could e.g. stem from market operators or Member States115 and that, given this, the competent supervisory authority could impose fines and periodic penalty payments for failure to timely supply the information requested or for supplying incomplete, incorrect or misleading information. The recent proposal of an EU Regulation defines, in Article 14, that the EC may take a decision if an undertaking concerned or a third country provides incomplete, incorrect or misleading information or fails to provide information. Furthermore, it defines possible fines and penalty payments if an undertaking provides incorrect information (see Article 15). However, it remains unclear how the EU will act if a third country decides not to cooperate, knowing that the possible EU reaction can happen in the light of geo-politics. Furthermore, a grey area remains when it comes to the possible application of article 107 / 2 and 3 TFEU to foreign subsidies. As seen above, the White Paper makes a parallel between foreign subsidies and EU state aid just when considering de minimis situations.

112 See Judgement of 3 April 2014, French Republic v European Commission, C-559/12 P, EU: C:2014:217, paragraph 96. 113 Judgement of 17 September 2009, MTU Friedrichshafen GmbH, C-520/07 P, EU:C:2009:557, paragraph 54. 114 This hypothesis is recognized in the White Paper on levelling the playing field as regards foreign subsidies, p. 18. 115 See White Paper on levelling the playing field as regards foreign subsidies, p. 13.

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This said, it is still unclear if distortions in the internal market can be justified by third countries under the analogous application of article 107/2 and 3 TFEU to foreign subsidies. If not, non-discrimination principle established in the WTO rules may be harmed. On the other hand, if the analogous application of article 107/2 and 3 TFEU is considered one can ask, for example, how the EC would deal with and verify an argument provided by a third country that a subsidy was given to a certain undertaking in order to promote the economic development in third country areas where the standard of living is abnormally low or where there is serious underemployment (see article 107/3 (a) TFEU). The proposal for a EU Regulation on foreign subsidies distorting the internal gives the EC the power to, where warranted, balance the negative effects of a foreign subsidy in terms of distortion on the internal market with positive effects on the development of the relevant economic activity (see Article 5). Still, the proposal nothing says about the possible application of article 107/2 and 3 TFEU to foreign subsidies and therefore, the question remains to be answer. Finally, two points remain unclear regarding possible EU screening of foreign subsidies. Firstly, third countries would have rights to defence as this is a fundamental principle of EU law116 and could even appeal to the Charter of Fundamental Rights of the European Union. The EU proposal for a Regulation refers to the need to comply with general principles of Union law, such as proportionality, legal certainty, and with fundamental rights (see considering 41). In this scenario, the EU will have to follow the application of the EU proportionality and equality principles to third countries and non-EU companies the same way as it does to Member States and EU-companies. Secondly, possible overlaps with other EU law regimes, such as the FDI screening mechanism, may occur. On balance, the White Paper—and the recent proposal for an EU Regulation— seem to tackle the identified breaches. Both target the identified harm—competitive imbalances caused by foreign subsidies granted by third countries—and provide remedies. Notwithstanding the foregoing, if the White Paper was ambiguous, it remains to be seen how the procedure and the parameters defined in the proposal for an EU Regulation will be executed, namely considering the potential administrative and compliance burden. Although the reaction to the White Paper was positive across the EU, the nature and the content of the proposals to be specified in a legal instrument remain open. Here, a narrow and strict approach would be preferable instead of a wider one that may create grey areas and unbalance the possible application of the EU law. Gradually, the EU could increase the fine-tuning of the instrument and, by doing so, promote legal certainty and security.

116

Judgement of 13 February 1979, Hoffmann-La Roche, C-85/76, EU:C:1979:36.

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5 Conclusions The ECJ has recognized the important role of the “effects theory” in the application of EU competition law. As a result, anti-trust behaviour that occurs outside the territory of the EU and produces anti-competitive effects inside the internal market is attracted to the orbit of EU law. Despite the range of application of the “effects theory”, some gaps remain to be filled. This is the case of situations where the application of EU law could be necessary in order to assure a level playing field among all companies and investors that compete within the internal market. In a globalized economy, non-EU companies and investors can benefit from the regulatory and financial support given from non-EU countries and, at the same time, compete within the EU internal market. This is hardly scrutinized according to the existing EU rules. In many cases, non-EU jurisdiction regimes—such as merger control or public procurement—appear to be neutral towards national and non-national companies but, in the end, pursue protectionist measures. Here, possible application of WTO rules to assure the maintenance of a certain level playing inside the EU remains insufficient. A multilateral approach to international trade is, nowadays, less enthusiastic and it was replaced by a bilateral approach, followed by many world states and the EU, in the context of world trade relations. In this context, the EU is gradually becoming more proactive and equipped with legal instruments that will allow it to evaluate economic policies followed by third countries, especially related to investment in the EU when associated with foreign subsidies. This is the case with the FDI-screening Regulation and the new EU Regulation based on the White Paper that defines a level playing field for both EU and non-EU companies that benefit from foreign subsidies. This instrument may face some hurdles as it has to be compatible with WTO rules, EU state aid rules and provide non-EU companies and states the same rights of defence as those given to EU Member states, companies and citizens. It remains to be seen how third countries will react to this new legal instrument, particularly considering the reciprocity principle and possible reaction from those countries. This might actually hinder the Council when deciding on the approval of the new legal instrument, fearing the possible deterioration of trade relations, especially with China. In any scenario, the new attitude of the EU in world trade would not be possible without seeking, in the upcoming EU legal instruments, some degree of connection or link with the EU internal market and, in doing so, recognizing the importance of the effects theory in EU economic law.

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Nuno Cunha Rodrigues has a Bachelor (1995), Master in Law (2003) and PhD (2012) in Law from the Faculty of Law of the University of Lisbon (FDL). Associate Professor at the Faculty of Law of the University of Lisbon (FDL). Lawyer, VicePresident of the European Institute of the FDL. Researcher and Deputy Director of CIDEEFF (Center for Research in European, Economic, Financial and Fiscal Law). Editor and member of Advisory Board of the Journal of Competition and Regulation. Member of the Editorial Committee of the Journal of Public Finance and Tax Law. Holder of a Jean Monnet Module (2015-2018) and a Jean Monnet Chair, awarded by the European Commission (since 2018).

The Conclusion of Trade Agreements and the EU’s Duty to Respect Human Rights Abroad: Extraterritorial and Territorial Considerations Eva Kassoti and Ramses A. Wessel

Abstract The chapter explores the question of whether the EU is bound by human rights obligations towards individuals located outside the territory of the Member States when it concludes trade agreements with third countries. In this light, the chapter focuses on two concrete sub-questions: (a) the question of the extraterritorial applicability of the EU Charter of Fundamental Rights; and (b) the question of the existence of a due diligence obligation incumbent upon the EU institutions to examine the impact of the agreement to the human rights situation in the third State. In relation to the question of the extraterritoriality of the Charter, the chapter argues that territorial considerations are immaterial in the context of determining the Charter’s applicability; what matters in this context is whether the situation in question is covered by an EU competence. Next, the chapter examines whether a relevant EU duty of due diligence exists—as a matter of either EU or international law. It is shown that the existence of such a duty under international law is far from straightforward and it involves an examination of the relevant primary norms. The chapter concludes by highlighting that, as a matter of EU law, a duty of due diligence to take into account the impact of a future agreement on the human rights situation in a third State clearly exists.

E. Kassoti T.M.C. Asser Institute, The Hague, The Netherlands e-mail: [email protected] R. A. Wessel (*) University of Groningen, Groningen, The Netherlands e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 N. Cunha Rodrigues (ed.), Extraterritoriality of EU Economic Law, European Union and its Neighbours in a Globalized World 4, https://doi.org/10.1007/978-3-030-82291-0_11

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1 Introduction Is the EU bound by human rights obligations towards individuals outside the territory of its Member States1 when it concludes trade agreements with third countries?2 In the literature, even though the broader issue of the EU’s human rights obligations in its external trade policies has received some (limited) attention,3 this question has remained largely unexplored. Recent developments have rekindled interest in the topic.4 More particularly, the General Court’s (GC) judgment5 as well as the Opinion of Advocate General (AG) Wathelet6 in the context of the Front Polisario case before the Court of Justice of the European Union (CJEU) have provided a more solid basis for engagement with the issue of the EU’s duty to protect human rights outside the territory of its Member States. The Front Polisario case concerned an action for annulment brought by Front Polisario, the main Saharawi national liberation movement, against the Council decision7 adopting the 2010 EU-Morocco Agreement on agricultural, processed 1

For the territory of the Member states to which the EU treaties apply see art 52 TEU and art 355 TFEU. See also D. Kochenov, European Union Territory from a Legal Perspective: A Commentary on Art. 52 TEU, 355, 349, and 198-204 TFEU, University of Groningen Faculty of Law Working Paper 2017-05, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_ id¼2956011. See more generally on the notion of territory in EU law, Cardwell and Wessel (2020), pp. 143–161. An early draft of the present contribution appeared as E. Kassoti and R.A. Wessel, ‘The EU’s Duty to Respect Human Rights Abroad: The Extraterritorial Applicability of the EU Charter and Due Diligence Considerations’, CLEER Papers (2020). 2 We leave aside the question of the extraterritorial application of other forms of EU secondary law. See recently for instance Dero-Bugny and Motte-Baumvol (2020), pp. 41–60. 3 The seminal work on the topic is Moreno-Lax and Costello (2014), p. 657. See also more generally Bartels (2014); Cannizzaro (2014), p. 109360; Ganesh (2015), p. 475. By way of contrast, the question of the EU’s complicity in internationally wrongful acts committed by a third State, namely the violation of a number of human rights of individuals located in that third State, through the conclusion of trade agreements with that third State under the law of international responsibility has gained considerable traction over the last few years. See for example: E. Kassoti, The Legality under International Law of the EU’s Trade Agreements covering Occupied Territories: A Comparative Study of Palestine and Western Sahara, CLEER Paper Series 2017/3, available at https://www. asser.nl/media/3934/cleer17-3_web.pdf. F. Dubuisson, The International Obligations of the European Union and its Member States with regard to Economic Relations with Israeli Settlements, (2014), available at http://www.madeinillegality.org/IMG/pdf/etude_def_ang.pdf. For the procedural and evidentiary difficulties of proving complicity in international law, see Corten and Klein (2012), pp. 315–334; Lanovoy (2016), pp. 101–103, 218–234, and more recently Macchi (2020), pp. 409–435. Pages 409–435. 4 Ryngaert (2018), p. 374; Berkes (2018), p. 1. S. Hummelbrunner, Beyond Extraterritoriality: Towards an EU Obligation to Ensure Human Rights Abroad, CLEER Paper Series 19/02, p. 23, available at https://www.asser.nl/media/679407/cleer_19-02_web.pdf. 5 Case T-512/12, Front Polisario v Council of the European Union EU:T:2015:953. 6 Case C-104/16 P Council of the European Union v Front Polisario EU:C:2016:677, Opinion of AG Wathelet. 7 Council Decision 2012/497/EU of 8 March 2012 on the conclusion of an Agreement in the form of an Exchange of Letters between the European Union and the Kingdom of Morocco concerning

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agricultural and fisheries products (‘Liberalization Agreement’)8 in so far as that Agreement extended to the territory of Western Sahara. According to the applicant the decision breached EU and international law.9 The GC ruled that since the Liberalisation Agreement facilitated the export into the EU of products originating from Western Sahara, the Council should have ensured that the production of the goods in question is not conducted to the detriment of the population of the territory and that it does not entail infringements of fundamental rights.10 At the same time, it needs to be noted that the GC simply assumed the extraterritorial application of the EU Charter of Fundamental Rights (the Charter),11 namely its application vis-à-vis the peoples of the Western Sahara–– without providing more by way of explanation. The GC concluded that the Council failed to fulfil its obligation to examine all the elements of the case before the adoption of the Decision and thus, it annulled the contested Decision insofar as it approved the application of the Liberalisation Agreement to Western Sahara.12 On appeal, while AG Wathelet agreed that fundamental rights may, in some circumstances, produce extraterritorial effects, he argued that the conditions for the extraterritorial application of the Charter were not fulfilled in casu.13 While the Advocate General disagreed with the GC’s reliance on the Charter, he did postulate the existence of a duty of due diligence on the part of the EU institutions to take into account the human rights impact of the agreement in the territory of the third State before actually concluding it.14 According to the AG, this due diligence obligation is incumbent upon the EU institutions on the basis of both EU and international law.15 The CJEU did not have an opportunity to pronounce on the matter since it concluded, on the basis of relevant international law rules applicable between the parties (namely the EU and Morocco), that neither the EU-Morocco Association Agree-

reciprocal liberalization measures on agricultural products, processed agricultural products, fish and fishery products, the replacement of Protocols 1, 2 and 3 and their Annexes and amendments to the Euro-Mediterranean Agreement establishing an association between the European Communities and their Member States, of the one part, and the Kingdom of Morocco, of the other part [2012] OJ L241/2. 8 Agreement in the form of an Exchange of Letters between the European Community and the Kingdom of Morocco concerning reciprocal liberalization measures on agricultural products, processed agricultural products, fish and fishery products, the replacement of Protocols 1, 2 and 3 and their Annexes and amendments to the Euro-Mediterranean Agreement establishing an association between the European Communities and their Member States, of the one part, and the Kingdom of Morocco, of the other part [2012] OJ L241/4. 9 Case T-512/12, supra note 4, para. 117. 10 Case T-512/12, supra note 4, paras. 228, 241. 11 Charter of Fundamental Rights of the European Union [2012] OJ C 326/391. 12 Case T-512/12, supra note 4, paras. 242–248. 13 Opinion of AG Wathelet, supra note 5, paras. 270–272. 14 Ibid. paras. 254–269. 15 Ibid.

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ment16 nor the Liberalization Agreement were intended to cover the territory of Western Sahara—and it quashed the GC’s judgment.17 Thus, although the precedential value of the GC’s judgment is limited due to the exigencies of the case, the question of whether the EU is bound by human rights obligations towards distant strangers when it concludes trade agreements with third countries still looms large. On this basis, the purpose of this contribution is to revisit this question in the light of the Front Polisario case. In order to do so, the contribution will focus on two concrete sub-questions that this new jurisprudential development gives rise to: (a) the question of the extraterritorial applicability of the Charter of Fundamental Rights; and (b) that of the existence of a due diligence obligation incumbent upon the EU institutions to examine the impact of the agreement on the human rights situation in the third State.

2 The Extraterritorial Applicability of the EU Charter of Fundamental Rights: The Irrelevance of Notions of Territoriality in Defining the Charter’s Scope of Application In contrast to some human rights instruments, the Charter does not contain a clause defining its territorial scope. Articles 52 TEU and 355 TFEU are of little avail in establishing the territorial scope of the Charter since they merely define the Member States’ territory to which the TEU and the TFEU apply.18 In a similar vein, the Charter’s applicability has not been conditioned upon the threshold criterion of jurisdiction.19 16

Euro-Mediterranean Agreement establishing an association between the European Communities and their Member States, of the one part, and the Kingdom of Morocco, of the other part [2000] OJ L70/2. 17 Case C-104/16 P Council of the European Union v Front Polisario EU:C:2016:973, paras. 81-115. For comment see Kassoti (2017), p. 23. J. Odermatt, Council of the European Union v. Front Populaire pour la Libération de la Saguia-El-Hamra et Du Rio de Oro (Front Polisario). Case C-104/16P, 111 AJIL 731 (2017). 18 Moreno-Lax and Costello (2014), p. 1664. For analysis of arts 52 and 355 TFEU, see D. Kochenov, supra note 1. See also the various contributions to E. Kassoti and R.A. Wessel (Eds.), EU Trade Agreements and the Duty to Respect Human Rights Abroad (CLEER Papers, 2020). 19 See for example Art 1 of the European Convention for the Protection of Human Rights and Fundamental Freedoms (‘ECHR’): “The High Contracting Parties shall secure to everyone within their jurisdiction the rights and freedoms defined in Section I of this Convention.” European Convention of Human Rights (adopted 4 November 1950, entered into force 3 September 1953), available at https://www.echr.coe.int/Documents/Convention_ENG.pdf. Art 2 of the International Covenant on Civil and Political Rights (‘ICCPR’): “Each State Party to the present Covenant undertakes to respect and to ensure to all individuals within its territory and subject to its jurisdiction

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In lieu of a jurisdictional clause, the Charter only contains a provision stipulating its field of application. Art. 51(1) of the Charter specifies that the provisions of the Charter “are addressed to the institutions of the Union . . . and to the Member States only when they are implementing Union law.”20 The wording of Art. 51(1) of the Charter suggests that the application of the Charter has been defined exclusively rationae materiae:21 since the Charter applies to acts of the institutions of the Union and to national acts implementing EU law,22 the crux of the matter is whether a situation is covered by an EU competence.23 In this sense, Art. 51(1) of the Charter envisages a parallelism between EU action and application of the Charter.24 The only limitation contained in the relevant provision pertains to the material scope of the Charter—which has been limited in so far as action by Member States is concerned.25 As the Court explained in its seminal judgment in Akerberg Fransson: “[S]ituations cannot exist which are covered . . . by European Union law without those fundamental rights being applicable. The applicability of European Union law entails the applicability of the fundamental rights guaranteed by the Charter.”26 the rights recognized in the present Covenant. . .” International Covenant on Civil and Political Rights (adopted 16 December 1966, entered into force 23 March 1976), available at https://www. ohchr.org/en/professionalinterest/pages/ccpr.aspx. See also generally Ryngaert (2015), pp. 22–26. 20 In the Explanations to the Charter, it is also stressed that Art. 51 of the Charter “seeks to clearly establish that the Charter applies primarily to the institutions and bodies of the Union”, whereas Member States are only bound by the Charter “when they act in the scope of Union law.” Explanations Relating to the Charter of Fundamental Rights [2007] OJ C 303/17, p 32. For commentary on Art. 51, see A. Ward, Article 51, in S. Peers et al. (eds.), supra note 2, p. 1413 at pp. 1413–1454. 21 Van Danwitz and Paraschas (2017), p. 1399. According to Tridimas: “The Charter does not apply unless a situation is governed by Union law by virtue of a connecting factor other than the Charter . . . Nonetheless, within the ambit of EU law, there is no limitation rationae materiae in the scope of application of the Charter.” Tridimas (2014), p. 381. 22 On what constitutes ‘implementation of Union law’ by the Member States, see generally Pirker (2018), p. 133. 23 Kube (2019), p. 34. For the relevance of a competence-based reading of the scope of the Charter, see the Opinion of Advocate General Bot in Opinion 1/17, ECLI:EU:C:2019:72, para. 195: “[I]t is necessary to clarify that it follows from the second sentence of Article 207(1) TFEU, read in conjunction with Article 21 TEU, that the European Union must, when exercising the competences conferred on it by the EU and FEU Treaties, including those relating to the common commercial policy, respect fundamental rights, of which the principle of equal treatment forms part. The European Union is a union based on the rule of law in which all acts of its institutions are subject to review of their compatibility with, in particular, the Treaties, general principles of law and fundamental rights.” 24 Case C-638/16 PPU X and X v Belgium Case, Opinion of AG Mengozzi, EU:C:2017:173, para 91. 25 Ibid., para. 97. Joined cases C-8/15 P, C-9/15P and C-10/15P Ledra Advertising Ltd et al v European Commission and European Central Bank, EU:C:2016:701, Opinion of AG Wahl, para. 85. 26 Case C-617/10 Aklagaren v. Akerberg Fransson, ECLI:EU:C:2013:105, para 21. See also Case C-390/12 Robert Pfleger and Others, ECLI:EU:C:2014:281, para 34.

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This construction suggests that territorial criteria bear no relevance in the context of determining the applicability of the Charter.27 In this light, the model propounded by Moreno-Lax and Costello in 2014 still holds great explanatory force. According to them: “The scope of application ratione loci of the Charter is . . . to be determined by reference to the general scope of application of EU law, following autonomous requirements. The Charter applies to a particular situation once EU law governs it. There is no additional criterion, of a territorial character or otherwise, that needs to be fulfilled in this context.”28 Advocate General Mengozzi also shared this view in his Opinion in X and X v. Belgium. The case concerned a request for a short-term visa (visa with limited territorial validity) on the basis of Art. 25 of the Visa Code29 submitted at the Belgian Embassy in Lebanon by a Syrian family living in Aleppo.30 According to Mengozzi, Art. 51(1) implies that the fundamental rights recognised by the Charter “are guaranteed . . . irrespective of any territorial criterion. If it were to be considered that the Charter does not apply where an institution or a Member State implementing EU law acts extraterritorially, that would amount to claiming that situations covered by EU law would fall outside the scope of the fundamental rights of the Union”—thereby undermining the parallelism between EU action and application of the Charter envisaged under Art. 51(1) of the Charter.31 Although the CJEU found that the Charter was not applicable in casu, this was done on the ground that Art. 25 of the Visa Code did not apply to the situation at hand since the X family were intending to stay in Belgium for more than 90 days—and not on the basis of absence of a territorial link with the EU. According to the Court: “Since the situation at issue in the main proceedings is not . . . governed by EU law, the provisions of the Charter . . . do not apply to it.”32 Thus, although the Court did not address the question of extraterritorial applicability of the Charter expressly, it did (at least indirectly) link the question of applicability of the Charter solely to the question of whether the situation at the bar falls within the scope of EU law. The GC’s judgment in Front Polisario further attests to the rejection of any territorial considerations as a precondition for the applicability of the Charter. According to the GC, the Council, in concluding an agreement with a third State must examine all the relevant facts in order to ensure that the agreement does not impact the enjoyment of fundamental rights abroad.33 In other words, according to

27

Kube (2019), pp. 34–36. Moreno-Lax and Costello (2014), pp. 1679–1680. 29 Art. 25(1)(a) of Regulation (EC) No 810/2009 of the European Parliament and of the Council of 13 July 2009 establishing a Community Code on Visas (Visa Code), OJ [2009] L243/1. 30 Case C-638/16 PPU X and X v Belgium EU:C:2017:173, para. 19. 31 Case C-638/16 PPU X and X v Belgium Case, Opinion of AG Mengozzi, supra note 23, paras. 89, 92. (Emphasis in the original). 32 Case C-638/16 PPU X and X v. Belgium, supra note 29, para. 45. 33 Case T-512/12, supra note 4, para. 228. 28

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the GC, the Union institutions bear extraterritorial obligations under the Charter since their actions may entail infringements of fundamental rights abroad.34 The case-law of the CJEU regarding targeted sanctions against individuals located abroad35 further supports the proposition that territorial considerations are immaterial in determining the applicability of the Charter and that the only relevant question in this context is whether an entity has been affected by EU action.36 There is more case-law to bear out this proposition. The Mugraby case concerned an action for damages in respect of injuries that occurred because of the failure of the EU to adopt appropriate measures against Lebanon (suspending aid programmes) under a human rights clause in the EU-Lebanon Association Agreement following Lebanon’s fundamental rights violations.37 While the action failed on the merits, 34

O. De Schutter, The implementation of the Charter of Fundamental Rights in the EU institutional framework, November 2016, study requested by the European Parliament’s Committee on Constitutional Affairs, at p. 57, available at http://www.europarl.europa.eu/RegData/etudes/STUD/2016/ 571397/IPOL_STU(2016)571397_EN.pdf. C. Ryngaert, supra note 2, p. 81. 35 The fact that cases involving targeted sanctions enforced in the territory of a State party against individuals located abroad have not, thus far, raised any issues of ‘jurisdiction’ within the meaning of Art. 1 ECHR in the context of ECtHR case-law (see for example Nada v. Switzerland, App. No. 10593/08, 12 September 2012), does not necessarily mean that they do not raise issues of extraterritoriality. For criticism of the ECtHR’s sidestepping of the question of extraterritoriality of the ECHR in the Nada judgment, see M. Milanovic, European Court Decides Nada, 23 February 2012, available at https://www.ejiltalk.org/european-court-decides-nada-v-switzerland/. This is especially the case if one takes into account the definition of extraterritorial obligations contained in Clause 8(a) of the Maastricht Principles on the Extraterritorial Obligations of States in the Area of Economic, Social and Cultural Rights (2011), available at https://www.etoconsortium.org/nc/en/ main-navigation/library/maastricht-principles/?tx_drblob_pi1%5BdownloadUid%5D¼23. Clause 8(a) of the Maastricht Principles defines extraterritorial obligations as “obligations relating to the acts and omissions of a State, within or beyond its territory, that have effects on the enjoyment of human rights outside of that State’s territory.” (Emphasis added). See also Milanovic (2011), p. 7: “Extraterritorial application simply means that at the moment of the alleged violation of his or her human rights the individual concerned is not physically located in the territory of the state party in question, a geographical area over which the state has sovereignty or title. Extraterritorial application of a human rights treaty is an issue which will most frequently arise from an extraterritorial state act, i.e. conduct attributable to the state, either of commission or of omission, performed outside its sovereign borders. . . However—and this is a crucial point—extraterritorial application does not require an extraterritorial state act, but solely that the individual concerned is located outside the state’s territory.” (Emphasis in the original). See contra Sicilianos (2017), p. 793. 36 A. Ward, supra note 19, p. 423: “[E]merging case-law shows that once the legal interests of an entity have been affected by EU law, and it is pertinent to the resolution of a dispute, then the Charter will apply, even if that entity is located outside of the EU.” V. Kube, supra note 22, p. 4. In case C-200/13 P Council of the European Union v. Bank Saderat Iran, ECLI:EU:C: 2016:284, para. 47, the Court stated that: “Bank Saderat Iran puts forward pleas alleging an infringement of its rights of defence and of its right to effective judicial protection. Such rights may be invoked by any natural person or any entity bringing an action before the Courts of the European Union.” See also case T-494/10 Bank Saderat Iran v. Council of the European Union, ECLI:EU:T:2013:59, paras. 34-44; case C-176/13 P Council of the European Union v. Bank Mellat, ECLI:EU:C:2016:96, para. 49; case C-130/10 European Parliament v. Council of the European Union, ECLI:EU:C:2012:472, para 83. 37 Case C-581/11 P Mugraby v. Council of the European Union, ECLI:EU:C:2012:466.

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the Court did not question the applicants’ assumption that the EU may bear responsibility vis-à-vis a non-EU national for violation of his/her fundamental rights in a third country.38 Finally, in this context, mention should be made of the Zaoui case involving an action for damages for the loss of a family member killed by Hamas.39 According to the applicant, the EU was responsible because of its funding of education in Palestinian territory which allegedly incited hatred and thus led to the attack. Although the action failed because the applicants did not manage to prove causality, the Court (again) did not question the assumption that the EU could be held responsible for extraterritorial violations of fundamental rights.40 Furthermore, different EU instruments show that Union institutions remain bound by the Charter even when they act outside the territory of EU Member States. A prime example here is Regulation 2016/1624 on the European Border and Coast Guard.41 According to the Regulation, in performing its tasks, which, inter alia, expressly include training42 and co-ordination of border management activities in the territory of third States,43 the European Border and Coast Guard Agency “shall guarantee the protection of fundamental rights . . . in accordance with relevant Union law” and “in particular the Charter.”44 More interestingly for present purposes, the Commission’s Guidelines on the analysis of human rights impacts in impact assessments for trade-related policy measures45 lend further support to the argument advanced here. The Guidelines highlight that the purpose of identifying human rights impacts is to assess “how trade measures which might be included in a proposed trade-related policy initiative are likely to impact: either on the human rights of individuals in the countries or territories concerned; or on the ability of the EU and the partner country/ies to fulfil or progressively realise their human rights obligations.”46 De Schutter stressed, in a 2016 study commissioned by the European Parliament, that this “confirms the understanding (illustrated by the Front Polisario case . . .) that fundamental rights that are binding in the EU legal order should be complied with also for the benefit of individuals situated outside the territories of the Member States: such fundamental rights have in other terms, an ‘extraterritorial’

Ibid., para 81. L. Bartels, supra note 2, p. 1076. V. Kube, supra note 22, p. 35. Case C-288/03 P Zaoui and Others v. Commission, ECLI:EU:C:2004:633. 40 Ibid., paras 3, 13-15. L. Bartels, supra note 2, p. 1076. V. Kube, supra note 22, p. 35. 41 Regulation 2016/1624 of the European Parliament and of the Council of 14 September 2016 on the European Border and Coast Guard amending Regulation 2016/399 of the European Parliament and of the Council and repealing Regulation No 863/2007 of the European Parliament and of the Council, Council Regulation No 2007/2004 and Council Decision 2005/267/EC, OJ[2016] L251/1. 42 Ibid., Art. 36(7). 43 Ibid., Art. 54(1)–(3). 44 Ibid., Art. 34(1). 45 European Commission, Guidelines on the analysis of human rights impacts in impact assessments for trade-related policy measures, 2 July 2015, available at https://trade.ec.europa.eu/doclib/docs/ 2015/july/tradoc_153591.pdf. 46 Ibid., p. 2 (Emphasis added). 38 39

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scope. . .”.47 In this context, it is also worthwhile noting that the Guidelines explicitly provide that: “Respect for the Charter of fundamental rights in Commission acts and initiatives is a binding legal requirement in relation to both internal policies and external action.”48 Overall, the existing case-law on the extraterritorial application of the Charter as well as several EU instruments support the conclusion reached above on the basis of a textual analysis of Art. 51(1). Whether or not the EU institutions exercise their powers within the territory of the Member States is immaterial; what matters in the context of triggering the applicability of the Charter is whether the situation at hand is covered by an EU competence.

3 The Extraterritorial Applicability of the EU Charter of Fundamental Rights: Importing the ECtHR’s Model of Effective Control? As seen above, there is sustained practice to support the view propounded by Moreno-Lax and Costello to the effect that the Charter reflects “an assumption that EU fundamental rights simply track all EU activities, as well as Member State action when implementing EU law.”49 However, this view has not gone unchallenged. Others have argued that the equivalence of meaning and scope between the rights of the Charter and the corresponding rights of the ECHR, provided for under Art. 52 (3) of the Charter,50 allows the transposition of the jurisdictional clause of Art. 1 ECHR to the fundamental rights regime of the Charter. This is the approach followed by Advocate General Wathelet in his Opinion in the Front Polisario case before the CJEU.51 The Advocate General applied by analogy the ECtHR’s effective control standard and concluded that the Charter would apply “where an activity is

O. De Schutter, supra note 33, p. 2. Ibid., p. 5. (Emphasis in the original). 49 Moreno-Lax and Costello (2014), p. 1658. 50 Art 52(3) of the Charter stipulates that: “In so far as this Charter contains rights which correspond to rights guaranteed by the Convention for the Protection of Human Rights and Fundamental Freedoms, the meaning and scope of those rights shall be the same as those laid down by the said Convention. This provision shall not prevent Union law providing more extensive protection.” 51 Opinion of Advocate General Wathelet in case C-104/16 P, supra note 5. See also E. Guild, S. Carrera, L. Den Hertog, J. Parkin, Implementation of the EU Charter of Fundamental Rights and Its Impact on EU Home Affairs Agencies: Frontex, Europol and the European asylum Support Office, report requested by the European Parliament’s Committee on Civil Liberties, Justice and Home Affairs, (2011) European Parliament Directorate General for Internal Policies Policy Study pp. 48–50, http://www.europarl.europa.eu/thinktank/en/document.html?reference¼IPOL-LIBE_ ET(2011)453196. 47 48

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governed by EU law and carried out under the effective control of the EU and/or its Member States but outside their territory.”52 There are many reasons militating against the ‘importation’ of the effective control standard developed by the ECtHR. As Ryngaert observes, the development of this particular extraterritoriality standard by the ECtHR has been to a large degree influenced by the type of cases that have come before the court in question, namely extraterritorial military operations conducted by ECHR contracting parties.53 Such cases typically involve State conduct outside its territory and thus, the development of the effective control standard in order to determine the reach of the Convention is, arguably, logical in this particular context. However, as Ryngaert stresses “normally the EU will not engage in such extraterritorial conduct, but rather take decisions that may have extraterritorial effects.”54 The factual scenario of the Front Polisario case, involving the conclusion of a trade agreement with a third State that might have affected the enjoyment of fundamental rights by individuals in that third State, attests to the inappropriateness of extrapolating from this strand of ECtHR case-law. In this context, it would seem more apt to derive guidance from the ECtHR’s case-law involving measures with extraterritorial effect—rather than focusing on the Court’s jurisprudence involving extraterritorial conduct. However, as Bartels notes, while there is a plethora of judgments regarding the application of the ECHR to extraterritorial conduct, cases regarding its application to measures with extraterritorial effects are not only few and far between but also contradictory.55 The examples furnished by Bartels highlight this point. In Kovačić, the ECtHR acknowledged the principle that when “acts of the [State’s] authorities continue to produce effects, albeit outside [that State’s] territory, . . . such that [State’s] responsibility under the Convention could be engaged.”56 Conversely, in Ben El Mahi, the Court found inadmissible an application against Denmark for permitting the publication of allegedly offensive caricatures of the Prophet Muhammad since there was no jurisdictional link between the applicants [a Moroccan national resident in Morocco and two Moroccan associations based and operating in Morocco] and Denmark.57 Thus, according to the Court in Ben El Mahi, persons affected by a measure adopted by a contracting party are not considered as falling within its jurisdiction—a

Opinion of Advocate General Wathelet in case C-104/16 P, supra note 5, para. 270 and fn. 24 citing relevant ECtHR case-law regarding the extraterritorial application of the ECHR. (Emphasis added). 53 C. Ryngaert, supra note 2, p 382. M. Milanovic, supra note 34, pp. 118-127. For an overview of the relevant case-law see the fact-sheet of the ECtHR on Extraterritorial Jurisdiction of States Parties to the European Convention on Human Rights (ECtHR, July 2018) https://www.echr.coe. int/Documents/FS_Extra-territorial_jurisdiction_ENG.pdf. 54 C. Ryngaert, ibid. 55 Bartels (2014), p. 1077. 56 Kovačić and Others v Slovenia App Nos 44574/98, 45133/98, 48316/99, (ECtHR, Decision on Admissibility, 09 October 2003 and 1 April 2004), p. 55. 57 Ben El Mahi and Others v Denmark App No 5853/06 (ECtHR, 11 December 2006). 52

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proposition that is hard to reconcile with the principle established in Kovačić.58 Overall, the ECtHR has generated some inconsistent case-law on extraterritoriality—and thus, it may, in practice, be of little guidance in ascertaining the outer boundaries of extraterritorial jurisdiction.59 There are further reasons to reject the transposition of the extraterritoriality standard developed by the ECtHR. It needs to be noted that there is no textual support for this argument. Art. 51 of the Charter, which expressly purports to prescribe its field of application, makes no reference to territory or jurisdiction as a threshold criterion for the applicability of the Charter.60 More particularly, nothing in the Charter itself (or in the Explanations thereto), justifies the imposition of a superadded jurisdictional condition to its applicability. One could argue that the equivalence of meaning and scope between the rights of the Charter and the corresponding rights under the ECHR, provided for under Art. 52 (3) of the Charter, entails that the limitations to ECHR rights (in concreto the jurisdictional limit of art 1 ECHR) should also apply to the Charter as a whole. This position was adopted by the Belgian government in the X and X v. Belgium case.61 As the Opinion of Advocate General Mengozzi in the same case stresses, this view is erroneous on a number of grounds. More particularly, this position conflates the question of applicability of the Charter62 (namely, its field of application as provided for under Art. 51 of the Charter) with that of the scope and content of the obligations enshrined therein63 (namely, the scope and interpretation of the Charter rights as provided for under Art. 52 of the Charter).64 Simply put, Art. 52(3) of the Charter merely enshrines the rule that “the law of the ECHR prevails where it guarantees protection of the fundamental rights at a higher level.”65 As the text of Art. 52 and the Explanations thereto make clear, the rights of the ECHR and the relevant case-law of the ECtHR are relevant in the context of interpretation of the Charter rights to the extent that the Charter provisions correspond to those of the

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Bartels (2014), p. 1077. See in general Milanovic (2012). 60 Art 51 of the Charter reads: “1. The provisions of this Charter are addressed to the institutions, bodies, offices and agencies of the Union with due regard for the principle of subsidiarity and to the Member States only when they are implementing Union law. They shall therefore respect the rights, observe the principles and promote the application thereof in accordance with their respective powers and respecting the limits of the powers of the Union as conferred on it in the treaties. 2. The Charter does not extend the field of application of Union law beyond the powers of the Union or establish any new power or task for the Union, or modify the powers and tasks as defined in the Treaties.” See also the Explanations Relating to the Charter of Fundamental Rights [2007] OJ C 303/17, p. 32. 61 Case C-638/16 PPU X and X v Belgium EU:C:2017:173, see also the Opinion of AG Mengozzi, supra note 23, para.95. 62 See the text of art 51 Charter and the Explanations thereto. 63 See the text of art 52 Charter and the Explanations thereto. 64 Opinion of AG Mengozzi, supra note 23, para 101. 65 Ibid., para. 98. 59

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ECHR.66 A contrario, in so far as the Charter does not correspond to the ECHR (and Art. 51 which pertains to the Charter’s field of application certainly does not), no equivalence between the two instruments is envisaged. Furthermore, Art. 52(3) of the Charter specifies that the equivalence of meaning and scope between the rights of the Charter and the corresponding rights of the ECHR “shall not prevent Union law from providing more extensive protection.” As the Explanations to Art. 52 of the Charter make clear, this caveat against a ‘lock, stock and barrel’ transposition of the meaning and scope of ECHR rights is an expression of the autonomy of the EU legal order which allows for divergences from the ECHR (provided that the level of protection afforded by the Charter may never be lower than that guaranteed by the ECHR).67 If one accepts that the ‘scope and meaning’ of the rights enshrined in the Charter (Art. 52(3) of the Charter) also encompass the jurisdictional limit of Art. 1 ECHR, this would mean that the EU is required to apply to Charter rights the exact same limitations as those accepted in the scheme of the ECHR.68 This reading of Art. 52(3) of the Charter would not only render the explicit reference to the Union’s ability to guarantee more extensive protection redundant,69 but it would also undermine the Charter’s aspiration to contribute to an autonomous EU fundamental rights regime.70

4 Territorialising the Obligation to Respect Human Rights Abroad: The Soering Model The previous sections showed that there is abundant evidence to support the proposition that territorial considerations are immaterial in ascertaining the extraterritorial applicability of the Charter and what matters in this context is whether a situation is covered by an EU competence. Furthermore, it was shown that attempts to ‘import’ the ECtHR’s extraterritoriality standard fall short of convincing on numerous grounds. However, in the literature, there have been calls to move away from the (still nebulous) concept of extraterritoriality of the human rights obligations owed by the EU to distant strangers and to approach the question through the lens of a territorial due diligence obligation of the EU to examine the human rights situation in the territory of the third State.71 According to Ryngaert, reframing the debate in terms of territorial due diligence obligations would have the benefit of avoiding “the need for 66

See art 52(3) of the Charter of Fundamental Rights [2012] OJ C 326/391, see also Explanations to the Charter, supra note 19, p. 33. 67 Ibid. 68 Opinion of AG Mengozzi, supra note 23, para. 99. 69 Ibid. 70 Kube (2019), p. 31; Moreno-Lax and Costello (2014), pp. 1660, 1682. 71 C. Ryngaert, supra note 3, pp. 383–389.

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complicated doctrinal constructions of extraterritorial obligations, . . .”.72 According to this line of argumentation, the decision on the conclusion of an international agreement by the EU remains essentially a territorial one and as such it triggers a (territorial) obligation to take into account, before the decision’s adoption, the agreement’s compatibility with human rights law or its effects on the enjoyment of human rights abroad.73 Ryngaert’s model of territorialisation of the EU’s human rights obligations towards distant strangers draws inspiration from and builds upon74 the ECtHR’s line of reasoning in the Soering case.75 The case raised the question of whether extradition of an individual to a third State where he could face the death penalty constituted a violation of Art. 3 ECHR which prohibits torture and inhuman or degrading treatment. While the ECtHR stressed that the notion of jurisdiction laid down in Art. 1 ECHR is essentially territorial, it did establish the existence of a territorial due diligence obligation incumbent upon States Parties to take into account the foreseeable consequences of extradition that may occur outside their jurisdiction.76 The Court held that: [T]he decision by a Contracting State to extradite a fugitive may give rise to an issue under Article 3 . . ., and hence engage the responsibility of that State, under the Convention, where substantial grounds have been shown for believing that the person concerned, if extradited, faces a real risk of being subjected to torture or to inhuman or degrading treatment or punishment in the requesting country . . . In so far as liability under the Convention is or may be incurred, it is liability incurred by the extraditing Contracting State by reason of its having taken action which has as a direct consequence the exposure of an individual to proscribed ill-treatment.77

On this basis, Ryngaert proposes to extend the territorial principle propounded in Soering to cover situations such as those at hand. However, the adoption of this territorial due diligence model is not without problems. First, it needs to be noted that, from a jurisdictional perspective, the Soering judgment is based on territoriality; in Soering (and in other extradition and expulsion cases more generally) the individual is actually located within the territory of a State party (i.e. within the territorial jurisdiction of a State party). As Miller observes, in this line of case-law: [A]n individual [is] entitled to allege violation of Convention rights because the wrongful act occurs either immediately before (extradition) or immediately after (expulsion) the individual is within a signatory state’s territory. Jurisdiction extends in these cases, in other words, because the wrongful act . . . is directly connected to the individual’s territorial presence in a signatory state, and the signatory state is accordingly responsible for the conditions under which it brings someone into its country and forces him to leave . . . It is because the

Ibid., p. 383. Ibid., p. 385. 74 Ibid. 75 Soering v. United Kingdom, Appl. No. 14038/88, Judgment of 7 July 1989. 76 Ibid., para. 86. 77 Ibid., para. 91. 72 73

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individual is ultimately present in the state – whether as a result of extradition or pending expulsion – that related acts fall ‘within the jurisdiction’ of signatory states under Article 1.78

By way of contrast, situations such as those that gave rise to the Front Polisario case are essentially different: in this type of cases, the trade agreement concluded between the EU and the third State potentially affects the enjoyment of human rights by individuals located outside the territory—and (thus) outside the jurisdiction—of Member States. In this light, any extrapolation from the Soering line of case-law seems misplaced. It is worth noting that Ryngaert himself acknowledges that the lack of presence of an individual in the territory of a Member State is problematic in the context of extending the Soering model to human rights violations resulting from the EU’s conclusion of a trade agreement with a third State.79 According to him, “this lack of actual presence need however not be fatal to a finding of jurisdiction.”80 Borrowing from the line of arguments put forward by Jackson in the context of expanding the Soering doctrine to cases of state complicity in torture abroad,81 Ryngaert claims that “it would be absurd for one specific form of complicity to be prohibited under the principle in Soering, but to ignore ‘equally consequential forms’, especially in light of the universal recognition of human rights.”82 According to him, the EU’s facilitation of serious human rights violations abroad through the conclusion of trade agreements could be considered as an ‘equally consequential form’83—thereby, allowing at a theoretical level at least, the extension of the Soering model to this type of cases. It needs to be stressed that in the light of the absence of relevant judicial practice, this argument remains de lege ferenda. In this context, it needs to be borne in mind that, in Soering, the ECtHR acknowledged and emphasised the special circumstances of extradition.84 Thus, it is questionable whether the application of the Soering doctrine in a non-extradition scenario would be legally sound. Ultimately, one wonders whether this approach serves its express purpose of obviating “the need for complicated doctrinal constructions of extraterritorial obligations”.85 Indeed, although by following the Soering model the focus shifts to territorial (instead of extraterritorial) considerations, some intellectual juggling is also needed in this context. Shoehorning scenarios with a clear extraterritorial dimension (such as those that gave rise to the Front Polisario case) in a model that was specifically designed to cover situations with a territorial nexus somewhat detracts from the persuasive force of this line of thinking.

78

Miller (2009), pp. 1242, 1243. (Emphasis in the original). C. Ryngaert, supra note 3, p. 386. 80 Ibid. (Emphasis in the original). 81 Ibid. See also Jackson (2016), p. 828. 82 Ibid. 83 Ibid. 84 Soering v. United Kingdom, supra note 74, paras. 86, 89. 85 C. Ryngaert, supra note 3, p. 383. 79

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More fundamentally, this approach fails to identify the exact legal basis of this (territorial) obligation under EU law. In fact, the Soering—inspired model does not address at all the fact that, unlike the ECHR, the Charter’s applicability has not been conditioned upon the threshold criterion of jurisdiction. In this light, merely extrapolating from the case-law of the ECtHR without more seems to neglect the fact that, as seen above, the Charter aspires to contribute to an autonomous EU fundamental rights regime—which radically departs from international human rights law notions of ‘territoriality’ and ‘jurisdiction’.

5 Territorialising the Obligation to Respect Human Rights Abroad: A Due Diligence Obligation to Examine the Human Rights Situation in the Third Country? Although the previous section showed that the Soering-inspired territorial due diligence model seems to be unconvincing in our context, there have also been other attempts to ‘territorialise’ the EU’s duty to protect human rights abroad that are worth discussing here. More particularly, in the context of the Front Polisario case, AG Wathelet, while disagreeing with the GC’s reliance on the Charter, confirmed the existence of an EU obligation of due diligence pertaining to the need to examine the potential impact of a treaty on the human rights situation in a third state; an obligation which, according to the AG, stems from both EU and international law.86 This section will address this argument. As far as the existence of a duty of due diligence under EU law is concerned, the AG’ s argument is two-pronged. First, the AG asserted that this obligation results from a combined reading of Articles 3(5), 21(1)(2)(c), and 23 TEU.87 In his view, these articles dictate that all actions of the EU must comply with the principles of the rule of law, human rights and human dignity.88 While it is questionable whether Art. 23 TEU can be considered the correct legal basis to anchor an EU law duty of due diligence—since it merely refers back to the objectives of Article 21 TEU89—the situation seems to be different when it comes to Arts. 3(5) and 21 TEU. More particularly, the advent of the Lisbon Treaty has strengthened the nexus between trade and human rights. The text of Art. 207 TFEU attests thereto. According to Art. 207 TFEU “[t]he common commercial policy shall be conducted in the context of the principles and objectives of the Union’s external action”. These objectives are stated in Arts. 3(5) and 21 TEU—and they expressly include the

Opinion of AG Wathelet, supra note 5, paras. 254–269. Ibid., paras. 254–255. 88 Ibid., para. 255. 89 S. Hummelbrunner, supra note 3, p. 34. According to Hummelbrunner, Art. 3(5) TEU is not an appropriate legal basis in this context since it merely establishes “EU objectives on the international scene in a more general way.” Ibid. 86 87

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promotion of human rights. Thus, as Van Elsuwege stresses: “[e]ven though the precise meaning of the partly overlapping provisions [Art. 3(5) and Art. 21 TEU] may be subject to discussion, it is obvious that the integration of human rights in EU external trade relations is a constitutional obligation and not a mere policy choice.”90 The existence of an EU law duty to take into account human rights when the Union acts in the area of its external policies is further supported by the Court’s case-law on the normative weight to be attached to Art. 21 TEU. In Parliament v Commission, the Court stated that: As regards, in particular, provisions of the EU-Tanzania Agreement concerning compliance with the principles of the rule of law and human rights, as well as respect for human dignity, it must be stated that such compliance is required of all actions of the European Union, including those in the area of the CFSP, as is clear from the provisions, read together, set out in the first subparagraph of Article 21(1), Article 21(2)(b) and (3) TEU, and Article 23 TEU.91

On this basis, it is at least arguable that, under EU law, there is a duty incumbent upon the EU institutions to examine the human rights situation in the third State before concluding an agreement therewith in order to ensure that it would not have a negative impact on the enjoyment of human rights abroad.92 As the European Ombudsman highlighted in her Decision on the EU-Vietnam Free Trade Agreement: EU institutions and bodies must always consider the compliance of their actions with fundamental rights and the possible impact of their actions on fundamental rights. This applies also with respect to administrative activities in the context of international treaty negotiations. The EU Administration should not only ensure that the envisaged agreements comply with existing human rights obligations, and do not lower the existing standards of human rights protection, but should also aim at furthering the cause of human rights in the partner countries.93

Importantly, whether or not the agreement does actually bear a negative effect on the human rights in the third State is immaterial. What matters in this context, according to AG Wathelet, is the existence of an obligation “under EU law to examine the general human rights situation in the other party to the international agreement, and more specifically to study the impact which that agreement could van Elsuwege (n.d.), p. 2, on file with the authors. Case C-263/14, European Parliament v Council of the European Union, EU:C:2016:435, para. 47. (Emphasis added). 92 S. Hummelbrunner, supra note 3, p. 40. Kube (2019), pp. 69–71. 93 European Ombudsman, Decision in case 1409/2014/MHZ on the European Commission’s failure to carry out a prior human rights impact assessment of the EU-Vietnam free trade agreement, 26 February 2016, para. 10. (Emphasis added). For the sake of completeness, it should be mentioned that in her Decision in the EU-Vietnam Free Trade Agreement, the European Ombudsman found that, although Art. 21(1) and (2) TEU do not establish a legally binding obligation to carry out a human rights impact assessment, “it would be in conformity with the spirit of the [se] legal provisions . . . to carry out a human rights impact assessment.” Ibid., para. 11. Thus, although the Ombudsman did not read these provisions as entailing a legally binding due diligence obligation, she did rely on them in order to support the existence of a non-binding standard of ‘good administration’. Ibid., para. 10. 90 91

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have on human rights.”94 The General Court’s judgment in Front Polisario further corroborates the view that, in order to fulfil its due diligence obligations, the Union institutions must examine the human rights situation in the third party and on the basis of that examination decide whether the agreement could have a negative impact thereon.95 Secondly, the AG based the existence of the EU’s duty of due diligence on an argument of effectiveness. According to Wathelet, the relevant due diligence obligation results from the need to give practical effect to the EU’s duty to respect international human rights law. [I]t is settled case-law that the Union must respect international law in the exercise of its powers. It follows that, if it is not to be devoid of any practical purpose, the question of the conformity of the agreement at issue with international law must be taken into account in the prior examination of all relevant facts to be conducted by the institutions before concluding an international agreement.96

This argument seems to stand on thin evidentiary grounds. More particularly, this line of reasoning presupposes that, under international human rights law, there is an obligation to take into account the possible negative impact of an agreement on the enjoyment of human rights abroad before concluding it. However, there is no general, free-standing obligation of due diligence under international law.97 The requirement to act with due diligence only exists as a corollary of a primary rule, and thus, it is to be established on a case-by-case basis – with reference to the relevant primary norms.98 Since the AG failed to show either the existence of a broad due diligence obligation incumbent upon the EU under international human rights law, or that, in concreto, the relevant international human rights norms encompass such a duty, the ‘effectiveness argument’ put forward in his Opinion is unconvincing. Secondly, the AG inferred the existence of a due diligence obligation incumbent upon the EU to take into account the impact of an agreement on the human rights situation in the third country from international law. According to Wathelet: In addition to the obligation under EU law to examine the general human rights situation in the other party to the international agreement, and more specifically to study the impact which that agreement could have on human rights, international law requires actors in international law, in particular States and international organisations, to respect peremptory norms of international law ( jus cogens) and erga omnes obligations.99

Opinion of AG Wathelet, supra note 5, para. 257. Case T-512/12, supra note 4, paras. 225–228. 96 Opinion of AG Wathelet, supra note 5, para. 256. 97 Crawford (2014), pp. 219–232. See also generally T. Koivurova, Due Diligence, Max Planck Encyclopedia of Public International Law, February 2010. On the principle of due diligence in international law, see Kulesza (2016). 98 McDonald (2019), p. 1044; Besson (2020) p. 6, available at https://esil-sedi.eu/wp-content/ uploads/2020/04/ESIL-Reflection-Besson-S.-3.pdf. 99 Opinion of AG Wathelet, supra note 5, para. 257. See also ibid., para 269: “Even if the existence and enforceability of such a principle in EU law were disputed, it is clear that international law imposes a clear obligation on the European Union and its Member States not to recognise an illegal 94 95

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However, this proposition is problematic to the extent that the AG does not clarify the exact source of this putative international law obligation. More particularly, this argument suffers from the same weaknesses identified above. The AG’s thesis could only hold if either: a) one assumes the existence of a general due diligence obligation under international law; or b) one assumes that the norms of international law invoked in the case at hand require the EU to conduct due diligence activity. It thus seems fairly safe to assume that indeed no broad due diligence obligation exists under general international law.100 As Besson explains: “The standard of due diligence, even if it may be grounded. . . as a standard independent from the obligation it is qualifying . . ., cannot ground that obligation itself, and hence cannot give rise to a human rights duty in the first place. The conditions for that duty to arise have to be met independently.”101 The case-law of the ICJ also confirms that there is no free-standing due diligence obligation in international law.102 As the Court stated in the Genocide case: The Genocide Convention is not the only instrument providing for an obligation on the states parties to it to take certain steps to prevent the acts it seeks to prohibit. Many other instruments include a similar obligation, in various forms . . . The content of the duty to prevent varies from one instrument to another, according to the wording of the relevant provisions, and depending on the nature of the acts to be prevented. The decision of the Court does not, in this case, purport to establish a general jurisprudence applicable to all cases where a treaty instrument, or other binding legal norm, includes an obligation for States to prevent certain acts.103

In the absence of a broad due diligence obligation under public international law, one must examine whether the applicable norms in each case prescribe such a duty. In the particular context of the Front Polisario case, there seems to be no evidence that the relevant international law norms104 involve a due diligence requirement. Thus, while it is arguable that under EU law there is a due diligence obligation to take into account the possible negative impact of the agreement on the human rights situation in the third country, the existence of a similar duty under international law is to be determined on a case-by-case basis—depending on the primary norms invoked in each case. situation resulting from the infringement of principles and rules concerning fundamental rights and not to render aid or assistance in maintaining the situation created by that infringement. To that end, the EU’s institutions and its Member States must examine the impact which the international agreement at issue could have on human rights.” (Emphasis added). 100 McDonald (2019), p. 1044; Besson (2020), p. 6. 101 Besson (2020), ibid. 102 See McDonald’s analysis of the relevant ICJ jurisprudence in McDonald (2019), pp. 1045–1048. McDonald’s analysis focuses in particular on the Corfu Channel case, ICJ Reports 1949, p. 4; the Pulp Mills case, ICJ Reports 2010, p. 14; the Armed Activities on the Territory of the Congo case, ICJ Reports 2005, p. 168; and the Application of the Convention on the Prevention and Punishment of the Crime of Genocide case, ICJ Reports 2007, p. 43. 103 Application of the Convention on the Prevention and Punishment of the Crime of Genocide case, ibid., para. 429. 104 For the relevant norms, see Opinion of AG Wathelet, supra note 5, paras. 258–259.

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6 Conclusions The chapter explored the question of whether the EU is bound by human rights obligations towards individuals located outside the territory of the Member States when it concludes trade agreements with third countries. Recent case-law of the CJEU, and more particularly the Front Polisario saga, has rekindled interest in the topic. Thus, the chapter focused on two concrete sub-questions that this line of caselaw has given rise to: (a) the question of the extraterritorial applicability of the EU Charter of Fundamental Rights; and (b) the question of the existence of a due diligence obligation incumbent upon the EU institutions to examine the impact of the agreement to the human rights situation in the third State. In relation to the question of the extraterritorial applicability of the Charter, it was shown that territorial criteria bear no relevance in determining the Charter’s applicability. More particularly, we argue that what matters in this context is whether the situation at hand is covered by an EU competence. We then went on to discuss efforts that have been made in the literature to import into the fundamental rights regime of the Charter the extraterritoriality standard developed by the ECtHR. It was shown that this approach is erroneous to the extent that it fails to take into account that, contrary to other human rights instruments, the Charter does not contain a superadded jurisdictional condition for its applicability and that this approach undermines the Charter’s aspiration to create an autonomous fundamental rights regime. Against this background, we turned next to different attempts to ‘territorialise’ the EU’s duty to protect human rights abroad by advocating in favour of the existence of a relevant EU duty of due diligence—allegedly stemming both from EU and international law. It was shown that it is complex to establish the EU’s obligation to act with due diligence in the context of concluding an international agreement on the basis of international law. In order to do that, one must examine the relevant primary norms involved and the extent to which these norms contain a due diligence requirement. On the other hand, this contribution argues that a duty of due diligence clearly exists as a matter of EU law to take into account the impact of a future agreement on the human rights situation in the third State.

References Bartels L (2014) The EU’s human rights obligations in relation to policies with extraterritorial effects. EJIL 25:1071 Berkes A (2018) The extraterritorial human rights obligations of the EU in its external trade and investment policies. Europe World Law Rev 5:1 Besson S (2020) Due diligence and extraterritorial human rights obligations – mind the gap! ESIL Reflections 9:1 Cannizzaro E (2014) The EU’s human rights obligations in relation to policies with extraterritorial effects: a reply to Lorand Bartels. EJIL 25:1093

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Cardwell P, Wessel RA (2020) EU external relations and international law: divergence on questions of ‘Territory’? In: Fahey E (ed) Framing convergence with the global legal order: the EU and the World. Hart Publishing, Oxford, pp 143–161 Corten O, Klein P (2012) The limits of complicity as a ground for responsibility: lessons learned from the Corfu channel case. In: Bannelier K, Christakis T, Heathcote S (eds) The ICJ and the evolution of international law: the enduring impact of the Corfu channel case. Routledge, London, pp 315–334 Crawford J (2014) State responsibility: the general part. Cambridge University Press, New York, pp 219–232 Dero-Bugny D, Motte-Baumvol J (2020) Shaping EU external relations beyond treaty-making: the scope of extraterritorial EU legislation and its enforcement challenges. In: Douma WT, Eckes C, Van Elsuwege P, Kassoti E, Ott A, Wessel RA (eds) The evolving nature of EU external relations law. T.M.C. Asser Press, The Hague, pp 41–60 Ganesh A (2015) The European Union’s human rights obligations towards distant strangers. Mich J Int Law 37:475 Jackson M (2016) Freeing Soering: the ECHR, state complicity in torture, and jurisdiction. EJIL 27:816 Kassoti E (2017) The Council v Front Polisario case: the court of justice’s selective reliance on treaty interpretation. Eur Papers 2:23 Kube V (2019) EU human rights, international investment law and participation: operationalizing the EU foreign policy objective to global human rights protection. Springer, Berlin, p 34 Kulesza J (2016) Due diligence in international law. Leiden, Brill Lanovoy V (2016) Complicity and its limits in the law of international responsibility. Hart Publishing, Oxford, pp 101–103 Macchi C (2020) With trade comes responsibility: the external reach of the EU’s fundamental rights obligations. Transnational Legal Theory 11(4):409–435 McDonald N (2019) The role of due diligence in international law. ICLQ 68:1041 Milanovic M (2011) Extraterritorial application of human rights treaties: law, principles, and policy. Oxford University Press, Oxford, p 7 Milanovic M (2012) Al-Skeini and Al-Jedda in Strasbourg. EJIL 23:121 Miller S (2009) Revisiting extraterritorial jurisdiction: a territorial justification for extraterritorial jurisdiction under the European Convention. EJIL 20:1223 Moreno-Lax V, Costello C (2014) The extraterritorial application of the EU charter of fundamental rights: from territoriality to facticity, the effectiveness model. In: Peers S et al (eds) The EU charter of fundamental rights: a commentary. Hart/Beck, Oxford, p 657 Pirker B (2018) Mapping the Scope of Application of EU Fundamental Rights: A Typology. European Papers 3:133 Ryngaert C (2015) Jurisdiction in international law, 2nd edn. Oxford University Press, Oxford, pp 22–26 Ryngaert C (2018) EU trade agreements and human rights: from extraterritorial to territorial obligations. ICLR 20:374 Sicilianos A (2017) The European Court of human rights facing the security council: towards systemic harmonization. ICLQ 66:783 Tridimas T (2014) Fundamental rights, general principles of EU law, and the charter. Camb Yearb Eur Legal Stud 16:361 Van Danwitz T, Paraschas K (2017) A fresh start for the charter: fundamental questions on the application of the European charter of fundamental rights. Fordham Int Law J 35:1396 van Elsuwege P The Nexus between common commercial policy and human rights: implications of the Lisbon Treaty. In: Van Der Loo G, Hahn M (eds) The law and practice of the common commercial policy: the first 10 years after the Treaty of Lisbon. Brill, Leiden, p 2

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Dr. Eva Kassoti is a Senior Researcher in International and EU Law as well as the academic co-ordinator for the Centre of the Law of EU External Relations (CLEER) at the T.M.C. Asser Institute. Eva read law at the Democritus University of Thrace, Greece, and was subsequently admitted to the Greek bar. She completed the LL.M. in Public International Law at the University of Nottingham and obtained her Ph.D. from the University of Bristol. Her monograph entitled ‘The Juridical Nature of Unilateral acts of States in International Law” was published in 2015. Before joining the T.M.C. Asser Institute, Eva worked as a Senior Lecturer in International and EU Law at The Hague University of Applied Sciences from 2012 to 2018. Eva has held visiting fellowships at Max Planck Institute for Comparative Public Law and International Law in Heidelberg (Germany), the T.M.C. Asser Institute, and the EUI (Florence). Eva’s research interests include public international law, EU law, EU external relations law, as well as the interplay between the international and the EU legal order. Ramses A. Wessel is Professor of European Law and Head of the Department of European and Economic Law at the University of Groningen. His research expertise is in EU external relations law, EU foreign and security policy, EU trade law and international organizations. He published widely on issues of European and international institutional law and participates in a number of international projects of the (legal) role of the European Union as a global actor. He has been a visiting professor at, inter alia, the La Sapienza and LUISS universities in Rome, the Universidad Pablo Olavide in Sevilla, and the European University Institute in Florence. Ramses Wessel is Vice-President of the European Society of International Law (ESIL), and Member of the Governing Board of the Centre for the Law of EU External Relations (CLEER) in The Hague. He is Editor of a number of international journals in the field, including European Papers, International Organizations Law Review, and European Foreign Affairs Review.

Extraterritorial Effects of EU Financial Markets Laws Johan Schweigl

Abstract This chapter is dedicated to extraterritoriality in the EU legal framework concerning regulation of financial markets. Having first outlined and categorised the core aspects of the extraterritorial effects of laws, the author presents a list of respective laws with a brief description of their extraterritoriality nature, to systemise these laws according to the nature of the extraterritorial effects they have. The main emphasis is on EU directives and regulations concerned with financial markets.

1 Extraterritoriality in Laws Regulating Financial Markets There is a general principle of international law that a state cannot enforce its laws in another state’s jurisdiction, without the consent of the other state. Jurisdiction manifests state sovereignty (Bowett 1982, p. 1). In principle, the regulatory systems of individual states are construed to have only domestic effects and not to interfere in other jurisdictions. Nevertheless, certain laws have a so-called extraterritorial effect. These laws represent exceptions to the above-mentioned general principle. The causes on which the laws base their extraterritorial effects may be classified into certain types. Dover and Frosini (Dover and Frosini 2012, p. 11) present following list:1 i. the objective territorial principle (under this principle, a state may claim its jurisdiction if a particular action was at least partially committed in its territory). For instance, nation A passes a law according to which the persons of nation B have certain obligations or rights in the territory of nation A. Although some

1

The comments on the particular types result from revisions by the author and may not reflect the views of Dover and Frosini who created the types of extraterritoriality classification.

J. Schweigl (*) Masaryk University, Faculty of Law, Department of Financial Law and Economics, Brno, Czechia e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 N. Cunha Rodrigues (ed.), Extraterritoriality of EU Economic Law, European Union and its Neighbours in a Globalized World 4, https://doi.org/10.1007/978-3-030-82291-0_12

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consider these laws to have an extraterritorial effect, the effects of such a law are limited only to the territory of nation A although they apply to all persons, e. g. a person of nation B if such a person intends to enter nation A’s market. The extraterritoriality of such laws is thus disputable. the universality principle (jurisdiction is established based on the need to suppress a certain type of behaviour, which is internationally recognised as unacceptable). For instance, nation A passes a law according to which everybody, i.e. also persons of nation B, has certain obligations or rights in the territory of nation B. These laws have an obvious extraterritorial effect. Their effects cross the territory of nation A and create obligations or rights on all the respective persons even in the jurisdiction of nation B.2 the ‘effective control’ principle (jurisdiction is based on the effective control of one state over a certain territory or citizens of another state). the nationality principle (jurisdiction is established based on the nationality of a certain individual). For example, nation A passes a law according to which persons of nation A3 have certain obligations or rights also in nation B. These laws have obvious extraterritorial effects, as their effects cross the territory of nation A and create obligations or rights for persons of nation A and also for their activities in the territory of nation B, due to their being nation A nationals.4 the ‘effects’ principle (one state may claim jurisdiction based on the effects that certain acts committed abroad may have in the particular state). This approach is sometimes called the ‘effects doctrine’5 and may be found in court decisions both in the USA6 and the EU.7

For instance, the ‘bonus cap’ laid down in the CRD IV package (see below) belongs to this category. 3 The term ‘persons from nation A’ shall hereafter cover both the natural (physical) persons and legal persons either registered or having any other substantial connection to the nation in nation A. 4 For instance, they also have to maintain certain standards regarding their behaviour in the territory of nation B or they shall not carry out certain acts in nation B. 5 Aside from distinguishing between the different types of effects the laws may have, we may differentiate between the effects of acts carried out by physical and legal persons: (i) a person of nation A carries out an act that only has effects in nation A (purely domestic effects); (ii) a person of nation A carries out an act that also has effects in the territory of nation B (the extraterritorial effects of such an act); (iii) a person of nation B carries out an act in nation B and this act has effects in nation A (the extraterritorial effects of such an act). 6 In 1945, the US court decided in the Alcoa case (US v. Aluminium Company of America and others, 44 F Supp. 97; 148 F. 2d 416) and for the first time applied the ‘effects doctrine’ in the US. There were certain foreign companies that were manipulating the price of aluminium, which affected the level of imports into the US (Dover and Frosini 2012, p. 11). 7 In 1988, the European Court of Justice (ECJ) applied a similar approach in the case Ahlstrom Oy v. Commission (1988), where the ECJ ruled that foreign companies that had engaged in pricefixing, which effected the markets of the European Communities (EC), were subject to EC law, because they sold directly to purchasers from the EC (Dover and Frosini 2012, p. 11). 2

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vi. the ‘substantial connection’ principle (jurisdiction established based on the real and substantial connection between individuals or entities in different jurisdictions) (Dover and Frosini 2012, p. 5). Another perspective distinguishes extraterritoriality in terms of ‘application’ and ‘implication’. The former applies to situations where a law of nation A has certain effects in nation B, whereas the latter applies to situations where a person of nation B has to comply with the laws of nation A even in their home country (nation B) when entering the market of nation A.8 In general, extraterritorial laws meet at least one of the following features: they originate from the acceptance of certain universal values (for instance, fundamental human rights or internationally recognised humanitarian standards) or are designed to deal with certain behaviour that is likely to have effects in more jurisdictions (activities connected with environmental issues, market manipulation, money laundering, or affecting financial markets) or are connected with nationality/place of registration of the addressee.

2 Key EU Laws with Extraterritorial Effect I will now analyse selected EU laws—one by one, in the sub-sections which follow—from the perspective of their extraterritorial effects. The list of analysed EU laws contains those that target certain areas of financial markets. The structure of each sub-section will follow this pattern: term of validity of the law (year of entering into power), the core objective of the law, and description of its extraterritorial effects. The following laws will be covered: – Acquisitions Directive9 – Capital Requirements Directive IV10 – Capital Requirements Regulation11

8

Comp. Deutsche Bank. Global Equities. MiFID II: What is new for buy side? Extraterritoriality. Global Market Structure—Europe. 2014, p. 1. Available here: https://autobahn.db.com/microSite/ docs/GMS_MiFID2Examined_7_ExtraTerritorialityOfMiFIDII.pdf. 9 Directive 2007/44/EC of the European Parliament and of the Council of 5 September 2007, amending Council Directive 92/49/EEC and Directives 2002/83/EC, 2004/39/EC, 2005/68/EC and 2006/48/EC as regards procedural rules and evaluation criteria for the prudential assessment of acquisitions and increase of holdings in the financial sector (“Acquisition Directive”). 10 Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (“CRD IV”). 11 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (“CRR”).

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European Market Infrastructure Regulation12 Markets in Financial Instruments Directive II13 Benchmark Regulation14 Emissions Trading Scheme Directive15 Market Abuse Regulation16 Market Abuse Directive17 EU Emissions Trading Scheme Directive18 Short Selling Regulation19 Alternative Investment Fund Managers Directive20 Investment Firm Regulation21 Investment Firm Directive22

Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (”EMIR”). 13 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (“MiFID II”). 14 Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No 596/2014 (“Benchmark Regulation”). 15 Directive 2008/101/EC of the European Parliament and of the Council of 19 November 2008 amending Directive 2003/87/EC so as to include aviation activities in the scheme for greenhouse gas emission allowance trading within the Community (“Emissions Trading Scheme Directive”). 16 Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/ 72/EC (“MAR”). 17 Directive 2014/57/EU of the European Parliament and of the Council of 16 April 2014 on criminal sanctions for market abuse (market abuse directive) (“CSMAD”). 18 . Same as 16? 19 Regulation (EU) No 236/2012 of the European Parliament and of the Council of 14 March 2012 on short selling and certain aspects of credit default swaps (“Short Selling Regulation”). 20 Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 (“AIFMD”). 21 Regulation (EU) 2015/751 of the European Parliament and of the Council of 29 April 2015 on interchange fees for card-based payment transactions (“IFR”). 22 Directive (EU) 2019/2034 of the European Parliament and of the Council of 27 November 2019 on the prudential supervision of investment firms and amending Directives 2002/87/EC, 2009/65/ EC, 2011/61/EU, 2013/36/EU, 2014/59/EU and 2014/65/EU (“IFD”).

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Acquisitions Directive (2007/44/EC)

The Acquisitions Directive was adapted in 2007 (implemented in 2009) with the intention to lay down a regulatory framework for situations in which a natural or legal person took a decision to acquire or increase a qualifying holding in a credit institution, assurance, insurance or re-insurance undertaking or in an investment firm. The previous rules for such acquisition were distributed among numerous directives23 and had provided neither detailed criteria for a prudential assessment of acquisitions nor clear rules of procedure for their application. The Acquisitions Directive’s goal was to prevent any circumvention of the initial conditions for authorisation to acquire a qualified holding and to design a proper framework for more effective harmonisation throughout the EU of the procedure and prudential assessments so that particular EU member states would not lay down stricter rules. This directive is no longer in force, as it was repealed by MIFID II (put in effect in 2018).24 The extraterritoriality effect was reflected in the requirement that proposed acquisitions of the qualified share in the above-mentioned entities required prior approval from the relevant competent EU authorities. This applied to all potential acquirers, regardless of where their head office was registered.

2.2

Capital Requirements Directive IV (2013/36/EU) and Capital Requirements Regulation (575/2013)

The main objective of CRD IV and CRR, together called the ‘CRD IV package’ (both adapted in 2013) is to “coordinate national provisions concerning access to the activity of credit institutions and investment firms, the modalities for their governance, and their supervisory framework”25 (CRD IV) and to set the prudential rules for credit institutions and investment firms (CRR).26 The CRD IV package follows up, adjusts and extends the rules established by previous EU laws on the subject. Firstly, we should mention the ‘CRD I Package’ of 2006, which consisted of

23

Council Directive 92/49/EEC of 18 June 1992 on the coordination of laws, regulations and administrative provisions relating to direct insurance other than life assurance (third non-life insurance Directive), Directive 2002/83/EC of the European Parliament and of the Council of 5 November 2002 concerning life assurance, Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments, Directive 2005/68/EC of the European Parliament and of the Council of 16 November 2005 on reinsurance and Directive 2006/ 48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions. 24 See below. 25 Recital 2, CRD IV. 26 Recital 5, CRR.

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the legal framework set up by both Directive 2006/48/EC27 relating to the taking up and pursuit of the business of credit institutions and Directive 2006/49/EC on the capital adequacy of investment firms and credit institutions.28 The CRD I Package was later29 changed by Directive 2009/111/EC as regards banks affiliated to central institutions, certain own funds items, large exposures, supervisory arrangements, and crisis management30 (CRD II) and Directive 2010/76/EU as regards capital requirements for the trading book and for re-securitisations, and the supervisory review of remuneration policies (CRD III),31 the purpose of which was to strengthen the rules on banking capital and remuneration in the financial sector. The CRD IV package was introduced in 2011 by the European Commission so as to implement the global regulatory standards developed by the Basel Committee on Banking Supervision.32 The CRD IV package contains several provisions which have obvious extraterritorial effects. These effects mainly relate to prudential requirements (as a general rule, institutions apply full consolidation concerning their subsidiaries, or the subsidiaries of their parent financial holding company or parent mixed financial holding company)33 and remuneration practices (competent authorities should ensure compliance with the principles and rules on remuneration for institutions on a consolidated basis, that is at the level of the group, parent undertakings and subsidiaries, including the branches and subsidiaries established in third countries).34 These apply

27

Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions. 28 These directives recast the previous Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000 relating to the taking up and pursuit of the business of credit institutions and Council Directive 93/6/EEC of 15 March 1993 on the capital adequacy of investments firms and credit institutions. 29 As a reaction to the financial crisis of 2008 and the following euro area ‘debt’ crisis of 2010. 30 Directive 2009/111/EC of the European Parliament and of the Council of 16 September 2009 amending Directives 2006/48/EC, 2006/49/EC and 2007/64/EC as regards banks affiliated to central institutions, certain own funds items, large exposures, supervisory arrangements, and crisis management. 31 Directive 2010/76/EU of the European Parliament and of the Council of 24 November 2010 amending Directives 2006/48/EC and 2006/49/EC as regards capital requirements for the trading book and for re-securitisations, and the supervisory review of remuneration policies. 32 Comp. Opinion of Advocate general Jääskinen delivered on 20 November 2014, Case C-507/13, paragraphs 14–18. 33 See, EBA. Final report. Guidelines on sound remuneration policies under Articles 74(3) and 75 (2) of Directive 2013/36/EU and disclosures under Article 450 of Regulation (EU) No 575/2013, EBA/GL/2015/22 p. 10 and EBA Consultation paper. Draft Regulatory Technical Standards on the methods of prudential consolidation under Article 18 of Regulation (EU) No 575/2013 (Capital Requirements Regulation—CRR). EBA/CP/2017/20, p. 6. 34 Recital 67 of CRD IV and EBA. Final report. Guidelines on sound remuneration policies under Articles 74(3) and 75(2) of Directive 2013/36/EU and disclosures under Article 450 of Regulation (EU) No 575/2013. EBA/GL/2015/22.

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at group, parent and subsidiary levels if the group’s head office is located in the EU (Latham and Watkins 2017).35 Some of the provisions regulating remuneration policies and practices of financial institutions, with the main emphasis on a so-called ‘bonus cap’, were brought by the United Kingdom before the ECJ. The UK argued that these provisions36 be annulled, as they pose an “infringement of the customary international law principle against extra territoriality.”37 The UK finds the core problem in the scope of Article 94(1) (g) of the CRD IV Directive, which in principle applies to ‘group, parent company and subsidiary entities established outside the EU entirely. Next, Article 92(1) of the CRD IV Directive and the application of Article 94 CRD IV Directive is to be ensured by competent authorities for institutions at group, parent company and subsidiary levels, including those established in offshore financial centres. According to Article 109(2) competent authorities shall ensure that parent undertakings and subsidiaries subject to that directive implement certain arrangements, processes and mechanisms in their subsidiaries not subject to the directive.38 The case was reviewed by General Attorney Jääskinen, who, nevertheless, came to the conclusion, inter alia, that an EU legislative measure “cannot be invalid simply because it has effects on conduct in territory located outside of the EU.”39 The General Attorney even referred to the ECJ decisions in which it had been established that conduct taking place outside the EU that impacts internally on it can be regulated by EU law.40 The case never went on to be considered by ECJ judges as the UK withdrew its action for annulment as the UK saw ´minimal prospect for success’.41

35

Compare Articles 92 (1), 94. Articles 94(1)(g), 94(2) and 162(1) and (3) of the CRD IV, and Articles 450(1)(d), 450(1)(i), 450 (1)(j) and 521(2). Article 18 of the CRR. 37 Opinion of Advocate general Jääskinen delivered on 20 November 2014, Case C-507/13, paragraph 26. 38 Opinion of Advocate general Jääskinen delivered on 20 November 2014, Case C-507/13, paragraph 27. 39 Opinion of Advocate general Jääskinen delivered on 20 November 2014, Case C-507/13, paragraph 36. 40 Judgment in Imperial Chemical Industries v Commission, 48/69, EU:C:1972:70, and Judgment in Ahlström Osakeyhtiö and Others v Commission, C-89/85, C-104/85, C-114/85, C-116/85, C-117/ 85 and C-125/85 to C-129/85, EU:C:1988:447. 41 See letter from chancellor Osborne to Mark Carney, Chair of the Financial Stability board, of 20 November 2014. Available here: https://assets.publishing.service.gov.uk/government/uploads/ system/uploads/attachment_data/file/377192/CX_MC_201114.pdf. 36

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Investment Firm Regulation (2019/2033) and Investment Firm Directive (2019/2034)

Investment firms have, in principle, along with credit institutions, been subject to the CRD IV package as regards their prudential treatment and supervision. Their authorisation and other organisational requirements and conduct are set out in MiFID II. Nonetheless, many of the requirements that stem from the framework of the abovementioned regulatory framework were designed to address risks faced by credit institutions. In other words, they aim to preserve the lending capacity of credit institutions through economic cycles and to protect depositors and taxpayers from possible failure, and are not designed to address all of the different risk profiles of investment firms.42 The risks that investment firms face and post are substantially different to the risks of credit institutions. Therefore, a special framework (mainly covering prudential requirements) as represented by the IFD/IFR was created for investment firms. The IFR requires relevant investment firms to comply with IFR own funds, capital requirements, concentration risk, disclosure and reporting requirements on a consolidated basis,43 such as is the case with the CRD IV package. The extraterritorial effects of IFR/IFD are thus also given. This specific regime is however required only for investment firms which ‘are not systemic by virtue of their size and their interconnectedness with other financial and economic actors.’44 Systemic investment firms remain to be subject to the existing prudential framework under the CRD IV package.

2.4

Alternative Investment Fund Managers Directive (2011/ 61/EU)

Managers of alternative investment funds (AIFMs) manage a significant amount of invested assets in the EU. Thus, they are subject to a EU legal framework. The AIFMD aims at establishing common requirements governing the authorisation and supervision of AIFMs. These requirements should provide a coherent approach to the related risks and their impact on investors and markets in the EU and to provide for an internal market for AIFMs and a harmonised and stringent regulatory and supervisory framework for activities within the EU.45 This includes both those who have their registered office in a Member State (EU AIFMs) and those who have their registered office in a third country (non-EU AIFMs). The AIFMD applies to all EU 42

Recital 4 of the IFD. Deloitte. Financial Services UK. IFR/IFD: revisions to the prudential regime for EU investment firms and third-country access. In: Deloitte web. 2019. Available at: https://blogs.deloitte.co.uk/ financialservices/ifrifd-revisions-to-the-prudential-regime-for-eu-investment-firms-and-third-coun try-access.html. 44 Recital 6 of the IFD. 45 Recital 2 and 4 of the AIFMD. 43

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AIFMs managing EU AIFs or non-EU AIFs, irrespective of whether or not they are marketed in the EU, to non-EU AIFMs managing EU AIFs, irrespective of whether or not they are marketed in the EU, and to non-EU AIFMs marketing EU AIFs or non-EU AIFs in the EU.46 In order to manage EU AIFs, the non-EU AIFMs have to be authorised in an EU member state. Such an authorisation requires: (i) full compliance with the AIFMD as if the AIFM were based in the EU, (ii) a cooperation agreement to be in place, (iii) the non-EU country cannot by listed by the Financial Action Task Force as a non-cooperative country or territory (NCCT) and (iv) a tax exchange agreement has to be in place.47 Extraterritoriality arises mainly from the fact that the AIFMD affects all managers of non-UCITS funds located in the EU as well as many non-EU managers managing and marketing their funds to investors in EU instruments from non-EU jurisdictions (such as the US, Switzerland, the Cayman Islands and the British Virgin Islands) (Latham and Watkins 2012).

2.5

European Market Infrastructure Regulation (648/2018)

The EMIR was adopted in 2012, and amended in 2019, as a piece of legislation to bring more transparency to OTC derivative contracts the volumes and terms of which had often been known only to the contractual parties, which had led to an increase of uncertainty in times of market stress and, accordingly, it had posed risks to financial stability.48 In 2009, G20 leaders agreed that all standardised OTC derivative contracts should be cleared through a central counterparty (CCP) and that OTC derivative contracts should be reported to trade repositories.49 These approaches materialised in the EMIR according to which clearing, trade reporting and risk mitigation requirements are applicable also to non-EU branches of EU counterparties.50 Under certain circumstances, the risk mitigation requirements apply even when two non-EU entities trade with one another if their contract has a ´direct or foreseeable effect´ in the EU or it is necessary to prevent evasion of the EMIR.51,52 46

Recital 13 of the AIFMD. Shearman & Sterling LLP (2014). 48 Recital 4 of the EMIR. 49 See Recital 5 of the EMIR. 50 Latham & Watkins. Overview of Extraterritorial Effects of EU Financial Services Legislation. EU-DOCS/19889744.1, 2017. 51 For more, see Shearman & Sterling LLP. Extraterritoriality Revisited: Access to the European Markets by Financial Institutions, Funds and Others from Outside Europe. 2014. Available at: https://www.shearman.com/~/media/Files/NewsInsights/Publications/2014/08/ExtraterritorialityRevisited-Access-to-European-Markets-by-Financial-Institutions-Funds-and-Others-FIA-082714.pdf. 52 Some authors claim that there are risks that the extraterritorial effect of the EMIR, particularly when combined with the extraterritorial effects of third country legislation, may disrupt crossborder trades. See Mayer Brown. The Extraterritorial Effect of the EU Regulation of OTC Derivatives. 2014. Available at: https://www.mayerbrown.com/en/perspectives-events/publica tions/2014/06/the-extraterritorial-effect-of-the-eu-regulation. 47

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Markets in Financial Instruments Directive II (2014/65/ EU)

MiFID II and the MIFIR53 follow and revise the MiFID legal framework.54 MiFID II and MiFIR were adopted by the EC in 2014 with the intention of reinforcing the rules for securities markets.55 Despite the fact that MiFID II does not appear to be deliberately extraterritorial,56 there are several provisions that have raised questions concerning their extraterritorial effects. These areas mainly cover transaction reporting requirements of non-EU firms, best execution, EU-venue trading, and pre- and post-trade transparency.57 There has been a vigorous discussion about the territorial scope of MiFID II regarding reporting requirements leading to several different perspectives.58 Under a

53

Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 (“MiFIR”). 54 Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/ EEC (“MiFID”). MiFID dealt mainly with: conduct of business and organisational requirements for investment firms, authorisation requirements for regulated markets, regulatory reporting to avoid market abuse, trade transparency obligations for shares, and rules on the admission of financial instruments to trading. 55 MiFID II focuses mainly on ensuring that organised trading takes place on regulated platforms, introducing rules on algorithmic and high frequency trading, improving the transparency and oversight of financial markets—including derivatives markets—and addressing some shortcomings in commodity derivatives markets, enhancing investor protection and improving the conduct of business rules as well as conditions for competition in the trading and clearing of financial instruments. The MiFIR deals with disclosure of data on trading activity to the public, disclosure of transaction data to regulators and supervisors, mandatory trading of derivatives in organised venues, removal of barriers between trading venues and providers of clearing services to ensure more competition, specific supervisory actions regarding financial instruments and positions in derivatives. See EC. Investment services and regulated markets—Markets in financial instruments directive (MiFID). In: EC web. 2020. Available at: https://ec.europa.eu/info/business-economyeuro/banking-and-finance/financial-markets/securities-markets/investment-services-and-regulatedmarkets-markets-financial-instruments-directive-mifid_en. 56 Ashurst. How extra-territorial is MiFID? Financial Regulation Briefing, 2016. Available at: https://www.ashurst.com/en/news-and-insights/legal-updates/how-extra-territorial-is-mifid/. 57 For further details, see: Latham & Watkins. Overview of Extraterritorial Effects of EU Financial Services Legislation. EU-DOCS/19889744.1, 2017 or Mason, John. Impact of MiFID II for Non-European Based Firms. Reuters. Available at: https://www.thomsonreuters.in/content/dam/ openweb/documents/pdf/india/white-paper/whitepaper-impact-of-MiFIDII-for-non-Europeanbased-firms.pdf or ESMA. MiFID II Supervisory briefing on the supervision of non-EU branches of EU firms. ESMA35-43-1493 February 2019. Available at: https://www.esma.europa.eu/sites/ default/files/library/esma35-43-1493_mifid_ii_supervisory_briefing_on_the_use_of_third-coun try_branches_by_eu_firms.pdf or Bloomberg. The long arm of MiFID II: How non-EU firms will be impacted. Regulation. Available at: https://data.bloomberglp.com/professional/sites/4/ 750722249_SALES_MiFIDII_SFCT_DIG.pdf. 58 A ‘strict and conservative approach’ on the one hand, and an ‘alternative approach’ and ‘purposive approach’ on the other.

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‘strict and conservative´ interpretation, “all rules that apply to the head office should also apply to all branches equally no matter where they are located.”59 Under an ‘alternative approach’ and ‘purposive approach’, there is a general rule that non-EEA branches are out of the scope of MiFID II unless it is explicitly stated that they fall under the rules. The difference between these two approaches lies in identifying the provisions with extraterritorial effect. Both of these approaches, however, identify some sort of extraterritoriality in MiFID II. On 6 February 2019, ESMA published a Supervisory briefing on the supervision of non-EU branches of EU firms, which contained answers to some of the questions concerning the extent of extraterritoriality.60 EU firms are to provide the competent authority from their home state with relevant information on any new non-EU branch that they plan to establish so that the competent authorities will be able to ensure that the applicant is able to comply with all the legal requirements of the EU legislation.61 There was an attempt to replace some of the MiFID II provisions by requesting non-EU firms to register within the EU and be fully bound by EU laws. This amendment was not however adopted, and extraterritorial provisions were strengthened.62

2.7

Market Abuse Regulation (596/2014) and Market Abuse Directive (2014/57/EU)

MAR and CSMAD, known together as MAD II, replaced the previous EU legal framework dealing with market abuse, which had been established in 2005 by the Market Abuse Directive (2003/6/EC).63 This framework contains rules on insider dealing, unlawful disclosure of inside information and market manipulation. MAD II is a reaction to MiFID II and seeks to better align the market abuse regime introduced there.64 Although some provisions of MAR’s predecessor, MAD, had already had

59

Deutsche Bank, 2014. ESMA. MiFID II Supervisory briefing on the supervision of non-EU branches of EU firms. ESMA35-43-1493 February 2019. Available at: https://www.esma.europa.eu/sites/default/files/ library/esma35-43-1493_mifid_ii_supervisory_briefing_on_the_use_of_third-country_branches_ by_eu_firms.pdf. 61 ESMA. 2019. 62 Patterson, Julie. New capital requirements and much more. The main elements of the Investment firm directive and regulation have broadly been welcomed. In: KPMG web. 2019. Available at: https://home.kpmg/xx/en/home/insights/2019/04/new-capital-requirements-and-much-more-fs. html. 63 Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation (market abuse) (“MAD”). 64 Baker & McKenzie. Market Abuse Regulation: Have you completed your Checklist for 3 July 2016? Legal Alert. In: Baker & McKenzie web. 2016. Available at: https://www.bakermckenzie. c o m / - / m e d i a /fi l e s / i n si g h t / p u b l i c a t i o n s / 2 0 1 6 / 0 6 / m a r k e t - a b u s e - r e g u l a t i o n / a l _ u k _ marketabuseregulation_jun16.pdf?la¼en. 60

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extraterritorial effect, these effects have now been significantly extended. MAD had applied only to securities listed on ‘regulated markets’,65 whereas MAD II also applies to financial instruments traded on a multilateral trading facility (MTF) and an organised trading facility (OTF). Hence, the scope of MAD II now applies to non-EU companies, the securities of which are listed on EU MTFs or OTFs. These issuers are now subject to the obligation to disclose certain inside information as soon as possible, an obligation for directors and other senior staff to disclose dealings in the issuer’s securities, an obligation not to engage in unlawful disclosure and rules for market soundings.66

2.8

Benchmark Regulation (2016/1011)

To introduce a regulatory regime for benchmark administrators ensuring accuracy, transparency and integrity for the benchmarks used in the EU, the Benchmark Regulation was adopted. Although there had been several provisions in EU law regulating benchmarks,67 there was a need to grasp the issue comprehensively and introduce a one-piece complex law. The importance of this regulation is based on the fact that many financial instruments have used benchmarks as reference rates in financial contracts, particularly mortgages68 and the regulation applies to cases where the output value of the benchmark determines the value of a financial instrument or a financial contract, or measures the performance of an investment fund.69 Extraterritoriality is manifested according to some authors through the fact that EU regulated firms may only use benchmarks administered by providers from non-EU countries if such a benchmark qualifies via one of the methods of equivalence, recognition or endorsement.70 The Regulation refers to the IOSCO

65

Such as the main market of the London Stock Exchange. For further details, see, e.g.: Hastie, Charles. How New European Union Market Abuse Rules Affect US Firms. In: Law360 web. 2016. Available at: https://www.moraeglobal.com/how-neweuropean-union-market-abuse-rules-affect-us-firms/. 67 Comp. e.g. Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (OJ L 173, 12.6.2014, p. 349), Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC (OJ L 345, 31.12.2003, p. 64), Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (OJ L 302, 17.11.2009, p. 32) and Regulation (EU) No 1227/2011 of the European Parliament and of the Council of 25 October 2011 on wholesale energy market integrity and transparency (OJ L 326, 8.12.2011, p. 1). 68 History shows that if not properly regulated, the manipulation of benchmarks appears (comp. cases of manipulation of interest rate benchmarks such as LIBOR and EURIBOR). 69 See Recital 9 of Benchmark Regulation. 70 See e.g. Latham & Watkins (2017). 66

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principles71 and it requires that supervision and regulation in a third country should be equivalent to EU supervision and regulation of benchmarks. Benchmarks provided from such a third country can only be used by supervised EU entities if: (a) a co-operation agreement is in place; (b) a determination of equivalence is made; (c) the administrator of the benchmark has been authorised and is supervised in its own country; (d) the administrator is registered by ESMA; and (e) it complies with the IOSCO Principles for Financial Benchmarks (Shearman and Sterling 2014).

2.9

Emissions Trading Scheme Directive (2008/101/EC)

Although the EU Emissions Trading Scheme Directive is not a piece of legislation that would typical fall within financial markets regulation, it may be useful to mention it here as there is strong connection between emission trading and financial markets.72 The Directive was an outcome of the EU’s long lasting commitment to combat climate change. In 2003, a directive was adapted establishing a scheme for greenhouse gas emission allowance trading with the goal of promoting reductions of greenhouse gas emissions in a cost-effective and economically efficient manner.73 The EU Emission Trading Scheme Directive was adapted in 2008 in order to improve the then-existing legal framework concerning emission trading, namely to reduce the EU’s greenhouse gas emissions to at least 20% below 1990 levels by 2020. The directive is applicable to all flights arriving and departing from EU aerodromes, i.e. it also covers flights to and from third countries if departure or arrival takes place in the EU (Dover and Frosini 2012, p. 15). The extraterritorial effects of the Emissions Trading Scheme Directive are obvious. The extraterritoriality of this directive was challenged by the Air Transport Association of America and three other American airlines before the UK courts. The claimants stated that (i) the EU is exceeding its powers under international law by not confining its emissions trading scheme to wholly intra-European flights and by including within it those sections of international flights that take place over the high seas or over the territory of third countries, (ii) emissions trading scheme for international aviation activities should be negotiated and should not be introduced unilaterally, and (iii) the emissions trading scheme amounts to a tax or charge prohibited by international agreements. (Dover and Frosini 2012, p. 16)

In other words, the claimants asserted that the directive should not be implemented into UK law and that it was unlawful in the light of international treaty

Principles issued by International Organisation of Securities Commission (IOSCO) which inter alia serve as global standards for regulatory requirements for benchmarks. 72 See e.g. Busch (2006). 73 Directive 2003/87/EC of the European Parliament and of the Council of 13 October 2003 establishing a scheme for greenhouse gas emission allowance trading within the Community and amending Council Directive 96/61/EC. 71

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law and customary international law.74 The ECJ concluded that examination of the directive has disclosed no factor of such a kind as to affect its validity.

2.10

Short Selling Regulation (236/2012)

Following the financial crisis of 2008, the supervisory authorities of some of the EU member states and other significant economies, such as USA or Japan, started passing legislation restricting or banning short selling.75 To ensure both the proper functioning of financial markets and consumer and investor protection, a common regulatory framework dealing with short selling and certain aspects of credit default swaps was created at the EU level by means of the Short Selling Regulation. The regulation does not ban short selling in general, it rather sets forth rules for better transparency and establishes rules for taking measures in exceptional circumstances. Better transparency is to be achieved by a duty to report on significant net short positions in specific financial instruments and significant net short positions relating to sovereign debt. A special limitation applies to so-called ‘naked selling’.76 Some of the provisions of this regulation apply to persons and actions in third countries, so a framework was introduced for the exchange of communication between the relevant authorities. Extraterritoriality is given by the fact that disclosure to regulators in certain EU instruments applies regardless of where the investor is based.

3 Concluding Remarks There are numerous laws with extraterritorial effects in the legal system of the EU. Due to the global, cross-border nature of financial markets, it is typical for its regulation to contain a lot of extraterritorial norms concerning the markets. This extraterritoriality occurs under different types (territorial principle, ‘effects’ principle, nationality principle, etc.), some of which are used more frequently than others. Having analysed the use of norms with extraterritorial effects in the selected EU laws, it can be concluded that efforts are being carried out to make the regulation of financial markets (including extraterritorial provisions) more complex and interconnected. Given that the “variety of changes in the nature of the global marketplace, driven by technology in particular, make these actions inevitable” 74

See C-366/10, Air Transport Association of America and Others, item 43. They acted in this way due to concerns that at a time of considerable financial instability, short selling could aggravate the downward spiral in the prices of securities and consequently create systemic risks. 76 For further details, see, e.g. Noked, Noam. Pan-European Short Selling Regulation. In: Harvard Law School Forum on Corporate Governance web. 2012. Available at: https://corpgov.law.harvard. edu/2012/10/09/pan-european-short-selling-regulation/. 75

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(Baxter 2014, p. 3), we may expect that more unilateral actions in the form of laws with extraterritorial effects are likely to emerge in the following years. The area of extraterritoriality should be thus given more attention not only by practising lawyers and financial markets participants, but also by academics and legal theory.

References Baxter LG (2014) Extraterritorial Impacts of Recent Financial Regulation Reforms: A Complex World of Global Finance (August 28, 2014). Available at: https://scholarship.law.duke.edu/ faculty_scholarship/3355/ Bowett D (1982) Jurisdiction: changing patterns of authority over activities and resources. Br Yearb Int Law 53(1):1–26. ISSN 0068-2691 Busch T (2006) Emissions trading and effects on financial markets. In: Antes R, Hansjürgens B, Letmathe P (eds) Emissions trading and business. Physica-Verlag HD. ISBN: 978-3-79081747-8. Available at. https://doi.org/10.1007/3-7908-1748-1_18 Dover R, Frosini J (2012) Study: the extraterritorial effects of legislation and policies in the EU and US. Directorate-General for External Policies of the Union. Directorate B. Policy Department, Brussels. ISBN 978-92-823-3717-2 Latham & Watkins (2012) Key Considerations in Running an AIFMD Compliant Investment Fund. Analysis. Available at: https://www.lw.com/thoughtLeadership/aifmd-compliant-investmentfund. Latham & Watkins (2017) Overview of Extraterritorial Effects of EU Financial Services Legislation. EU-DOCS/19889744.1 Shearman & Sterling LLP (2014) Extraterritoriality Revisited: Access to the European Markets by Financial Institutions, Funds and Others from Outside Europe. Available at: https://www. shearman.com/~/media/Files/NewsInsights/Publications/2014/08/Extraterritoriality-RevisitedAccess-to-European-Markets-by-Financial-Institutions-Funds-and-Others-FIA-082714.pdf

Official Documents EBA. Final report. Guidelines on sound remuneration policies under Articles 74(3) and 75(2) of Directive 2013/36/EU and disclosures under Article 450 of Regulation (EU) No 575/2013, EBA/GL/2015/22, p. 10 and EBA Consultation paper. Draft Regulatory Technical Standards on the methods of prudential consolidation under Article 18 of Regulation (EU) No 575/2013 (Capital Requirements Regulation - CRR). EBA/CP/2017/20 Deutsche Bank. Global Equities. MiFID II: What is new for buy side? Extraterritoriality. Global Market Structure – Europe. 2014, p. 1. Available at: https://autobahn.db.com/microSite/docs/ GMS_MiFID2Examined_7_ExtraTerritorialityOfMiFIDII.pdf See letter from chancellor Osborne to Mark Carney, Chair of the Financial Stability board, of 20 November 2014. Available at: https://assets.publishing.service.gov.uk/government/uploads/ system/uploads/attachment_data/file/377192/CX_MC_201114.pdf Opinion of Advocate general Jääskinen delivered on 20 November 2014, Case C-507/13

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Laws and Decisions Judgment in Imperial Chemical Industries v Commission, 48/69, EU:C:1972:70, and Judgment in Ahlström Osakeyhtiö and Others v Commission, C-89/85, C-104/85, C-114/85, C-116/85, C-117/85 and C-125/85 to C-129/85, EU:C:1988:447 Judgment of the Court (Grand Chamber) of 21 December 2011. Air Transport Association of America and Others v Secretary of State for Energy and Climate Change. Reference for a preliminary ruling: High Court of Justice (England & Wales), Queen’s Bench Division (Administrative Court) - United Kingdom.C-366/10, Air Transport Association of America and Others Directive 2007/44/EC of the European Parliament and of the Council of 5 September 2007, amending Council Directive 92/49/EEC and Directives 2002/83/EC, 2004/39/EC, 2005/68/ EC and 2006/48/EC as regards procedural rules and evaluation criteria for the prudential assessment of acquisitions and increase of holdings in the financial sector Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC Directive 2008/101/EC of the European Parliament and of the Council of 19 November 2008a amending Directive 2003/87/EC so as to include aviation activities in the scheme for greenhouse gas emission allowance trading within the Community Directive 2014/57/EU of the European Parliament and of the Council of 16 April 2014 on criminal sanctions for market abuse (market abuse directive) Directive 2008/101/EC of the European Parliament and of the Council of 19 November 2008b amending Directive 2003/87/EC so as to include aviation activities in the scheme for greenhouse gas emission allowance trading within the Community Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 Directive (EU) 2019/2034 of the European Parliament and of the Council of 27 November 2019 on the prudential supervision of investment firms and amending Directives 2002/87/EC, 2009/65/ EC, 2011/61/EU, 2013/36/EU, 2014/59/EU and 2014/65/EU Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC Regulation (EU) No 236/2012 of the European Parliament and of the Council of 14 March 2012 on short selling and certain aspects of credit default swaps Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 Regulation (EU) 2015/751 of the European Parliament and of the Council of 29 April 2015 on interchange fees for card-based payment transactions Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (“CRR”) Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012a on OTC derivatives, central counterparties and trade repositories Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012b on OTC derivatives, central counterparties and trade repositories Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds and amending Directives 2008/48/EC and 2014/17/EU and Regulation (EU) No 596/2014

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Johan Schweigl Assistant Professor Department of Financial Law and Economics – Faculty of Law, Masaryk University, Brno, Czech Republic. Mr. Schweigl focuses on financial regulation and international monetary law. He participated in the following research projects State fiscal responsibility (2019/20); EU Financial Assistance Funds (2020); Legal and economic aspects of CNB’s foreign exchange interventions (2017/18); Financial and Tax Law (2016/2017) and he currently supervises several doctoral and master thesis, mainly concerning financial and monetary regulation. Mr. Schweigl has professional experience from law firm, where he focused on cross-border insolvency proceedings, from Supreme Court of the Czech Republic, where he gained experience as a clerk to a Supreme Court Justice and from audit firm (Deloitte), where he worked as auditor’s assistant.

Extraterritoriality and EU Standards in Investment Law: The Reform of the Energy Charter Treaty Claas Friedrich Germelmann

Abstract EU legal standards are often based on fundamental principles of EU primary law. They can have extraterritorial effects when influencing or determining the negotiating position of the EU institutions in the process of treaty-making with relation to third countries. A recent example is the international investment protection in the field of energy law. The Union’s position concerning the modernisation of the Energy Charter Treaty draws on the primary law interpretation of the European Court of Justice concerning the compatibility of arbitral tribunals with the autonomy of EU law, its regulatory freedom and the requirements of the rule of law. Although these standards will necessarily contribute to the shaping of a modernised form of investment protection in energy law, it is indispensable to keep a compromiseoriented approach when negotiating the Energy Charter Treaty. The current challenges of energy transition require an effective and sustainable rule based system of international investment protection.

1 Introduction One of the priorities of international economic law is the attempt to create an environment that is both fair in terms of a level playing field and, at the same time, investor friendly.1 Ideally, these goals will be pursued by way of international cooperation based on mutual acceptance and, especially, by means of international treaty-making. However, in recent times, the underlying idea of multilateralism has been facing rather severe backlashes in many fields, including international economic law.2 In this context, it is not just a general protectionism that is challenging

1 2

See, albeit with some criticism, Cho and Kurtz (2018), pp. 182ff. Cf. Ghérari (2008), p. 255; Germelmann (2016), p. 207; Montanaro and Violi (2020), p. 299.

C. F. Germelmann (*) Institute of International Law, Leibniz Universität Hannover, Hannover, Germany e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 N. Cunha Rodrigues (ed.), Extraterritoriality of EU Economic Law, European Union and its Neighbours in a Globalized World 4, https://doi.org/10.1007/978-3-030-82291-0_13

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the standards of the international economic order, which have been developed since the end of World War II and, notably, after the founding of the WTO.3 Obviously, power politics have begun to play an ever-increasing role in international economic law during the last years.4 Although the attempt to extend unilateral regulatory concepts to the international sphere is not an entirely new phenomenon,5 it nevertheless seems to have gained relevance in a world that is more and more interconnected and where rules and regulations are continuously becoming more complex and sophisticated. This holds true for many areas of international economic law and the endeavours of the European Union and its partners to include complex regulatory issues and ways of cooperation in the recent free trade agreements are significant examples of this trend.6 This article wishes to highlight and examine the EU strategy in the field of energy investment law. It is a field of reference where different aspects of and reasons for EU regulatory interest come together. They are, on the one hand, matters of modern EU investment policy, often with a focus on climate protection, and, on the other hand, necessary adjustments to the case law of the European Court of Justice (ECJ) as far as institutional issues are concerned. While questions of policy are usually open to negotiations and compromise solutions, this is not the same for established and fundamental choices of internal Union law. The focus will therefore lie on the question to what extent the EU is trying to externalise its internal legal requirements to the sphere of international energy investment law. The immediate occasion for the analysis is the current reform of the Energy Charter Treaty of 1994.7 For the negotiations, the EU has proposed several reform issues that are being discussed at the moment.8 The future of the Energy Charter Treaty therefore will be not only dependent on its ability to create an investment protection system that is fit for the challenges of a modern and sustainable energy transition. It will also have to consider the question whether it can be aligned to the basic requirements of the constitutional legal order of the EU which is a central party to the treaty.

3

Roberts et al. (2019), p. 655 are even arguing for a new economic order. See the conflict between the US and China in recent years. Further, cf. Evenett (2019), p. 535. 5 See, for environmental law issues, the disputes under the DSU of the WTO concerning legitimate interests and appropriate levels of protection under the TBT and SPS agreements. For an overview, Matsushita et al. (2015), pp. 452–462, 486–496. 6 See e.g. the detailed chapters on technical barriers to trade and, where applicable, regulatory cooperation in the recent free trade agreements of the EU with Canada (CETA, chapters 4, 21), Singapore (chapter 4), and Vietnam (chapter 5). 7 OJ 1998 L 69/26. See, for an overview, Coop (2014), p. 515. 8 Infra, Sect. 4. 4

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2 The Role of Investment Law in International Economic Law Investment law is an important branch of international economic law and plays a significant role in modern energy law.9 It addresses the problems that arise from shortcomings in national domestic judicial systems, which are not always able to adequately protect foreign investors. It is safe to assume that the need for international investment protection will remain an important issue in the process of the transition to a climate friendly energy system that will rely heavily on the contributions of private investors and companies. Hence, the modernisation of the investment protection regime of the Energy Charter Treaty seems highly desirable.

2.1

Protective Function and Conciliatory Role of Investment Law

The reasons why national investment protection often lacks in efficacy can be multifaceted: Apart from deficits in the independence and the impartiality of judges, inefficiencies in the administration of justice and excessive procedural delays may jeopardise an effective judicial protection of the investors.10 Although the international community has never reached an agreement on binding global rules concerning investment protection,11 the second half of the twentieth century saw the development of a multitude of bilateral investment treaties (BITs).12 They have set more or less similar substantive legal standards for investment protection as e.g. the prohibition of direct or indirect expropriation without any compensation or the minimum standard of protection that is contained in the principle of fair and equitable treatment of foreign investors.13 One of the main achievements is the option of an investor-state dispute settlement (ISDS) which most investment treaties set as an alternative to a mere state-state dispute settlement. It greatly increases the opportunities of judicial review for the investor and thus represents an element of effective legal protection. At the same time, it contributes to reducing direct political conflicts between the home state of the investor and the state which is the target of the investment and the defendant in the 9

See the recent statistics: Cases under the Energy Charter Treaty as of 9 October 2020 (https://www. energycharter.org/fileadmin/DocumentsMedia/News/20201009_Statistics_of_ECT_Cases_9_ October.pdf). 10 See, in this context, Collins (2017), p. 217; Sattorova (2012), p. 223. 11 An attempt of the OECD at the end of the last century to bring into force a Multilateral Agreement on Investment (MAI) failed because of the diversity of views and interests concerning foreign direct investment that could not be reconciled. See Sornarajah (2017), pp. 304–309. 12 For an overview, see Collins (2017), pp. 34–64. 13 See, in more detail, Vasciannie (1999), p. 99. For the energy sector, Schreuer (2008), p. 63.

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asserted infringement of investor rights.14 The dispute settlement, and notably the ISDS, is therefore an element of international law that tries to bring conflicts down to a more rational and legal level of discussion. It thereby reduces the chances of unilateral and possibly extraterritorial enforcement actions of the home state in those cases in which it feels the necessity to protect its subject against the host state as the alleged perpetrator.

2.2

Shortcomings of the Traditional ISDS and Modern Developments

However, the ISDS obviously crosses the borderline of national sovereignty since it reduces the freedom of the host state to pursue its policies by making it possible for the individual investor to bring claims for damages. That does not infringe the sovereignty of the host state in legal terms as the jurisdiction of the arbitral tribunal is rooted in an international treaty the state itself has agreed to. The damage awards, however, tend to be rather deterring, and in more recent times, doubts have arisen as to the legitimacy of ISDS tribunals that are mostly assembled ad hoc and are not integrated into the structure of a national, rule of law based court system.15 It is therefore not astonishing that some modern investment treaties have been searching for alternatives in the settlement of investment disputes. Two basic lines can be distinguished. In some cases, the investment treaty and its parties dispense entirely with the option of private claims and thus with the ISDS as a model of investment dispute settlement. An example—albeit not with a particular focus on energy issues—is the modern development in the context of Mercosur.16 Furthermore, most recently, Canada opted out of the modified investment protection regime and its ISDS, which the new USMCA, the successor of NAFTA, has created.17 This rather radical approach of renouncing an ISDS is not particularly convincing. It reduces the effectiveness of the legal protection of investors usually without providing for an adequate replacement. If a settlement of disputes is only possible at

Cf. the situation before the conclusion of the BITs: see Collins (2017), p. 11. Academic writing on these questions is numerous. See, for an overview, Alvarez (2016), p. 1. A convincing summary of the relevant arguments can be found in the Opinion of Advocate General Bot of 29 January 2019, Opinion 1/17 (CETA), ECLI:EU:C:2019:72, para. 15. 16 The “Protocolo de cooperación y facilitación de inversiones intra-Mercosur” of Buenos Aires, of 7 April 2017, in force since 31 July 2019, focuses on the domestic jurisdiction of the host state (article 4) and on mediation (article 23). ISDS has been excluded for the exclusive benefit of a statestate dispute settlement (article 24 para. 4). 17 Chapter 14 of the Agreement between the United States of America, the United Mexican States, and Canada, https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canadaagreement/agreement-between. An exception applies to legacy investment claims and pending claims under NAFTA for a transition period (Annex 14-c USMCA). 14 15

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the state level, the example of the current situation of the DSB of the WTO18 shows quite clearly what kind of problems an institutionalised system might undergo by being highly dependent on the good will of the Member States. Moreover, reducing the potential claimants by excluding individual investors will result in lifting the dispute from the legal sphere to a more political (and thus less rational) level. By suspending the possibility of a rule-based ISDS, investment protection may shift from a consensualist, treaty-based approach towards a unilateral handling of the case which might lead to real problems of extraterritoriality if the home state tries to find ways of enforcing its own understanding of legal protection for the benefit of the investor. The second approach is the one the EU is pursuing in its modern investment treaties. It tries to replace the ad hoc investment tribunals with an investment court system accounting for more judicial independence of the judges and for a more coherent and foreseeable case law.19 The exact composition of this multilateral investment court (MIC) or investment court system (ICS) is dependent on the relevant treaty since there are currently no internationally approved general standards.

3 The Primary Law Framework of EU Investment Protection Some standards, however, are rooted in EU primary law making them a potential field for the extraterritorial impact of EU law on international investment law and hence also for the specific case of the Energy Charter Treaty.

3.1

The Question of Competences: Investment Treaties as Mixed Agreements

Under European Union law, investment protection treaties with third countries usually have to be concluded as mixed treaties according to the case law of the European Court of Justice. That means that both the EU and the Member States will have to ratify the treaties since they relate to the field of external competences of both of them. In its opinion on the EU-Singapore FTA,20 the ECJ has clearly stated that investment protection by international treaties including a system of dispute settlement is not entirely covered by the EU competence under article 207 para. 1 TFEU See, e.g., Bahri (2019), p. 293; Pauwelyn (2019), p. 297. See, in more detail, infra at Sects. 3.2.3 and 4.3. 20 ECJ (Full Court), 16 May 2017, Opinion 2/15 (EUSFTA), ECLI:EU:C:2017:376; case notes i.a. by Hervé (2018), p. 693; Dony (2017), p. 525; Hainbach (2018), p. 199; Simon (2017), p. 6. 18 19

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which only relates to foreign direct investment. It is clear from the wording of article 3 para. 1 (e) TFEU that, with a view to this kind of investment, Member States do not dispose of any external competence, but that it is exclusively for the Union to conclude international treaties in this field.21 Other forms of investments, especially such as portfolio investments as well as the establishment of investment arbitration tribunals and their procedural aspects, however, remain within the sphere of the shared competences of the Member States according to article 4 para. 1, 2 (a) TFEU.22 As no explicit external EU competence is available for these aspects, the only possibility to transfer the entire field of investment protection into the realm of EU competence would be an internal harmonisation of the field. According to the ERTA case law of the ECJ23 as codified by article 3 para. 2 (3rd alternative) and 216 para. 1 (4th alternative) TFEU, this would entail an external competence so as to prohibit negative repercussions on secondary law. Such secondary law harmonisation, however, still does not exist although Union law provides for investment guarantees by way of its internal market law, notably the freedom of establishment and the free movement of capital, as well as of the fundamental rights such as the protection of property under article 17 CFR.24 Since an all-encompassing external EU competence is not indispensable either in order to make full use of the Union’s internal competences (article 3 para. 2, 2nd alternative TFEU), the result will be mixity as the standard of investment agreements. The fact that the primary law framework requires the Union and the Member States to act together in drafting and concluding investment treaties with third countries necessitates a considerable degree of willingness to find compromise solutions before coming to the negotiations with the third country. Thus, the Union strategy and standards of investment protection law that may be designed to influence the partner and the international sphere in general can find themselves under a constant challenge by individual Member States. Although the broad lines of EU investment policy do not seem to be particularly controversial at the moment, and the example of the negotiations with the United Kingdom in the process of “Brexit” has shown the ability of the Member States to unite behind a common negotiating line, a certain danger subsists. In the process of concluding CETA, the specific constitutional status of Belgium’s regions complicated the Union’s position and even caused some delay.25 It thus seems desirable in the longer run to adjust the distribution of competences and make investment law an area for exclusive action on the part of the EU. 21

ECJ (Full Court), 16 May 2017, Opinion 2/15 (EUSFTA), ECLI:EU:C:2017:376, paras. 82, 87. ECJ (Full Court), 16 May 2017, Opinion 2/15 (EUSFTA), ECLI:EU:C:2017:376, paras. 83, 227, 243, 293. 23 ECJ, 31 March 1971, Case 22/70 (Commission v Council), ECLI:EU:C:1971:32. 24 Cf. ECJ, 15 April 2021, Joined Cases C-798/18 and C-799/18 (Federazione nazionale delle imprese elettrotecniche ed elettroniche (Anie) and Others), ECLI:EU:C:2021:280; Communication from the Commission to the European Parliament and the Council “Protection of intra-EU investment”, COM(2018) 547 final of 19 July 2018. 25 See, for more details, Couveinhes Matsumoto (2017), p. 69; Kleimann and Kübek (2018), p. 13. 22

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Constitutional Requirements of EU Law

Apart from these questions of competence, substantive conditions in EU primary law set the framework for any conclusion of an investment treaty by the Union and the Member States. The recent case law of the European Court of Justice in the Achmea case26 and in its opinion on CETA27 has developed three main principle-based requirements that are anchored in the EU constitutional order. They cannot be changed by an international agreement of the Union, which is always inferior to the European treaties.28 Any international treaty, therefore, has to abide by these constitutional requirements. Since they partly contain institutional guidelines and make certain legal standards compulsory, they might have an impact on the third countries that are parties to the treaty as well.

3.2.1

The Principle of Autonomy of EU Law

The first requirement stems from the principle of EU law autonomy, which is related to its effectiveness and unity. The Court of Justice held in Achmea that this constitutional principle of EU law presupposes its unchallenged and permanent authority over the interpretation of EU law.29 According to article 19 para. 1 TEU, in the judicial system of the EU, the ECJ must be the entity of last resort for deciding questions of EU law. Both articles 267 and 344 TFEU safeguard this authority. As the duty to refer questions to the ECJ under article 267 para. 3 TFEU is not applicable to arbitral tribunals, the ECJ held that they cannot be competent for interpreting EU law at all.30 Therefore, the Court of Justice found the Member States, which had agreed on the ISDS in the relevant BIT, in breach of the principle of EU law autonomy. At the same time, they violated their duty of sincere cooperation under article 4 para. 3 TEU and especially the obligation of mutual trust

26 ECJ (Grand Chamber), 6 March 2018, Case C-284/16 (Slovak Republic v Achmea), ECLI:EU: C:2018:158; case notes i.a. by Arp (2018), p. 466; Cazala (2018), p. 597; Classen (2018), p. 361; Contartese and Andenas (2019), p. 157; Fumagalli (2018), p. 896; Gaillard (2018), p. 616; Gundel (2018a), p. 124; Gundel (2018b), p. 727. 27 ECJ (Full Court), 30 April 2019, Opinion 1/17 (CETA), ECLI:EU:C:2019:341; notes i.a. by Berramdane (2019), p. 189; Gundel (2019), p. 181; Maubernard (2019), p. 573; Monjal (2019), p. 11; Riffel (2019), p. 503; Simon (2019), p. 13. 28 Cf. article 218 para. 11 TFEU; ECJ (Grand Chamber), 26 July 2017, Opinion 1/15 (EU-Canada PNR Agreement), EU:C:2017:592, para. 67. 29 ECJ (Grand Chamber), 6 March 2018, Case C-284/16 (Slovak Republic v Achmea), ECLI:EU: C:2018:158, paras. 33–37. This line of reasoning can already be found in the much-criticised opinion on the accession to the ECHR; ECJ (Full Court), 18 December 2014, Opinion 2/13 (ECHR), ECLI:EU:C:2014:2454, paras. 174ff. See also Jacqué (2014), p. 823; Spaventa (2015), p. 35; De Witte and Imamović (2015), p. 683. 30 ECJ (Grand Chamber), 6 March 2018, Case C-284/16 (Slovak Republic v Achmea), ECLI:EU: C:2018:158, paras. 45–49.

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vis-à-vis their respective judicial systems by creating a parallel regime of alternative jurisdiction which cannot be sufficiently integrated in the EU legal order.31 In its CETA opinion, however, the ECJ made clear that adhering to a dispute settlement system with third countries does not entail the exact same difficulties. The principle of mutual trust in the relevant judicial system obviously does not apply where third countries are concerned.32 The ECJ made clear that an ISDS does not necessarily infringe the principle of the autonomy of EU law. If, according to the treaty texts, the arbitral tribunals are not in a position to interpret EU law, their authority to settle disputes remains permissible at the least in relation to third countries. Nevertheless, the indispensable condition remains that the dispute settlement body cannot interpret Union law in a way that would bind the Union’s institutions.33 It must be possible for the ECJ to exercise its competence of last resort for the interpretation of EU law.

3.2.2

Regulatory Autonomy of the EU and the Member States

However, the Court of Justice established some additional prerequisites that not only CETA, but all the investment treaties will have to meet. Since its approach is rather principled and without any sufficiently precise guidelines, it is lacking in clarity as far as the exact scope of these conditions is concerned. The first main concern of the ECJ relates to the regulatory autonomy of the EU and its Member States as far as issues of public interest are concerned. According to the Court, international investment protection may not prevent a state from implementing legitimate policy decisions by e.g. awarding excessive sums in damages to investors whose expectations concerning their investment have not been met. It is necessary for the investment treaty to accept legitimate public interests as a counterbalance to the provisions on investment protection by e.g. listing them as grounds for justification or by textually describing the conditions for an infringement in a sufficiently precise manner.34 By way of example, the Court of Justice held that infringements such as “abusive treatment, manifest arbitrariness and targeted discrimination,”35 would in any event be a permissible standard of international investment protection. It is evident that this approach leaves but little room for the traditional minimum standard of “fair and equitable treatment”.

31 ECJ (Grand Chamber), 6 March 2018, Case C-284/16 (Slovak Republic v Achmea), ECLI:EU: C:2018:158, paras. 56–59. 32 ECJ (Full Court), 30 April 2019, Opinion 1/17 (CETA), ECLI:EU:C:2019:341, para. 129. 33 ECJ (Full Court), 30 April 2019, Opinion 1/17 (CETA), ECLI:EU:C:2019:341, paras. 130–135. 34 ECJ (Full Court), 30 April 2019, Opinion 1/17 (CETA), ECLI:EU:C:2019:341, paras. 151–160. 35 ECJ (Full Court), 30 April 2019, Opinion 1/17 (CETA), ECLI:EU:C:2019:341, para. 159.

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Procedural Requirements for the Dispute Settlement System

Regarding the dispute settlement system, the ECJ in its CETA opinion required a minimum standard for the arbitral bodies and their procedure, which has to be equivalent to the standards of article 47 CFR that binds the Union and the Member States when concluding a mixed international agreement.36 This entails safeguarding the independence and the impartiality of the tribunals as well as a sufficiently effective and equal accessibility for the dispute settlement system. The latter aspect involves costs for arbitral proceedings,37 which, under the current system, tend to be elevated. The independence and impartiality of the adjudicators,38 however, represent requirements that are indispensable in any judicial proceedings and, even today, the dispute settlement bodies set high thresholds and impose severe sanctions up to the invalidity of an arbitral award if there are reasoned doubts concerning the persons of the adjudicators.39 Although it is not necessary for the dispute settlement system to be institutionalised, as it is the case under the CETA between the EU, its Member States and Canada,40 such a condition probably helps to fulfil the ECJ’s requirements in an easier and more consistent manner than under the premises of the traditional ISDS with its ad hoc arbitral tribunals.

36

ECJ (Full Court), 30 April 2019, Opinion 1/17 (CETA), ECLI:EU:C:2019:341, para. 190. ECJ (Full Court), 30 April 2019, Opinion 1/17 (CETA), ECLI:EU:C:2019:341, paras. 201, 205–222. 38 ECJ (Full Court), 30 April 2019, Opinion 1/17 (CETA), ECLI:EU:C:2019:341, paras. 202–204, 223–244. 39 See e.g. Eiser v. Spain, Decision on the Kingdom of Spain’s Application for Annulment, 11.6.2020, ICSID Case No. ARB/13/36. The ad hoc Annulment Committee under the ICSID Convention considered the tribunal not to be properly constituted because of an undisclosed relationship of an arbitrator with one party’s damages experts. It therefore assumed a serious departure from a fundamental rule of procedure according to article 52 para. 1 ICSID Convention. 40 Articles 8.27–8.29 CETA. 37

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4 The EU Negotiating Position for the Reform of the Energy Charter Treaty Some41 of the EU negotiating positions42 in the reform process of the Energy Charter Treaty that started in 201943 after the decision of the Energy Charter Conference in 201744 can be traced back to the internal EU law principles as set out in the case law of the European Court of Justice. They may therefore be a matter of extraterritorial extension of EU legal principles in the larger sense. As far as the EU and the Member States45 are concerned, there generally seems to be a common political ground concerning the negotiations of investment protection in the reform of the Energy Charter Treaty.46

41

The additional text proposals of the European Commission of February 2021 (https://trade.ec. europa.eu/doclib/docs/2021/february/tradoc_159436.pdf) rather concern the EU climate targets and hence aim to limit the scope of application of the ECT relating to investments in fossil fuels. 42 European Commission, Recommendation for a Council Decision authorising the entering into negotiations on the modernisation of the Energy Charter Treaty, COM(2019) 231 final of 14 May 2019; Council of the EU, Negotiating Directives for the Modernisation of the Energy Charter Treaty—Adoption, Doc. 10745/19 ADD 1 of 2 July 2019; European Commission, EU text proposal for the modernisation of the Energy Charter Treaty (ECT) of 27.5.2020 (https://trade.ec.europa.eu/ doclib/docs/2020/may/tradoc_158754.pdf). 43 See Decisions of the Energy Charter Conference “Modernisation of the Energy Charter Treaty”, Doc. CCDEC 2018 18 STR of 27 November 2018 with a list of reform issues, “Policy Options for Modernisation of the ECT”, Doc. CCDEC 2019 08 STR of 6 October 2019, and “Modernisation of the Energy Charter Treaty: Mandate, Procedural Issues and Timeline for Negotiations”, CCDEC 2019 10 STR of 6 November 2019 with a time table. 44 Ashgabat Energy Charter Declaration of 29 November 2017. 45 Only Italy ended its membership of the ECT in 2016. That does not compromise the EU part of the competence though. 46 Some disagreement may subsist as to the problem of intra-EU disputes under the ECT. See the Declaration of the Representatives of the Governments of the Member States, of 15 January 2019, on the Legal Consequences of the Judgment of the Court of Justice in Achmea and on Investment Protection Within the European Union, signed by 22 Member States, the dissenting Declaration of the Representatives of the Governments of the Member States, of 16 January 2019, on the Legal Consequences of the Judgment of the Court of Justice in Achmea and on Investment Protection Within the European Union, signed by another 5 Member States, and the Declaration of the Representative of the Government of Hungary, of 16 January 2019, on the Legal Consequences of the Judgment of the Court of Justice in Achmea and on Investment Protection Within the European Union. Most recently, the Belgian government has requested an opinion pursuant to Article 218(11) TFEU on the compatibility of the dispute settlement system in the draft modernised Energy Charter Treaty with Article 19 TEU and Article 344 TFEU (Opinion 1/20).

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The Problem of Intra-EU Disputes and the Principle of EU Law Autonomy

The core problem of intra-EU disputes under the ECT is still a controversial issue in the legal and political debate of the EU.47 Under the current version of the ECT, the arbitral tribunals usually hold that there is nothing in the wording of the treaty that would prevent them from exercising their jurisdiction.48 Since the actual ECT does not contain a disconnection clause for disputes between EU investors and EU Member States, this legal reasoning is convincing. EU law, however, requires the arbitral tribunals to restrict the legal basis of their decisions under article 26 ECT to the treaty itself as well as to international law in a narrow sense and to refrain from interpreting and applying EU law.49 That is the consequence of the ECJ’s reasoning in Achmea, which can at least be partly transferred to intra-EU disputes under the multilateral ECT. Contrary to the intra-EU BITs, however, the ECT, being a multilateral treaty with a mixed membership of the EU and the Member States, cannot be considered invalid for infringement of the principle of EU law autonomy. The principle of mutual trust that the ECJ emphasised when condemning intraEU BITs is not applicable for third country relations,50 and a core purpose of the treaty lies in improving the situation of foreign investors in countries that do not share the principles of the European economic order.51 In concluding a mixed treaty, which the EU also supports as a party, the EU Member States have not breached their duty of sincere cooperation under article 4 para. 3 TEU.52 A convincing and legally sound solution for excluding intra-EU disputes under the ECT would therefore be the inclusion of a disconnection clause in the treaty. This would mean a transposition of internal EU legal principles into the international sphere. It can, however, hardly be seen as a truly extraterritorial issue since it does not interfere with the legal positions or interests of the third country members of the ECT. The current proposal of the Commission, however, confines itself to a solution similar to that in CETA, which excludes EU law and its interpretation from the sources of the applicable law

47

The Agreement for the termination of bilateral investment treaties between the EU Member States of 5 May 2020, OJ 2020 L 169/1, does not concern the ECT, but leaves the issue open for further discussion; see the 10th recital of the agreement. Until now, it has not been signed by Finland, Ireland, Austria and Sweden. For more detail, cf. Germelmann (2020), pp. 391–401. 48 See, with a particularly decided reasoning, Vattenfall v. Germany, Decision on the Achmea Issue, 31.8.2018, ICSID Case No. ARB/12/12, paras. 108ff.; Eskosol S.p.A. in liquidazione v. Italy, Decision on Termination Request and Intra-EU Objection, 7.5.2019, ICSID Case No. ARB/15/50, paras. 114ff. 49 See, in more detail, Germelmann (2018), p. 235. 50 ECJ (Full Court), 30 April 2019, Opinion 1/17 (CETA), ECLI:EU:C:2019:341, para. 129. See, however, also the dissenting view of AG Szpunar, 3 March 2021, Case C-741/19, Republic of Moldova v Komstroy. 51 See Salacuse (1996), pp. 328ff. 52 Cf. Gundel (2018b), p. 728.

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in investment arbitration.53 A specific exception shall furthermore bring the compensation regime in line with EU state aid law.54

4.2

Regulatory Freedom and Investment Protection

As far as the regulatory autonomy is concerned, the EU proposal wishes to include a new article into the text of the ECT chapter on investment.55 The article puts forward an explicit confirmation of the states’ “right to regulate” in order to pursue “legitimate policy objectives”. Examples are, among others, environmental protection and, above all, the fight against climate change, as well as public health protection and other social issues, and finally the “promotion and protection of cultural diversity” (para. 1). Apart from these general issues, the article tries to address in particular the ongoing disputes about the phasing out of state subsidies for renewable energies (para. 2). It intends to limit the damages for the breach of financial expectations that investors have often claimed with success before the arbitral tribunals when a host state had suddenly reduced its support for existing renewable energy plants and thus had made the investment less profitable. In line with the case law of several arbitral tribunals,56 the right to reparation now shall require a specific commitment by the host state.57 An amendment to the core provision on investment protection in article 10 ECT is meant to clarify the concrete duties of the states in relation to foreign investment. According to the proposal, the fair and equitable treatment standard should be described having regard to specified actions of the host state such as e.g. a “fundamental breach of due process”, “targeted discrimination” or the frustration of legitimate expectations on the basis of “specific representations”.58 Similarly, the proposal attempts to render the provision on expropriation in article 13 ECT, which 53

EU text proposal for the modernisation of the Energy Charter Treaty (ECT), article 26 para. 6 with clarifying footnote: “For greater certainty, the domestic law of a Contracting Party shall not be part of the applicable law. Where a tribunal is required to ascertain the meaning of a provision of the domestic law of a Contracting Party as a matter of fact, it shall follow the prevailing interpretation of that provision given by the courts or authorities of that Contracting Party and any meaning given to the relevant domestic law of a Contracting Party by the tribunal shall not be binding upon the courts or authorities of that Contracting Party. A tribunal shall not have jurisdiction to determine the legality of a measure, alleged to constitute a breach of the obligations under Part III of this Treaty, under the domestic law of a Contracting Party.” 54 EU text proposal for the modernisation of the Energy Charter Treaty (ECT), p. 5, new article para. 4. 55 EU text proposal for the modernisation of the Energy Charter Treaty (ECT), p. 4. 56 E.g. Blusun e.a. v. Italy, Award, 27.12.2016, ICSID Case No. ARB/14/3, paras. 319, 371ff.; Charanne v. España, Laudo final, 21.1.2016, SCC Arbitraje No.: 062/2012, paras. 515ff. 57 See also EU text proposal for the modernisation of the Energy Charter Treaty (ECT), article 10 para. 1(ii), 12. 58 EU text proposal for the modernisation of the Energy Charter Treaty (ECT), article 10 para. 1.

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plays a significant role in investment arbitration as well, more accessible by adding substantial clarifications as to its contents and scope.59 These proposals made by the EU respond to the general guidelines on regulatory freedom given by the CETA opinion of the ECJ.60 At the same time and more specifically, they address the current problem of legitimate expectations in energy subsidies law. Both elements do not necessarily appear to relate to a question of extraterritoriality or of imposing EU standards on third countries though. The general idea behind them is, on the one hand, the preservation of regulatory competences for the ECT Member States. This is in line with the current discussion and practise trends in international investment law.61 On the other hand, by inserting more precise and concrete obligations for host states of foreign investment, the new rules wish to limit the discretion of the arbitral tribunals. The EU approach therefore seems more like a general restructuring of the main purposes and the core ideas of the treaty text in order to make it more easily applicable in cases of disputes. This perspective, however, is bound to change when the textually reinforced right to regulate connects with issues that shift the focus from investment protection as the main goal of the treaty towards conflicting policy goals that are on a similar footing and claim a comparable degree of global acceptance. Besides the protection of investment, the EU proposal contains new articles on a broad variety of questions that are currently under discussion on the international legal level such as sustainable development, protection against climate change and labour law standards.62 This fits in with the general debate on how to reconcile environmental and human rights aspects with economic and in particular investment law.63 Although the EU proposal mainly takes into account values of quasi-universal international conventions like the UNFCCC, the Paris Agreement or the ILO convention, their highlighting represents a political priority,64 which, in the end, can lead to an encroachment of EU positions on third countries. Besides transparency and impact assessment requirements, the current proposal asks for an effective implementation of these international treaties and a facilitation of trade and investment in these areas.65 Nevertheless and in spite of advocating for a state-state dispute settlement in order to clarify these extra-economic policy issues in a new article 28A, the proposal

59

EU text proposal for the modernisation of the Energy Charter Treaty (ECT), article 13, annex X. Supra, Sect. 3.2.2. 61 See e.g. Coop and Seif (2018), p. 221; Classen (2014), p. 611; Rajput (2018). 62 EU text proposal for the modernisation of the Energy Charter Treaty (ECT), pp. 10–14. 63 See, in this context, Sornarajah (2017), pp. 267ff. Moreover, Council of Europe, Parliamentary Assembly, Resolution 2151 (2017) “Human rights compatibility of investor-State arbitration in international investment protection agreements”; UN Human Rights Council, Resolution A/HRC/ RES/17/4 “Guiding Principles on Business and Human Rights: Implementing the United Nations ‘Protect, Respect and Remedy’ Framework”, UN Doc. A/HRC/17/31. 64 See also the additional text proposals of the European Commission of February 2021 (https:// trade.ec.europa.eu/doclib/docs/2021/february/tradoc_159436.pdf) concerning the EU climate targets. 65 EU text proposal for the modernisation of the Energy Charter Treaty (ECT), pp. 11–12. 60

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appears more as a first step in the discussion than as an aggressive externalisation of internal EU policy goals.

4.3

The Multilateral Investment Court

An EU approach that marks an institutional innovation is the proposal concerning the standing multilateral investment court. The EU has been successful in including such an institution in investment treaties with other countries that, in different situations, did not resort to this instrument.66 The idea behind an institutionalised dispute settlement system is to increase its legitimacy by securing independent and impartial judges, an appeal system and a higher degree of transparency and predictability of its decisions.67 The EU approach is set to follow two steps, the first being an Investment Court System (ICS) and the second, in the longer run, a permanent Multilateral Investment Court. According to the EU proposal for the reform of the ECT, a multilateral investment court shall be part of the options of the ISDS under the treaty. To that end, it inserts into article 26 ECT a new option dedicated to this kind of dispute settlement and a further provision encouraging the Member States to take part in such a multilateral institution.68 On top of that, the EU proposal contains several new provisions on procedural issues that are not strictly speaking a part of the investment court system, but mark the attempt to regulate in more detail the procedural law of the arbitration tribunals. The rules concern i.a. an option to strike out frivolous claims, the question of the costs of the arbitration, the application of the UNCITRAL Transparency Rules, intervention by third parties, and certain restrictions on the valuation of damages.69 This new approach marks the EU’s attempt to design the procedural law of the ECT dispute settlement system in a more text-based manner and to restrict the power of the arbitral tribunals, which will culminate in their replacement by a multilateral investment court. This proposal is in line with the principles the ECJ set out in its

See, e.g., Canada with Chapter 8 CETA versus Chapter 14 USMCA where Canada does not take part in the ISDS of the treaty. Cf. also, articles 3.9-3.12 of the EU-Singapore Investment Protection Agreement (IPA), which is currently in the process of ratification. 67 See, in more detail, e.g., UNCITRAL Working Group III (Investor-State Dispute Settlement Reform), Thirty-eighth session (resumed) (20–24 January 2020), Possible reform of investor-State dispute settlement (ISDS)—Appellate and multilateral court mechanisms: Note by the Secretariat, UN Doc. A/CN.9/WG.III/WP.185; Thirty-ninth session (30 March–3 April 2020), Possible reform of investor-State dispute settlement (ISDS)—Multilateral instrument on ISDS reform: Note by the Secretariat, UN Doc. A/CN.9/WG.III/WP.194. Further Bungenberg and Reinisch (2020); Sardinha (2017), p. 625. 68 EU text proposal for the modernisation of the Energy Charter Treaty (ECT), article 26 para. 3, 4 (d) and the following new article. 69 EU text proposal for the modernisation of the Energy Charter Treaty (ECT), pp. 16–20. 66

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CETA opinion.70 Since EU primary law does not explicitly prescribe an institutionalised dispute settlement body, the multilateral investment court is, as a reasonable idea, included in the treaty as one option among others. Concretising the tasks and competences of the dispute settlement bodies, in contrast, does not necessarily hinder or devalue the arbitration system as a whole, which would be neither appropriate nor acceptable for many states that still prefer a less institutionalised dispute settlement mechanism. Even though the EU proposal tries to extend its own legal values to the sphere of international investment law, it does so by way of seeking a compromise solution between, on the one hand, EU law requirements stemming from fundamental rights (article 47 CFR) as well as from the rule of law and, on the other hand, the necessity of an effective investment protection in as many countries as possible. This seems to be a politically reasonable approach. Indeed, establishing EU law standards in the ECT system at the price of a significant decline in acceptance would seem to be a rather questionable solution.

5 Conclusions International investment law is a field which should not leave too much room for unilateral action and thus for an extraterritorial application of domestic standards in the narrow sense. It is dependent on international cooperation in order to maintain the proper functioning of economic exchange. This holds true not only for the instruments and mechanisms of investment protection, but also for the balance between a substantive level of protection and other policy choices that are currently being discussed under the category of regulatory freedom. EU primary law as interpreted by the ECJ in its CETA opinion leaves sufficient room for compromise solutions in the process of the negotiations for an ECT reform. Its ambiguities, which make it difficult to apply from the legal point of view, should be interpreted as a leeway for the EU negotiators to strike a proper and proportionate balance between an investor friendly, predictable regulatory environment and the freedom of the state parties to implement their legitimate policy choices. To that end, the fair and equitable treatment standard should not be abandoned or restricted too heavily so that the legitimate expectations of investors can still be fully protected. It therefore appears questionable to lay too high an emphasis on an exhaustive description of the elements of the incriminated action by the host state as the wording of the CETA opinion seems to imply.71 Nevertheless, the trend towards textual clarification, which appears to represent the current trend of drafting modern investment treaties,72 is, in principle, desirable since it strengthens the rule based and cooperative approach of international treaty-making. This, however, presupposes the ability to strike

Supra, Sect. 3.2.3. Cf. ECJ (Full Court), 30 April 2019, Opinion 1/17 (CETA), ECLI:EU:C:2019:341, para. 158. 72 See, e.g., similarly, articles 14.6, 14.8, Annex 14-B USMCA. 70 71

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compromise solutions and to abstain from too many unilateral red lines rooted in the internal law of one party. An undifferentiated recourse to the ECJ’s standards is not helpful as not all of them can define compulsory guidelines for negotiation. The same applies to the procedural clarifications which the EU proposes. They mostly stem from EU primary law and thus try to extend EU legal standards to the international sphere of the ECT. Apart from the project of the Multilateral Investment Court, which is not a compulsory element of EU primary law, the restrictions of the procedural powers of the arbitral tribunals and the judicial standards are rooted in article 47 CFR and the rule of law as a general principle of EU law. Here, the influence of internal EU law on the international sphere becomes even more perceptible.73 These standards will thus be difficult to overcome in the negotiations. Nevertheless, it should not be impossible to negotiate their details provided that the general level of protection is being upheld. An extensive and fixed internal jurisdictional checklist for the negotiations might therefore not appear appropriate.74 If, after all, an indirect “extraterritorial” impact of EU legal standards in the field of international investment law cannot be denied, it is at the same time conditional on sound compromise solutions providing for a rule based, international approach. This has long been the paradigm of EU external relations and it should still be its priority in international investment law.

References Alvarez GM (2016) A response to the criticism against ISDS by EFILA. JIA 33:1 Arp B (2018) Slowakische Republik (Slovak Republic) v. Achmea B.V. Am J Int Law 112:466 Bahri A (2019) ‘Appellate Body Held Hostage’: is judicial activism at fair trial? JWT 53:293 Berramdane A (2019) Quelques remarques à propos de l’Avis 1/17 de la CJUE. RDUE 189 Bungenberg M, Reinisch A (2020) From bilateral arbitral tribunals and investment courts to a multilateral investment court, 2nd edn. Springer, Berlin Cazala J (2018) L'incompatibilité avec le droit de l'Union européenne du système d'arbitrage investisseur-État contenu dans un traité bilatéral d'investissement intra-UE. RTDE 597 Cho S, Kurtz J (2018) Convergence and divergence in international economic law and politics. Eur J Int Law 29:169 Classen CD (2014) Die Unterwerfung demokratischer Hoheitsgewalt unter eine Schiedsgerichtsbarkeit. EuZW 611 Classen CD (2018) Autonomie des Unionsrechts als Festungsring? – Anmerkung zum Urteil des EuGH (GK) v. 6.3.2018, Rs. C-284/16 (Slowakische Republik/Achmea BV). EuR 361 Collins D (2017) An introduction to international investment law. Cambridge University Press, Cambridge

Cf. ECJ (Full Court), 30 April 2019, Opinion 1/17 (CETA), ECLI:EU:C:2019:341, para. 192. Neither does the threat to withdraw of the ECT completely; see, however, EP Doc. P-005555/ 2020: Answer given by Executive Vice-President Dombrovskis on behalf of the European Commission (2.12.2020). The challenges of a frictionless energy transition require a sound level of investment protection.

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Contartese C, Andenas M (2019) EU autonomy and investor-State dispute settlement under inter se agreements between EU Member States. Common Market Law Rev 56:157 Coop G (2014) 20 years of the Energy Charter Treaty. ICSID Rev 29:515 Coop G, Seif I (2018) ECT and States’ right to regulate. In: Scherer M (ed) International arbitration in the energy sector. Oxford University Press, Oxford, p 221 Couveinhes Matsumoto, F (2017) L'épopée de la Wallonie et la signature de l'AECG/CETA. RGDIP 69 De Witte B, Imamović Š (2015) Opinion 2/13 on accession to the ECHR: defending the EU legal order against a foreign human rights court. Eur Law Rev 683 Dony M (2017) L'avis 2/15 de la Cour de justice: un “jugement de Salomon”? RTDE 525 Evenett SJ (2019) The Smoot–Hawley fixation: putting the Sino-US trade war in contemporary and historical perspective. J Int Econ Law 22:535 Fumagalli L (2018) Meccanismi ISDS negli intra-EU BIT’s: la Corte di giustizia pone fine a un lungo dibattito. E ora? Riv dir int 896 Gaillard E (2018) L'affaire Achmea ou les conflits de logiques. RCDIP 616 Germelmann CF (2016) Perspektiven bilateraler und regionaler Freihandelsabkommen im Welthandelsrecht. EuZW 207 Germelmann CF (2018) Die Zukunft des Investitionsschutzes im europäischen Energierecht. RdE 229 Germelmann CF (2020) Der Investitionsschutz im Energie- und Klimaschutzrecht zwischen “European Green Deal” und Grenzen des Unionsprimärrechts. EuR 375 Ghérari H (2008) Le bilatéralisme conquérant ou le nouveau visage du commerce international. RGDIP 255 Gundel J (2018a) Anmerkung zu EuGH (Große Kammer), Urt. v. 6.3.2018 – C-284/16 (Slowakische Republik/Achmea BV). NVwZ 727 Gundel J (2018b) Investitionsschutz-Schiedsgerichtsbarkeit und Unionsrecht nach dem AchmeaUrteil des EuGH. EWS 124 Gundel J (2019) Das CETA-Gutachten des EuGH: Neue Grenzen des Unionsrechts für die Unterwerfung unter “fremde Richter”? EWS 181 Hainbach P (2018) The CJEU’s opinion 2/15 and the future of EU investment policy and law-making. LIEI 45:199 Hervé A (2018) L’avis 2/15 de la Cour de justice — et maintenant, que faire du partage des compétences entre l’Union et ses États ? CDE 693 Jacqué J-P (2014) CJUE - CEDH: 2-0. RTDE 823 Kleimann D, Kübek G (2018) The signing, provisional application, and conclusion of trade and investment agreements in the EU: the case of CETA and opinion 2/15. LIEI 45:13 Matsushita M, Schoenbaum TJ, Mavroidis PC, Hahn M (2015) The World Trade Organization, 3rd edn. Oxford University Press, Oxford Maubernard C (2019) L'avis 1/17 ou les contours de l'autonomie procédurale et substantielle de l'ordre juridique de l'Union. RevUE 573 Monjal P-Y (2019) L’Avis 1/17 de la Cour de justice et le système juridictionnel des investissements: le CETA comme Gold-standard trade pact. RDUE 11 Montanaro F, Violi F (2020) The remains of the day: the international economic order in the era of disintegration. J Int Econ Law 23:299 Pauwelyn J (2019) WTO dispute settlement post 2019: what to expect? J Int Econ Law 22:297 Rajput A (2018) Regulatory freedom and indirect expropriation in investment arbitration. Wolters Kluwer, Alphen aan den Rijn Riffel C (2019) The CETA opinion of the European Court of Justice and its implications – not that selfish after all. J Int Econ Law 22:503 Roberts A, Choer Moraes H, Ferguson V (2019) Toward a geoeconomic order in international trade and investment. J Int Econ Law 22:655

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Salacuse JW (1996) The Energy Charter Treaty and bilateral treaty regimes. In: Wälde TW (ed) The Energy Charter Treaty – an east-west gateway for investment and trade. Kluwer Law International, London, p 321 Sardinha E (2017) The new EU-led approach to investor-state arbitration: the investment tribunal system in the Comprehensive Economic Trade Agreement (CETA) and the EU–Vietnam Free Trade Agreement. ICSID Rev 32:625 Sattorova M (2012) Denial of justice disguised? Investment arbitration and the protection of foreign investors from judicial misconduct. Int Comp Law Q 61:223 Schreuer CH (2008) Fair and equitable treatment (FET): interactions with other standards. In: Coop G, Ribeiro C (eds) Investment protection and the Energy Charter Treaty. Huntington, New York, p 63 Simon D (2017) L'avis 2/15 sur l'accord de libre-échange entre l'Union et Singapour: un apport majeur pour les modalités de conclusion des accords ultérieurs “de nouvelle génération” (CETA, TAFTA, nouveau “partenariat” avec le Royaume-Uni), Europe 7/2017, 6 Simon D (2019) Accord UE/CETA: Compatibilité avec le droit primaire. Europe 6/2019, 13 Sornarajah M (2017) The international law on foreign investment, 4th edn. Cambridge University Press, Cambridge Spaventa E (2015) A very fearful court? The protection of fundamental rights in the European Union after opinion 2/13, MJ 35 Vasciannie S (1999) The fair and equitable treatment standard in international investment law and practice. British Yearb Int Law 70:99

Claas Friedrich Germelmann is Full Professor of Public Law and European Law, Managing Director of the Institute of International Law.

Part III

EU Consumer Law

Adjusting National Consumer Protection Legislation in Georgia, Moldova and Ukraine to EU Standards: Practices, Experience and Challenges Oksana Holovko-Havrysheva

Abstract After the signature and ratification of the Association Agreements (hereafter—AAs) the EU concluded with Georgia, Moldova and Ukraine, these countries are now implementing policies to approximate their domestic legislation to the respective EU rules, standards and procedures. All these AAs include provisions on establishing a free trade area between the EU and the associated countries. All AAs include also so-called approximation clauses, which contain a unilateral obligation of the associated countries to approximate their legislation to the EU acquis in different areas, including consumer protection. As it is a sensitive issue within the EU, which attracts particular attention from all stakeholders—the Member States, businesses and consumers within the internal market—consumer protection in a digitalized economy matters not only within the EU or any domestic legal order, but also extends out of the EU. Consumer protection in these associated countries seems to be an area where these approximation processes are slow. This contribution aims to analyse the approximation practices in Georgia, Moldova and Ukraine in the area of consumer protection and their impact on the establishment of free trade areas between the EU and the respective countries. Since the approximation obligations in the consumer protection area are of a selective nature and require the associated states to adjust their domestic legislation to particular EU directives, this contribution also tries to find the answer to the question, as to how EU consumer protection standards are being introduced into the legal systems of Georgia, Moldova and Ukraine.

O. Holovko-Havrysheva (*) Ivan Franko National University of Lviv, Lviv, Ukraine e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 N. Cunha Rodrigues (ed.), Extraterritoriality of EU Economic Law, European Union and its Neighbours in a Globalized World 4, https://doi.org/10.1007/978-3-030-82291-0_14

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1 Introduction The global economy is based on global consumption. In the modern world it has become clear that consumer policy is an inherent part of any society and the establishment of a sound, simple, transparent and feasible consumer protection system has become more and more important, since this is linked both to economic development and social wealth-being in any country worldwide. Digitalization and the pandemic caused by COVID-19 have affected consumer behaviour. As a recent KPMG study shows, a contemporary “new” consumer is financially constrained, digitally educated, selective in decision-making and ready to “. . .reset values in the world” (Consumers 2020). This new consumer profile will sharpen not only the behaviour of businesses and markets, but will also underline, even more than before, the need for new regulatory frameworks for national and international consumer protection policies in new realities. The need for a joint consumer protection agenda worldwide will become more evident. The EU, as a global actor and powerful economic development centre, is known for its consumer protection regime which it established to defend the legitimate rights and interests of European consumers. The EU rules and standards on consumer protection are become effective not only in the domestic legal orders of the EU member states; they also get “exported” outside of the EU borders, either by virtue of the conclusion of international agreements with provisions on cooperation in consumer protection issues or by using existing international cooperation fora and instruments. As Durovic points out, international agreements that contain provisions on the adjustment of the consumer legislation of third countries to the EU rules and standards make it evident that transplanting EU consumer protection rules and procedures beyond its border takes place with a different intensity depending on the aims the EU and its counterparts have set in removing non-tariff barriers in their trade relations (Durovic 2016). The EU approach to approximation is rooted in internal practices dealing with the elimination of inconsistent differences in the national legislation of EU member states. The EU-internal approximation discourse is marked with a clear emphasis on legislative approximation, whereas the regulatory approximation discourse seems to be addressed less, both in primary and secondary treaty provisions. Moreover, approximating laws has a status of a common policy (Ćemalović 2015, p. 245), where the procedural rules are placed separately from rules empowering the EU to take actions, which might lead to the coherent application of the EU law in the domestic legal orders of the member states. The EU requirements for the approximation of laws under Association Agreements between the EU and Georgia, Moldova and Ukraine (hereafter—AAs) are based upon the experiences gained by the EU and the EU member states in the course of the fulfilment of Art. 114 and 115 of the TFEU, which are aimed at eliminating the inconsistencies in national legislation of the EU member states in order to ensure the functioning of the internal market. EU approximation practices under Art. 114 and 115 TFEU are based upon strict rules that require the full

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transposition of the relevant EU law provisions into the national legal orders followed by the duty of countries to provide institutions and budgets able to apply the legislative framework and to establish an efficient system of law enforcement of the EU law within the domestic legal orders. This approximation “philosophy” has been employed by the EU while developing its relations with third countries for exporting the EU acquis on a contractual basis beyond its borders. Georgia, Moldova and Ukraine inherited their consumer protection regimes from Soviet times. After the conclusion and entering into force of their association agreements, these countries face the need to implement the relevant EU consumer protection legislation as a part of the agenda of adapting their legal systems to those of the EU through the gradual or full approximation of national legislation to the EU legal framework. Research questions: How Georgia, Moldova and Ukraine have approximated their domestic legislation in the area of consumer protection to EU standards and which challenges have these countries faced while implementing the EU consumer acquis?

2 Cooperation Between Georgia, Moldova, Ukraine and the EU in Consumer Protection Matters As it is based on the prioritization of trade-related legal approximation and the strict conditionality in linking the intensification of the bilateral cooperation of the EU with these countries to the efficiency of the AA implementations, the EU has significantly influenced the changes in various sectors and policies in Georgia, Moldova and Ukraine. Cooperation between the EU and Georgia, Moldova and Ukraine in the consumer protection area is aimed at two interconnected goals: a high level of consumer protection and compatibility of consumer protection systems with EU requirements, both requiring the adjustment of the regulatory framework of these countries regarding consumer matters to EU standards and rules (EU-Georgia AA 2014:1 Art. 345; EU-Moldova AA 2014:2 Art. 38; EU-Ukraine AA 2014:3 Art. 415). The EU consumer acquis and regulatory practices have become part of the domestic legal systems of these countries in a most obvious way—through the approximation clauses in the AAs, marking the contractual basis for the extraterritorial application

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In this publication the Association Agreement between the European Union and its Member States, of the one part, and Georgia, of the other part is referred to as EU-Georgia AA. 2 In this publication the Association Agreement between the European Union and its Member States, of the one part, and Moldova, of the other part is referred to as EU-Moldova AA. 3 In this publication the Association Agreement between the European Union and its Member States, of the one part, and Ukraine, of the other part EU is referred to as EU-Ukraine AA.

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of EU consumer protection standards in these countries. However, in an indirect manner, EU consumer protection rules and practices, such as e.g. return policies of the companies, handling the consumer claims, are applied extraterritorially very often as part of normal business life and are introduced by European businesses working in markets in Georgia, Moldova and Ukraine. Such situation leads to the application of the EU consumer protection standards within the business transaction regulation and contract law in the associated countries. Moreover, indirectly, the EU consumer acquis might be applied extraterritorially, if the domestic institutions, which deal with the implementation of the AAs, apply the relevant EU law, including the ECJ practice while directly transposing it to the domestic legal orders or establishing the practices of the AA and EU-conform interpretation of the domestic legislation. Having similar aims, the wording of the relevant AAs provisions seems to be slightly different as to directions regarding concrete cooperation s: while all three AAs defined as priorities for detailed cooperation promoting the exchange of information about consumer protection systems, supporting the development of independent consumers and raising the abilities of administrative personnel within public authorities and other consumer interest representatives, the EU-Georgia and EU-Moldova AAs have established as a key cooperation field approximation of consumer legislation for avoiding trade barriers(EU-Georgia AA 2014: Art.346 (a); EU-Moldova AA 2014: Art.39 (а)). At the same time the EU-Ukraine AA does not explicitly mention legislative approximation among the bilateral cooperation priorities, although it specifies cooperation on consumer information and the provision of expertise for improving the legislative and technical capacity of the Ukrainian authorities in the enforcement of consumer and market surveillance legislation as a field of mutual interest (EU-Ukraine AA 2014: Art. 416 (b), Art. 416 (c)). The annexes to the EU-Georgia, EU-Moldova and EU-Ukraine AA relevant treaty chapters on consumer protection contain an almost identical set of EU consumer acquis provisions dealing with product safety, marketing, contract law and unfair commercial terms, financial services, consumer credits, redress in consumer claims, enforcement and general cooperation in consumer protection matters with different implementation periods. Georgia has a 5-year implementation period in almost all cases with the exemption of product safety legislation, where the implementation period is for one year or extended to two years). Georgia also is obliged to implement Regulation (EC) No 2006/2004 of the European Parliament and of the Council of 27 October 2004 on cooperation between national authorities responsible for the enforcement of consumer protection laws (hereafter—Regulation 2006/2004) only partially, namely Article 3(c); Article 4(3) to 4(7); Article 13(3) and 13(4) of this Regulation are to be introduced into Georgian legal system within a 5-year limit. The Republic of Moldova has a 4-year implementation period for almost all cases with the exemption of the Directive of the European Parliament and of the Council of 3 December 2001 on general product safety, where the implementation period is two years; the Council Directive of 25 June 1987 on the approximation of the laws of the Member States concerning products which, appearing to be other than they are,

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endanger the health or safety of consumers, which has to be implemented in Moldova within three years and Directive 98/6/EC of the European Parliament and of the Council of 16 February 1998 on consumer protection in the indication of the prices of products offered to consumers which has to be implemented in Moldova within one year. Ukraine has a three-year period to introduce the EU consumer acquis, but for Regulation 2006/2004,4 like Georgia and Moldova, the implementation period is 5 years from the date the relevant AAs fully entered into force. The wording of the approximation clauses in all three AAs is slightly different: while Art. 347 of the EU-Georgia Association Agreement and Art. 40 of the EU-Moldova Association Agreement contain a clear obligation to approximate their domestic legislation on consumer protection to EU standards,5 Art. 417 of the EU-Ukraine Association Agreement contains the obligation for Ukraine to gradually approximate its legislation to the EU consumer acquis. Moreover, the EU-Ukraine Association Agreement includes a clause on mandatory regular dialogue between parties under Chapter 20 of Title V (Economic and Sector Co-operation) of this Agreement (EU-Ukraine AA 2014: Art. 418). Thus, the approximation of the consumer protection legislation of Georgia, Moldova and Ukraine to the EU consumer acquis is shaped by these AA clauses, which contain almost identical provisions as to the substance of the EU legislation to be transposed. However, the wording of the approximation clauses in the EU-Georgia, EU-Moldova and EU-Ukraine AA differs, leading to the need to analyse the scope of such approximation clauses under the AAs.

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Regulation (EC) No 2006/2004 of the European Parliament and of the Council of 27 October 2004 on cooperation between national authorities responsible for the enforcement of consumer protection laws establishes a cooperation framework for national consumer protection enforcement authorities within the internal market. In order to ensure smooth and effective cooperation under this regulation countries need to already implement the EU consumer acquis and establish the competent authorities to deal with its enforcement within the member state legal orders. In the case of Georgia, Moldova and Ukraine, the 5-years limit to transpose this Regulation stems logically from the assumption that these countries also need to introduce EU-aligned consumer protection standards in their domestic legal orders, so that the cooperation between the competent national authorities in enforcement matters starts based on harmonized legal rules. 5 Art. 347 of the EU-Georgia Association Agreement reads as follows: “Georgia will carry out approximation of its legislation to the EU acts and international instruments referred to in Annex XXIX to this Agreement in accordance with the provisions of that Annex.” Art. 40 of the EU-Moldova Association Agreement reads as follows: “The Republic of Moldova shall carry out approximation of its legislation to the EU acts and international instruments referred to in Annex IV to this Agreement according to the provisions of that Annex”.

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3 General Approximation Clauses in the EU-Georgia, EU-Moldova and EU-Ukraine Association Agreements: A Comparative Overview The EU-Georgia, EU-Moldova and EU-Ukraine AAs contain sets of provisions dealing with the approximation of the domestic legislation of these countries to EU legal standards, linking this approximation to the acquis communautaire. Academic legal literature mainly addresses the legislative approximation discourse (Van der Loo et al. 2014; Tyushka 2015; Wolczuk et al. 2017), whereas regulatory approximation remains relatively underresearched. The discussion on legislative and regulatory approximation is for the utmost importance for the consumer protection area. Obviously, the introduction of the EU consumer protection standards depends not only on the adoption of the respective legislation as such. It depends on wider changes in regulatory framework addressing consumer protection policies, institutions and administrative practices, which ensure effective enforcement of the EU-compatible consumer protection standards. This regulatory framework needs to be modernized alongside with the legislation, in order to make the enhanced EU-based consumer protection standards effective. Legislative approximation and regulatory approximation discourses are also found in the texts of the AAs, e.g. in the clauses defining the association aims: having a similar aim—the gradual integration to the EU Internal Market for all countries (EU-Georgia AA 2014: Art.2 (h); EU-Moldova AA 2014: Art.2 (g); EU-Ukraine AA 2014: Art.2 (d)), Georgia and Moldova see market access and regulatory approximation as the key means to achieve this goal, while Ukraine additionally establishes a more ambitious aim—to seek EU support for the transition to a market economy based upon progressive legislative approximation to EU law. As Petrov argues, such a formulation endeavours that Ukraine attains “the objective of soft regulatory approximation of Ukrainian legislation to the EU acquis with a wide scope of discretion for the Ukrainian authorities” (Petrov 2014, p. 2). However, while setting this ambitious goal, the EU-Ukraine Association Agreement is restrained as to approximation as a priority for bilateral cooperation,6 whereas the EU-Georgia and EU-Moldova AAs (EU-Georgia AA 2014: Art.2 (g); EU-Moldova AA 2014: Art.2 (f)) include the additional reference to the importance of such legislative approximation for the development of their economic potential. Institutional and procedural aspects of the approximation are also regulated differently by the AAs with Georgia, Moldova and Ukraine. The EU-Georgia and EU-Moldova AAs include quite extensive treaty-based regulations. Unlike to Georgia and Moldova the EU-Ukraine AA contains framework rules in a treaty-body. 6

Such a situation contrasts considerably with the actual expectations of the academic community, which sees the approximation as an undoubted priority for the bilateral cooperation agenda (Petrov 2014; Tyushka 2015), as well as for the current political situation, where the public authorities, including the Government of Ukraine and the Parliament of Ukraine consider the approximation agenda as an important part of its public policies and political life.

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The detailed regulation of procedural aspects is provided by separate annexes to the EU-Ukraine AA, namely the Annex XVII on the regulatory approximation procedures with appendixes addressing horizontal and sectoral approximation, rules on monitoring of the EU-Ukraine AA implementation and provisions regarding the enactment of the national legislation in compliance with the EU-Ukraine AA and EU acquis. In general terms, notwithstanding the fact that all the AAs include a general provision on the gradual approximation of their legislation to EU law and other internal standards, there is a lack of clarity as to the rules dealing with the regulatory approximation as an instrument for making the legislation of Georgia, Moldova and Ukraine. This leads also to the ambiguities as to the scope and content of the notions of the legislative and regulatory approximation, where the differences between these approximation types are blurred. An example provides the Annex XVII to the EU-Ukraine AA on the regulatory approximation procedures. Without defining the essence of the regulatory approximation, it clearly provides that the sectors covered by the regulatory approximation include financial services, telecommunications, postal and courier services and international maritime services. While the Annex XVII lays down basic rules for the regulatory approximation, it refers mainly to the legislative aspects of the approximation and provides guidance as to the legislative approximation: EU Regulations or Decisions “. . .shall as such be made part of the internal legal order of Ukraine” (Annex XVII 2014), while as regards approximating the national legislation to the EU acquis in the case of the transposition of EU directives, Ukrainian authorities have a choice of the forms and methods for the implementation of the EU acquis. All three AAs have similar provisions on the monitoring of the approximation containing the obligation of Georgia, Moldova and Ukraine to adapt not only necessary measures, including legislation, but also to ensure the enforcement and effectiveness of the measures taken. Similarly, the AAs provide for the right of the Association Council to periodically or upon request revise the annexes and association agreement contractual obligations in order to trace the evolution of EU law, international developments as well as the needs of contracting parties, thus reflecting the evolutionary nature of EU law and policies in their external actions and which underline the dynamic features of the approximation. The text of the EU-Moldova Association Agreement treaty contains requirements for the assessment of the approximation progress and the results of its monitoring, whereas in the case of Ukraine, such requirements are included in the special annex on regulatory approximation and in the case of Georgia these rules seem to be applied as part of customary practices. Of note is that all three AAs include similar repetitive clauses on the obligations of Georgia, Moldova and Ukraine to gradually adjust their domestic legal systems to the EU acquis, referring textually to the cases of legislative approximation (e.g. on customs, company law, accounting and auditing, transport, energy, consumer protection etc.) but very often legislative approximation is seen in the content of wider regulatory adjustments the relevant sector needs to ensure the compatibility of

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sectoral regulation with European standards as to the degree, efficiency and effectiveness of the approximation processes. Consumer protection is very often seen as a non-tariff trade barrier and has led to a lot of litigation under EU law; thus, approximation in this area is genuinely connected to cooperation under AAs chapters regulating trade and trade-related matters between Georgia, Moldova, Ukraine and the EU, especially the clauses dealing with technical barriers to trade. The EU-Georgia, the EU-Moldova and the EU-Ukraine AAs contain special regulations on the approximation aimed at eliminating technical barriers to trade. The scope of the obligations of Georgia, Moldova and Ukraine is identical and includes an obligation to refrain from unilateral amendments of national technical regulations and standardisation legislation, an obligation to introduce EU standards, an obligation to withdraw conflicting national legislation and regulations, an obligation to inform the EU about changes in domestic legislation on technical standardisation and regulation, an obligation to achieve and ensure an effective and transparent administrative system for the management of technical standardisation and regulation issues and an obligation to fulfil other conditions of European standardisation organizations (EU-Georgia AA 2014: 47; EU-Moldova AA 2014: Art. 173; EU-Ukraine AA 2014: Art. 56). These hard requirements serve as a prerequisite for Georgia, Moldova and Ukraine to conclude Agreements on Conformity Assessment and Acceptance of Industrial Products (henceforth—the ACAA) as separate protocols to the AAs, marking the opening of the EU internal market for industrial products originating from Georgia, Moldova and Ukraine on a freer and more competitive basis. At the same time, the consumer protection rules form an integral part of the functioning of the internal market and, through the product safety rules and public health protection conditions, are tightly connected with the rules on technical standards and regulations. Therefore, despite the AA texts seeming to limit approximation in consumer protection to legislative approximation, and taking into consideration the dynamic nature of the approximation, Georgia, Moldova and Ukraine might be offered two basic scenarios for approximation in consumer protection issues: the first, being based on general approximation clauses and the second, based upon approximation rules applicable to the area of technical standardisation and regulation issues. In the first case, when the general approximation clauses are applied to approximation in consumer protection, the focus in the process will mainly be shifted towards legislative approximation practices, very often lacking the regulatory approximation discourse, however, in the second case the approximation, being based on stricter rules, might provide more clear guidelines for the countries and ensure the compatibility of not only the legislation at stake but also the regulatory framework for consumer protection as such. In order to prove which scenario is followed in reality the approximation practices in Georgia, Moldova and Ukraine need to be analysed in detail.

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Approximation Practices in Georgia in Consumer Protection Matters

Relations between Georgia and the EU have had a complicated history, ranging from extensive contractual cooperation since the late 1990s to the unwillingness and unreadiness of the political elites of the country to develop a deep and comprehensive contractual cooperation framework with the EU immediately after the collapse of the USSR. The Rose Revolution in 2003, when the libertarian approach towards economic reforms was taken, and the security policy shift in 2008, when the Russian-Georgian war became a challenge for Georgia and European security largely contributed to the intensification of Georgia-EU relations. The early debates in Georgia on the future of relations with the EU, especially in late 2000 were dominated, as Wolczuk et al. state, by the resistance of Georgia to introduce the EU acquis into its domestic legal system (Wolczuk et al. 2017); the post-2008 cooperation agenda was dominated by security and human rights issues, sharpened by the fact that Georgian authorities tended in the bilateral relations with the EU to prioritize only their preferences in non-market-related issues, e.g. deregulation of economic activities, the fight against corruption, conflict resolution etc. and paid less attention to the DCFTA as a part of the AA. Moreover, during the AA negotiations, according to Wolczuk et al. “Georgia was the only EaP country which explicitly questioned the relevance of the AA as a framework for reform and its relevance for the developmental needs of the EaP countries” (Wolczuk et al. 2017, p. 25). Taking into consideration the fact that DCFTA provisions and legal approximation issues in Georgia had strong internal opposition, the EU linked the AA conclusion to the DCFTA and to the acquis approximation in such issues as competition, protection of intellectual property rights, elimination of technical barriers to trade and the approximation of sanitary and phytosanitary rules to EU standards. The EU-Georgia Association Agreement was signed on June 27, 2014 and entered into force on July 1, 2016. It included the DCFTA provisions, which had been long debated in the domestic political discourse as not always compatible as such with Georgian national interests. Internally the approximation mechanism to the EU acquis in Georgia is based on Art. 4 (5) of the Constitution of Georgia, which stipulates that generally Georgian legislation shall be compatible with the universally recognized principles and norms of international law as well as that international treaties take precedence over domestic normative acts if not contradictory to the Constitution and the Constitutional Agreement of Georgia (Constitution of Georgia 1995). Further on, Art. 47 (2) (е) of the Constitution of Georgia states that international treaties, which require changes to domestic legislation, need compulsory ratification by the Georgian Parliament. The Law “On Normative Acts” establishes an internal hierarchy of normative acts for the country, placing international agreements under the Constitution of Georgia, constitutional laws and the Constitutional Agreement between Georgia and the Apostle Autocephalous Orthodox Church of Georgia. This law also defines the requirements as to the structure, language, promulgation and entering

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into force of legal and normative acts in Georgia. Art. 7 (5) of the Law of Georgia “On Normative Acts” confirms the constitutional rule and stipulates that international treaties contradictory to the Constitution of Georgia, constitutional laws and the Constitutional Agreement between Georgia and the Apostle Autocephalous Orthodox Church of Georgia shall not have precedence over domestic legislation (Law of Georgia (1876-IIc): 2009). The Law of Georgia “On International Treaties” defines the treaty-making procedures and powers of Georgian public authorities (Law of Georgia (934): 1997). The most important article of this law for the approximation of Georgian legislation and regulatory practices to the EU acquis is Art. 6 (3), which states that provisions of international treaties duly ratified and properly published, which contain concrete rights and duties of the parties not requiring the adoption of internal normative clarification acts are directly in force in Georgia. Being a country with a Partnership and Cooperation Agreement (hereafter—the PCA) concluded in 1996, Georgia started to develop its approximation practices quite early: in 1997, the Georgian parliament adopted a resolution dealing with the harmonization of domestic legislation to the EU acquis and has had a mandatory EU-compatibility check for domestic legislation since 1998. This step was followed by more active involvement by the President of Georgia and the executive branch, when the National Strategy on the harmonization of Georgian legislation to EU law was adopted in 2001. The next remarkable step in the regulation of its approximation in Georgia was undertaken in 2004, when the National programme for the harmonization of Georgian legislation to EU law accompanied by a detailed implementation plan was adopted by the Georgian government. Since that time, the Georgian government has introduced the practice of annual implementation plans for undertaking approximation with concrete agendas, measures and timetables, as well the government creating the organizational framework for approximation issues resulting from its enactments. The ENP Action Plan for Georgia boosted the approximation discourse as well stressing the importance of the approximation of the Georgian legislation to the EU acquis for future relations and underlining the importance for approximation of increasing the effectiveness of domestic reforms in the country. Georgian approximation practices originate from the relevant mechanisms developed in the course of the PCA implementation, especially when institutional and normative aspects are considered. From the institutional perspective, the national approximation mechanism in Georgia is based on the active involvement of the Government in the approximation process; from the normative perspective, it consists predominantly of regulatory acts which often cannot be considered as legislative acts with the exception of the resolution of the Parliament of Georgia, however in the Georgian legal system they can still have normative value if based on Art. 7 (1) of the Law on Normative Acts (2009). As to their material scope, these regulatory acts often determine either general principles and rules for the approximation or include detailed concrete actions plans for the sectors concerned. Moreover, as Khutsishvil states, Georgian approximation practices are also shaped by the lack of unified understanding of the acquis communautaire in the Georgian legislation

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(Khutsishvil 2015), causing ambiguity as to the gradual approximation of the Georgian legislation to the EU law as well negatively impeding the approximation process. The AA negotiations, the AA conclusion and entering into force and the EU-Georgia Association Agenda for 2017–2020 speeded-up the approximation discourse in Georgia. The AA itself introduced the system of approximation clauses with the general approximation clause (Art.417 of the EU-Georgia AA), the special approximation clauses (or DCFTA approximation clauses dealing with sectoral approximation issues and accompanied by the special annexes, e.g. customs, technical barriers to trade, services and establishment, consumer protection, energy, public procurement, transport, competition etc.), and as Gabrichidze notes (Gabrichidze 2018, p. 57), the approximation-supportive clauses (Art. 271–276 of the EU-Georgia Association Agreement). Taking into consideration these general conclusions, it is assumed that the cooperation in consumer protection issues and the approximation practices in this field seem to follow the general pattern, however several sector-specific features are to be presented. As stated above, the AA provisions in the consumer protection matters include the obligation for Georgia to approximate its legislation to the EU consumer acquis as well as define priorities for bilateral cooperation in this field. The EU-Georgia Association Agenda for 2017–2020 (Association Agenda 2017–2020) stresses Georgian commitments to approximate national legislation predominantly in sectors regulating trade and trade-related matters, however in the area of consumer policy it contains rather vague formulations as to the priorities in this field, recalling the obligation of Georgia to gradually approximate its consumer protection legislation within the timelines and to support consumer protection in the country through the training of public officials and consumer representatives on the approximation with EU legislation and its implementation. In the Association Implementation Reports on Georgia (Association Implementation Report 2017; Association Implementation Report 2019; Report on the Implementation of the DCFTA 2019; Association Implementation Report 2020), approximation of consumer legislation to the relevant EU acquis is also not given proper attention, as well as in the national AA implementation plans the approximation of consumer protection legislation and policy concerning the EU rule occupies a rather limited place. A crucial low interest in consumer protection issues in Georgia also confirms the recent report of the European Parliament Research Service (Association Agreement between the EU and Georgia, EPRS Report 2020), where consumer protection is not even presented. First, of importance, is the acknowledgment that Georgia inherited its consumer protection legislation from the Soviet regime, based upon Soviet approaches towards the market and the consumer role in the economy being reliant upon centralgovernment controlled markets, prices, quality, without consumer involvement. The first consumer protection law, the Consumer Rights Protection Act (hereafter—the CRPA Georgia) was adopted after the dissolution of the Soviet Union in Georgia in 1996. In 2003, after the Rose Revolution, the government decided to liberalize the market by deregulating economic activities and cancelling control of

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businesses with the effect that the poorly functioning consumer protection regime in Georgia has almost been eliminated to the detriment of consumers. In 2012 Georgia adopted the Code on Safety and Free Movement of Products (hereafter—the CSFMP 2012), and at the same time repealed the CRPA 1996 as well as a number of other laws dealing with standardization, certification of goods and services, technical regulation and control of technical threats. Thus, a legislative gap in these areas has been created, which negatively impacted upon a weak consumer protection regime. Art. 2 of the СSFMP stipulates its application to matters of product safety, technical regulation and non-tariff trade barriers and also states that products produced according to the EU Commission requirements on product safety fulfil safety requirements as provided by this Code (Law of Georgia No. 114 2012: Art. 2 (3)). Therefore, even before Georgia undertook its obligation to approximate product safety legislation, it already had in 2012 directed its domestic legislation towards the respective EU standards. In 2016, the Georgian Parliament started discussions on the new CRPA drafted in 2015, which introduces EU consumer protection standards to the Georgian legal system (Gvelesiani 2017), which has not been completed at the time of writing. In 2018 the EU, within the TAIEX programme, sent a mission to Georgia with the aim of assisting the country in the development of the legal framework for consumer protection. The current consumer protection regime in Georgia is founded on the abovementioned Code of Safety and Free Movement of Products (2012), the Code on Food and Feed Safety (hereafter—the CFFS 2012) and, in an indirect way, on the Georgian legislation on competition, market surveillance, technical regulations and standards, sectoral legislation (e.g. banking, energy, telecommunications) which aim to protect consumers from abuses in relevant legal relations. Consumer rights in Georgia are not regulated by a separate CRPA and are spread through the entire relevant consumer-protection legislation, whereas the Constitution of Georgia provides, that consumer rights are protected by law. Furthermore, by the constitutional amendment of 2018 the Constitution guarantees to everyone the right to access the Internet and provides that the financial and institutional independence of national regulatory bodies for mass media, electronic communications and consumer protection also has to be guaranteed by laws (Constitution of Georgia 1996: Art.17).7 The obligation of the state to protect consumer rights by law is also provided at the constitutional level (Constitution of Georgia, 1996: Art.26 (4) redaction 2018). Under Georgian legislation the right to full, timely and reliable information, including protection against fraudulent and misleading information (CFFS 2012: Art. 10 (1); CS FMP 2012: Art.12) seems to be guaranteed in a concise and systematic manner, however such consumer rights as the right to repair, to return, to replace the products are not regulated by the special consumer protection

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An independent consumer protection agency does not exist in Georgia. At the same time, the Food Safety Agency and the Competition Protection Agency have already been set-up. Under the existing legal framework and practices the Competition Protection Agency of Georgia might be entitled to enforce consumer protection legislation. For more details on this point—Gvelesiani (2017).

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legislation, but rather fall under the Civil Code of Georgia, which in terms of approximation discourse contains only one clause on out-of-premises contracts (Civil Code of Georgia 1997: Art.336). The consumer rights to education and association do not seem to be regulated on a separate basis, as well as the right to redress in consumer matters not having a special legislative framework. The absence of a special consumer rights protection legislation and consumer rights protection agency leads to gaps in the consumer protection system of Georgia from institutional and normative perspectives and results in difficulties in their enforcement. The shortcomings in the implementation of the EU consumer acquis in Georgia are addressed by the Parliament, which for 2019–2020 set out the drawing up of a new CRPA and amendments to the Civil Code of Georgia (2019–2020 Action Plan of the Parliament of Georgia) as its priorities for the near future. Given this, Georgian approximation practices are focusing on legislative approximation with rare attention given to the regulatory approximation discourse and contain differentiated mechanisms for approximation under the DCFTA chapters (trade and trade-related measures) and in other cooperation fields, which supplement each other. The national approximation mechanism is based upon the PCA implementation practices which define Georgia’s approaches towards the institutional and normative aspects of approximation. Traditionally, the national approximation mechanism is rooted in Georgian practices regarding the implementation of international law and relevant constitutional provisions whereas, as Gabrichidze notes (Gabrichidze 2018, p. 63), the national approximation framework is constitutionally problematic as it increases the impact of EU law on the domestic legal order, since the Constitution of Georgia contains framework provisions on the application of international treaties, rather than clear guidance, which can be applied in the course of the legal approximation in Georgia. The secondary legislation of Georgia, however, contains provisions on the direct effect of international treaties, if they do not contradict constitutional requirements, contain concrete rights and duties and do not need additional legislative activities to make them enforceable. As for the approximation practices in the field of consumer protection it can be stated that despite being declared by the AA as a priority for legislative approximation in consumer protection matters it does not occupy the first places, either in the approximation agenda or in the implementation plans. Moreover, the lack of political will to pursue consumer policy reform in Georgia prevents the country from achieving tangible results in terms of legislative approximation. The approximation practices, started before the AA entered into force, are fragmented in nature and include amendments as to their constitutional provisions with relevance for consumer protection as well as amendments to the existing legislative framework, which currently does not have consumer protection as a main regulatory field. The absence of special consumer protection legislation leads to the lack of a clear and consumerfriendly protection regime aiming to safeguard consumer rights and interests. Last, but not least, the consumer protection rules in domestic legislation are dispersed throughout a wide regulatory framework, stressing the need for internal systematization of the consumer protection legislation of Georgia per se.

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Approximation Practices in Moldova in Consumer Protection Matters

After gaining independence in 1991 Moldova, like other former USSR states, faced the need to identify national priorities for foreign policy issues, with the need to make a choice of whether to direct them either to Russian or the EU allegiance. The first years of the cooperation between Moldova and the EU were marked by the fact that the EU at first excluded Moldova from the set of former Soviet countries, when negotiating the Partnership and Cooperation Agreements (hereafter—the PCA) with other former Soviet republics. Upon Moldovan insistence, the PCA was concluded in 1994 and entered into force in 1998. In 1999, the Moldovan government stated that European integration is the main foreign policy objective of the country. However, internal political developments when pro-communist forces came to power had a negative influence on the intensity of bilateral relations, including the implementation of the PCA, the EU-Moldova Action Plan (EU-Moldova Action Plan 2008) and other commitments arising from bilaterally agreed documents. In 2008, when democratic forces came to power, EU-Moldovan relations took on new perspectives, which in 2014 led to the conclusion of the EU-Moldova Association Agreement. The EU-Moldova Association Agreement, with a traditionally extensive DCFTA part, was signed on June 27, 2014, and entered into force on July 1, 2016. Unlike Georgia, where relations with the EU were marked by a set of difficulties in approximation issues from very beginning, EU-Moldovan cooperation was considered by the EU as a “success story” until 2014, when a major fraud scandal in the banking sector in Moldova brought to light the lack of public trust in Moldovan political institutions and leaders and clashes among Moldovan oligarchs to establish their control over state institutions (Wolczuk et al. 2017, pp. 22–23). The situation became even more controversial in 2017, when Moldova gained observer status in the Eurasian Economic Union. The fraud scandal and internal political tensions in the country between pro-Russian and pro-European political forces has had a long-lasting negative impact on EU-Moldovan relations in general: The Report of the European Parliament Research Service for 2018 on the assessment of the AA implementation states: “Four years after Moldova signed the Association Agreement (AA) with the EU, the overall outcome of the reforms conducted in this country should be assessed as unsatisfactory” (Association agreements between the EU and Moldova, Georgia and Ukraine. European Implementation Assessment 2018: 55). Moreover, the “Molexit” from the AAs has been advocated by pro-Russian political forces in parliamentary elections in 2018. In 2019, the new government of Moldova came to power committed to pursuing reforms and speeding-up AA implementation. Paradoxically, in this complicated political context, AA implementation in Moldova appears consistent and structured. Both the PCA Moldova and the EU-Moldova Association Agreement include provisions on adjusting the domestic legal system of Moldova to the EU law. As in the case of Georgia, the Moldovan approximation mechanism is based on relevant

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constitutional provisions, dealing with international treaties and their legal status in the domestic legal order. The Constitution of Moldova was adopted in 1994 and contains only a framework regulation on international treaties and their place in the domestic legal order: it confirms the supremacy of international human rights law (Constitution of Moldova 1994: Art. 4) over secondary domestic legislation and contains the obligation to obey international treaties, to which Moldova is a party (Constitution of Moldova 1994: Art. 8). However, as in the case of Georgia, the Constitution of Moldova stipulates that, if contradictory to the Constitution, such an international treaty can enter into force only after the Constitution is revised. After the EU-Moldova Association Agreement was signed in June 2014, the Constitutional Court of Moldova dealt with the very first constitutional complaint arguing that the AA is not in line with the Constitution of Moldova and is limiting the sovereignty of the country. The Constitutional Court of Moldova declared the complaint groundless implying, in the words of Tofan , “that there is no urgent need for domestic constitutional reform in order to ensure the effective implementation of the EU-Moldova AA” (Tofan 2017, pp. 214–215). The Law of Moldova “On International Treaties” generally shares the ambiguity as to the role and place of international treaties within the domestic legal order of Moldova. However, as in Georgia, it contains a provision on the direct applicability of international treaties, stipulating that provisions of international treaties, which by their content are able to be applied in legal relations in Moldova without the adoption of special legislative acts, shall be enforced and applicable in the legal system including by the judiciary in Moldova (Law of Moldova (595-XIV) 1999: Art.20). The general framework of the provisions on the implementation of the commitments of Moldova arising from its treaties with the EU can be traced back to the practices which the country deployed to implement the PCA. This included governmental decrees, e. g. Decree No. 1345 “On the Approximation of the Legislation of Moldova to Community Legislation” of 24 November 2006,8 annual plans for the approximation of legislation and the monitoring of its implementation. In 2010, Moldova adopted the Methodology for Law Approximation equipping its decisionand law-makers with clear requirements on legal approximation (Methodology for Law Approximation 2010). The country established an institutional framework for approximation issues, defined the powers of the main institutions involved and the procedures to be followed by the stakeholders. Quite intensive approximation practices led to substantial amendments of national legislation dealing with the legislative process in the country, as Moldova adopted the law “On Legal Acts” in 2001 and in 2003 it also adopted the special law “On Normative Acts”, which besides clarifying the internal hierarchy of legal acts and procedures for the drafting of law also defined statutory requirements for the approximation of law. The new law “On Normative Acts” (2017) summarizes approximation practices, based on the rule that normative acts in the country shall

8 Cited from Anna Khvorostiankina (2014), Legislative approximation and application of EU law in Moldova.

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correspond to the EU law, which fosters the rapprochement of national legislation of Moldova to EU law through fast-track legislative procedures to be applied for the adoption of approximated legislation and introduces compliance-check procedures, e.g. the EU-legislation compatibility logo is introduced by its Art. 32 (Law of Moldova (100) 2017). In Khvorostiankina’s opinion, the legislative approximation in Moldova is more advanced when compared to other EaP countries due to the fact that the country imported a comprehensive approximation methodology from the EU (Khvorostiankina 2014). Within the approximation discourse in Moldova consumer protection issues also appear to be marginal in EU-Moldova relations: even so, the PCA with Moldova included provisions on the adaptation of national consumer protection legislation to the EU consumer acquis, and further documents in this area addressed consumer protection very generally: e.g. the EU-Moldova Action Plan (EU-Moldova Action Plan 2008) referred to consumer protection issues in the context of food safety under cooperation in the area of sanitary and phytosanitary measures and consumer empowerment under the provisions of support for civic society in Moldova. In reality, in the course of the PCA implementation, as Khvorostiankina states: “. . . . regardless of the non-binding nature of the ‘approximation clause’ in the PCA Moldova has embarked upon a process of comprehensive approximation of national legislation with the EU sectoral acquis” (Khvorostiankina 2014, p. 169), which also included consumer protection. The national guidelines for approximation of consumer protection legislation was adopted as early as 2010, leading to structured and systematic implementation of the EU consumer acquis in the country and the most substantial amendment of the Consumer Rights Protection Act of Moldova (hereafter—CRPA Moldova 2003) in 2011. As a result, despite the fact the AA contains a clause on legislative approximation in consumer protection, the Association Agenda between the European Union and Moldova establishes the strengthening the administrative capacity of consumer protection enforcement in Moldova predominantly “. . .by training government officials and other consumer interest representatives on the transposition of EU legislation and its subsequent implementation and enforcement” as a priority for bilateral cooperation (Association Agenda between the European Union and Moldova 2014). The Association Implementation Report on Moldova (2019) states that the EU will focus its efforts on supporting the people of Moldova, placing the enforcement of the consumer protection legislation and the consumer empowerment within the priorities for bilateral cooperation (Association Implementation Report on Moldova 2019). The consumer protection system of Moldova, unlike in Georgia, is lacking a constitutional provision on the state’s role in consumer protection, however in the statutory legislation the consumer protection regime is progressively regulated. The Consumer Rights Protection Act (hereafter—CRPA Moldova 1993) in the independent Moldova was adopted in 1993 and reflected Soviet traditions in the organization and functioning of the consumer protection model. It included a general list of consumer rights such as the right to the state protection of legitimate consumer interests, the right to be protected where products and services might harm a

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consumer’s life, health and safety, the right to full, reliable and exact information about the main features of goods and services; the right to compensation for damages caused by goods and services of improper quality; the right of redress to a court or to other state institutions and the right to association, the right to replace, repair, return, cancel the contract and the right to moral damages in the event of improper products and services. The CRPA Moldova (1993) also involved detailed provisions on consumer-relevant information about goods and services to be provided by traders and producers, safety rules, basic regulations on consumer associations and liability rules applicable in the case of the violation of consumer rights and CRPA provisions (Law of Moldova (1453-XII) 1993). In the course of the PCA implementation, in 2003 Moldova adopted the new Consumer Rights Protection Act (hereafter—the CRPA Moldova 2003), which substantially modified the list of individual consumer rights (e.g. the right to consumer education has been included in this list, the right to redress in consumer claims has been divided as the right to recourse to public authorities and to consumer associations, the right not to pay for transport services if the driver omits to issue a fiscal receipt on paper or electronically, etc.). The CRPA Moldova (2003) has been constantly amended and it currently involves a number of provisions introducing the EU consumer acquis into the consumer protection regime of Moldova: e.g., Chapter III is devoted to the protection of the economic interests of consumers, introduces EU acquis-aligned rules on the prohibition of unfair commercial practices with regard to consumers, liability for unfair commercial practices and sanctions for their conduct, new consumer contract requirements and consumer claim procedures; Chapter VII deals with consumer claims; Chapter VIII deals with transboundary cooperation in consumer matters defining the general principles of transboundary cooperation and handling information requests in transboundary consumer protection cases) (Law of Moldova (105-XV) 2003 (redaction of 2018). Moreover, in 2017, the Government of Moldova established the National Consumer Protection and Market Surveillance Agency, so the consumer protection system also became institutionalized (Enactment (1089) 2017). Besides the CRPA as the main legislative framework for consumer protection issues, the Civil Code of Moldova regulates this area, e.g., Chapter II of Book III of the CCM incorporated EU-requirements such as distance and outoff-premises contracts, Chapter V of the same book deals with unfair contract terms (Civil Code of Moldova 2002). It is also noteworthy that Moldova’s market surveillance, food safety, competition, technical regulation legislation has now been brought into compliance with the EU, and that the legislative framework on consumer protection issues in a broader sense also conforms with the EU acquis. Therefore, it can be stated that Moldovan approximation practices share the following common features: firstly, the legislative approximation is a primary goal to be achieved, whereas the regulatory approximation, despite being envisaged by treaties, has not been achieved in reality. The internal approximation mechanism is based upon relevant constitutional provisions, which frame the conclusion and enforcement of international treaties in the legal order of Moldova, however the

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secondary legislation in this field contains provisions on the direct applicability of international treaties. Bilateral EU-Moldova relations suffer from political instability in the country, but the legal approximation process is very efficient. In terms of the legislative practices used by Moldova to approximate its legislation and regulatory policies to the EU, the adoption of new EU-acquis compatible legislation and by-laws is traditionally used, whereas the possibility to amend the Constitution of Moldova to confirm its pro-European orientation is not exploited for political reasons. The legal approximation practices in Moldova are similar to Georgian experiences and rely mostly on the active position of its government in the approximation process. As to approximation in the consumer protection field, it can be stated that in Moldova, EU consumer acquis are implemented in a concise and structured manner. Rooted in Soviet times, the Moldovan consumer protection system is based on special consumer protection legislation—the CRPA Moldova (2003), in which a part of the most important EU acquis has been incorporated. The National guidelines for the approximation of consumer protection legislation of Moldova (2010) played a crucial role in the legislative approximation process almost being completed in this area. Moreover, Moldova introduced changes to its Civil Code, to the most difficult chapter dealing with contractual obligations, creating a fully-fledged EU-approximated consumer protection framework in the country, which might lead to the establishment of an effective consumer protection regime with efficiently enforceable consumer rights. Other reforms will also become effective in the consumer protection area.

3.3

Approximation Practices in Ukraine in Consumer Protection Matters

EU-Ukraine cooperation also dates back to the collapse of the Soviet Union. In 1991, after the independence of Ukraine was proclaimed, the country also faced the need to develop its international relations within global and regional perspectives. After the EU-Ukraine partnership and cooperation agreement was concluded in 1994, it entered into force in 1998 and provided a framework for contractual relations between the EU and Ukraine until the conclusion of the EU-Ukraine Association Agreement in 2014. Very often being considered as a front-runner, Wolchuk et al. argue (Wolczuk et al. 2017, pp. 16–17), that Ukraine’s position before the conclusion of the AA was weaker than that of Georgia and Moldova due to the lack of conditionality prior to opening AA negotiations, the temporal disjuncture between the AA conclusion and its implementation, the contested nature, especially by Russia, and the lack of financial and institutional capacities to implement the AA. Like in Moldova and in Georgia, the general political context of the bilateral relations with the EU was marked by internal debates on the foreign policy direction of the country until 2013, when the Maidan and Dignity Revolution defined the pro-European orientation of

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Ukraine. In 2019, the Constitution of Ukraine was amended with “European Integration” clauses to reflect the aspirations of the Ukrainian population in the preamble (confirming the European identity of the people of Ukraine), in art. 85 (empowering the Ukrainian Parliament to define its internal and foreign policies including the realization of its strategic course towards full membership in the EU and NATO), in Art. 102 (entitling the President of Ukraine to act as the guarantor for the achievement of the full membership of these organisations) and in Art. 111 (empowering the Government of Ukraine to act correspondingly in order to ensure full membership) (Constitution of Ukraine 1996). The legal approximation discourse, as well as consumer protection discourse in the EU-Ukraine can also be dated back to the PCA. The PCA included direct references to consumer protection issues in Article 51 (adaptation clause) and Article 75 (on consumer protection). Both these clauses are of a framework nature, without a clear understanding about mutually important priorities for bilateral cooperation in the conventional text. According to Article 51 of the PCA, Ukraine recognized its unilateral obligation to adapt its domestic legislation to EU legal standards in a number of fields, where consumer protection is mentioned under p. 2 of this article. According to Article 75 of the PCA, the EU and Ukraine agreed to establish close cooperation in consumer protection in order to achieve compatibility between their consumer protection systems. This cooperation had to include support for legislative and institutional reforms in the consumer protection system of Ukraine, the establishment of a warning system for hazardous products, cooperation in matters of consumer empowerment, information and the training of officials and other interested representatives. However, the cooperation in the consumer protection area after the conclusion of the PCA and its entering into force was limited and did not occupy a prominent place within the post-PCA approximation agenda. Legal approximation practices in Ukraine started to develop after the PCA entered into force. As in the cases of Georgia and Moldova, national legislation on the application of international treaties within the domestic legal order plays the crucial role. The Article 9 of the Constitution of Ukraine provides that international treaties, once signed and duly ratified by the Ukrainian Parliament, form part of the country’s domestic legislation. The Constitution of Ukraine also provides that if an international treaty contradicts the constitution, it can be concluded only after the Constitution is revised. The Constitution of Ukraine does not contain clear rules regarding the place of international treaties in the legal system of Ukraine. Statutory legislation often provides that international treaties, if ratified and duly in force, are to be applied in the same manner as national legislation is enforced. Where national legislation contradicts international treaties, the latter have priority over Ukrainian legislation. The Law of Ukraine “On International Treaties” (2004), Art. 19, leaves space for ambiguity as to the enforcement and application of international law (Law of Ukraine (1906-IV) 2004) since national practices for the application of international norms are far from being internally consistent. Unlike Georgia and Moldova, Ukrainian statutory legislation does not contain special provisions on the direct applicability of international legal norms in Ukraine with one exemption: the European Convention of Human Rights is directly effective and applicable (Law

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of Ukraine (№ 3477-IV) 2006). However, in this case, the judiciary should fill the gap, as Petrov argues, and recognize the primacy and the direct effect of PCA provisions over the conflicting domestic legislation (Petrov 2014, p. 5). In Ukraine, such judiciary activism occurs in an inconsistent and sporadic manner. The statutory legislation of Ukraine gives also no clear answer to the question of the place international treaties occupy amongst domestic legal acts, since the country lacks secondary legislation on this issue. There were several attempts in Ukraine to introduce special legislation regulating the legislative process. However, such laws either were not passed by the Ukrainian Parliament or, if adopted, vetoed by the President of Ukraine (Miroshnichenko, Popov 2009). The most recent draft Law on “On Normative Acts” was proposed in 2010, passed its first reading in 2011, but has not been voted upon since (Draft Law 2010). Only one article of this Draft Law addresses the approximation discourse: Art. 37 prescribes a compatibility check for domestic legislation as part of legal expertise to be provided in the legislative process. The national framework for the approximation of Ukrainian legislation to the EU acquis started to be formed in 1998, when the Government of Ukraine adopted the National Strategy of the Integration of Ukraine into the EU, where the approximation discourse was defined in general terms. In 1999, the Government of Ukraine adopted the Concept of Adaptation of Ukrainian laws to the legislation of the EU (Decree 1496, 1999). Hereafter, in 2004 the Ukrainian Parliament approved the National Programme on the Adaptation of Ukrainian legislation to the EU acquis (Law of Ukraine (1629-IV) 2004), where, as Petrov argues, Ukraine voluntarily agreed to introduce the EU accession acquis without the perspective of full membership in the EU (Petrov 2014, p. 12). The institutional framework for the approximation also originates from PCA implementation practices and, as in Georgia and Moldova with the proactive role of the government in this process. Until 2017, the institutional framework of approximation in Ukraine was based on the idea that approximation and the EU law compliance check were to be organized within the government by line ministries. Such a situation often resulted in a lack of coordination leading to delays in the approximation process. In 2016, Ukraine re-organized the national institutional mechanism on the EU-Ukraine AA implementation and established the position of the vice-premier for handling issues related to the European and Euratlantic Integration of Ukraine. Thereafter, in 2017, the Governmental Office for the Coordination of European and Euro-Atlantic Integration of the Secretariat of the Cabinet of Ministers of Ukraine (Ruling 759, 2017) was established in order to direct, coordinate and control governmental efforts in the implementation of the EU-Ukraine AA, including the approximation of Ukrainian legislation to the EU acquis. Basic rules on the national approximation practices in Ukraine are relevant alongside the Law “About the All State Programme of adaptation of Ukrainian legislation to that of the EU” (2004), in the Rules of Procedure of the Government of Ukraine (para. 46 on the compliance check for conformity of Ukrainian draft law with the EU acquis) (Rules of Procedure 2009) and in the Ruling on the Governmental Office for European and Euro-Atlantic Integration, where most procedural

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rules are contained (Ruling 759, 2017). In 2018, with the support of the EU a “Methodology on EU law compliance check and tables of compliance” in legislative drafting was published by the Office and the project “Association4you” (Methodology 2018). The Government of Ukraine has introduced the practice of national implementation reports since 2014, which make the AA implementation process more visible and transparent. So, general rules for approximation issues in Ukraine are well established. However, national practices, especially in sectoral and trade issues, vary considerably e.g. the Governmental Report on Implementation of the Association Agreement between Ukraine and the European Union in 2019 states that in consumer protection issues no significant progress was achieved in 2019, whereas it rates the overall progress in this area to be 42% as compared e.g. to public procurement with 80% or technical barriers to trade with 79% (Report on Implementation 2019). In the Association Implementation Report on Ukraine (Association Implementation Report on Ukraine, 2019) the progress in aligning Ukrainian legislation to the EU consumer acquis was rated as slow. The most important PCA clause for the development of cooperation on consumer protection was Article 75, providing the parties establish close cooperation regarding the compatibility of their consumer protection systems, including expert assessment of legal and institutional reforms in Ukraine, a common information exchange system about unsafe products, pricing for consumers, features of goods and services, capacity-building for staff and civil society organizations, dealing with consumer protection issues in Ukraine as well as deepening the convergences between the consumer protection policies of the EU and Ukraine. Having identified these priorities in the PCA, however, the parties did not establish a well-functioning communication and cooperation mechanism on consumer protection. The next step in cooperation on consumer matters was the EU-Ukraine AA signed in 2014 and fully in force since 2018. In terms of the approximation practices in consumer protection matters the EU-Ukraine AA provisions are organized in a similar manner as those in the EU-Georgia and EU-Moldova AAs, namely containing general approximation clauses, and DCFTA-based sectoral approximation clauses—approximation and approximation-supportive clauses. The EU-Ukraine AA provisions include references to the more extensive protection of consumer rights, linking consumer protection, antidumping and compensatory measures (EU-Ukraine AA 2014: Art. 48), consumer protection and e-commerce (EU-Ukraine AA 2014: Art. 140), consumer protection and protection of intellectual property (EU-Ukraine AA 2014: Art. 193–206 on protection of trademarks and geographical names), on mutual cooperation with regard to the protection of intellectual property rights (EU-Ukraine AA 2014: Art. 252), state aid and consumer protection (EU-Ukraine AA 2014: Art. 262), pricing on energy and gas markets (EU-Ukraine AA 2014: Art. 262), cooperation in the nuclear energy sector (EU-Ukraine AA 2014: Art. 269), on the protection of the consumer in the financial services markets (EU-Ukraine AA 2014: Art. 383) with special AA provisions on consumer protection (EU-Ukraine AA 2014: Art. 415–418). Comparing the legal provisions of the PCA and AA agreements with regard to their normative contents,

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an interim conclusion can be formulated: despite being mostly similar in the wording of Articles 75 of the PCA and Articles 415–418 of the EU-Ukraine AA and mostly non-self-executing in their nature, the AA provisions, while cross-referencing Annex XXXIX, have produced more legal influence on the Ukrainian consumer protection system than the PCA normative regulations. In EU-Ukraine relations, consumer protection discourse has also received rather limited attention. The EU-Ukraine Association Agenda, adopted in 2009, provides that in consumer protection matters Ukraine and the EU will cooperate in order to establish a dialogue on consumer protection and mutual exchange of information, to empower consumers and to strengthen the administrative capacity of consumer protection enforcement in Ukraine, mostly through a professional training programme for the legislative branch, judiciary and civil society organization in EU law transposition and enforcement (EU-Ukraine Association Agenda, 2009). These tasks have been partially fulfilled: EU-Ukraine dialogue on consumer protection regularly takes place with the Association Committee on Trade, however in other areas cooperation remains inefficient. As to approximation issues in consumer protection matters, it needs to be stated that Ukraine inherited its consumer protection legislation from Soviet times. As in Georgia, the Constitution of Ukraine obliges the state to protect consumer rights, to carry out controls regarding product safety and quality and supports the activities of consumer associations (Constitution of Ukraine 1996: Art.43 (3)). The Consumer Rights Protection Act of Ukraine was adopted even before the Constitution of the country in 1991. As it is based upon Soviet rules for trading, the Consumer Rights Protection Act of Ukraine (hereafter—the CRPA Ukraine, 1991) provided and still provides a number of consumer rights protected within the territory of Ukraine, such as a right to state protection for consumers, guaranteed level of consumption, due quality of goods and services, product safety, consumer information, compensation claims in the event of the violation of consumer rights, right to legal remedies and right to establish consumer organizations (Law of Ukraine (1023-XII) 1991). The Civil Code of Ukraine contains relevant consumer-protection provisions, e.g. Art. 700 on information to be provided in retail purchase contracts, Book V on obligations, which are also applied in the case of consumer contracts (Civil Code of Ukraine 2003: Book V). The most important amendments in this area relating to distance contacts, out-of-premises contracts, electronic commerce are not reflected therein. Ukrainian special legislation on e-commerce, consumer credits, market surveillance, and consumer contracts has been already adopted introducing the relevant EU acquis elements into the legal system of Ukraine. The Commercial Code of Ukraine stipulates that consumers, who are in the territory of Ukraine when purchasing, ordering or using goods (works, services) in order to satisfy their needs, are entitled to state protection of their rights, a guaranteed level of consumption, proper quality of goods, services and works; safety of goods, works and services; necessary, accessible and reliable information about quality, quantity and assortment of goods, services and works; compensation for damages; legal remedies, including appeal to court and other authorized authorities for the

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protection of violated rights or legitimate interests and the establishment of consumer civic society organisations (Commercial Code of Ukraine 2003: art. 39). The state shall guarantee to its citizens the protection of their interests as consumers, the free choice of goods, services and works, equipping them with necessary knowledge and qualifications needed for a conscious consumer choice. Moreover, the state shall guarantee a consumption volume sufficient to maintain health and life (Commercial Code of Ukraine 2003: art. 39). This dichotomy of the regulation on consumer protection between two Ukraine codes does not seem to have a positive impact on consumer rights enforcement, hence the need for internal systematization of Ukrainian consumer rights protection legislation becomes obvious. The institutional dimension of the Ukrainian consumer protection system has been also established based upon the provisions of the above-mentioned law, where key powers were granted to State Inspection on the Protection of Consumer Rights, which existed until 2000. In 2000, the institutional system became decentralized, where the line ministries (Ministry of Economic Development, Trade and Agriculture of Ukraine, Ministry of Justice of Ukraine, Ministry of Health and independent state agencies like the State Service of Ukraine for Food Safety and Consumer Protection, State Committee on Technical Standardization and Consumer Protection and other bodies (sectoral and cross-sectoral) play an important role and are empowered with a number of tasks dealing with both the development of the consumer protection policy of Ukraine and providing protection and support for consumer rights. Based upon the experiences of Soviet regulation, the consumer protection system of Ukraine can be described as state centred, where the state was entitled to control, to monitor and to penalize in the case of violation of consumer protection standards. Ukraine started deregulation aiming to simplify the conduct of business activities in the country. Deregulation also marks reform in the consumer protection system, where all parts of this system—the state, consumers and business—are in sharp need of developing common priorities and approaches to consumer protection in the age of digitalization and globalization. However, as to the compatibility of Ukrainian consumer protection legislation with EU rules and standards in this field, it can be assumed that the most weaknesses of the Ukrainian consumer protection system are linked to the legal cultures of law-making and law enforcement, where poor quality laws in terms of compliance with rule-of-law making standards leads to their poor obeisance among the population, making all reforms difficult and not supported in the society. The consumer protection area, which genuinely addresses all the country’s population internally and all consumers of Ukrainian products and services externally is an extremely sensitive area, where a lot of economic, social and legal problems are on the waiting list to be resolved, including the modernization of the consumer protection legislation and the elaboration of efficient enforcement mechanisms suitable to protect consumers in real and digital economies. Thus, the approximation discourse in Ukraine focuses primarily on the approximation of laws and leaves for the discussion on the regulatory approximation rather limited space. Legislative approximation is rooted in constitutional provisions,

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which clearly articulate Ukraine’s willingness to achieve full membership in the EU. The legislative approximation mechanism in Ukraine is based on constitutional provisions, which primarily regulated the application of international law within the Ukrainian legal order, as well as relevant statutory legislation. The incoherent and selective application of international law in the Ukrainian legal order undermines the effectiveness of EU-Ukraine AA implementation, diminishing the effectiveness of the AA implementation process, as well its approximation practices. In Ukraine, the direct applicability and direct effect of the EU-Ukraine AA is not explicitly regulated in the legislative framework but stems rather from sporadic EU-progressive judiciary practices. The general legal framework for the approximation of Ukrainian legislation to the EU acquis is well established, however the achievements of the approximation are rather moderate. In terms of approximation in consumer protection issues, legislative approximation processes are slow. Ukraine, like Moldova, deploys amendments to existing legislative acts, including relevant codes, and the adoption of new legislation as key approximation techniques. Being based on constitutional provisions, the Ukrainian consumer protection system is linked to the Civil Code of Ukraine and the Commercial Code of Ukraine, also causing ambiguities as to the legal framework for the protection of consumer rights, especially within the internal debate on the necessity of the Commercial Code of Ukraine. The special legislation—the CRPA Ukraine— originates from 1991. It has been amended with EU-rules, thus making this body of law incoherent and inconsistent, and in reality, unenforceable.

4 Conclusions Contemporary cooperation between the EU, Georgia, Moldova and Ukraine is based on AA, which places the DCFTA at the centre of economic cooperation. The creation of the DCFTA also implies the adjustment of legal frameworks between the EU and associated countries, through a process of approximation. National approximation practices in all countries are based on national practices of the application and enforcement of international treaties within the domestic legal order, where the primacy of international treaties over domestic statutory legislation is a key feature, which ensures the efficiency of these approximation processes. The issues of the direct application and direct effect of international treaties in the domestic legal order of Georgia, Moldova and Ukraine appears immensely important for ensuring the effectiveness of approximation practices in general terms. Georgia, Moldova and Ukraine developed an extensive national framework for the approximation of their legislation to the EU acquis, but far-reaching regulatory approximation is still to be achieved, since the approximation of regulatory practices to EU requirements, as shown for the consumer protection area, is often not addressed either by the EU or by the associated countries (except partially for Moldova, where consumer protection legislation is the most in line with the EU acquis).

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In consumer protection matters, the level of the approximation of domestic legislation to the EU consumer acquis is different, with Moldova being the frontrunner. Georgia and Ukraine have rather moderate achievements here. Georgian, Moldovan and Ukrainian consumer protection legislation and regulatory practices stem from Soviet times, but their modern consumer protection policies and regimes are considerably different. Each of these countries faces, and has faced, challenges in the way the rapprochement of their legislation and regulatory practices conforms to the EU acquis. First of all, European integration as the main path of their foreign policy is constantly challenged by pro-Russian elites and population (all these countries have either frozen or active conflicts with Russia). These tensions very often result in slowing down such approximation processes. Secondly, these are countries with ongoing internal reforms, which often last for years, but lack any tangible achievements. The consumer protection area is one such example, where the need to modernize the consumer protection systems and legislation has been articulated, but even if EU-aligned legislation is introduced, as in Moldova, enforcement remains poor. Thirdly, Georgia, Moldova and Ukraine, being at different stages in the approximation of their domestic consumer protection legislation to the EU acquis, face the need to develop their national consumer protection policies coherently with their economic policies in order to make consumer protection standards affordable by local businesses and comply with the approximation obligations per se.

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Association Agreements Between the EU and Moldova, Georgia and Ukraine. European Implementation Assessment (2018), European Parliament Research Service, https://www.europarl. europa.eu/RegData/etudes/STUD/2018/621833/EPRS_STU(2018)621833_EN.pdf Association Implementation Report on Georgia (2017), 09.11.2017 SWD (2017) 371 final Association Implementation Report on Georgia (2019), 30.1.2019 SWD (2019) 16 final Association Implementation Report on Georgia (2020), 6.2.2020 SWD (2020) 30 final Ćemalović U (2015) Framework for the Approximation of National Legal Systems with the European Union’s Acquis: From a Vague Definition to Jurisprudential Implementation. CYELP 11:241–258 Civil Code of Georgia, Parliamentary Gazette of 24 June 1997, 1997, No. 31 Civil Code of Moldova, Monitorul Oficial, 2002, No. 82-86, Art. 661 Civil Code of Ukraine, Records of the Verkhovna Rada of Ukraine, 2003, Nos. 40-44, Art. 356 (wording of 2019) Code of Safety and Free Movement of Products of Georgia (2012) Law of Georgia (No. 114) of 19 December 2012, https://matsne.gov.ge/en/document/download/1659419/7/en/pdf Commercial Code of Ukraine, Records of the Verkhovna Rada of Ukraine, 2003, No.18, Nos. 19-20, No. 21-20, Art. 144 (wording of 2019) Constitution of Georgia adopted by Parliament of Republic of Georgia on 24 August 1995, Legislative Herlаd of Georgia, 1995, No. 668, Art. 31–33 Constitution of Moldova adopted by Parliament of Republic of Moldova on 29 July 1994, Monitorul Oficial 1994, No. 78, Art. 140 Constitution of Ukraine adopted by Verkhovna Rada of Ukraine on 28 June 1996, Records of the Verkhovna Rada of Ukraine, 23 July 1996, No. 30, Art. 141 Consumers and the new reality: Preparing for changing customer needs, behaviors and expectations (2020), KPMG International Cooperative, https://home.kpmg/content/dam/kpmg/xx/pdf/2020/ 06/consumers-and-the-new-reality.pdf Decree of the Cabinet of Ministers of Ukraine No. 1496 of 16 August 1999 on the Concept of adaptation of the legislation of Ukraine to the legislation of the EU, Official Herald of Ukraine, 1999, No. 33, Art. 168 Directive (EU) 2019/2161 of the European Parliament and of the Council of 27 November 2019 amending Council Directive 93/13/EEC and Directives 98/6/EC, 2005/29/EC and 2011/83/EU of the European Parliament and of the Council as regards the better enforcement and modernisation of Union consumer protection rules (Text with EEA relevance), OJ L 328, 18.12.2019 Directive 2011/83/EU of the European Parliament and of the Council of 25 October 2011 on consumer rights, amending Council Directive 93/13/EEC and Directive 1999/44/EC of the European Parliament and of the Council and repealing Council Directive 85/577/EEC and Directive 97/7/EC of the European Parliament and of the Council (Text with EEA relevance), OJ L 304, 22.11.2011 Draft Law of Ukraine “On Normative Acts” (2010), http://search.ligazakon.ua/l_doc2.nsf/link1/ JF5PT00A.html Durovic M (2016) External dimension of the EU consumer law. In: Cremona M, Micklitz HW (eds) Private law in the external dimension of the EU. OUP Enactment (1089) of the Government of the Republic of Moldova of 18 December 2017 on the establishment and functioning of the National Consumer Rights Protection and Market Surveillance Agency, Monitorul Oficial, 2017, No. 1213, Art. 440. https://www.legis.md/cautare/ getResults?doc_id¼110431&lang¼ru EU-Moldova Action Plan, 2008. https://www.legislationline.org/download/id/982/file/ 691b325459a174bbe9ea3a349eb7.pdf EU-Ukraine Association Agenda to prepare and facilitate the implementation of the Association Agreement, http://eeas.europa.eu/archives/docs/ukraine/docs/st06978_15_en.pdf Food/Feed Safety, Veterinary and Plant Protection Code (2012) Law of Georgia (No. 6155- IS) of 8 May 2012, https://matsne.gov.ge/ka/document/download/1659434/4/en/pdf

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Petrov R (2014) Legislative approximation and application of EU law in Ukraine. In: Petrov R, Van Elsuwege P (eds) Legislative approximation and application of EU law in the Eastern neighbourhood of the European Union towards a common regulatory space? Routledge Regulation of the Parliament of Georgia (No 828), 1997 on the harmonization of Georgian Legislation with the EU Legislation of 2 September 1997, https://matsne.gov.ge/ka/document/ view/38704?publication¼0 (in Georgian language) Regulation (EC) No 2006/2004 of the European Parliament and of the Council of 27 October 2004 on cooperation between national authorities responsible for the enforcement of consumer protection laws, OJ L 364, 09.12.2014 Report on Implementation of the Association Agreement between Ukraine and the European Union in 2019 Results and plans (2019), https://eu-ua.org/sites/default/files/inline/files/ar_aa_ implementation-2019-4_eng.pdf Report on the implementation of the Association Agreement between Ukraine and the European Union in 2018 [Zvit pro vykonannia ugody mizh Ukrainoiu ta Europejs’kim Soiuzom v 2018], Uriadovyj ofis koordynatsii europejs’koi ta euroatlantychnoi integratsii, https://www.kmu.gov. ua/storage/app/sites/1/55-GOEEI/AA_report_UA.pdf (20.01.2019) Report on the Implementation of the DCFTA, Implementation National Action Plan for 2019, 2019, http://www.dcfta.gov.ge/public/filemanager/implimentation/Final%20Report%202019%20[ ENG].pdf Rules of Procedure of the Cabinet of Ministers of Ukraine, No. 712 (2009), https://www.kmu.gov. ua/npas/228286390. Ruling of the Cabinet of Ministers of Ukraine, № 759 (2017), https://www.kmu.gov.ua/npas/ 250334224 The Association Implementation Report on Moldova (2019), SWD(2019) 325 final, https://eeas. europa.eu/sites/eeas/files/swd_2019_325_f1_joint_staff_working_paper_en_v10_p1_1045191. pdf Tofan M (2017) The constitutional order of Moldova and the challenge of multi-vector integration. In: Petrov R, Van Elsuwege P (eds) Post-soviet constitutions and challenges of regional integration. Adapting to European and Eurasian integration projects. Taylor and Francis Tyushka A (2015) Association through approximation: procedural law and politics of legislative and regulatory approximation in the EU-Ukraine association agreement. Baltic J Eur Stud 5 (1):18 Van Der Loo G, Van Elsuwege P, Petrov R (2014) The EU-Ukraine Association Agreement: Assessment of an Innovative Legal Instrument. EUI Working Papers, LAW 2014/09, https:// biblio.ugent.be/publication/5651910/file/5651912.pdf Wolczuk K, Delcour L, Dragneva R, Maniokas K, Žeruolis D (2017), The Association Agreements as a Dynamic Framework: Between Modernization and Integration. EU-STRAT Working Paper, 2017, No. 06

Oksana Holovko-Havrysheva PhD in Law, associate professor of the European Law Department of the Ivan Franko National University of Lviv, head of the Jean Monnet Centre of Excellence “Western Ukrainian Research Center for European Studies”. She promoted in 2004 with the degree of the Candidate of Juridical Sciences (12.00.11—International Law) at the State and Law Institute named after Volodymyr Koretskyy of the National Academy of Sciences of Ukraine. In 2008 she was awarded the academic title of Associate Professor of the European Law Department. Participant in numerous international projects, conferences and seminars in Ukraine and abroad as well as to international internships and trainings in Austria, the UK, the USA, Germany and other countries. In 2014–2017 she was the academic coordinator of the Jean Monnet Project 553310 “Summer Courses in EU Law and Policies”. In 2017–2018—Senior Legal Research Fellow, in 2018–2019— Senior Legal Training Fellow in the EU-funded project “Association4U”, provided consultations to the Ministry of Trade and Development of Ukraine on approximation of the Ukrainian legislation to the EU law. President of the Ukrainian Association of European Studies since 2018. Email: oksana. [email protected].

Part IV

EU Environmental Law

Extraterritoriality and the Impact of EU Regulatory Authority: Environmental Protection as Soft Power Jamile Bergamaschine Mata Diz and Hélio Eduardo de Paiva Araújo

Abstract This chapter will shed some light into the issue of the extraterritorial effects of EU Norms to assert that the EU rarely makes direct extraterritorial claims, rather it acts in a much more subtle way. One successful way the EU exerts influence over the behaviour of foreign actors is often achieved by the enactment of domestic laws, which at first do not possess an intrinsic extraterritorial element to them. This chapter analyses the case of the adoption of criteria to allow access into the European market by log producers and/or traders, based on European regulations aiming to fight deforestation. After such analysis, this chapter concludes that the extraterritoriality issue must be understood not only in its formal aspect but also in its material one. The comprehension of the extraterritoriality conundrum cannot be achieved by assessing formal geographical limits. It is mandatory to evaluate the capacity of a given regulatory framework to “impose” on producers and suppliers’ certain obligations as a condition for accessing a given consumer market. Whilst, on one hand, it should be noted that there is an evident positive aspect arising from the adoption by the EU of certain domestic laws that have extraterritorial implications, since it serves to set clearer rules so that market access could be achieved under a more equitable manner. Nevertheless, it also can cause negative consequences on competition, especially when considering the access of producers outside the EU, restricting the possibility of the expansion and growth of international trade.

J. B. Mata Diz Faculty of Law of the Federal University of Minas Gerais, Belo Horizonte, Brazil H. E. de Paiva Araújo (*) Universidade Federal de Minas Gerais (UFMG), Belo Horizonte, Brazil e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 N. Cunha Rodrigues (ed.), Extraterritoriality of EU Economic Law, European Union and its Neighbours in a Globalized World 4, https://doi.org/10.1007/978-3-030-82291-0_15

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1 Introduction In a more globalized and mobile world, where people, goods and services circulate at unparallel volumes, and with trade flows heavily intertwined, the issue of extraterritorial jurisdiction has taken on greater importance. Traditionally, the exercise of jurisdiction by a state is (or was) limited to acts taking place within a given territory, as this reflected the accepted idea of state sovereignty. Current global trade volumes and the movement of people, however, had led to an increase in the use of exterritorial jurisdiction by states, either to address transnational crimes, transnational issues affecting the whole of mankind (i.e., the environment) or other situations that the global community sees as being of vital importance. These more frequent claims of extraterritorial jurisdiction have been accompanied by a lack of consensus and heated debates over their usage. The disputes are various and multifaceted, ranging from the very definition of what extraterritoriality is to an intriguing issue regarding nexus and whether a state is sufficiently connected to a given situation to allow it to claim jurisdiction over these facts. In sum, there is great confusion as to the precise characterization of extraterritorial jurisdiction. As such, this article will shed some light on this issue and demonstrate that states rarely make direct extraterritorial jurisdiction claims, but they rather act in a more subtle way. Usually, states use unilateral measures, mainly represented by domestic laws, that may influence the behaviour of foreign actors or have other extraterritorial impacts or reflexes. These unilateral behaviours can be noticed in various regulatory areas, such as antitrust and anticorruption, as well as criminal law, however the focus of this piece will be limited to the European Union (EU) environmental regulations that present extraterritorial implications. Environmental problems—climate change, flora, fauna, etc.—do not usually confine themselves within a single territory. They are transnational in nature. Yet international environmental regimes are difficult to establish, since states often disagree on the scope and content of the protective measures to be adopted. Due to the lack of an overarching environmental treaty regime, states usually make attempts to impose standards on actors operating within their territory. A good example of such behaviour is the ban on imports of products that have been produced or harvested in an environmentally damaging way, as represented by the EU fight against deforestation and illegal logging. In this context, this article will analyse the adoption of criteria allowing log producers and/or traders to access the European market, based on European regulations that address a specific sector and whose main purpose is indeed specified by invoking environmental protection through the fight against deforestation. The choice of this specific sector is not random given that it particularly affects exports and trade flows between Brazil and Europe, in addition to being based on a strategic component involving the preservation of global national forests, a component that is often used in ways that go beyond mere environmental protection discourse, thus impacting the purchase and sale of goods, which may result in market and trade restrictions.

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2 Jurisdiction Under accepted doctrine, there are three types of jurisdiction: (i) prescriptive (or “legislative”), which is the ability to legislate; (ii) enforcement, the ability to enforce acts emanating from the legislature or courts; and (iii) adjudicative (or “judicial”), which concerns the ability of courts to adjudicate and resolve disputes. It is important to highlight that this article will mainly cover prescriptive jurisdiction, that is, the exercise of legislative authority by states and not that performed by international courts. This ability of states to prescribe, enforce and adjudicate is not unlimited. The most important limit it faces is geographical. Legal competence assumes the existence of a territorial base. This is due to the political and legal importance of territorial sovereignty: the idea that each state should be able to regulate activities within its own borders in accordance with its own policies, objectives, and priorities.1 This has been termed the territoriality principle. Another principle governing jurisdiction is nationality—or personality. This principle grants to a state jurisdiction over its people under a nationality bond. A third one is the protective principle. This gives a state the right to undertake extraterritorial jurisdiction over actors or conduct abroad that affect a state’s vital or essential interests. This is the case, for example, of the counterfeiting of money and national documents, or espionage. Alongside with the above-mentioned aspects, there is the so-called effects doctrine, which was first invoked by the United States in antitrust disputes. According to the effects doctrine, the sole fact that there is a substantial and/or direct production of economic effects2 in a state (changes in prices due to a corporate reorganization) is a sufficient nexus to attract jurisdiction of a state.3 This assertion of jurisdiction is disputed and has led to a productive debate in the international legal community.4 Finally, there is the universality principle, which asserts jurisdiction over acts regardless of any connecting factors (i.e., territory, nationality, or direct effects). To some scholars the universality principle draws its legitimacy from the fact that certain acts, due to their very nature, “are of concern to the international community as a whole”.5 This principle is the object of strong criticism on the grounds that while 1

Under the 1933 Montevideo Convention, an entity was a state only if it had (a) a permanent population; (b) a defined territory; (c) government; (d) capacity to establish relations with other states. Therefore, a territory and its accessories (air space and territorial sea), together with the government and a population form the base of a state (Crawford 2019). 2 Confusion remains as to a proper definition of a proper test for effects, but also as to the degree of the impact necessary for jurisdiction to attach. U.S Jurisprudence range from a requirement of direct or substantial to a requirement of direct and substantial. If that was not enough, the determination of substantial also remains open to heated debates both in the US and EU. 3 See the Alcoa case, US v. Aluminium Co. of America 148 F.2d 416 (2d Cir. 1945). Available at: https://law.justia.com/cases/federal/appellate-courts/F2/148/416/1503668/. 4 For an interesting debate see Whatstein (1992) and Coppel (1993). 5 International Criminal Court, preamble, and article 5.

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it may help to tackle impunity for gross human rights violations, it would be advisable to distinguish between the universal condemnation of a crime from the possibility of universal jurisdiction (Klabbers 2017). As can be seen, uncertainty and disagreement remain, thus making the subject of territorial and extraterritorial jurisdiction a contentious one. Such contention is a good reason to distinguish between claims of direct extraterritorial jurisdiction on the one hand and domestic measures with extraterritorial implications on the other. While the latter may present a territorial, albeit minimal, nexus, it can still exert influence over foreign behaviour. According to Zerk (2010), the use of direct extraterritorial jurisdiction is the most obvious way that states can regulate foreign conduct, however, there are many ways for states to ‘export’ values, standards, and behaviour to other countries through domestic measures.

3 Extraterritorial Jurisdiction 3.1

Definition and the Risk of Oversimplification

Extraterritorial jurisdiction refers to the ability of a state, via various legal, regulatory, and judicial instruments, to exercise its authority outside its own territory. According to Scott (2014), a state’s measure will be deemed extraterritorial when it imposes obligations on persons who do not enjoy a relevant territorial connection with the enacting state. Nevertheless, international law places limits on the use of direct extraterritorial jurisdiction, since some connecting factors shall be present (i.e., territory, nationality, direct effects). Moreover, it is generally accepted that the use of direct extraterritorial jurisdiction is subject to an overarching requirement of “reasonableness”. According to Zerk (2010), reasonableness is rooted in the fundamental international law principle of the sovereign equality of states,6 the corollary of which is that no state may interfere in the domestic affairs of another state.7 Obviously, for these purposes, understanding which matters fall within the category of “domestic affairs” is key, but since this is a highly contentious topic, it falls outside the scope of this piece. Historically, states were shielded from the intrusion of others, limiting a state’s regulatory authority to activities within its territory. Extraterritorial jurisdiction, although tolerated under certain circumstances, was disfavoured until recently. Extraterritorial claims of jurisdiction were first noticed in antitrust cases, being used as a tool by the US to expand its international influence. More recently,

6

See the Charter of the United Nations, Article 2(1). See the Declaration on Principles of International Law Concerning Friendly Relations and Cooperation Among States in Accordance with the Charter of the United Nations, UNGA/Res/ 2625/(XXV): “No State or group of States has the right to intervene, directly or indirectly, for any reason whatever, in the internal or external affairs of any other state.”

7

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globalization and terrorism have pushed extraterritorial jurisdiction to a new level (Parrish 2011). In sum, the increasing importance of extraterritoriality seems to be a logical response to globalization, among other factors. This has given rise to a trend leading to unilateral global governance, which can be defined as a situation when a “single state is able to externalize its laws and regulations outside its borders through market mechanisms, resulting in the globalization of standards” (Bradford 2012).

3.2

Unilateral Global Governance

As mentioned, the use of direct extraterritorial jurisdiction is the most obvious way states can influence offshore practices. However, for it to be validly invoked, one of the grounds for jurisdiction must be present, otherwise it may conflict with sovereignty and equality of states principles. To circumvent this, states have found other ways to exert offshore influence and to export some of their regulatory practices and values. One of these ways, as stated above, is to use domestic legislation that has extraterritorial impacts, i.e., to use market access as a tool to “impose”, even if indirectly, its norms abroad. The EU has been a prominent global power in international governance practices which are based on unilateral measures. This behaviour has been endowed with different names. Anu Bradford has described it as “unilateral regulatory globalization”, but lately it has been known more colloquially as “the Brussels Effect”, while Jan Klabbers refers to it as global governance. Finally, Zerk calls it global influential authority. While this article will adopt Klabbers’ term, the nomenclature is not so relevant. What is important is the understanding that states make use of domestic measures with extraterritorial implications as a tool to influence offshore practices without using direct extraterritorial jurisdiction, thus, prima facie, respecting the sovereignty of other states. According to Bradford (2012), the following conditions are necessary for a state to unilaterally promote global governance: a large domestic market, significant regulatory capacity, and a propensity to enforce strict rules over inelastic targets (e.g., consumer markets) as opposed to elastic ones (e.g., capital). In addition, unilateral global governance presumes that the benefits of adopting a uniform global standard exceed the benefits of adhering to multiple regulatory standards. This is the case when production is non-divisible, meaning that it is not legally or technically feasible, or economically viable, to maintain different standards in different markets. The EU possesses one of the biggest consumer markets in the world.8 However, the size of the market alone may not be enough to explain the EU’s global regulatory

8

In 2018, the world’s population reached 7.63 billion inhabitants. The most populous countries being China and India (both G20 members) with the EU (represented by its 27 members) reaching approximately 446 million people. Also based on 2018 figures, the world’s gross domestic product

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role. The economies of the US, China and Japan are as large and as significant, but the relative importance of the market is also a function of its consumers’ affluence, i.e., its purchasing power capacity. The EU has both a large market and a huge number of affluent consumers with high purchasing capacity. Secondly, it is key that it possesses strong and well-developed regulatory institutions. In this sense, a state shall demonstrate regulatory capacity and regulatory propensity to exercise global regulatory authority. Regulatory capacity means institutional structures that can produce and enforce regulations effectively. Regulatory propensity refers to a preference for non-lax regulatory standards and the predisposition to regulate inelastic targets. This is more likely to be found in countries with high levels of income, which, therefore, can better afford to pursue consumer protection at the expense of the profitability of their firms. (Bradford 2012). Finally, the EU common market also explains its attitude towards consistent regulatory frameworks. For companies to do business within the EU, the abolishment of obstacles and the flattening of possible regulatory conflicts had to be achieved through the adoption of a common regulatory scheme. Once all European firms have incurred the adjustment costs to comply with common European standards, they would have an incentive to push such standards to be adopted globally. Hence, EU corporations have sought to export these standards to third countries. According to Bradford (2012), there is a widespread perception that markets punish inefficiencies, including regulations that are so strict that they ultimately affect prices. However, according to her, strict domestic regulations can operate as global standards without being punished, only if they cannot be circumvented or bypassed. One example of this is the EU management of its hazardous waste regime. The cost to comply with environmentally safe waste disposal is considerable and significant, while at the same time illegal transfers of contaminated and untreated waste remains a common practice globally, thus offering producers an easier escape route (O’Neill 2001). The above example explains why the EU targets its regulatory efforts to measures and policies linked to its consumer markets. The size of such market and its high purchasing power9 cannot be circumvented – in this sense it is inelastic. Therefore, the EU’s choice to target product and food safety or environmental concerns, only to the extent that they are linked to its consumer markets, is not fortuitous. Its ability to unilaterally push in the direction of environmental global governance is causally linked to the importance of its market forces.

(GDP) was seventy-two point six (72.6) trillion euros, with the EU-27 members representing approximately eighteen-point six percent (18.6%) of such global trade and it is among the largest importers of goods and services (Statistical Office of the European Communities 2020). 9 According to the OECD, purchasing power parities “are the rates of currency conversion that try to equalize the purchasing power of different currencies, by eliminating the differences in price levels between countries. The basket of goods and services priced is a sample of all those that are part of final expenditures: final consumption of households and government, fixed capital formation, and net exports. This indicator is measured in terms of national currency per US dollar.” Available at:

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Extraterritorial Jurisdiction: The European Union as a Proxy

In sum, it can be said that the EU fully adopts the territoriality principle, except for claims on the grounds of nationality. All other extraterritorial (i.e., direct effects and universality) applications are not usual. Despite this fact, in some situations extraterritorial issues can be considered by EU legislation. Here, before advancing further, it is imperative to clarify some common misunderstandings: not all assertions of jurisdiction over foreign persons and behaviour would be deemed extraterritorial, at least not stricto sensu. This becomes even more complex if the concept is applied to different regulatory areas. For example, regarding health and food safety, the EU has issued strict regulations pertaining to Genetically Modified Organisms (GMOs). According to Regulation (EC) No 1830/2003, products containing GMOs are to be traced at all stages of the production and distribution chains. Hence, traceability is a key element within the overall scope of the EU food safety policy. Sellers intending to sell products which contain GMOs, must, among other obligations, disclose that fact to buyers. Moreover, packaging should be labelled to unambiguously demonstrate that the product contains GMOs. As a result, all sellers of products containing GMOs, in Europe or abroad, must fully comply with the regulation to gain access to the EU’s consumer market. However, to the extent sellers do not access the EU market, they will be outside the scope of such EU regulation. Technically speaking, this regulation is only “extraterritorial” in terms of its implications. Another example comes from the emissions trading scheme (ETS). In broad terms, the ETS is a policy to combat climate change and a key instrument in the fight against greenhouse gas (GHG) emissions. Since 2012, the EU has included the aviation industry within such a scheme, whereby flights departing from or landing at an EU airport are subject to it.10 This includes emissions that are generated on the entire route, therefore demonstrating an element of extraterritoriality in relation to GHG emissions taking place outside the EU airspace. Be as it may, one connecting factor remains present, which is the need for flights to originate from or be headed for a European airport, in such a way that a territorial nexus can still be claimed. The above examples show that the EU rarely makes use of direct extraterritorial jurisdictions; on the contrary, the EU makes frequent use of domestic measures with extraterritorial impacts (Zerk 2010), which enables the EU to indirectly regulate activities and behaviour that do not take place within its territory, thus influencing the content and direction of foreign legal systems and ultimately the development of international law.

10

See Directive 2008/101/EC, of the European Parliament and of the Council of 19 November 2008 Amending Directive 2003/87/EC.

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4 Environmental Legal Order and the Extraterritorial Impact Some areas of the international legal system are not characterized by institutional fragmentation or by a fragmentation of norms, as the international trade regime, sponsored by the WTO, seems to demonstrate. However, the international environmental legal order seems to be of a different kind. According to Keohane and Victor (2011), the international legal community has struggled to craft a strong, integrated, and comprehensive regulatory system for managing environmental concerns. This environmental system has been called the “regime complex for climate change”. In their view, regulations dealing with environmental concerns are not only extremely diverse, but they are also not integrated, comprehensive, or arranged under a clear hierarchy. As such, they form a loose regime complex. Keohane and Victor’s idea of a regime complex, an array of fragmented and non-integrated regulations indistinctly issued by states, international institutions, private entities, and NGOs, thus outside a comprehensive multilateral framework, is crucial to understanding certain key aspects of international environmental law (IEL). From this large and fragmented body of norms dealing with environmental issues, some effort has been put in to identify common and shared key concepts and guiding principles. One of these guiding principles is differentiation, which is a principle situated at the intersection between development and environmental protection. It is often used to reconcile potentially conflicting requirements as will be further explained below.

4.1

The Differentiation Principle

Differential treatment among states constitutes one of the bases of current IEL. It is grounded on ideas of global distributive justice and helps to rebalance some of the most visible inequalities among formally equal states. It is an attempt to address disparate characteristics, such as size, power, or natural resource endowments (Cullet 2016). It is the recognition by IEL that formal equality of states is a fiction and that there must be measures to address the existing substantive inequalities. As a corollary of this recognition, it is possible to admit the existence of responsibilities that are non-reciprocal in IEL. In sum, as brilliantly stated by Rajamani (2019, p. 167) it “addresses equity and fairness concerns in the distribution of burdens and benefits of global environmental regulation.” From a pure legal perspective, differentiation can be justified on different grounds for justice (Sen 2001). One is the corrective justice theory, originally stated by Aristotle, whereby there is maintenance or restoration of notional equality between the parties. It is a return to the status quo ante. This approach can be seen in the context of rules addressing climate change since there is a direct correlation between GHG emissions and level of economic development. The other theory is that of

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distributive justice (Sen 2001), which sets rewards or burdens based on preconceived criteria that compare the relative merits of the participants. According to Cullet (2016, pp. 5), “distributive justice reminds us that it is not sufficient to provide for equality of chances but that what matters is equality of results.” In view of the aforementioned disparities, international law should be wary of and act upon them. Various forms of differentiation have been developed and, as such, this could appear in the form of a particular wording in certain treaties—‘in accordance with its particular conditions and capabilities’—or of obligations being set unequally among states, as in the 1997 Kyoto Protocol, or as individualization of obligations among states as per those found in the 2015 Paris Agreement. Moreover, differentiation usually pairs certain categories of parties to categories of obligations. Categories of parties include, among others, developed countries, developing countries, least developed countries (LDCs), and small island developing states (SIDs). A key form of differentiation is the provision of financial and technological assistance. First appearing in the 1972 Stockholm Declaration,11 but in Rio gaining the status of an authoritative principle, under principle 712 of the 1992 Rio Declaration on Environment and Development it was established that states should jointly cooperate to conserve, protect, and restore the Earth’s ecosystem, but considering their different contributions to global environmental degradation, such cooperation should be differentiated. This became known as the principle of common but differentiated responsibilities (CBDR). It is in the UN Framework Convention on Climate Change—the FCCC—however, that the CBDR principle finds its full and distinct expression. After the FCCC, the principle become known as the Common but Differentiated Responsibilities and Respective Capabilities (CBDR–RC). The FCCC aims to “stabilize greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system.” In this regime, unlike in others, the differentiated principle, stated as a CBDR-RC, is an operational provision, carrying a legally binding nature, being part of the raison d’etre of the agreement. Although the CBDR principle has come to play a pivotal role in IEL as represented by its importance and relevance within the climate change regime, the US opposition to the Kyoto Protocol, a landmark environmental treaty that was adopted in 1997 at the FCCC’s third (3rd) Conference of the Parties (COP) in Japan,

11

Declaration of the United Nations Conference on the Human Environment, Stockholm, 16 June 1972, UN Doc. A/CONF.48/14/Rev.1. Available at: http://www.unep.org/Documents/Default.asp? documentID¼97&ArticleID¼1503. Principle 12: “Resources should be made available to preserve and improve the environment, taking into account the circumstances and particular requirements of developing countries and any costs which may emanate - from their incorporating environmental safeguards into their development planning and the need for making available to them, upon their request, additional international technical and financial assistance for this purpose.” 12 According to Viñuales (), “Principle 7 can be seen, conceptually, as a more specific application of the general principle of differentiation enshrined in Principle 6.” Principle 6: Special Situation of Developing Countries.

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shows that while differentiation is key, it can limit participation in the treaty and if not applied intelligently may end up hindering the ultimate goals of the accord. The 2015 Paris Agreement, signed at COP21, tried to address the US reluctance against differentiation by creating a system of ‘self-differentiation’, which allowed the parties to set their own level of commitments and targets, thus creating differences among them. Weakening as it may be perceived by some commentators, since the 2015 Paris Agreement has abandoned legally binding reductions to adopt no language regarding individual commitments but foreseeing voluntarily emission targets (through nationally determined contributions—NDCs) it shows that differentiation, although weaker and in a different format, cannot be obliterated. Notwithstanding the US opposition, differentiation, as represented by CBDR, has been adopted in other conventions.13 Recent examples of the use of CBDR can be found in the Stockholm Convention on Persistent Organic Pollutants14 and the Minamata Convention on Mercury15 and major UN summits.16 This recent adoption of the principle reiterates its central importance and demonstrates that it has become so pervasive that a proper understanding of IEL cannot be accomplished without it being considered (Cullet 2016). However, according to Rajamani (2019), while the CBDR principle has achieved certain widespread endorsement, its legal status and ability to lead to concrete measures remains under attack. Some of this controversy revolves around the nature of its obligation (hard or soft law), the differentiating criteria to be adopted (economic capacity, contribution to environmental harm, or both) and the categorization of the parties to an IEL instrument, since the complexities of the global community may not be captured and framed as developed, developing, and least developed countries and small island developing states. Nevertheless, differentiation and CBDR principles form a fundamental part of the overarching structure of IEL, remaining an indispensable instrument to promoting equity in international law.

13

The 1992 Convention on Biological Diversity (available at: https://www.cbd.int/doc/legal/cbden.pdf) and the 1992 Convention to Combat Desertification (available at: https://www.unccd.int/ sites/default/files/relevant-links/2017-01/English_0.pdf). 14 Available at: http://chm.pops.int/TheConvention/Overview/TextoftheConvention/tabid/2232/ Default.aspx. 15 Available at: https://treaties.un.org/doc/Treaties/2013/10/20131010%2011-16%20AM/CTCXXVII-17.pdf. 16 Such as the 2012 Rio+20 summit (UN General Assembly Resolution 66/288, The Future we Want, UN Doc. A/RES/66/288 (2012). Available at: http://www.un.org/ga/search/view_doc.asp? symbol¼A/RES/66/288&Lang¼E. or the 2015 Sustainable Development Goals’ summit.

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The EU Attempt to Ban Illegal Logging: The Timber Regulation

After several failed attempts to agree on a legally binding international regime on sustainable forest management, the EU and other countries decided to act unilaterally in support of existing international endeavours, such as the UN-REDD17 programme. Thus, in 2003, by means of a regulation approved in 2000, the EU laid down a mechanism to control the placement of timber and timber products on its market—the so-called EU Timber Regulation (EUTR).18 Such regulation counters the trade in illegally harvested timber through three key obligations: (i) a ban on the placing on the EU market of illegally harvested timber and products derived from it; (ii) traders placing timber on the EU market shall exercise ‘due diligence’; and (iii) once on the market, operators of the transformation or retail chains (referred to as traders) shall keep detailed records of their suppliers and customers. The core aspect of the due diligence is materialized by an obligation to carry out a risk assessment on timber suppliers to minimize the risk of placing illegally harvested timber on the EU market. This system also involves three key elements, whereby the operator: (a) shall have access to information describing the timber: country of harvest, species, quantity, details of the supplier and information on compliance with national legislation; (b) should assess the risk of illegal timber in its supply chain, based on the information identified in item (a) and based on any additional criteria set out in the regulation; and (c) if the assessment carried out in accordance with item (b) demonstrates a risk of illegal timber in the supply chain, that risk can be mitigated by requiring additional information and verification from the supplier. The EUTR covers a broad range of timber products and it deems timber and timber products to be in compliance with its mandates which are covered by valid licences issued pursuant to the terms of the EU Forest Law Enforcement, Governance and Trade (FLEGT)19 or the United Nations Convention on International Trade in Endangered Species of Wild Fauna and Flora20 (CITES). A key element of the FLEGT regulation is a voluntary scheme to ensure the import of only legally harvested timber. This scheme is realized through bilateral FLEGT Voluntary Partnership Agreements (VPAs) that are entered into by and between non-EU countries and the EU. Such VPAs include commitments and

17

The United Nations Programme on Reducing Emissions from Deforestation and Forest Degradation (UN-REED) is a collaborative programme sponsored by the UN. 18 Regulation (EU) No 995/2010 of the European Parliament and of the Council of 20 October 2010 laying down the obligations of operators who place timber and timber products on the market, Text with EEA relevance, OJ L 295, 12.11.2010, pp. 23–34. 19 Council Regulation (EC) No 2173/2005 of 20 December 2005 on the establishment of a FLEGT licensing scheme for imports of timber into the European Community. Available at: http://data. europa.eu/eli/reg/2005/2173/2020-01-01. 20 Available at: https://www.cites.org/sites/default/files/eng/disc/CITES-Convention-EN.pdf.

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actions to halt trade in illegal timber, notably by a licence scheme at the level of the non-EU country and the issuance of FLEGT licences at the EU level. The VPA also promotes better enforcement of forest law and an inclusive approach involving civil society and the private sector. In this sense, the EUTR is a contingent unilateral action taken by the EU that has extraterritorial consequences. It is contingent, rather than absolute—because the ban on illegal harvested timber can be avoided if VPAs are put in place. By acting unilaterally, the EU has established the privilege to, among other aspects, set as parameters for the global trade in timber its own measures and standards, through defining what constitutes “legal timber”. All these aspects are of upmost relevance, and cannot be minimized, as examples of EU unilateral global regulatory attempts. Albeit controversial, the EU unilateral and extraterritorial approach is not to be entirely condemned. As a key trader in timber, and in the absence of an international regulation, the EU is using its market power to address global deforestation. While there are positive aspects to the initiative—achieving substantial global reach as the EU market in timber is a key one and can promote similar effects by other countries—it remains questionable if the EUTR complies with the CBDR principle. The EUTR is a unilateral decision to prohibit illegal harvested timber within the EU market. For a timber supplier to be able to sell it must be licensed under the FLEGT or, for timber products without FLEGT licenses, EU importers must undertake due diligence to demonstrate that they are legal. As mentioned above, FLEGT licenses require a non-EU timber exporting state to enter a VPA. In this light, it is necessary to investigate whether the VPAs leave any room for differential treatment and for the application of the CBDR. According to a document called VPA Unpacked,21 the content of which is based on lessons and experiences captured and described by the EU FLEGT Facility hosted by the European Forest Institute, VPAs are governed by eight (8) principles.22 One of them is the principle of flexibility, which determines that VPA processes ought to be open to new ideas and solutions and adapt to the realities and goals of each Non-EU state. Therefore, in terms of CBDR, FLEGT can be compared to a quasi-partnership regime, since it combines non-EU and EU legislation and accepted multilateral environmental standards, with a high degree of participation from civil society, NGOs, and foreign governments. In this context, it can be said that the EU is the co-creator of norms (a partner), not a unilateral global regulator (Morgera 2013). However, this perception is not shared by all and some argue that, despite ambitions towards sustainable, ethical, and participatory governance, VPAs at best promote a reductionist model of participation aimed at technical solutions with little consideration of socio-economic and political contexts (Wodschow et al. 2016).

21

Available at: https://ec.europa.eu/environment/forests/pdf/VPA%20Unpacked.pdf. A VPA: (i) is voluntary, but legally binding; (ii) is participatory and reflects a national consensus; (iii) is practical and results-oriented, (iv) transparent, (v) is more than a trade agreement; (vi) promotes good governance; (vii) is country-owned; and (viii) is flexible.

22

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Be as it may, despite pro and contrary views, FLEGT pays homage to the domestic rules of non-EU timber suppliers, thus being respectful of these countries’ sovereignty. Nonetheless, the lack of participation by non-EU states and the lengthy implementation of VPAs illustrates that the proposal remains particularly challenging, in terms of both the program’s requirement for participation and the need to implement broad non-EU domestic reforms (Decottigny 2020). For the EU, this is a means to implement green governance, allowing it to raise the level of environmental protection, while setting clear and specific criteria for access to its market without creating distortions among producers. However, it should be mentioned that the creation of standards by the EU—with extraterritorial implications—does not necessarily entail fair and even competition among states, especially when considering their various levels of development, notably their domestic regulatory framework.

5 Conclusion The extraterritoriality issue, considered within a matrix of international law principles, must be understood not only in its formal aspect but also in its material one. Contrary to the position that grants the territory a pivotal importance in international law—probably influenced by its “qualifying” nature under a classic definition of state—the impact (direct or indirect) of the prescriptive jurisdiction of a legal system, represented here by EU regulatory systems (taken here in its hard and soft law aspects), on the systems of other states or groups of states is as relevant. Therefore, comprehension of the extraterritoriality conundrum cannot be achieved by assessing formal geographical limits. It is necessary to evaluate the capacity of a given regulatory framework to “impose” certain obligations on producers and suppliers as a condition for accessing a given consumer market. In the EU case addressed here, considering that some of these obligations, which must necessarily be observed by organizations (companies and other actors), takes place within the EU territory/space, and any spill over impacts onto third countries’ systems, which forces individuals and legal entities (and sometimes even a non-EU state as well) to observe foreign regulations—i.e., EU standards and obligations—is of relevance to research. This article, more specifically, carried out an analysis of the timber sector, seeking to delimit the extraterritoriality effects and implication of the EUTR that crosses EU geographical borders to reach foreign markets and suppliers which trade with the EU, that is, extraterritoriality which, in this case, entails measures applicable to foreign producers and suppliers that wish to gain access to the EU internal market and, thus, must fulfil certain conditions as previously described above. It should be mentioned that there is an evident positive aspect arising from the adoption by the EU of certain domestic laws that have extraterritorial implications. In this sense, derived from an environmental protection paradigm, which aims to combat deforestation, a global lever to increase international levels of environmental protection can be developed and created, in addition to serving as a means to set

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clearer rules so that market access may be achieved under a more equitable manner. Nevertheless, such access does not effectively reach all non-EU states given the strict criteria adopted and the difficulty foreign companies experience in complying with these. In addition, it is worth mentioning that within the framework of European funds, companies located in the EU (or that have their headquarters there—the so-called societatis europeas) have access to a wide range of subsidies, grants and loans that help them to comply with and conform to the stringent criteria adopted by the EU, which does not apply, in principle, to non-EU companies. Then, extraterritoriality can cause negative consequences on competition, especially when considering access of producers outside the EU, restricting the possibility of the expansion and growth of international trade. Finally, it should also be noted that the extraterritoriality covered here does not exclude other forms of “indirect impact” European standards may produce on non-EU suppliers and markets, as well on foreign regulatory agencies. It is evident here that there is an obvious mismatch between the levels of protection to be achieved and the effective means (i.e., resources, funds, and other types of support) to do so, demonstrating the dichotomy between the discourse of the protection of the environment (albeit valid) and the protection of the EU domestic market

References Bradford A (2012) The Brussels effect. Northwest Univ Law Rev 107(1):25–66 Coppel J (1993) A hard look at the effects Doctrine of Jurisdiction in public international law. Leiden J Int Law 6(1):73–90. https://doi.org/10.1017/S0922156500001643 Crawford J (2019) Brownlie’s principles of public international law, 9th edn. Oxford University Press, Oxford, New York Cullet P (2016) Differential treatment in environmental law: addressing critiques and conceptualizing the next steps. Transnat Environ Law 5(2):305–328. https://doi.org/10.1017/ S204710251600025X Decottigny H (2020) Addressing global deforestation through market power and the empowerment of developing countries: the EU FLEGT initiative as an unusual – yet innovative – example? blogdroiteuropéen, 26 February. Available at: https://blogdroiteuropeen.com/2020/02/26/ addressing-global-deforestation-through-market-power-and-the-empowerment-of-developingcountries-the-eu-flegt-initiative-as-an-unusual-yet-innovative-example-by-helene-decottigny/. Accessed 13 July 2020 Keohane RO, Victor DG (2011) The regime complex for climate change. Perspectives on politics. American Political Science Association, Cambridge University Press 9(1):7–23 Klabbers J (2017) International law. Cambridge University Press, West Nyack. Available at: https:// public.ebookcentral.proquest.com/choice/publicfullrecord.aspx?p¼4829802. Accessed: 11 July 2020 Morgera E (2013) Ambition, complexity, and legitimacy of pursuing mutual supportiveness through the EU’s external environmental action. In: Van Vooren B, Blockmans S, Wouters J (eds) . Oxford University Press, The EU’s role in global governance, pp 195–208. https://doi. org/10.1093/acprof:oso/9780199659654.003.0013 O’Neill K (2001) The changing nature of global waste management for the 21st century: a mixed blessing? Glob Environ Polit 1(1):77–98 Parrish AL (2011) Evading legislative jurisdiction. SSRN Electron J. https://doi.org/10.2139/ssrn. 1762138

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Rajamani L (2019) Differentiation. In: Aguila Y, Viñuales JE (eds) A global pact for the environment - legal foundations. C-EENRG (C-EENERG 2019-1), Cambridge, pp 167–176 Scott J (2014) Extraterritoriality and territorial extension in EU law. Am J Comp Law 62 (1):87–125. https://doi.org/10.5131/AJCL.2013.0009 Sen A (2001) Development as freedom. 1st edn. 6th print. Knopf, New York Statistical Office of the European Communities (2020) The EU in the world: 2020 edition. Available at: https://op.europa.eu/publication/manifestation_identifier/PUB_KSEX20001ENN. Accessed: 8 July 2020 Whatstein L (1992) Extraterritorial application of EC competition law — comments and reflections. Israel Law Rev 26(2):195–237. https://doi.org/10.1017/S0021223700010918 Zerk JA (2010) Extraterritorial jurisdiction: lessons for the business and human rights sphere from six regulatory areas. Corp Soc Responsib Initiative Work Pap 59:222

Jamile Bergamaschine Mata Diz Graduate in Law from the Universidade Federal de Viçosa (1997), Master in Institutions and Policies of the EU—Universidad Camilo José Cela (2005), Master’s in Public Law—UNIVERSIDAD DE ALCALÁ DE HENARES (2003) and PhD in Public Law—UNIVERSIDAD DE ALCALÁ DE HENARES (2005). Jean Monnet Professor of Community Law (565401-EPP-1-2015-1-BR-EPPJMOCHAIR). She has various articles, book chapters and books. She is currently a visiting professor at the Universidad de la Republica do Uruguay, Universidad de Castilla-la Mancha, Universidad de Alcalá de Henares, Universidad Anahuac, and Universidad de Buenos Aires. Adjunct professor at the Federal University of Minas Gerais and the Fundação Universidade de Itaúna and former professor at the Federal University of Viçosa. Director of the Jean Monnet Professor of Derecho Comunitario UFMG and member of the Jean Monnet Professor of Community Law UAH. Legal advisor to the Mercosur Secretariat (2008–2009). Coordinator of GT-14 FOMERCO. Member of the Latin American Universities Network. She has carried out scientific projects with the institutions of the Andean Community of Nationals and the Central American Integration System. She has experience in Law, with an emphasis on Public International Law, acting mainly in the following areas: Mercosur, European Union, Integration Process, Community Law and Environmental Law. Hélio Eduardo de Paiva Araújo Doctoral student in the “European Studies” field of studies of the research area State, Reason and History at the Federal University of Minas Gerais—UFMG (2023). Master’s in public international law from the Graduate Institute of International and Development Studies—IHEID, Geneva, Switzerland (2018), Former Adviser to the Administrative Council for Tax Appeals—CARF (2008–2016). MBA from Bernard M. Baruch College, New York, USA (2001). Bachelor of Law from the Federal University of Minas Gerais—UFMG (1996).

Contributions of the Seventh Framework Programme of the European Union on Environmental Matters: Future Perspectives on the Matter Carlos Molina del Pozo

Abstract With the Extraterritoriality of EU Economic Law developed, we consider necessary to face the most immediate future perspectives regarding the aforementioned environmental matter, which It is a generator of important critical literature, political argument and legislative projection in recent years, at the same time that it has been assuming such high levels of evidence evident in today’s society, increasingly aware and with a greater degree of responsibility for the harmful consequences that It could cause a major ecological disaster or global scope and scope. Taking the context of the European Union as a fundamental perspective on the realization of the current analysis, taking into account that it is necessary to offer a contextualization about the legal bases and foundations that emanate from the Union, in environmental matters, as well as the most relevant measures that have been last about this policy in recent years. All this with the purpose of entering, later, in the analysis of the essential objectives established in the Framework Program, and being able to offer, from our opinion, a future perspective that faces some of the main current problems that environmental matters offer us, stories like the US withdrawal. UU. of the Paris Agreement or the irremediable environmental catastrophe and the possible non-return of disasters caused in the last century, and which, as we say, seem to be absolutely irreversible.

The author wishes to record his gratitude to Verónica Zawadzki Manteca and Virginia Saldaña Ortega, collaborators in my Jean Monnet Chair “ad personam” of European Union Law, for their invaluable support in the preparation of this work. C. Molina del Pozo (*) Cathedratic Professor of Administrative Law and Jean Monnet Professor “ad personam” of European Union Law at the University of Alcalá, Madrid, Spain e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 N. Cunha Rodrigues (ed.), Extraterritoriality of EU Economic Law, European Union and its Neighbours in a Globalized World 4, https://doi.org/10.1007/978-3-030-82291-0_16

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1 Introduction: Legal Bases and Foundations of the European Union in Environmental Matters The European Union has one of the highest environmental standards in the world and it is not trivial to state how environmental policy represents an essential element in helping to bring together and make the European Union’s economy visible, as a counterweight to great powers, in a scenario of globalization. The measures that I will present below are adopted bearing in mind that environmental quality is essential in different areas, whether for our health, the economy or our own wellbeing. However, the European Union faces major challenges, including climate change, unsustainable consumption and production, as well as various forms of pollution. Be that as may, environmental policies and legislation emanating from the European Union seek to protect natural habitats, ensure the maintenance of the atmosphere, ensure proper waste disposal, improve knowledge about toxic chemicals and help companies to move towards a sustainable economy and to admit as a maxim the concept “who pollutes pays”.1,2 For all these reasons, in environmental matters over the years, there have been different measures taken, both in a particular way by the Member States, as well as jointly through the European Union itself. However, it must be considered that this is an extremely extensive area, in such a way that it has been regulated through the creation and implementation of a series of modified policies, depending on the moment and the historical situation. In any case, attempts have always been made to adapt these measures to achieve effective compliance with all the general principles that inform environmental policy, namely: the principle of caution, prevention, precaution and correction of pollution at its source. All this, by virtue of the competence granted to it, through articles 11 and 191 to 193 of the Treaty on the Functioning of the European Union.3 Specifically, in article 191 of the TFEU, it is stated how the fight against climate change is an explicit objective of the environmental policy of the European Union, with sustainable development also being a general objective for the supranational organization, which it undertakes to achieve a “high level of protection and improvement of the quality of the environment”.4 Furthermore, the European Union turns out to be competent to act in all areas, except where such competence is limited, by the principle of subsidiarity and by the requirement of unanimity required in the Council for certain areas. Likewise, it

1

Directive 2004/35/CE of the European Parliament and of the Council, of April 21, 2004, on environmental liability in relation to the prevention and repair of environmental damage. Available at: https://eur-lex.europa.eu/legal-content/ES/ALL/?uri¼CELEX%3A32004L0035 (Retrieved February 10, 2020). 2 In this regard, see: Environment and Climate Change. Available at: https://eur-lex.europa.eu/ summary/chapter/environment.html?root_default¼SUM_1_CODED¼20&locale¼es (Retrieved February 10, 2020). 3 Molina del Pozo (2018). 4 See Article 3 of the Treaty on European Union (TEU).

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can be stated that, since the Single European Act of 1987, this environmental matter, under the heading “Environment”, has been the first common legal basis in this environment for the Member States. To the extent that the role of the European Parliament as a co-legislating institution of the Union was subsequently gradually strengthened, and with the aim of trying to make the most of the environmental measures adopted by the European Union, it was understood, as a necessary element, to carry out strict compliance with all the regulations issued by the Union, in addition to ensuring that there is greater security in the application of environmental policy in order to combat, in this way, to the extent or if possible, climate change and, likewise, establish a clear reinforcement, in the revisions of the Treaties, of the need to gradually protect the environment. With all the above, what has been achieved is that there is a basic framework through which the present and future environmental situation is evaluated, the regulations to be taken into account by the Member States are applied and their compliance and tracing. Consequently, and motivated by all this, the Commission has been formulating a series of programmes through which future legislative proposals and objectives for environmental policy are established. In the same vein, it seems necessary for us now to highlight the conceptual bases and essential notions that support the drafting of the Seventh Action Programme on the Environment, carried out in 2013 and due to conclude in 2020, with its statement: “Living well, within the limits of our planet”, and which set a wide range of initiatives and priority objectives for the Union.

2 Essential Objectives Established in the Last Framework Programme With the General Programme of Action of the Union in the field of the Environment until 2020,5 a series of key objectives have been established that the programme itself has been establishing throughout these years. There are nine essential objectives, but the first three have to be interrelated and particularly pursued in parallel, namely:6

5

Onwards, VII PMA. Decision number 1386/2013/EU of the European Parliament and of the Council of 20 November 2013 relative to General Union Environment Action Programme to 2020 “Living well, respecting the limits of our planet”. Available at: https://eur-lex.europa.eu/legal-content/ES/TXT/? uri¼CELEX%3A32013D1386 (Retrieved February 10th 2020).

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Protect, Conserve and Enhance the Natural Capital of the Union

To protect the biodiversity that provides essential goods and services, it is necessary to sustain them through Union legislation, such as the Water Directive,7 the Marine Strategy,8 the Urban Wastewater Directive,9 legislation on climate change, Industrial emissions among others that, in turn, also contribute to reducing the loss of nutrients, as well as alleviating the pressures on the soil and biodiversity. However, despite this, the Union continues to lose these elements, and it is increasingly clear how severely damaged ecosystems are,10 which is why it is absolutely necessary to continue to apply coherent legislative measures that contribute to the protection of the environment, trying to tackle problems at their source. To protect, conserve and enhance the Union’s natural capital, the 7th EAP planned to ensure that by 2020: (a) The loss of biodiversity and the degradation of ecosystem services, including pollination, ecosystems and the services they provide has been stopped and at least 15% of degraded ecosystems have been restored. (b) The impact of the pressures exerted on transitional, coastal and fresh waters to achieve, maintain or improve the good condition referred to in the Water Framework Directive has been considerably reduced. (c) The impact of the pressures exerted on marine waters has been reduced to achieve or maintain good environmental status. (d) Air pollution and its impacts on ecosystems and biodiversity have continued to be reduced. (e) In relation to land, which is managed in a sustainable way in the Union, the soil is adequately protected and contaminated places continue to be cleaned up.

7

Directive 2000/60/EC of the European Parliament and of the Council, of October 23, 2000, which establishes a Community framework for action in the field of water policy. Available at: https://eur-lex.europa.eu/eli/dir/2000/60/oj?locale¼es (Retrieved February 10, 2020). 8 Directive 2008/56/EC of the European Parliament and of the Council, of June 17, 2008, establishing a framework for Community action for marine environment policy (Framework Directive on marine strategy) (Relevant text for the purposes of the EEE). Available at https://eur-lex.europa.eu/legal-content/ES/ALL/?uri¼CELEX%3A32008L0056 (Retrieved February 10, 2020). 9 Council Directive 91/271/EEC, of May 21, 1991, on the treatment of urban wastewater (OJ L 135, 30.5.1991, p. 40). Available at: https://www.boe.es/buscar/doc.php?id¼DOUE-L-1991-80646 (Retrieved on February 10, 2020). 10 European Environment Agency: The European environment – state and outlook 2020, executive summary. Available at: https://www.eea.europa.eu/es/publications/el-medio-ambiente-en-europa (Retrieved February 10, 2020).

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(f) Regarding the cycle of nutrients, nitrogen and phosphorus, this is managed in a more sustainable and efficient way in terms of the use of resources. (g) Moreover, ensure that the management of forests is sustainable and that forests, their biodiversity and the services they provide are protected and the resilience of forests against climate change, fires, storms, pests is improved.

2.2

Make the Union a Low-Carbon, Resource-Efficient, Green and Competitive Economy

Here, what is intended is that a transition takes place towards an economy characterized by its efficiency when using all resources, dissociating, as far as possible, economic growth from the use of resources, energy and environmental impact, with the latter being reduced. To achieve all this, the support of Member States must be counted on in order to improve their practices, especially industrial ones. It is established in the said Programme that, by 2020: (a) the Union has met its climate and energy targets, while already working to reduce GHG emissions by 80–95% by 2050, compared to 1990 levels, as part of the effort to keep the average temperature rise below 2  C compared to pre-industrial levels, with the conclusion of an agreement on a regulatory framework for climate and energy as a key step in this process. (b) the overall environmental impact of the main sectors of economy of the Union has been significantly reduced, their efficiency in the use of resources has been increased and benchmarks have been established and measurement methods in place, market incentives are being applied and policies aimed at encouraging business investment in resource efficiency and green growth is being stimulated through measures to promote innovation. (c) structural changes in production, technology and innovation, as well as consumption patterns and lifestyles, have reduced the overall environmental impact of production and consumption, in particular in the food sectors, housing and mobility. (d) waste is managed safely as a resource and to prevent damage to health and the environment, the absolute volume of waste generation and waste generated per capita registering a decrease, with discharges limited to residual waste, that is to say, to the non-recyclable and non-recoverable, taking into account the postponements provided for in the regulations. (e) water shortage in the Union has been prevented or significantly reduced.

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Safeguarding the Citizens of the Union Against Environmental Pressures and Risks to Health and Well-Being

One of the primary objectives of the Union, in general, is to ensure the protection of the citizens of the Member States. In order to achieve this objective, also from an environmental point of view, it is necessary to reduce the levels of air pollution, including indoor air pollution, since a considerable proportion of the population of the Union is at higher levels than those advised by the WHO.11 In addition, there are other different problems, as could be pointed out: exposure in large urban areas to high levels of noise, difficulties in accessing quality water in rural areas, the effects of chemical products, and health problems and inconveniences, in addition to, on another level, the questions that arise as a consequence of various climatic phenomena, such as droughts, floods, storms, etc., all of them evident consequences of climate change. To protect the citizens of the Union from environmental pressures and risks to health and well-being, the Programme guarantees that by 2020: (a) the quality of outdoor air in the Union will have improved significantly, approaching WHO recommended values, and the quality of indoor air improved, in accordance with the relevant WHO guidelines; (b) noise pollution in the Union will have decreased considerably, approaching the levels recommended by WHO; (c) citizens throughout the Union will enjoy high quality standards for drinking water and bathing water; (d) the combined effects of chemicals and safety concerns posed by endocrine disruptors are effectively controlled in all relevant Union legislation, and risks to the environment and health are assessed and minimized, in particularly with regard to minors, which are associated with the use of dangerous substances, including chemical substances present in products. In this sense, long-term measures will be identified with a view to achieving the goal of a non-toxic environment; (e) the use of pesticides does not cause harmful effects on human health or have an unacceptable influence on the environment, and that these products are used in a sustainable way; (f) safety concerns related to nanomaterials and materials with similar properties are adequately controlled, applying a consistent approach in legislation; (g) decisive progress has been made in adapting to the impacts of climate change.

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Report: The European environment: state and prospects 2020. Available at: https://www.miteco.gob.es/va/calidad-y-evaluacion-ambiental/temas/agenciaeuropea-medio-ambiente-informacion-ambiental/soer/default.aspx (Retrieved on February 10, 2020).

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Maximize the Benefits of Union Environmental Legislation by Improving Its Enforcement

In this same sense, and with regard to the benefits of the effective application of the Union’s environmental legislation, we can distinguish three aspects: the creation of equitable conditions for economic agents operating in the internal market; the promotion of innovation; and, the promotion of the so-called “pioneer advantages”, aimed at European companies in various sectors. Be that as may, the highest priority is given to improving the implementation of the Union’s environmental acquis in the Member States. In order to obtain the maximum benefit, as a consequence of a better application of environmental legislation, it is guaranteed that, by 2020: (a) the citizen will have access to clear information on how the Union’s environmental legislation is being applied in line with the Aarhus Convention;12 (b) compliance with specific legislative provisions on the environment will have increased; (c) compliance with Union environmental legislation will have been achieved in all administrative areas, while ensuring a level playing field in the context of the internal market; (d) Union environmental legislation and its implementation will inspire more confidence in citizens; (e) the application of the principle of effective judicial protection of citizens and civil society organizations will be facilitated.

2.5

Improve Knowledge of the Environment and Expand the Evidence Base on Which to Base Policies

In order to improve knowledge of the environment, we must bear in mind that policy in this area is based mainly on monitoring the environment, carrying out continuous assessments, taking into account the data and indicators associated with the application of the Union legislation, in addition to the work carried out in the context of formal scientific research, as well as citizen science initiatives. In addition, it is true that, in recent years, there has been an improvement in the quality of the information collected and the use of statistics on the environment, requiring a constant investment to be made in order to guarantee the existence of indicators and data that allow us to compare and guarantee the highest quality for the 12

Instrument of Ratification of the Convention on access to information, citizen participation in decision-making and access to justice in environmental matters, signed in Aarhus (Denmark), on June 25, 1998. Available at: https://www.boe.es/diario_boe/txt.php?id¼BOE-A-2005-2528 (Retrieved on February 10, 2020).

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information obtained. However, there are still gaps in the data and knowledge offered, consequently demanding truly advanced research work and modelling tools that provide a better understanding of the current environmental situation. There is also another series of gaps that can be highlighted. Thus, for example, the uncertainty, in relation to the implications for human health and the environment, that endocrine disruptors have, the effects of chemical substances present in products, nanomaterials, etc. Likewise, there are gaps in relation to maximum possible exposure to hazardous substances, especially in vulnerable groups. In order to improve the knowledge and information base of the Union’s policy on the environment, the 7th EAP guaranteed that, by 2020: (a) Policy makers and stakeholders should have a more informed basis for developing and implementing environment and climate policies, in particular for understanding the environmental impact of human activities and calculating the costs and benefits of acting, as well as those that would imply non-performance; (b) significantly improve our knowledge and ability to assess and manage emerging climate and environmental risks; (c) the science-policy interface will have been consolidated, in particular with regard to the accessibility of data for citizens and the contribution of citizen science; (d) the influence of the Union and its Member States in international science-policy forums will have been intensified, in order to improve the knowledge base on international environmental policy.

2.6

Ensure Investments for Climate and Environment Policy, Taking into Account the Environmental Costs of All Activities

It is quite evident that in order to ensure and meet the stated objectives, especially in relation to the climate and the environment, economic investments are required from public or private sources, which allow for all the needs that arise in this context to be met. However, it is difficult to find investors in this area, in addition to highlighting the serious problems that some countries already present “ab initio” in the financial and economic field. Indeed, in order to ensure the essential investments for environmental and climate policy, as well as to deal with environmental externalities, the European Union, through the VIIth EAP, guaranteed that, by the end of the period of validity of the continuing Programme, in 2020: (a) the objectives of the environment and climate policy were realized in a costeffective manner, and such objectives were supported by adequate funding; (b) increased funding from the private and public sectors for environmental and climate-related expenditures;

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(c) the value of natural capital and ecosystem services, as well as the cost of their degradation, have been adequately assessed and taken into account in political decision-making and investments.

2.7

Better Integrate Concern for the Environment in Other Areas and Ensure the Coherence of New Policies

Although the protection of the environment through the use and implementation of public policies is a requirement demanded by the Treaties, the progress made at present is not entirely sufficient to be able to manage the negative trend that is evident today. For this reason, the use of effective instruments to achieve this objective seems to be more than necessary, in addition to ensuring compliance with them, by the Member States, requiring that the measures they must apply are consistent and carried out over time, and sufficient to consolidate and strengthen the aforementioned compliance. With the aim of achieving intensification of environmental integration and coherence between policies, the 7th EAP confirmed that, by 2020, the sectoral policies of the Union and the Member States will be developed and applied in such a way that they favour the achievement of pertinently determined objectives and targets in the matter of climate and the environment.

2.8

Increase the Sustainability of the Cities of the Union

As a consequence of the grouping of people in relation to population density in urban and peri-urban centres, an increase in sustainability in the cities of the Union must be ensured, as this will have an impact on the quality of life of citizens, impacting in a direct way on their health. In this same sense, it is pertinent to point out that we must continue to fight against the ecological problems suffered by most cities and that are caused by circumstances, such as air quality, traffic, high noise levels, scarcity of water and, paradoxically, also by the floods produced by the overflowing of rivers or streams, as well as by the increasingly frequent existence of extensive storms that cause other adverse weather phenomena, progressively decrease due to human capture of enormous surfaces previously occupied by green areas. Indeed, with the purpose of increasing the sustainability of the cities that occupy the territory of the Union, the VIIth EAP ensured that, by 2020, most of the cities and towns of the Union would be applying planning and design policies for sustainable urban space, including the necessary innovative approaches to urban public transport and mobility, in addition to everything related to sustainable buildings, energy efficiency and the conservation of urban biodiversity.

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Strengthen the Effectiveness of the Union in Tackling Environmental and Climate Challenges Internationally

It can be stated that, at present, the sustainable use of resources constitutes one of the most significant existing objectives, which the world faces, due to the great repercussions that they present, in being able to contribute to achieving the end of poverty, so that a sustainable future,13 as has been well defined, can be guaranteed. On the other hand, at the Conference known as “Rio + 20”,14 world leaders once again renewed their commitment in favour of a sustainable development and future, in addition to trying to ensure and fight to implement and achieve the promotion of a better future for the planet, both for present and future generations, strengthening sustainability from different areas and from an economic, social and environmental point of view. The leaders from the different countries participating in the Conference also recognized that the verification of an inclusive and green economy is a pertinent instrument to achieve sustainable development. In addition to the above, there was also considerable emphasis on the fact that, in the world in which we find ourselves today, with a growing and increasingly urbanized population, the challenges we face today require action, not only individually to be developed by the Member States, but also require the existence of international action in certain matters, such as water resources, oceans, sustainable use of land and ecosystems, efficiency in the use of resources, especially waste, good management of chemical products, sustainable energy and climate change, among many other matters. For all these reasons, it should be emphasized that many of the primary objectives established in the 7th EAP have only been achieved within a perspective and within a global, humanitarian approach and in cooperation with partner countries, the other countries and overseas territories. Thus, the Union and its Member States must continue to participate in the relevant processes at international, regional and bilateral levels in a determined, focused, united and coherent manner.15 While considering these objectives, the Programme also has another series of objectives, expressed in a more detailed manner, apart from those mentioned above, but which are mostly consequences of those already mentioned. Therefore, having raised and fulfilled the former, other related objectives may be established, perhaps not as urgent as these at present.

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United Nations Development Programme: Human Development Report (2011). Available at: https://www.undp.org/content/undp/es/home/librarypage/hdr/human_ developmentreport2011.html (Retrieved February 10, 2020). 14 The Rio + 20 Conference took place in Rio de Janeiro in June 2012, on the 20th anniversary of the first United Nations Conference on Environment and Development. 15 Decision number 1386/2013/EU of the European Parliament and of the Council, of 20 November 2013, relative to General Union Environment Action Programme to 2020 ‘Living well, within the limits of our planet’, Page 197. Available at: https://eur-lex.europa.eu/legal-content/ES/TXT/?uri¼CELEX%3A32013D1386 (Retrieved February 15, 2020).

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To strengthen the Union’s effectiveness in tackling international environmental and climate challenges, the 7th EAP determined that by 2020: (a) the conclusions of “Rio + 20” will have been fully integrated into the Union’s foreign and domestic policies, effectively contributing to global efforts to implement agreed commitments, including those made under the Rio Conventions, as well as initiatives aimed at promoting the global transition towards a green and inclusive economy in the context of sustainable development and poverty eradication; (b) the Union will be effectively supporting national, regional and international efforts to solve environmental and climate problems as well as ensure sustainable development; (c) the impact of Union consumption on the environment outside its borders will have been reduced.

3 Most Relevant Measures Adopted The most relevant measures adopted from the European Union are diverse, but they can be summarised through a series of environmental policies in the following areas and objectives: (a) Circular economy: as a new strategy, for a more competitive and efficient economy when using resources. To this end, in 2018, from Brussels, a new package of measures on circular economy16 was implemented, through which a new path began to open to new business opportunities while boosting competitiveness. The extensive measures were aimed at modifying the entire life cycle of the product, without limiting themselves to addressing the end-of-life stage, underlining the clear will of the Commission to transform the economy of the European Union and achieve results. As a consequence of the incentives that have been described, it is understandable that innovative and more efficient ways of producing and consuming should gradually emerge. In addition, it should be possible to create numerous jobs in Europe at the same time, preserving valuable and increasingly scarce resources, as well as reducing the environmental impact of the use of resources and injecting new value into waste products. (b) On the other hand, sectoral measures have also been established, as well as quality standards for secondary raw materials. Key actions taken include: • financing of more than € 650 million from Horizon 2020 and € 5.5 billion from the Structural Funds;

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Available at: https://ec.europa.eu/commission/presscorner/detail/es/MEMO_15_6204.

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• measures to reduce food waste, including a common measurement methodology, improved timing and tools to achieve the sustainable development goal of halving food waste by 2030; • development of quality standards for secondary raw materials in order to strengthen the confidence of operators in the internal market; • measures in the work plan on ecological design, for the 2015–2017 period, installing and promoting the repairability, durability and recyclability of products, in addition to energy efficiency; • a revision of the Fertilizers Regulation, to facilitate the recognition of organic and residue-based fertilizers in the single market and to strengthen the role of bionutrients; • a strategy for plastic in the circular economy, capable of addressing the problems of recyclability, biodegradability, the presence of hazardous substances in plastics and the sustainable development objective of significantly reducing marine litter; • a series of actions on the reuse of water, including a legislative proposal on the minimum requirements for the reuse of wastewater. In another vein, the revised legislative proposal on waste sets clear reduction targets and sets out an ambitious and credible long-term path for waste management and recycling. In order to ensure their effective implementation, the waste reduction targets are accompanied, in the new proposal, by concrete measures to address obstacles on the ground and the different situations that exist in the Member States. Of note is that the essential elements of the revised waste proposal include: • a common objective of the European Union for the recycling of 65% of municipal waste between now and 2030; • a common goal of the European Union for the recycling of 75% of packaging waste by 2030; • a binding target of reducing landfill disposal to a maximum of 10% of all waste by 2030; • a ban on landfilling of separately collected waste; • promoting economic instruments to discourage landfilling; • simplification and improvement of definitions and harmonization of methods for calculating recycling rates throughout the European Union; • concrete measures to promote reuse and stimulate industrial symbiosis, converting the by-products of the raw materials of one industry to another; • financial incentives for producers to put greener products on the market and support for recovery and recycling regimes (e.g. packaging, batteries, electrical and electronic equipment, vehicles). Given the above, it follows as a fundamental premise that the circular economy is now a global megatrend. However, it is felt that much is still needed to scale up action at the level of the European Union and globally, fully close the loop and fully take advantage of what the Union has done. Interaction with stakeholders suggests that areas not covered by the action plan could be investigated to complete the

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circular agenda in the future. It is considered that actions would be needed, as suggested in the Reflection Paper “towards a sustainable Europe by 2030”, in which the circular economy should become the backbone of the European Union’s industrial strategy, allowing circularity in new areas and sectors, with product life cycle assessments being the norm and expanding the eco-design framework as much as possible. In addition, work has begun on chemicals, the non-toxic environment, eco-labelling and eco-innovation. Critical raw materials and fertilizers have been accelerated by the European Union, to reap the maximum benefit from a transition to a circular economy. Similarly, consumers should be empowered to make informed decisions and efforts should be enhanced by the public sector through sustainable public procurement. In any event, the objective should be to ensure that the economy is profitable and safe for citizens and the environment. Therefore, the European Union must also continue to support research, innovation and investment as a priority. Building on the example of the European strategy for Plastics in a circular economy, many other sectors with a high environmental impact and potential for circularity such as IT, electronics, mobility, the built environment, mining, furniture, food and beverages or textiles, could benefit from a similar holistic approach to becoming circular. In none of them has the full potential of the EU single market been exploited yet. Above all, the transition of the circular economy reinforces social and territorial cohesion and favors a balanced distribution of jobs that comply with health and safety standards, enabling the generation of fair and sustainable growth.17 (c) Marine and coastal environment: in order to protect and clean coasts, oceans and seas in a sustainable way, certain regulations have been created to meet these objectives, such as the Framework Directive on marine strategy. But, specifically, what is the objective of the Marine Strategy Framework Directive and how does it work? The Marine Strategy Framework Directive18 aims to achieve good environmental status (GES) for the marine waters of the European Union by 2020, as well as to protect the resource base on which economic and social activities related to the sea depend. It is undoubtedly the first legislative instrument of the Union related to the protection of marine biodiversity, since it contains the explicit regulatory objective that “biodiversity is maintained by 2020”, as a cornerstone to achieve the GES. Likewise, the Directive enshrines in a legislative framework the ecosystem approach for the management of human 17

Report from the commission to the European Parliament, the Council, the European economic and social committee and the committee of the regions on the implementation of the circular economy action plan, March 4, 2019. Available at: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri¼CELEX%3A52019DC0190 (Retrieved February 10, 2020). 18 Directive 2008/56/EC of the European Parliament and of the Council, of June 17, 2008, which establishes a framework for community action for marine environment policy. Available at https://eur-lex.europa.eu/legal-content/ES/ALL/?uri¼CELEX%3A32008L00 (Retrieved February 10, 2020).

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activities that have an impact on the marine environment, including the concepts of environmental protection and sustainable use. In order to achieve its objective, the Directive establishes European marine regions and subregions, on the basis of geographical and environmental criteria. The aforementioned Directive lists four European marine regions: the Baltic Sea, the North East Atlantic Ocean, the Mediterranean Sea and the Black Sea, located within the geographical limits of the existing Regional Sea Conventions. Cooperation between the Member States of a marine region and with neighbouring countries that share the same marine waters is already being carried out through these Regional Marine Agreements. In order to achieve GES in 2020, each Member State is required to develop a strategy for its marine waters (or marine strategy). In addition, because the Directive follows an adaptive management approach, the Marine Strategies must be kept updated and reviewed every 6 years.19 It is also worth highlighting another series of actions that have been undertaken, such as HelcomAction,20 QuietMed II,21 MedRegion,22 CeNoBS,23 Indicit II24 and RAGES.25 (d) Clean air: Note how, since the industrial revolution, the quality of the air we breathe has deteriorated considerably, mainly as a result of human activities. The increase in industrial and energy production, the burning of fossil fuels and biomass, as well as the dramatic increase in traffic on our roads, turn out to be factors that contribute to air pollution in our towns and cities, which, in turn, can generate serious problems both for the health of people and for the protection of the environment. As a result, it can be shown that much progress has been made in the fight against air pollutants, such as sulfur dioxide, lead, nitrogen oxides, 19

Available at: https://ec.europa.eu/environment/marine/projects/index_en.htm (Retrieved February 15, 2020). 20 Based on the implementation of actions to assess and identify effective measures to achieve GES in the marine region of the Baltic Sea. Available at: https://helcom.fi/helcom-at-work/projects/action/ (Retrieved March 20, 2020). 21 Joint programme for the evaluation of GES on noise in the Mediterranean marine region. Available at: http://www.quietmed-project.eu/ (Retrieved March 20, 2020). 22 Aimed at supporting the Mediterranean member states in the implementation of the framework directive of the new GES decision marine strategy and programmes of measures to contribute to regional/subregional cooperation. Available at: http://www.info-rac.org/en/projects/medregion (Retrieved March 20, 2020). 23 Supports the implementation of MSFD in the Black Sea by establishing a regional cetacean monitoring and noise monitoring system to achieve GES. Available at: https://accobams.org/main-activites/cenobs-project/ (Retrieved March 20, 2020). 24 Relating to the implementation of the indicator “Impacts of marine litter on sea turtles and biota”. Available at: https://indicit-europa.eu/ (Retrieved on March 20, 2020). 25 The objective of which is to offer risk-based approaches to good environmental status. Available at: https://ec.europa.eu/environment/marine/eu-coast-and-marine-policy/marine-strategy-frame work-directive/index_en.htm (Retrieved February 15, 2020).

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carbon monoxide and benzene. However, despite the progress made to date, poor air quality continues to cause serious and preventable problems. As a next step towards improving air quality, the European Commission in 2013 adopted a Clean Air Policy Package,26 which includes a Clean Air Programme for Europe, which set targets for 2020 and 2030, as well as a set of accompanying legislative measures. It should also be noted that, in 2018, the Commission adopted a Communication “A Europe that protects: Clean air for all”, which provides national, regional and local stakeholders with practical help to improve air quality in Europe.27 (e) Noise pollution: It is worth mentioning that environmental noise pollution is related to noise caused by road, rail and airport traffic, industry, construction, as well as certain other outdoor activities. Through the adoption of regulations that avoid, prevent and reduce the harmful effects on health of environmental noise, the aim is to remedy the consequences of prolonged exposure to noise. Indeed, noise can cause serious health effects measured by the human endocrine system and the brain, such as sleep disorders, cardiovascular disease, discomfort (a feeling of discomfort that affects general well-being), cognitive impairment and mental health problems. It can also cause direct effects such as tinnitus. It is a proven fact that the effects of noise exposure affect the economies of the European Union. It seems clear that they lead to a loss of productivity for workers, whose health and well-being are affected by noise. They also place a burden on health care systems and cause a substantial depreciation of property values.28 For this reason, revisions have been made to the Directive on environmental noise, such as Annex II of the Directive on environmental noise, through which the common methods of the European Union to calculate exposure to different noise levels are described. This also includes a set of formulas and coefficients that are used to calculate noise levels on the façade of buildings. The common methods were adopted through a revision of Annex II, in 2015. In addition, Annex III of the Directive on environmental noise,29 describes the methods for calculating the burden of disease caused by exposure to specific noise levels. The methods include dose-effect relationships for a set of health endpoints, such as cardiovascular disease, discomfort, and sleep disorders.

26

Available at: https://www.consilium.europa.eu/es/policies/clean-air/ (Retrieved March 20, 2020). Available at: https://ec.europa.eu/environment/air/index_en.htm (Retrieved February 15, 2020). 28 Available at: https://ec.europa.eu/environment/noise/index_en.htm (Retrieved February 15, 2020). 29 Directive (EU) 2020/367 of the Commission, of March 4, 2020, which modifies Annex III of Directive 2002/49/EC of the European Parliament and of the Council, regarding the establishment of evaluation methods for the harmful effects of ambient noise. Available at: https://www.boe.es/buscar/doc.php?id¼DOUE-L-2020-80377 (Retrieved March 20, 2020). 27

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A revised Annex III is currently being developed, following the latest scientific update on the health effects of noise by WHO.30 (f) Urban environment: This is intended to be carried out through the adoption of policies that help cities in their sustainable management. The general objective of this political push is to improve the sustainability of the cities of the European Union, in order to ensure that, by 2050, all Europeans “live well, within the limits of the planet”. Specifically, the Action Programme states that, by 2020: “. . . most cities in the Union are implementing policies for sustainable urban planning and design. . .” and that the Commission should develop: “. . . a set of criteria to evaluate the environmental performance of cities, taking into account the economic, social and territorial impacts”. The Directorate-General for the Environment of the European Commission (DG Environment) dedicates its effort and continues to work every day to improve the urban environment, and does this in various ways: – Through the general environmental legislation of the European Union, to ensure that European citizens enjoy, on the one hand, cities with clean air and water, avoiding exposure to excessive noise, and, on the other, cities that adequately manage waste, while protecting their nature and biodiversity, as well as promoting a better green infrastructure. – Through the European Green Capital and European Green Leaf initiatives, which allow cities to show their environmental performance and attitude. – By developing a new tool that will allow cities to compare their environmental recovery, assess progress compared to similar cities, share best practices and experiences, and track improvements over time.31 (g) Waste and recycling: in order to reduce the impact on the environment and the health of the population. To this end, the European Commission adopted an ambitious circular economy package, including revised legislative proposals on waste to stimulate Europe’s transition to a circular economy that boosts global competitiveness, fosters sustainable economic growth and creates new jobs. The revised legislative proposal on waste sets clear targets for waste reduction and sets an ambitious and credible long-term path for waste management and recycling. To ensure effective implementation, the waste reduction targets in the new proposal are accompanied by concrete measures—previously mentioned—to address obstacles on the ground and different situations in the Member States of the European Union. It should also be noted that, in recent years, the following legislative proposals on waste have been adopted: 30

Available at: https://ec.europa.eu/environment/noise/policy_dev_en.htm (Retrieved on February 15, 2020). 31 Available at: https://ec.europa.eu/environment/urban/index_en.htm (Retrieved February 15, 2020).

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Proposal for a Directive on waste32 Annex to the proposed Directive on waste Proposal for a Directive on packaging waste33 Annex to the proposal for a Directive on packaging waste Proposal for a Directive on landfills34 Staff working document - Implementation plan.35

Water resources: Currently considered as an essential point and, therefore, their protection is addressed as far as possible. With climate change, both floods and droughts are likely to be more frequent in Europe. Furthermore, aquatic ecosystems could also change. All this would result in the need to improve our water management much more to adapt to the future in the coming years. In light of all the above, the Commission has published its fifth Implementation Report that assesses progress in complying with the Water Framework Directive and the Flood Directive. Finally, it should be noted that, on September 17, 2018, an online public consultation was launched, which covered both the Water Framework Directive and the Flood Directive.36

4 Main Current Problems in the Environment We can state that, in the last decades, the European Union has, carried out the drawing up of an extensive and varied range of environmental legislation. As a result, air, water and soil pollution have been greatly reduced. Legislation on chemicals has been modernized and the use of many toxic and dangerous substances have been restricted. Today, the citizens of the European Union enjoy water of the highest quality and more than 18% of the territory has been designated as natural areas or protected territories. However, many persistent challenges remain, and these must be tackled together, in a structured way.

32

Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 2008/98/EC on waste. COM/2015/0595 final - 2015/0275 (COD). Available at: https://eur-lex.europa.eu/legal-content/ES/TXT/?uri¼CELEX%3A52015PC0595 (Retrieved March 21, 2020). 33 Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL amending Directive 94/62 /EC, on packaging and packaging waste. Available at: https://eur-lex. europa.eu/legal-content/ES/TXT/. 34 And subsequent DIRECTIVE (EU) 2018/850 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of May 30, 2018, amending Directive 1999/31/EC on the landfill of waste. Available at: https://eur-lex.europa.eu/legal-content/ES/TXT/PDF/?uri¼CELEX:32018L0850& from¼EN (Retrieved March 21, 2020). 35 Available at: https://ec.europa.eu/environment/waste/target_review.htm (Retrieved March 21, 2020). 36 Available at: https://ec.europa.eu/environment/water/index_en.htm (Retrieved March 21, 2020).

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The Seventh Environment Action Programme served as a guide to achieve the implementation of the European environmental policy, until 2020. As of this year, the intention is to establish a longer-term objective, and this is how far the European Union wants to go in its forecasts and progressive actions in environmental matters for the year 2050: In 2050, we will live well, taking into account the environmental limits of the planet. Aiming to reach an ecological welfare state that comes from an innovative circular economy in which nothing is wasted and natural resources are managed in a stable manner, and biodiversity is protected, valued and restored in a way that improves the flexibility of our society. We have also distanced ourselves from the high consumption of coal, setting the path towards a safe and sustainable globalized society.

It should be noted that, since the last report on the situation of the environment,37 evolution has not been as evident as expected. This has been due to the fact that the objectives set and already mentioned above for this year 2020 have not been achieved at all, especially in the field of biodiversity. However, the prospects for the future are hopeful and there is still the possibility of achieving these goals by 2030 and 2050. Despite the progress made in relation to resources and the circular economy, we can observe how trends have shown a slowdown in the reduction of waste generation and the percentage of renewable energy, without being sufficient to achieve and meet long-term objectives. It is estimated that, most likely, only the designation of marine and terrestrial protected areas will be fulfilled. In this way, it will become clear that if trends are not reversed, the state of nature will only worsen, as well as being accompanied by increased air, soil and water pollution. Regarding climate change and air and noise pollution, as we well know, the currently verifiable situation continues to be worrying, due to the large number of deaths for which these factors are responsible in Europe.38 The exit of the United States from the Paris Agreement is already more than probable and the worst existing omens since the threat of Donald Trump in this regard, are increasingly realistic. It is for this reason that, if the President of the United States carries out the procedure, under article 28, there is the possibility that he will abandon the Agreement. This event, carried out a few months ago, as we well know, has serious consequences for the planet, since the year 2015, among other things, went down in history as that in which the great achievement of the Paris Agreement was achieved after the completion of intense negotiations. Through the

37 Europe’s environment in 2015: future well-being depends on bolder policy, knowledge, investment and innovation measures. Available at: https://www.eea.europa.eu/es/pressroom/newsreleases/el-medio-ambiente-eneuropa (Retrieved on February 15, 2020). 38 400,000 premature deaths in Europe per year, according to the press release of the SOER 2020 Report, p. 3. Available at https://www.miteco.gob.es/es/calidad-y-evaluacion-ambiental/temas/agenciaeuropea-medio-ambiente-informacion-ambiental/soer/default.aspx (Retrieved on February 15, 2020).

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aforementioned Agreement, 195 countries of the 197 of which were part of the so-called United Nations Framework Convention on Climate Change, committed to joining before 2020 and to review their objectives every five years, to fighting together against climate change. The main objective was to prevent the global temperature from rising more than two degrees, as well as a series of commitments in terms of reduction, in relation to greenhouse gas emissions. The exit of the Paris Agreement by the United States39 will lead to serious consequences at the environmental level. All this, as is well known, has been triggered by the enormous impact that the United States has in relation to the volume of carbon dioxide emissions, as it is the country, after China, that emits the largest volume of that gas.40 In this sense, it is estimated that the level of emissions that it produces as a percentage represents approximately 15% of the global total, in such a way that, what was agreed by Obama as a commitment for 2030 could now be estimated from now on that this will not be fulfilled. In addition, it should be noted that the consequences of this fact not only refer to carbon dioxide emissions and the results they have on the environment but, in addition, it contributes approximately 20% of the Fund for the Environment, from the Paris Agreement. Therefore, we can affirm that, without a doubt, the decision of the United States to leave the Agreement will affect the lives of millions of people around the world, seriously harming and having a special impact on human rights, such as the right to food, water and health among others. In addition, this adopted, perverse position is likely to cause the so-called “contagion effect”. In this way, it could happen that other countries would also follow and go hand in hand with the United States, thinking and maintaining publicly that the Paris Agreement has not turned out to be, after all, as important as it was believed to be at the outset.

5 Conclusions Taking into account all that has been stated, it can be seen how the Seventh Framework Programme served to determine a wide series of short-term objectives, which were to be promoted through the implementation and practical and actual execution of public policies, focused on achieving a higher level of care and attention to the environment, all of which should be the fundamental basis for achieving the objectives set for 2050, which, unfortunately, have not been met by the expected and desired deadlines. 39

Paris Climate Conference (COP21), held in December 2015. Available at: https://ec.europa.eu/clima/policies/international/negotiations/paris_es (Retrieved on February 15, 2020). 40 According to BP Statistical Review of World Energy 2019. Available at: https://www.bp.com/content/dam/bp/business-sites/en/global/corporate/pdfs/ news-and-insights/speeches/bp-stats-review-2019-bob-dudley-speech (Retrieved on February 15, 2020).

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In summary, we can see that, in 2020, Europe faces environmental challenges of unprecedented magnitude and urgency. Although the policies adopted by the European Union, in terms of climate and environment, have served to bring important benefits during the last decades, it can be said that, today, we continue to face persistent and far-reaching problems in areas such as the loss of biodiversity, resource use, the impact of climate change and environmental risks to health and well-being. Indeed, the truth is that, to achieve all the objectives which have been outlined, a variety of measures have been adopted, mainly at the national, regional or local level, in accordance with the principle of subsidiarity and always keeping in mind the shared nature and horizontality inherent to this Policy, which is why, in many cases, additional measures have been required and, in the future, will have to be mandated by the Union. Due to the aforementioned situation, one of the purposes clearly stated in the Programme has been that the different administrative levels assume the achievement of shared objectives and that equitable conditions should be guaranteed for companies and public authorities, all of this while taking into account that natural goals and objectives also provide the necessary guidance and a predictable framework for action for policy makers and other stakeholders, especially in regions and cities, companies and cities. social partners, as well as in the case of private citizens.41 Finally, and bearing in mind the current health and social crisis situation that we are going through in all the Member States of the Union, we cannot forget the tragic and terrible consequences that COVID-19 is causing. It is necessary to affirm that the spread of the virus worldwide is unleashing a series of consequences that were not foreseen, especially in the field of contamination. In this sense, we must note that recent studies42 seem to show that there is an evident relationship between the level of environmental pollution and the effects on people who are prone to suffering from the disease or are more vulnerable to it, due to other different reasons, such as previous pathologies of a serious nature, older age, etc., increasing the risk of contracting COVID-19.43 However, on the other hand, the level of air pollution that existed prior to the appearance of the coronavirus has decreased, and this has been due to the inactivity of many of the polluting companies, the decrease in vehicle traffic levels and, in general, from the producing or emitting sectors with the highest degree of pollution in the world. In addition, global mega-trends, such as demographic change, only intensify many of the existing challenges on an environmental scale, while rapid technological Fernández de Gatta Sánchez, D., “Séptimo Programa Ambiental de la Unión Europea, 20132020”, Revista Aragonesa de Administración Pública, Núm 74, p. 32. 42 For example, the Study conducted by CREA: Centre for Research of Energy and Clear Air “How air pollution worsens the COVID-19 pandemic”. Available at: https://energyandcleanair.org/publications/ (Retrieved March 21, 2020). 43 Available at: https://www.ambientum.com/ambientum/contaminacion/la-contaminacion-delaire-gran-aliado-del-covid-19.asp (Retrieved May 2, 2020). 41

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change brings new risks and uncertainties both for society in general, and for the planet as a whole.44 Therefore, I would agree with the general opinion that a change of course in the attitudes of our society is one of absolute urgency, so that it is possible to meet the objectives set in 2050, facing the existing challenges and, in short, fighting to be able to establish and enjoy, at the level of all humanity, a better future45 for the planet and the citizens that inhabit it.

References Molina del Pozo CF (2018) Tratado de Lisboa, 2ª edición, Editorial Universitaria Ramón Areces, Madrid

Regulation Directive 2004/35/CE of the European Parliament and of the Council of 21 April 2004 on environmental liability with regard to the prevention and remedying of environmental damage. Available at: https://eur-lex.europa.eu/legal-content/ES/ALL/?uri¼CELEX%3A32004L0035 Directive 2000/60/EC of the European Parliament and of the Council of 23 October 2000 establishing a framework for Community action in the field of water policy. Available at: https://eur-lex.europa.eu/eli/dir/2000/60/oj?locale¼es Directive 2008/56/EC of the European Parliament and of the Council of 17 June 2008 establishing a framework for community action in the field of marine environmental policy (Marine Strategy Framework Directive) Available at: https://eur-lex.europa.eu/legal-content/ES/ALL/? uri¼CELEX%3A32008L0056 Council Directive 91/271/EEC of 21 May 1991 concerning urban waste-water treatment (DO L 135 de 30.5.1991, p. 40). Available at: https://www.boe.es/buscar/doc.php?id¼DOUE-L1991-80646 Directive 2008/56/EC of the European Parliament and of the Council of 17 June 2008 establishing a framework for community action in the field of marine environmental policy (Marine Strategy Framework Directive) Commission Directive (EU) 2020/367 of 4 March 2020 amending Annex III to Directive 2002/49/ EC of the European Parliament and of the Council as regards the establishment of assessment methods for harmful effects of environmental noise. Available at: https://www.boe.es/buscar/ doc.php?id¼DOUE-L-2020-80377 (Retrieved on 20 March 2020) Decision No 1386/2013/EU of the European Parliament and of the Council of 20 November 2013 on a General Union Environment Action Programme to 2020 ‘Living well, within the limits of our planet’ Available at: https://eur-lex.europa.eu/legal-content/ES/TXT/?uri¼CELEX% 3A32013D1386

44 European Environment Agency: The European environment – state and outlook 2020, executive summary. Available at: https://www.eea.europa.eu/es/publications/el-medio-ambiente-en-europa (Retrieved February 10, 2020), p. 3. 45 Report: The European environment: state and perspectives 2020, Page 1 et seq.

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Decision No 1386/2013/EU of the European Parliament and of the Council of 20 November 2013 on a General Union Environment Action Programme to 2020 ‘Living well, within the limits of our planet’, Page 197. Available at: https://eur-lex.europa.eu/legal-content/

Carlos Molina del Pozo Holds a Law Degree from the University of Strasbourg and a Doctor of Law from the University of Granada. He is the Director of the Center for European Studies at the University of Alcalá de Henares, Director of the Center for European Documentation at the University of Alcalá de Henares (Madrid), and President of the Euro-Latin American Institute of Studies for Integration and was President of the University Association for Community Studies. He has been distinguished as a “Jean Monnet” Professor of European Community Law, and as Doctor Honoris Causa by the National University of Córdoba, the University of Buenos Aires and the University of Rosario in Argentina.

Part V

Data Protection

The Extraterritoriality of the Right to Data Portability: Cross-Border Flow Between the European Union and Brazil Augusto Jaeger Junior and Daniela Copetti Cravo

Abstract Considering that data tends to flow in a cross-border way in the digital economy, this paper seeks to investigate from whom the right to data portability, provided by the European GDPR, can be demanded. In this sense, the paper aims to answer the following questions: is it possible that the right to data portability could be demanded from the agents who perform the data processing outside the territory of the European Union? Or from agents who do not have establishments in its territory, such as organizations localized in Brazil? And in case it is applied in an extraterritorial way, what are the consequences and the peculiarities of this situation? In conclusion, it is possible to apply the right to data portability to agents who operate in Brazilian territory, provided that they are captured by the provisions of the third article of the European GDPR. The consequences of this extraterritorial application of data portability are the creation of a new right/duty in third countries and the international transference of data, which, in the long-term, contribute to the harmonization and the convergence of data protection policies around the world.

1 Introduction The digitalization of the economy is a latent and generalized reality, not restricted to a specific sector. In the centre of this new economic system is data (personal data as well), which represents and can generate significant value to entrepreneurial activities, especially when analysed and combined with products and services. Such a reality, coupled with the fact that there is no tendency for users to choose privacyfriendly services, perhaps even because of unfamiliarity with the risks, requires specific protection for personal data, as a part of personal rights. To take these new necessities into account specific legislation on data protection has emerged or

A. Jaeger Junior UFRGS, Porto Alegre, Brazil D. C. Cravo (*) Municipality of Porto Alegre, Porto Alegre, Brazil © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 N. Cunha Rodrigues (ed.), Extraterritoriality of EU Economic Law, European Union and its Neighbours in a Globalized World 4, https://doi.org/10.1007/978-3-030-82291-0_17

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has been renewed in different jurisdictions. The greatest example is the European Union, which recently replaced its former Directive 95/45/EC with the General Data Protection Regulation (GDPR), which came into force on May 25th of 2018. Following this tendency, Brazil has recently enacted Law No. 13.709/2018, known as the General Data Protection Act. It is important to highlight that the goal pursued by these laws does not include only data protection against acknowledgement or use by third parties, but also, essentially, includes a right to informative self-determination, as adopted by the Federal Constitutional Court of Germany, in 1983, in its famous Census decision (German Federal Constitutional Court’s Judgment of 15 December 1983, 1 BvR 209, 269, 362, 420, 440, 484/83). Moreover, to enable the exercise of an informative self-determination, the existence of mechanisms that promote the right of choice to data subjects is indispensable. Given this, the right to data portability in these new data protection laws was incorporated, as is the case for the General Data Protection Regulation (GDPR) and the Brazilian General Data Protection Act. Portability allows consumer migration between different services or products in the digital market. It guarantees that data subjects receive back personal data that was provided. The data subject also has the right to have his/her personal data transmitted directly from one controller to another. Considering that data tends to flow in a crossborder manner in the digital economy, it is important to investigate from whom the right to data portability, as provided by the GDPR, could be required. Could it be required from organizations which perform data processing outside the territory of the European Union? Or from agents who do not have establishments in its territory, such as organizations located in Brazil? In the case of an extraterritorial application, what are the consequences and the peculiarities of this situation? To answer these questions, this paper will, at first, analyse the right to data portability provided by the GDPR and to which situations it can be applied in an extraterritorial manner. Following this, the peculiarities of an extraterritorial application of the right to data portability will be considered, from a Brazilian perspective.

2 The Right to Data Portability in the GDPR The right to data portability is one of the GDPR’s major novelties. This right was not provided by previous data protection legislation, such as Directive 95/45/EC. During the legislative procedure for the Regulation, there was a lot of discussion about the true nature of the right to data portability. The debate encompassed doubts about its suitability and affinity with data protection. Despite such controversies, the GDPR ended up making data portability a core element. Apparently, the understanding that the aforementioned legal provision is related with data protection, and not just with competition regulation, prevailed (Article 29 Data Protection Working Party 2016, p. 4), providing for data control and data management by data subjects. Therefore,

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from this perspective, this is an individual right (Boardman et al. 2017), not limited to the competitor's right of access to an essential facility. Besides its informative self-determination characteristic, data portability “goes to the heart of competition policy” (Graef 2016, p. 2) and has a significant impact as it prevents consumer lock-in and diminishes switching costs. These costs need to be eliminated or reduced because they create barriers to consumers moving freely between the available market options, preventing them from exercising their right of choice and, thus, generating a lock-in effect. Such costs are a differential factor when it comes to a homogeneous product offer (Dzhain 2014, p. 5) and could be the reason that there is no feasible competition in certain markets. Because of the undeniable importance of this right for data owners, data portability was provided through article 20 of the GDPR, which has to be interpreted in the light of recital number 68. In Brazil, this right was provided by article 18 of the Brazilian General Data Protection Act, more precisely, in its line five. However, this Act still has not come into force and there are legislative discussions that have been postponed to 2021 (Brasil, Congresso Nacional 2020). The GDPR has established a double capacity regarding exercising the right to data portability (Fernández-Samaniego and Fernández-Longoria 2016, p. 257): this is as much about the possibility of the owner receiving a copy of the supplied data as it is about requiring direct data transmission to another data controller or data processor, when technically possible. In relation to the right to receive the provided data, minimum standards need to be observed to enable its implementation, which is the adoption of a structured format, in current use and automatic reading (Fidalgo 2019, p. 103). Despite the establishment of this minimum standard, the GDPR does not require interoperability, even though it states that it is desirable. At this point, it is important to investigate from whom the right to data portability could be demanded. Could the right to data portability provided by the GDPR be demanded from an organization which performs data processing outside the European Union, even though this does not have an establishment in its territory, such as organizations localized in Brazil? Moreover, if it is applicable in this context, what are the consequences and the peculiarities of this extraterritorial situation? To answer these questions, it is necessary to analyse under what circumstances the GDPR is applied and which of these can be considered as extraterritorial hypotheses.

3 The Extraterritorial Substantive Application of the GDPR State jurisdiction, considered broadly, is an attribution granted by International Law to the State to enact its laws, apply and execute them. These powers are classified by doctrine as normative or prescriptive jurisdiction, adjucative or judicial jurisdiction and executive jurisdiction.

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This attribution and legal competence to enact and to apply laws are usually carried out with respect to the territoriality principle. João Grandino Rodas and Gesner de Oliveira add that “International Law cherishes the territoriality principle. However, exceptionally, it allows the extraterritoriality of the law” (Oliveira and Rodas 2004, p. 376). This matter is, incidentally, one the subjects of International Private Law. “It is up to International Private Law (IPL) to regulate this potential spatial application of more than one legal system, avoiding overlapping or omission (absence of legislation), as well as establishing the jurisdiction” (Carvalho Ramos 2015, p. 90). If it was, originally, common to state that jurisdiction limits were restricted to the spatial scope of the territory, including the non-intervention principle of States on each other’s internal affairs forming one of the backbones of International Relations since the classic authors, as with today, with globalization, technological development and the reduction of distances, there is has been a relativization of the concept of sovereignty and of State jurisdiction limits themselves. One of the major actors responsible for such changes is, undoubtedly, the Internet: this is the origin of a level of innovation without precedents, which has enabled market development, the suppression of frontiers, the evolution of education and of knowledge and the right to freedom of speech and access to information (Braet et al. 2013, p. 10). It is necessary to point out that more than 4.1 billion people have access to the Internet worldwide (ITU 2019), and in Brazil this number is over a hundred million Internet users (IBGE 2019). Orin Kerr (Kerr 2015, p. 287), addressing the application of the Fourth Amendment of the U.S. Constitution to Internet users, describes that in the beginning of digital era it was possible to sustain this incidence on a domestic territoriality basis. In 1980 and 1990, most of the services, companies and users were U.S. based. However, nowadays this conception is entirely obsolete, emphasizes Orin Kerr (Kerr 2015, p. 287). The last twenty years, according to the author, have been witness to a dramatic globalization of the Internet, in such way that at the end of 2013 only less than 10% of digital traffic could be attributed to U.S. based users. In this context, it is undoubtedly possible to verify through the global Internet, as well as in the digitalized world, a new salience to the extraterritorial protection of rights, such as that of privacy. In the case of the European Union, its legislation has sought to define the characterizing criteria of its “territoriality” to justify its application. Before the enactment of the current GDPR, there had been Directive 95/45/ EC, which also applied to the Internet. It was an unfolding of the provisions established by the Charter of the Fundamental Rights of the European Union (2000/C364/01) and by the Treaty on the Functioning of the European Union. This Directive is a historical mark on how to protect data, having as its key objectives ensuring the promotion of fundamental individual rights to privacy and to intimacy and, at a regional integration level, guaranteeing a free flow of personal information in the European market. In this, a “territorial” application of data protection regulation was defended, which as the CJEU (Court of Justice of the European Union) itself stated, was a “scope of application rather wide” (CJEU, case C-131/12, 2014). Hon et al. (2012, p. 7), when analysing the provision of the former

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Directive, reported that the purpose of its jurisdictional provisions, as referred to by article four, was to assure the application of obligations related to personal data connected in some way to the European Union, even if the data processing was not established in its territory. To then determine the occurrence of the Directive rules, one of these requirements should be present in the data processing: (1) Establishment—the data controller should possess an establishment in the European Union and should do the data processing of the personal data in the context of its activity. This requirement was utilized in the Google Case (CJEU, C-131/12, 2014) in a way that an establishment in Spain selling advertisements was considered “in the context of its activity”, despite the data processing being performed at an establishment located in United States of America. (2) National legislation should be applicable by force of International Public Law— the entity responsible for the data processing would not be established in any territory of any Member States, but at a location where national legislation is applied by determination of International Public Law. An example of this scenario given by Hon et al. (2012) is the case of an airplane or a ship with the flag of a Member State. This provision has evoked some concerns in relation to cloud computing, in particular when the data center is in a ship and outside the territorial sea of any Member State.1 (3) Means/Equipment—this criterion, difficult to understand, is understood as the utilization of any physical means, substantial, tangible or not that contains personal data, such as surveys and researches (Hon et al. 2012, p. 13). These were the criteria utilized for the application of the Directive, which was attributed a “wide territorial” nature. It was the case that, despite the results of the Directive, its implementation suffered deadlocks when it came to the distinct processing adopted in the context of the national legislation of the Member States.2 Moreover, the Directive suffered due to the technological advances witnessed in recent times, which compromised and put at risk its efficiency, given that when it was created the so-called “digital era” was taking its first steps (Edwards and Harbinja 2013, p. 130). For these reasons, a Regulation for data protection was issued, presented by the European Commission to the Council in 2012 and published on May 4th of 2016. It came into force on May 25th 2018. The change established by a regulation is very remarkable, notedly to counter fragmentation. At this point, it is important to remember that a regulation has a binding force stronger than that of a directive, imposing its adoption in its totality by Hon, Hörle and Millard clarify that hypothesis: “While this may sound futuristic, Google has obtained a patent in the United States for such data centres built on ships. So, in the future there may well be data centres on ships moored outside territorial waters, with the possibility of flags of convenience being used for data protection law purposes” (Hon et al. 2012, p. 13). 2 Despite the protection given, there was critics of the Directive, including it being described as: “the elephant has laboured and given birth to a mouse”, especially because of the problems in its implementation (Lloyd 2014). 1

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Member States immediately and simultaneously. A Directive, in contrast, after being imposed with certain factual support, determines the application of national legislation of the Member States (Fernándes Rozas and Sánchez Lorenzo 2009). The Regulation, furthermore, has an additional objective, besides the protection of the privacy of individuals, which is the consolidation of the Digital Single Market. For its success the existence of uniform rules and the removal of technical and legal barriers is indispensable (Wubben et al. 2012, p. 4). The highlight of the Regulation that concerns this paper is the extension given to data protection, which can reach agents that do not have a presence in the European Union, as long as the data of a European resident is being processed in the context of an offer of a product or a service. Another possibility is when the behaviour of an individual in the European Union is being tracked (Boardman et al. 2017, p. 1), which shows the possibility of an extraterritorial application of the Regulation (Zeiter 2014, p. 30). Besides these, article three of the GDPR specifically provides for its application to the processing given to personal data in the “context of activity” of an establishment in the territory of the European Union, regardless whether the processing is taking place inside or outside of its territory. The GDPR is also applicable to cases where the national legislation of a Member State is applied by force of International Public Law. Thus, the General Data Protection Regulation gives emphasis to an even greater scope of application, which has been recognized as an expressly extraterritorial application of the Regulation. In other words, if until this moment the European Union has applied its data protection legislation sheltered by an “expanded territoriality”, now, the future seems to promise the consecration of extraterritoriality. The reason for the adoption of extraterritoriality was the search for personal data protection effectiveness, detached from the personal data operator’s geographical location. Therefore, the enlargement of the scope of application provided by the GDPR seeks to enforce rules for the data processing undertaken by those who own an establishment in the European Union or by those who use the data of individuals that are in European Union territory (Fonseca 2019, p. 292). In fact, jurisdiction based solely on the territoriality principle is becoming less evident in the digital era (De Hert and Czerniawski 2016, p. 230), which has generated a discussion about the need for harmonization or for the crafting of an instrument of International Law, such as a Convention. An example of this tendency, besides the GDPR, is the Brazilian General Data Protection Act, which not only provides for its applicability to data processing undertaken in Brazilian territory, but also lays down that its legal rules will be applied to data processing activities that have as their objective the offer or the supply of goods or services in its territory or when the processed data has been collected in national territory or when the data subjects are located there. It is worth noting, however, that this is not “pure” extraterritoriality nor it is extreme. A limited extraterritoriality is usually verified, conditional to the existence of some connection with the European Union—be it an offer of goods or services or be in the context of the activities—(Kuner 2019, p. 16). This is also applied to the criteria adopted by the Brazilian General Data Protection Act, which are, in short: (i) data gathering in the national territory, (ii) geographical localization in Brazilian

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territory of the data subject or of the goods or services receiver, or (iii) data processing in the national territory, except in the case of line four, paragraph second, of the Brazilian General Data Protection Act (De Menezes and Colaço 2019, p. 193). In other words, in Brazil there is also a certain reasonableness in the selection of the criteria for the application of legislation, which can, under certain circumstances, generate an extraterritorial application of the data protection law. With regard to the effects of the extraterritoriality of the GDPR in the activities of Brazilian agents, it is possible to mention the potential of the following sectors being affected: (i) Brazilian companies in the area of information technology that function as processors, processing personal information on behalf of controllers with their establishment in the European Union; (ii) companies engaged in activities related to tourism or the movement of individuals residing in Europe to Brazil (e.g., airlines and their websites), who are responsible for the processing of personal data; (iii) companies engaged in e-commerce that offer personalized services or Brazilian applications that use tracking software on their EU resident-users and individual or collective automated profiling techniques. (Oliveira et al. 2018, p. 18).

Therefore, despite the real efficiency and the enforcement of this extraterritorial application of the GDPR being disputable, it is certain that the entity responsible for data processing which fits within the Regulation provisions, even if this is in Brazil, will be subject to its duties and to its responsibilities. Being subject to the GDPR, the agents in Brazil can be required to implement data portability.

4 Peculiarities of the Extraterritorial Spatial Application of Data Portability in Brazil The extraterritoriality of the European legislation when it comes to data protection generates direct implications for businesses worldwide (Svantesson 2013, p. 278). In regard to the extraterritorial application of the right to data portability (as provided by article 20 of the GDPR), it is possible to visualize two possible implications: the creation of a new right/duty in third party countries and international data transfer (Zanfir-Fortuna 2012, p. 1). Such implications will be analysed by this paper in the light of the Brazilian perspective. The right to data portability is a right demandable in light of the GDPR. On the other hand, in Brazil, despite being provided by the Brazilian General Data Protection Act, as mentioned, this is not in force. Therefore, a company in Brazil can be required to implement the data portability provided by the GDPR, if it is one of the cases provided by article three of the GDPR, even if it does not have to observe such a right in relation to data subjects in Brazil, for instance. In this situation, therefore, there is the creation of a duty/right in Brazilian territory because of an external regulation. Such a situation has driven the European Union to be called a Global Regulator (Young 2015, p. 1233). This is an exportation of the European Union legislation and its internal policies to other markets and legal systems (Fonseca 2019,

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p. 51). This reality, while not exempt from critics3 and serious doubts about its own efficiency (classic problems of International Private Law, such as difficulties in the execution of decisions or the homologation of foreign sentences), ends up generating a situation of a parity of competition between companies, regardless of where they are located. This is because companies that have a connection with the European market will necessarily have to follow the same pattern and standard of data protection as practised by European companies. Besides that, there is a stimulus to a proactive adoption by companies of rights and conveniences for their users, even if some of them do not have the right provided by their national legislation. For example, the Facebook initiative for data access and portability of pictures and videos to Google in Brazil, even that this is not a right in force in that territory (Facebook 2020). In other words, there is a stimulation for the adoption of best practices (or the adoption of privacy-friendly measures), even if these are not mandatory, as is the case with offering data portability in Brazil. For that matter, it is important to highlight the tendency of data protection legislation (as is the case with the GDPR) to influence another legal system in an exogenous manner (Doneda 2006, p. 307). Another way to deal with this phenomenon is to emphasize its positive effects on legislation harmonization. Because of it, a free flow of data would be possible, which would ultimately benefit international commerce (Fonseca 2019, p. 25). The second implication of the extraterritoriality of data portability would be the resulting international data transfer. Taking into consideration companies that operate in Brazil, but for some reason process data that is subject to the GDPR, they could be required to offer data portability to a responsible entity in the European Union. As a rule, the Brazilian General Data Protection Act requires, for international data transfer, that the receiving country provides an adequate level of data protection. If this protection does not exist, international data transfer may be permitted, among other cases, when the data controller offers and ascertains guarantees regarding its compliance with the principles and the rights of data subjects, of the data protection regime (article 33, I and II, of the Brazilian Act). It can also happen that an organization in Brazil receives personal data from the European Union because of the exercise of data portability. In this case, application of articles 44 to 50 of the GDPR will apply. In article 44, there is the general principle of data transferences which provides that any transfer of personal data that is or which becomes the object of data processing after it by a third party country can only be permitted if the conditions established by the GDPR are respected by the responsible entity and by the subcontractor. The goal is that the level of the protection guaranteed by the GDR is not compromised (Prata De Carvalho 2019, p. 624). In these cases, the guarantee of a minimum or adequate data protection is

3

According to Schultz, the Internet, more than other context, argues for a return to the natural law approach to conflicts between laws, a return to Savigny and to Von Bar, for whom conflicts between laws are a part of single international system, not purely part of national legislation (Schultz 2008, p. 838).

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also a way for the European Union legislation to export an extraterritorial application of its legislation (Kuner 2015, p. 9). In addition, in the long-term, this also promotes the harmonization and the convergence of such legal protection worldwide, a necessary premise for international data transfer (Bioni and Mendes 2019, p. 801). Therefore, the application of the right to data portability in an extraterritorial form ends up stimulating its expansion to data subjects that are not embraced by the GDPR, as well as leading to international data transfer. Effectively, there will be a favourable domain for the adoption of a harmonious system of data protection, which can, consequently, favour international trade regarding the free flow of data.

5 Conclusion Bearing in mind the wide scope of the GDPR, organizations responsible for data processing which comply with the provisions of the Regulation, even if the data processing is done in Brazil, will be subject to the duties and the responsibilities provided for in that regulation. Being subject to the GDPR, the agents located in Brazil could be required to implement data portability, even though this is not required in the light of the Brazilian General Data Protection Act. This extraterritorial application of the right to data portability brings, in particular, two implications with it: the creation of a new right/duty in third party countries and international data transfer. In relation to the first implication, an organization located in Brazil may be required to implement data portability as provided by the GDPR, if it matches one of the criteria provided by its article three, even if it does not have to observe such a right in relation to data subjects covered by the Brazilian regulation. This reality, while not exempt from criticisms, ends up generating a situation of parity competition between companies, regardless of where they are located. This is because companies that have a connection with the European market will have to, necessarily, follow the same pattern and standard of data protection practised by European companies. Moreover, this provides a stimulus to a proactive adoption by companies of rights and conveniences to their users, even if some of them do not have the right provided for by their national legislation. The second implication of the extraterritoriality of the right to data portability would be the resulting international data transfer. In this case, to have data transmission, it is necessary to have a guarantee of a minimum or adequate protection. Such a requirement has the possibility to stimulate the harmonization of legal protection worldwide, a necessary premise for data free flow in the economy and in the international market. At the same time, it has the potential to promote a minimum protection for all people, through an external influence, regardless of which country they are located in.

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References Article 29 Data Protection Working Party (2016) Guidelines on the right to data portability. European Commission, Brussels Bioni B, Mendes L (2019) Regulamento Europeu de Proteção de Dados Pessoais e a Lei Geral Brasileira de Proteção de Dados: mapeando convergências na direção de um nível de equivalência. In: Frazão A, Tepedino G, Donato M (Org.). Lei Geral de Proteção de Dados e suas repercussões no direito brasileiro. 1ed. Thomson Reuters, São Paulo, pp 797–819 Boardman R, Mullock J, Mole A (2017) Guide to the general data protection regulation. Bird & Bird, London Boardman R, Mole A, Maldoff G. The Article 29 Working Party Issues Final Guidelines on the right to data portability. Available at: . Accessed 14 Jan 2018 Braet O, Graef H, Jacquemins M, Piron R, Schumacher L, Stevens D, Valcke P (2013) Étude Portant sur la Neutralité du Réseau (Internet) et les Mesures de Gestion du Trafic. Interdisciplinair Centrum voor Recht em Informatica, Belgium Brasil, Congresso Nacional (2020) Medida Provisória n 959, de 2020. Available at: . Accessed 10 May 2020 Carvalho Ramos A (2015) Direito Internacional Privado de Matriz Legal e sua Evolução no Brasil. Revista da AJURIS 42:89–113 De Hert P, Czerniawski M (2016) Expanding the European data protection scope beyond territory: Article 3 of the general data protection regulation in its wider context. Int Data Priv Law 6 (3):230–243 De Menezes JB, Colaço H (2019) Quando a Lei Geral de proteção de dados não se aplica? In: Tepedino G, Frazão A Donato Oliva M (Org) Lei Geral de Proteção de Dados Pessoais e suas repercussões no Direito Brasileiro, pp 157–195 Doneda D (2006) Da Privacidade à Proteção de Dados. Renovar, Rio de Janeiro Dzhain N (2014) Impact of switching costs and network effects on adoption of mobile platforms. Master’s Dissertation in Information Systems. Aalto University School of Business, Helsinki, Finland, p 98 f Edwards L, Harbinja E (2013) Protecting post-mortem privacy: reconsidering the privacy interests of the deceased in a digital world. Cardozo Arts Entertain Law J 32(1) Facebook (2020) Driving Innovation in Data Portability With a New Photo Transfer Tool. Available at: https://about.fb.com/news/2019/12/data-portability-photo-transfer-. Accessed 28 Mar 2020 Fernándes Rozas JC, Sánchez Lorenzo S (2009) Derecho Internacional Privado. Civitas, Madrid Fernández-Samaniego J, Fernández-Longoria P (2016) El derecho de la portabilidad de los datos. In: MANÃS, Jose Luis Piñas (dir.); CARO, Maria Alvarez; GAYO, Miguel Recio (coord.). Reglamento general de protección de datos: hacia un nuevo modelo europeo de privacidad. Réus, Madrid, pp 257–274 Fidalgo VP (2019) O direito à portabilidade de dados pessoais. Revista de Direito e Tecnologia 1 (1):89–135 Fonseca MdaG (2019) A Extraterritorialidade do regime geral de proteção de dados pessoais da União Europeia. Thesis (PhD in Law). Universidade Nova de Lisbon, Lisbon, Portugal Graef I (2016) Data portability at the crossroads of data protection and competition policy. Autorità Garante dellla Concorrenza e del Mercato e Osservatorio di Proprietà Intellettuale Concorrenza e Comunicazioni, Roma Hon WK, Hörnle J, Millard C (2012) Data protection jurisdiction and cloud computing – when are cloud users and providers subject to EU data protection law? Int Rev Law Comput Technol 26 (2–3):1–44 IBGE (2019) Pesquisa Nacional por Amostra de Domicílios Contínua, Brasil

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ITU (2019) Statistics. Available at: https://www.itu.int/en/ITU-D/Statistics/Pages/stat/default.aspx Kerr OS (2015) The fourth amendment and the global internet. Stanford Law Rev 285:285–329 Kuner C (2015) Extraterritoriality and regulation of international data transfers in EU data protection law. Int Data Priv Law, pp 235–245 Kuner C (2019) International organizations and the EU general data protection regulation: exploring the interaction between EU law and international law. Int Organ Law Rev 16:158–191 Lloyd I (2014) Information technology law. Oxford University Press, Oxford Oliveira DTN, Machado DC, Polido FBP, Brandao LCC (2018) GDPR and its effects on the Brazilian law: First impressions and a comparative analysis. IRIS, Belo Horizonte Oliveira G, Rodas JG (2004) Direito e Economia da Concorrência. Renovar, Rio de Janeiro Prata de Carvalho AG (2019) Transferência internacional de dados na lei geral de proteção de dados - força normativa e efetividade diante do cenário transnacional. In: Frazão A, Tepedino G, Oliva MD (eds) A Lei Geral de Proteção de Dados e suas repercussões no direito brasileiro. Revista dos Tribunais, São Paulo, pp 621–642 Schultz T (2008) Carving up the internet: jurisdiction, legal orders, and the private/public international law interface. Eur J Int Law 19:799–839 Svantesson D (2013) A “layered approach” to the extraterritoriality of data privacy laws. Int Data Priv Law 3:278–286 The GDPR and International Organizations (2019) AJIL Unbound 114:15–19 Wubben M, Schermer B, Teterissa D (2012) Legal aspects of the digital single market. Current framework, barriers and developments. Considerati, Amsterdam Young A (2015) The European Union as a global regulator? Context and comparison. J Eur Public Policy 22(9):1336 Zanfir-Fortuna G (2012) The right to data portability in the context of the EU data protection reform. Int Data Priv Law 2(3):1–14 Zeiter A (2014) The new general data protection regulation of the EU and its impact on IT companies in the U.S. Stanford – Vienna Transatlantic Technol Law Forum, pp 1–34

Augusto Jaeger Junior PhD in EU Competition Law from the Federal University of Rio Grande do Sul (UFRGS, Porto Alegre, Brazil). Associate Professor at UFRGS Law School. Former Fellow of the Alexander von Humboldt Foundation, Germany. Researcher with a productivity grant in current research at CNPq. He has been dedicated to studies on Private and Public International Law, the European Union and Mercosur. Permanent Professor of the UFRGS Graduate Law Programme. Daniela Copetti Cravo Attorney of the Municipality of Porto Alegre. PhD and Master in Law from UFRGS. She did a post-doctoral internship at the Department of Public Law and Philosophy of Law at the Faculty of Law of UFRGS (2019–2020). Honorable mention in the 5th SEAE Monograph Award. Author of the book “Right to Data Portability”. She was Substitute Professor at the Faculty of Law at UFRGS (2017–2019). She participated in research financed by the National Council of Justice (CNJ) on Judicial Demands and Delays in Civil Justice.

Personal Data and Transborder Flows Between the EU and the US: Dilemmas and Potential for Convergence Alexandre Veronese

Abstract This article analyses the current dilemmas and potentials for engagement between the European Union (EU) and the United States (US) in their policies about transborder data flows. It cites the international treaties from both the Organization for Economic Co-operation and Development (OECD) and the Council of Europe to demonstrate the global evolution of the subject. It describes the Safe Harbor agreement and its downfall after the Court of Justice of the European Union’s (CJEU) rulings in 2014 and 2015. Afterwards, it explains the General Data Protection Regulation rules about transborder dataflows and the Privacy Shield. The article demonstrates that the Privacy Shield comes along with many measures from the United States. However, despite this, the CJEU again considers this new agreement is insufficient to solve the subject about mutual protection of the data flows. After, the article briefly discusses the literature to assess the global expansion of the debate. The conclusion of the article examines the future possibility of establishing some federal agency to provide data protection in the US. This may come about from the strengthening of the Federal Trade Commission or by the creation of a new empowered body. Nonetheless, the next movement of both the EU and the US will be to find a solution to this issue, and that it will have positive global outcomes.

1 Introduction In 1996, Reibenberg published an article addressing two regulatory paradigms applicable to the Internet: one established in the United States (US), and one built in the European Union (EU).1 Reidenberg points out that comprehensive intent

1

Reidenberg (1996).

A. Veronese (*) University of Brasilia, Faculty of Law, and Centre of Politics, Law, Economics, and Technology of Communications, Brasilia, Brazil e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 N. Cunha Rodrigues (ed.), Extraterritoriality of EU Economic Law, European Union and its Neighbours in a Globalized World 4, https://doi.org/10.1007/978-3-030-82291-0_18

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would define the EU system. The EU opts to build policies wide enough to embrace several countries and focus on general terms. On the other hand, the US produces policies in a fragmented way. In other words, they disperse their policies over several different rulesets and agencies. Reidenberg finds some problems in both models. The EU model of Internet regulation tends to be outpaced by those regulated by its long approval process. In his opinion, the US model of regulation is not efficient because it produces contradictory regulatory policies due to its dispersion. Reidenberg alerted the U.S. about these contradictory policies. To him, the EU standards should influence future US regulation. However, Reidenberg concludes that the most significant legal interconnection between the EU and the US would be the data flows’ policies, and he was entirely right. The problem of data transfers between North Atlantic countries has been on the agenda since the 1990s. The central concept at that time was Electronic Data Interchange (EDI). Under this concept, extensive legal and technical literature in order to deal with data exchange matters among electronic systems in international commerce have been produced. In 1991, Boss published a text in which she made a synthesis of five initiatives for assisting in the establishment of policies about the EDI.2 The first was the report of UNCITRAL—United Nations (UN) Commission on International Trade Law—about the “legal aspects of automated data treatment.” The second was the International Chamber of Commerce that tried to create uniform rules of conduct for the electronic exchange of commercial information. The third was the final report on the legal situation of the EU member states on the EDI. The fourth was the action of the UN Working Party on the Facilitation of International Trade Procedures, which eventually led to the creation of a pattern of EDI, the EDIFACT. The fifth was the action of the American Bar Association on the context of the formulation of the US Uniform Commercial Code. Boss concludes that there already existed, and that there would continue to exist, the action of several countries and international organizations to fix EDI patterns. However, she added that the private parties would be responsible for such normative patterns. Therefore, the most prominent legal issue would be their compliance with state regulations. E-commerce itself was a definite booster of EDI’s adoption between companies.3 The EDI issue highlights that the debate over international data flows is not new. The novelty comes from the current problems over personal data protection in such exchanges. This subject had a turning point with the entry in force of Directive 95/46/EC,4 and the many efforts by the EU and the US to create equivalent personal data protection on both sides. The next part will deal with this issue.

2

Boss (1991). Shim et al. (2013), pp. 141–162. 4 European Union (1995). 3

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2 The Background Personal data transfers between the EU and the US gave rise to a technical and legal system that intended to provide reliability to their relationship. The subject was also under evaluation by some international organizations. Examples are the Organization for Economic Co-operation and Development (OECD) principles of 1980,5 and Treaty No. 108, by the Council of Europe (CoE) of 1981,6 In the EU, it fell under Directive 95/46/EC, making it possible to reach an agreement with the US. This agreement became known as the Safe Harbor, conceived between 1998 and 2000. The first international document that addresses electronic data flows is the OECD Guidelines on the protection of privacy and transborder flows of personal data.7 The OECD’s interest in the subject directly relates to the production of national statutes in Europe on behalf of personal data protection. Their final diagnosis, in the mid-1970s, referred to the increasing capacity of data and personal information processing, as well as its social and economic impact. Therefore, the main objective was to create guidelines that could provide countries with compatible legal standards and, thus, to construct an international regime of privacy and personal data protection. The document points out the existence of some international regulations that provide freedom of information and protection of privacy, such as the European Convention on Human Rights (1950),8 and the International Covenant on Civil and Political Rights (1966).9 However, the OECD document states that those provisions were insufficient to ensure adequate privacy and personal data protection. Some additional efforts were necessary to provide more protection. It also highlights that the subject was under discussion in the CoE (Resolutions of 1973,10 and 1974)11 and that a treaty of this organization was in the final stages of approval. The document also underlines a debate in the EU, which resulted in the production of a report in the European Parliament in 1979.12 The eight principles of the OECD Guidelines form a valuable set of elements for protecting personal data and privacy. They remained in force from 1980 until 2013.13 A revision of the eight principles began between 2010 and 2011, with an analysis that proposed updates on the Guidelines.14 In 2014, Oxford Internet Institute and Microsoft jointly published a report that offered

5

OECD (1980). Council of Europe (1981). 7 Kirby (1980) and Hondius (1980). 8 Council of Europe (1950). 9 United Nations (1966). 10 Council of Europe (1973). 11 Council of Europe (1974). 12 European Parliament (1979). 13 OECD (2013). 14 OECD (2011). 6

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revision recommendations and that had a significant impact on the modification of the Guidelines.15 The second international document on privacy and personal data protection is Convention No. 108 of CoE. It was signed and ratified gradually by the member states of the CoE and some non-member. The most crucial difference between Convention No. 108 and the OECD Guidelines is that the former constitutes cogent legal norms for the states that have signed or acceded to it. The legal provisions about international data transfer under the first version of Treaty No. 108 were minimal. This scenario changes with the approval of the update on 10 October 2018: Treaty No. 223 of CoE, also known as “Protocol amending the Convention for the Protection of Individuals with regard to Automatic Processing of Personal Data”.16 According to the amendment, Convention 108+ will bring its members a precise regime for international data transfers. The Convention’s Article 14 expands the details about international data transfers and currently has six paragraphs.17 The first paragraph of the current Article 14 merges the elements of paragraphs one and three of Article 12. It establishes, initially, the freedom of exchanging personal data across borders. However, Article 14(1) imposes two exceptions. The first one is applicable when there is a risk of circumvention of Convention 108+ by using a member state as an intermediary. The second one is a novelty and provides for the possibility to fence or limit the transfer, following a determination by an international organization. Another novelty is a system of measurement of the adequacy of protection. Paragraphs two and three of Article 14 outline standards to set systems of measurement of adequacy. Paragraph four determines exceptional cases. It is relevant to identify the integration of the concept of “comity”18 as “a necessary and proportional measure in a democratic society” in the Treaty, because this concept will show up in some other legal norms—like the US CLOUD Act (Clarifying Lawful Overseas Usage of Data Act).19 The absolute novelty of Convention 108+ on data transfers refers to the setting of parameters for supervisory authorities (or, agencies), stipulated in paragraphs five and six. What becomes clear is an evolution in the sense of uniformity of personal data protection legal patterns. The updated OECD Guidelines remain as non-binding instructions that determine principles, while Convention 108+ is mandatory between the adherent parties. In that sense, the international legal framework has evolved, although it maintained an unaltered general frame.20 However, the US privacy protection tradition is somewhat different from the EU model. To solve the gaps and differences, both parties engaged in negotiating to create an agreement, the Safe Harbor.

15

Cate et al. (2014). Council of Europe (2018). 17 Council of Europe (2020). 18 Dodge (2015). 19 Veronese (2018). 20 Howard Patrick (1981). 16

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Safe Harbor

The basis of the Safe Harbor agreement lies in Directive 95/46/CE. Its Articles 25 and 26 established that data transfers to countries outside of the EU only would be lawful if they complied with the EU standards. As soon as it came into force in the member states’ legal orders, an EU technical conclusion disqualified the US as a safe destination for the EU citizens’ data.21 Therefore, some adaptations were necessary. The literature indicates the existence of two legal cultures with differing ideas about privacy or data protection.22 In the US, the matter falls under the concept of privacy. The US concept of privacy evolves from the idea of continuing to strengthen it on behalf of the citizens’ protection against state intervention.23 Of course, there is regulation and protection of privacy on behalf of legal relations between private parties. They come primarily from contractual obligations. In a nutshell, constitutional and public law in the US would show little involvement in the issue.24 Only some areas have specific public law provisions, such as telecommunications. In EU countries, the state intervention in personal data protection was made effective by state activity towards private parties. Such protection became mandatory to the member states after some decades of evolution in the member states’ legal cultures.25 Throughout the 1970s and 1980s, several statutes were created, such as the French Act on Informatics, Data Archives, and Liberties of 1978.26 Those national statutes compelled private parties to comply with national statutory law regarding contracts and ensured that states must have supervision powers to protect their citizen's rights. Thus, the main difference between the two lies in the way they construct the legal concept of personal data protection from its strengthening as a right against the states and other persons alike. This process culminates in the separation of the fundamental right of privacy from the fundamental right to data protection.27 As the situation became an impediment to the development of trade and other relations, negotiations started with the purpose of establishing an agreement.28 In 2000, the US and the EU concluded the negotiations, with the issue of Decision 2000/520/EC.29 It determined that EU member states should consider personal data lawfully managed by US parties whenever they abide by the Safe Harbor principles.

21

Article 29 Working Party (1999). Swire and Litan (1998) and Gellman (1996). 23 Solove (2008). 24 Fromholz (2000). 25 Lynskey (2015). 26 France (1978). 27 European Union (2000). 28 Heisenberg (2005). 29 European Commission (2000). 22

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The implementation of those principles was never easy.30 According to Kuner, one can view the complexity of the Safe Harbor implementation in the mix of obligations concerning both risk management efforts and legal duties by e-commerce companies.31 Some other authors highlighted the role of the states (in contrast to the literature that considered the private sector the engine behind a new transnational regulation) in building a harmonious and effective regulation for e-commerce.32 It is relevant to evaluate whether a race towards a singular international standard may weaken or strengthen the protection. Long and Quek tested this hypothesis and concluded that, in Safe Harbor’s case, there was a cooperative convergence, which improved the protection.33 Nevertheless, this cooperation is not simple as the next section will describe.

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The Fall of the Safe Harbor

Safe Harbor could not survive. There was already a movement of citizens in the EU concerned with the prevalence of giant Internet companies and the emergence of a vast market for metadata collection. Nevertheless, the agreement's endpoint occurred with the journalistic disclosures about PRISM (the name of the NSA electronic surveillance system) in 2013, with the help of Edward Snowden. However, one legal issue was at the heart of the debate. There was a need to define the legal standard applicable to collect metadata, whether in the US or in the EU, without warrants. The US federal statutory law determines the retention of content and metadata by companies because security agencies may demand them. The obligation arises from Subsection (a) of Section 2703 of Title 18 of the US Code (Crimes and Criminal Procedure; and Appendix). This Section is part of the Stored Communications Act of 1986, which was, therefore, part of the Electronic Communications Privacy Act (ECPA). Subsection (a) of Section 2703 determines that a government entity (following several specific legal procedures) may demand the stored content for up to 180 days. In the exceptional cases provided by Section 2703 of Title 18 itself, the acquisition of those data, without the knowledge of the data subject, demands a warrant, a qualified judicial order under the terms of the Fourth Amendment to the US Constitution. The need of a warrant only applies to data gathering, and not metadata. Subsection (c) of Section 2703 regulates the metadata collection, and the government bodies may obtain it through a variety of means. In the EU, they passed into law Directive 2006/24/CE. Similarly, as the US federal law, it also prescribed data and records retention for 180 days, according to Article 6. This EU Directive lasted for only a few years. In 2014, the Court of Justice

30

Assey Jr and Eleftheriou (2001). Kuner (2001). 32 Farrel (2003) and Regan (2003). 33 Long and Quek (2002). 31

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of the EU (CJEU) considered it in conflict with Articles 7, 8, and 52 of the Charter of Fundamental Rights.34 That ruling was passed in Cases C-293/12 and C-594/12, also known as Digital Rights Ireland. This judicial decision overruled the previous understanding of the Court. A few years earlier, the CJEU denied (in Case 301/06) an appeal filed against the same Directive.35 It seems clear that the disclosures of have had a significant impact on public opinion and the political and legal system of the EU. After all, the massive extracting of information used the scheme with metadata,36 and the CJEU declared that Directive 2006/24/EC was invalid.37 Safe Harbor ended in 2015, after the ruling of Case C-362/14, known as Schrems Case.38 The CJEU ruled invalid the Decision 2000/520/CE, which established the agreement between the US and the EU. It concluded that the Decision was eroding the administrative authorities’ power by delegating such a protective function to the US without, however, establishing a system of adequacy and safeguards accessible to the EU citizens.39 However, the Court rulings of 2014 and 2015 did not end this legal and political debate about data retention. Several EU member states maintained or introduced statutory law providing access to metadata. On 24 July 2015, France enacted Act No. 2015-912, concerning measures of intelligence and safety.40 The act was under debate in the French Constitutional Council and, even after this judicial test, it still is in force. This act makes it possible to collect metadata only after administrative authorization. A debate continues because there is a delicate balance between protecting personal data and privacy, on the one hand, and the fight against terrorism and international organized crime, on the other. With the end of Safe Harbor, the world has come to this current moment. The scenario shows new patterns to the debate regarding the protection of personal data. The debate is marked by the approval of the General Data Protection Regulation (GDPR) and by the creation of the Privacy Shield.

3 The Post-schrems Scenario This section deals with the current worldwide problem concerning personal data transfers across borders. It has two parts. The first one describes the model from the EU GDPR. The second part describes the Privacy Shield construction, a new agreement between the US and the EU to replace Safe Harbor.

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CJEU (2014). CJEU (2009). 36 Guild and Carrera (2014). 37 CJEU (2014). 38 Ojanen (2016). 39 CJEU (2015). 40 France (2015). 35

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The GDPR Model

The CJEU’s decision in the Schrems case imposed an accelerated agenda on personal data protection. It immediately determined a pronouncement by the European Commission (EC) to point out alternatives to prevent interrupting the flow of personal data between the EU member states and the US.41 In parallel, in 2016, the EU approved the GDPR and a more comprehensive legal system. The specific rules are in Chapter V of the GDPR and spread out through seven articles (44 to 50). Article 44 states that there can only be transfers of personal data to a third and subsequent country, which is usual in data flows, if there is compliance with the requirements of the GDPR. It would be a mistake to consider that the GDPR protects only Europeans or those who reside there. The current text of Article 3 (2) of the GDPR states that “This Regulation applies to the processing of personal data of data subjects who are in the Union.”42 Therefore, even non-residents will be under the jurisdiction of the EU. Furthermore, Article 3 (1) determines that the GDPR has an extraterritorial scope once it establishes its application “regardless of whether the processing takes place in the Union or not.” Finally, if the treatment happens somewhere the national law of an EU member state shall apply, the GDPR will also apply following Article 3 (3) by force of some international treaty. In addition to these cases of direct application of EU law, Chapter V postulates indirect legal access, which would solve the problem experienced by Safe Harbor. The GDPR sets two general means of authorizing the data transfer outside the EU. The first general means of authorization is the existence of a general adequacy decision, as Article 45 provides. The second general means is the existence of appropriate safeguards, as Article 46 prescribes. Those appropriate safeguards do not require a previous decision. A specific decision of a national data protection authority (DPA) may assess and identify them. In the absence of an adequacy decision of the EC, or the identification of appropriate safeguards, there is still the possibility of transfer based on exceptional situations, listed in Article 49. The exceptions qualify as derogations from applying the general rules for assessing the lawfulness of the transfer. The role of the national DPAs and their necessary coordination is vital. For this purpose, the GDPR imposes a duty of coherence, embodied in Article 63. Also, the GDPR provides for creating a European Data Protection Board, which is already in operation. The first general system of authorization to personal data transfers refers to the adequacy decisions.43 The EC will grant such decisions only after the fulfillment of certain conditions by the foreign state. The first condition is that the foreign country must pay attention to the rule of law in a broad sense. It is of high relevance to the existence of a personal data protection system and also is for its effectiveness. The second condition is the presence of a national DPA or the country's submission to an 41

European Commission (2015). European Union (2016). 43 Bu-Pasha (2017) and Roth (2017). 42

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international treaty. Those two requirements focus more on local law. The third requirement focuses on the relation of the country with the international legal system. Thus, the internalization of treaties comes into the analysis. These evaluations will be periodic and may be revoked, altered, or suspended. In addition to the first general system, there is the possibility of considering data flows lawful when there are appropriate safeguards.44 Article 47 of the GDPR lists the appropriate general safeguards. They vary from: to the presence of a legal and binding agreement between governmental authorities or bodies, to binding rules that apply to foreign enterprises, to the external use of standard clauses (approved or ratified by the EC), to an enterprise code of conduct, to a technical and legal certification stamp, to contractual clauses that are awarded, to special standard clauses approved by the national authority; and finally, to legal arrangements approved by the national authority. In addition to the two general systems for attributing legality to international transfers, there are some exceptions. They are like those listed on the Directive.45 These exceptions are derogations from the general requirements of the GDPR, as they deal with specific situations and, thus, need a case-by-case analysis. Article 49, item 1, paragraph 1 sets out the first group of exceptions. There are some possibilities like the subject’s consent or interest. Also, the public interest or the necessity of the data to exercise rights. Beyond these exceptions, the GDPR also grants the possibility of lawful exceptions in paragraph 2. It allows transfers if it is simultaneously non-repetitive and if it concerns only a limited group of subjects. Also, another exception comes if the transfer is necessary for the controller's legitimate interests, only if they do not override the rights and freedoms of the subjects. Finally, the transfer can happen if the case suffered a previous exam and has subsequently suitable safeguards. The legal framework built by the GDPR is robust. Nevertheless, it can only maintain itself in that way if it achieves results that guarantee the promised level of protection. However, the robustness of the GDPR has already come under scrutiny due to some problems posed by giant US internet companies. Therefore, the solution to the problem is far from reach. The following section describes the Privacy Shield. It is the agreement that replaced Safe Harbor.

3.2

The Privacy Shield and the CJEU Decision

The downfall of Safe Harbor created a severe problem on both sides. The Privacy Shield construction involved a negotiation with some urgency.46 The CJEU rulings date from 2014 and 2015, and the negotiation between the EU and the US was

44

Schwartz (2013). Bu-Pasha (2017), p. 223. 46 Kuner (2017), p. 903. 45

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finished in 2016.47 But the US was revising its policies just before the CJUE rulings. Following the revelations about PRISM in 2013, the federal administration created a working group to produce reports on the matter.48 According to Schwartz and Peifer, the Obama administration produced a set of policies to improve the US privacy mechanisms.49 There was an attempt to create or reinforce authorities for the protection of privacy in the US. The first is the Privacy Shield Ombudsman. The second is the Privacy and Civil Liberties Oversight Board. This new set of measures included the approval of a significant revision of the Patriot Act and other provisions in the statutory law that reinforced the US intelligence system after the 11 September 2001 attacks. From this broader construction, one can understand the Privacy Shield without falling into the mistake of believing that it would merely renew the previous agreement. There was a clear intention to strengthen the state protection system, despite the limits imposed by the US legal tradition. This intent comes from a report of the US Congress.50 The report sets out four measures. The first would be increasing US companies’ obligations whenever they wish to transfer personal data from the EU to the US, and this would recognize the rights of these personal data subjects. The second would be increasing the supervision of companies by the Federal Trade Commission (FTC). The third would be adopting commitments and monitoring the problems jointly with the EC through federal government bodies. The fourth would be cooperating, granting assurances that US companies would process EU complaints in no more than 45 days. Also, national DPAs in Europe would have powers to demand the intervention of the FTC. Moreover, the report mentioned other measures, such as the Privacy Shield Ombudsman, which would serve to oversee federal intelligence agencies.51 Schwartz and Peifer offer a diagnosis of the difficulty of converging the two legal traditions. Therefore, they point out that the US negotiators agreed to a legal framework that resembles the EU pattern, knowing that the actual institutionalization would be a long-term construction.52 The Privacy Shield has some relevant changes in comparison to the former agreement. Nonetheless, on 16 July 2020, the CJUE ruled against the Privacy Shield with similar arguments used to invalidate the Safe Harbor decision.53 The primary concern of the CJEU was the US's inappropriate framework to protect EU citizens against national security surveillance. The absence of a specific agency with powers to block such surveillance is still the critical issue that requires a solution.

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European Commission (2016). Clarke et al. (2014). 49 Schwartz and Peifer (2017), p. 172; United States (2014). 50 Weiss and Archick (2016). 51 Weiss and Archick (2016). 52 Schwartz and Peifer (2017), p. 161. 53 CJEU (2020). 48

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4 Discussion Part of the literature criticizes the EU law requirement to establish transnational data protection regimes based on the GDPR application’s extraterritoriality. Colona considers that this would put at risk the incentives that US companies would have to join the agreements. If this were to happen, one could not undermine the incentives to build alternative routes.54 Other authors, such as Birnhack, see the EU's role as a driving force for the diffusion of positive global standards.55 For example, Bennett considers that convergence is possible and will occur. However, he adds that this process involves difficulties, once the concept of “adequate level of protection” will never be uniform.56 In the same sense, Safari believes that the advent of the GDPR will have a positive impact on the US and globally.57 Furthermore, Curtiss suggests that the GDPR model will allow developing countries to take advantage of the opportunity to set standards of personal data protection, if they cooperate with their private sector to address other policy issues, such as judicial efficiency and the existence of a welcoming institutional environment for social and economic development.58 One can draw three conclusions from the literature. The first is that the diffusion of the EU model has allowed for a greater engagement of several non-EU countries worldwide that may help creating a global debate about data protection. The second is that some agreement will always exist between the US and the EU to regulate the matter and create convergence.59 Currently, the US experiences some new trends, like governmental voices proposing the establishment of a federal agency to regulate Internet privacy,60 and some state legislatures passing statutory law, as California did.61 Finally, the third is that US agencies, like the FTC, are imposing fines to enforce privacy protection, which would be similar to those in the EU. Therefore, one can see a future potential reinforced convergence on both sides of the North Atlantic if the US creates a new agency to enforce data protection or substantially reinforces the powers of the FTC.62

54

Collona (2014). Birnhack (2008). 56 Bennett (2018). 57 Safari (2017). 58 Curtiss (2016). 59 Kuner (2020). 60 United States (2019). 61 California Office of the Attorney General (2020). 62 FTC (2019). 55

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5 Conclusion This chapter describes the attempts to make personal data protection systems compatible and raises some questions for the future. Ultimately, everybody wants the establishment of legal standards that “guarantee adequate levels of protection.” The complexity of the problem lies precisely in the technical and legal definitions of those levels. In 1999, Reidenberg considered Safe Harbor to be the right solution. However, he also proposed that the US should create some federal agency to reach the protection level of the EU model.63 Reidenberg’s proposal is still valid, and it is a crucial part of the future solution. The first section of the chapter showed that EDI was the beginning of the debate and how some international organizations, like the OECD and CoE, created legal prescriptions on the subject. The second part described how Directive 95/46/CE was a turning point to the Safe Harbor agreement. Afterwards, it elucidates the CJEU’s role in taking down the Safe Harbor and the Privacy Shield agreements. The chapter assessed the literature to identify that a solution to the problem would benefit the US and the EU, and other countries. It is possible to also see some new trends in the US, like the passing into law of state acts to reinforce Internet privacy. Notwithstanding, the establishing of a US Internet privacy protection agency could finally solve the problem. It may take the form of a new federal agency. Alternatively, it may happen by drastically reinforcing the FTC powers and structure.

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Alexandre Veronese Associate Professor at the University of Brasilia, Faculty of Law, and Centre of Politics, Law, Economics, and Technology of Communications, Brasilia.

Correction to: Filling the Regulatory Gap to Address Foreign Subsidies: The EC’s Search for a Level Playing Field Within the Internal Market Nuno Cunha Rodrigues

Correction to: Chapter 10 in: N. Cunha Rodrigues (ed.), Extraterritoriality of EU Economic Law, European Union and its Neighbours in a Globalized World 4, https://doi.org/10.1007/978-3-030-82291-0_10 The book was inadvertently published with a typo in Bruno Striebel’s name, whose work is cited in the chapter. The correction has been made now.

The updated online version of this chapter can be found at https://doi.org/10.1007/978-3-030-82291-0_10 © The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 N. Cunha Rodrigues (ed.), Extraterritoriality of EU Economic Law, European Union and its Neighbours in a Globalized World 4, https://doi.org/10.1007/978-3-030-82291-0_19

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