The financial services industry and the European Central Bank: the UK has won a battle, but can it win the war?

 

Steve Peers

Until yesterday, two trends seemed consistent in the jurisprudence of the EU courts. First of all, the UK kept losing cases relating to the interests of its financial services industry: on short-selling (discussed here), the financial transactions tax (discussed here) and bankers’ bonuses (discussed here). Secondly, the UK kept losing cases concerning its opt-outs from EU law (for instance, on social security and the immigration opt out, see here).

However, yesterday’s judgmentof the EU’s General Court on the UK’s challenge to the European Central Bank (ECB) policy on securities clearing systems bucks both trends. What are its implications for the UK's financial services industry, and for the UK's relationship with the EU?

The judgment

The UK challenged a ‘Policy Framework’ published by the ECB, which set out the role of the ‘Eurosystem’ (the ECB and the national central banks of Eurozone states) as regards payment, clearing and settlement systems. Sweden supported the UK, while Spain and France supported the ECB; the Commission stayed neutral. The UK objected to the Policy Framework provisions which stated that any central counterparties (CCPs) that held more than 5% of the credit exposure for one of the main euro-denominated product categories had to be legally incorporated and fully controlled from within the euro area. This would inevitably mean that a portion of the financial services industry which was traditionally located in the City of London would have to move to one or more Eurozone financial markets instead.

First of all, the judgment examined the admissibility of the action. The General Court rejected the ECB’s argument that its Policy Framework was not a reviewable act, ruling that despite its apparent soft law form it would perceived as a de facto binding policy and would be applied by Eurozone regulatory authorities in practice. Also, the Court ruled that the UK had standing to bring a legal action against acts of the ECB, despite its opt-out from the single currency.

Secondly, the Court ruled on the substance of the case. It was only necessary to rule on one of the UK’s five arguments against the validity of the Policy Framework: that the ECB lacked competence to adopt a measure on the location of CCPs. (The other arguments concerned Treaty free movement rules, competition law, non-discrimination on grounds of nationality and proportionality).

The ECB had claimed a power to regulate on the basis of Article 22 of its Statute, which takes the form of a Protocol attached to the Treaties, and states that the Bank ‘may make regulations, to ensure efficient and sound clearing and payment systems within the Union and with other countries’. Also, the Bank referred to Article 127(2) TFEU, which gave it the task ‘to promote the smooth operation of payment systems’, and the ECB’s general objective of maintaining price stability and supporting general economic policies, as set out in Article 127(1) TFEU.    

In the Court’s view, however, these powers only extended to the ability to regulate ‘payments’ in the narrow sense, ie the ‘cash leg’ of clearing operations, not the ‘securities leg’, since securities do not in themselves constitute payments. Article 22 of the ECB Statute could only apply to payment systems with a clearing stage, rather than all clearing systems, in the absence of any explicit reference to the clearing of securities. The Court also rejected the ECB’s argument that it had an implied power to regulate such issues, since such implied powers only existed ‘exceptionally’.

Finally, the Court concluded by sketching out (in effect) a ‘roadmap’ to change the current situation. Acknowledging that there are ‘very close links’ between payment systems and securities clearance systems, and that disturbances affecting securities clearance can affect payment systems, it stated that Article 129 TFEU could be used to amend the relevant provisions of the ECB Statute to extend the Bank’s powers in this field. So it suggested that the ECB could trigger that amendment process by requesting the EU legislature to amend the Statute.

Comments

The essential elements of the Court’s judgment (which could still be appealed to the Court of Justice) are convincing. From the perspective of accountability, the ECB should not be able to adopt ‘policy frameworks’ with quasi-mandatory language that will likely be applied in practice, as a means of evading the judicial review that would certainly apply if it adopted those rules (as its Statute specifies) in the form of regulations. Nor is it acceptable that the ECB could adopt measures with an impact on non-eurozone Member States and deny those countries standing to sue it, especially when the Treaties (as the Court pointed out) contain no limits on such standing.

As for the substance of the case, the Court is surely right, in the interests of accountability, to say that EU institutions’ implied powers have to be interpreted narrowly. There have been five major Treaty amendments in thirty years, and so there have been plenty of opportunities for Member States to decide what powers ought to be conferred upon EU institutions, and what powers should not. In the absence of an express conferral of power, the cases where the institutions have implied powers should be very exceptional indeed.

However, the Court takes an unusually narrow approach to the interpretation of an express power, namely the possibility for the ECB to regulate ‘clearing and payment systems’ as set out in its Statute. It is not self-evident that this provision can only apply to the ‘cash leg’ of clearing systems, especially in light of the links between payment and securities systems, and the impact of disturbances affecting securities clearance, which the Court expressly acknowledges.

This key aspect of the ruling can only be understood in light of the broader political context of this case. If the ECB had won, that result would have been widely regarded in the UK as a carte blanche for the ECB to split up the single market in financial services, as part of a broader ‘ganging up’ of Eurozone Member States against non-Eurozone Member States, in particular the UK. This would have been a rather hyperbolic reaction, since an ECB victory would not necessarily have had an impact beyond the specific issue of securities clearance, and the Eurozone Member States do not gang up as easily as is sometimes imagined: witness the current relationship between Greece and Germany, for starters. Nevertheless, it’s no wonder that the judges believed it would be wiser to hand this hot potato back to the politicians.

It’s striking, though, that the judges’ roadmap to give the ECB more powers is particularly easy to follow. The use of Article 129 TFEU to amend the ECB Statute only requires a proposal from the Commission or a recommendation of the ECB, followed by the ordinary legislative procedure, entailing joint power for the European Parliament and a qualified majority vote in Council. Although all Member States would have a vote, Eurozone States (if they do gang up together on this point) can now outvote non-Eurozone States.  The UK would have to seek alliances, rather than threaten vetoes, to block such a move. The referendum requirement in the UK’s European Union Act 2011 wouldn’t apply (see s. 10(1)(b) of the Act; the requirement for parliamentary approval there is meaningless, since the UK could be outvoted). Indeed, the UK would need the backing of some Eurozone States, as well as all non-Eurozone States, to block such a Treaty amendment. This would entail, for instance, securing the support of countries like Poland, at the same time as the UK (whichever of the two largest parties forms the biggest part of government after the next election) seeks to cut back the rights of Polish workers.

Failing that, the UK could bring a legal challenge to the Treaty amendment, or the ECB measure implementing it, invoking again its arguments concerning the internal market, competition law, discrimination and proportionality, which were not addressed in the General Court’s judgment. There’s a strong case to be made that the valid objective of regulating securities clearance effectively could be ensured by collaboration between the ECB and the Bank of England, rather than forcing some part of the financial services industry to move from the UK to the Eurozone, but the UK could not count on the EU courts accepting it.  

What are the broader implications of this judgment for the UK’s role in the EU? First of all, it weakens the pro-Brexit argument that ‘we should leave the EU because the Eurozone Member States are ganging up on us’. For now, the UK has won this battle, and it’s only a hypothetical possibility that it will lose the war later on. Secondly, it weakens the argument that ‘the City of London would be perfectly fine after Brexit’. If that were true, then why were Eurosceptics poised to make an unholy fuss if the UK had lost this case? Indeed, if the UK were not in the EU, it would not have had the privileged standing to sue the ECB, and the government (or British securities firms) would have had to go through national courts in the Eurozone to challenge this policy instead. Moreover, it might be harder to invoke the other arguments which the UK made in this case (and would have to make in future), depending on what legal arrangements governed the EU/UK relationship after Brexit.

 

Barnard & Peers: chapter 19

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Posting third-country workers within the EU: the ECJ squares the circle

Amedeo Arena, Assistant Professor of European Law - University of Naples "Federico II" School of Law

Judgment of the court (Second Chamber) of 11 September 2014, Essent Energie Productie BV v. Minister van SocialeZaken en Werkgelegenheid, Case C-91/13.

The ECJ has repeatedly held that, unlike workers from EU Member States, Turkish nationals are not entitled to freedom of movement within the European Union but can rely only on certain rights in the territory of the host Member State alone (Savas, para 59; Derin, para 66). The Essent judgment provides a recent and clear illustration of how, under certain circumstances, the EU internal market freedoms can be relied upon to overcome those limitations and, indirectly, to broaden the freedom of movement of Turkish and other third-country nationals.

Facts and legal background

Under Netherlands legislation, an employer is prohibited from having work carried out in the Netherlands by a foreign national who does not hold a work permit.

Essent, a company established in the Netherlands, had scaffolding at one of its branches in that Member State erected by a number of workers from Turkey and other non-EU countries. Essent, however, did not hire those workers: it entrusted the construction work to BIS, another Netherlands-based company, which in turn requested Ekinci, a company incorporated in Germany, to post the above workers to the Netherlands for the duration of the construction work.

As the Netherlands authorities had issued no work permit for the purposes of that posting, the Netherland Minister fined Essent EUR 264 000 for infringing Netherlands labour law.

In the ensuing litigation before the Netherlands Raad van State, two provisions came into play: Article 41(1) of the 1970 Additional Protocol to the EEC-Turkey Association Agreement and Article 13 of Decision no. 1/80 of the Association Council of 19 September 1980. Both are standstill clauses, prohibiting, respectively, new restrictions on the conditions of access to employment and on the freedom to provide services between Turkey and EU Member States. The Netherlands court thus resolved to stay proceedings and to seek guidance from the ECJ as to the interpretation of those provisions.

The Judgment

The ECJ first examined whether Article 41(1) of the Additional Protocol and Article 13 of Decision No 1/80 applied to a situation such as the one at issue in the main proceedings. After recalling that such provisions are directly applicable and can be relied upon to have incompatible national legislation set aside, the Court stressed that those provisions confer rights to Turkish nationals “in the territory of the host Member State alone”. In casu, the Court considered that the host Member State was Germany, where the Turkish workers were legally resident and employed, rather than the Netherlands, where the above workers were temporarily posted and whose labour market they had no intention to enter. Accordingly, the ECJ ruled that Article 13 of Decision 1/80 was not applicable to the present case.

The Court reached the same conclusion with reference to Article 41(1) of the Additional protocol. While a Turkish undertaking providing a service in a Member State could rely upon that provision, no such service provision occurred between Turkey and the Netherlands in the present case. The only link with Turkey was the presence of Turkish nationals among the workers posted by Ekinci to the Netherlands, a connecting element that the ECJ regarded as “not sufficient” to trigger the applicability of Article 41(1) of the Additional protocol.

The Court then turned to Articles 56 and 57 TFEU, which secure the freedom to provide services within the EU. It is worth noticing that the order for reference contained no preliminary question concerning those provisions, yet the Court considered that their interpretation could be useful to the referring court in adjudicating on the case pending before it.

Recalling Advocate General Bot’s Opinion, the Court noted that the posting of workers between undertakings established in different Member states (in this case Ekinci and BIS) fell within the scope of the free movement of services, in spite of the fact that some of those workers were not Union citizens. The Court also found that Articles 56 and 57 TFEU could be invoked not only by the recipient (BIS), but also by the end user of that service (Essent).

On those premises, the ECJ considered that the Netherlands work permit requirement, and the related administrative burdens, impeded the making available of foreign workers to a user undertaking established in the Netherlands by a service-providing undertaking established in another Member State.

As no harmonisation had been achieved in the area, the ECJ turned to the issue of possible justifications for the Netherlands measure. Whilst the Court acknowledged that the Netherlands Government’s desire to avoid disturbances on the labour market constituted an overriding reason in the public interest, it noted that posted workers do not seek to gain access to the host State labour market, as they return to their country of residence as soon as their work is over.

The Court also averred that Member States are entitled to check that an undertaking established in another Member State which posts foreign workers to its territory is not availing itself of the freedom to provide services for a purpose other than the performance of the service concerned. Nonetheless, the ECJ considered that the Netherlands work permit requirement was disproportionate to that aim, which could also be achieved through less-restrictive means. For instance, the service-providing undertaking could be required to show the Netherlands authorities that the situation of the workers concerned is lawful as regards matters such as residence, work permit and social coverage in the Member State in which that undertaking employs them. Similarly, the service-providing undertaking could be required to report beforehand to the Netherlands authorities the presence of posted workers, the anticipated duration of their presence and the provision of services justifying the posting.

Accordingly, the ECJ held that Articles 56 and 57 TFEU must be interpreted as precluding national legislation under which, when non-EU workers are posted by an undertaking established in a Member State to a user undertaking established in another Member State, such making available is conditional upon the latter Member State issuing work permits to those workers.

  

Comment

The present ruling highlights the somewhat peculiar situation of Turkish workers posted from one Member State to another in the aftermath of the ECJ ruling in Abatay. Those individuals can rely on Article 13 of Decision 1/80 against the Member State into whose labour market they seek to integrate through the pursuit of uninterrupted employment, but cannot invoke that provision against the Member State where they are posted for limited periods of time. By the same token, while a Turkish undertaking providing services in a Member State, as well as the Turkish employees of that undertaking, can invoke Article 41(1) of the Additional Protocol against that Member State, an EU undertaking employing Turkish nationals cannot rely on that provision to challenge national measures that restrict the movement of its Turkish employees.

In view of these incongruences and of the obvious trade-restrictive effects of the Netherlands work permit requirement, the ECJ’s willingness to expand the scope of the preliminary ruling to include Articles 56 and 57 TFEU is unsurprising. However, not too long ago, in Vicoplus, the ECJ had ruled that the freedom to provide services, read in connection with the 2003 Act of Accession, was no bar to the application of the Netherlands work permit requirement to Polish workers posted to the Netherlands during the transitional period provided in the Act of Accession. While AG Bot devoted several paragraphs of his Opinion to distinguish the factual and legal background in Vicoplus from that of the instant case, it is regrettable that the ECJ did not take the opportunity to account for what might be perceived as differential treatment between Turkish and Polish posted workers.

The ECJ only referred to Vicoplus to support its finding that the posting of workers between Ekinci and BIS, two undertakings established in different Member States, fell within the scope of the freedom to provide services. Neither Ekinci nor BIS, however, sought to rely on that freedom. Could Essent invoke Articles 56 and 57 TFEU against Netherlands labour legislation, even though that undertaking was not the direct recipient of the service?

In its Opinion, AG Bot first observed that, since the freedom to provide services pursues the public interest objective of establishing an internal market, persons “other than service providers and recipients” who, none the less, “have a material connection with a person who has that status” should be able to invoke that freedom against domestic restrictive measures. The Court had taken a  similar approach in respect of the free movement of workers in Las: “Article 45 TFEU may be relied on not only by workers themselves, but also by their employers. In order to be truly effective, the right of workers to be engaged and employed without discrimination necessarily entails as a corollary the employer’s entitlement to engage them in accordance with the rules governing freedom of movement for workers” (para 18).

The Advocate General then relied on an interesting twist of the abuse of rights doctrine. Since nowadays it is common to witness chains of several intermediaries between the principal contractor and the employees, to prevent circumvention of the work permit requirement, Netherlands legislation has adopted a broad notion of employer, making the principal contractor responsible for obtaining work permits for non-EU workers employed by its subcontractors. However, AG Bot argued that, to prevent circumvention of the ban on restrictions on the freedom to provide services, just as the principal contractor’s liability under national labour legislation expands, so should its ability to rely on Article 56 and 57 TFEU.

Unfortunately, the ECJ made no reference to the first argument, which could have provided some clarifications on the ability to invoke fundamental freedoms by persons who do not fall within the scope of such freedoms but have “a material connection” with others who did. In cases such as Carpenterand, more recently, Dogan, the ECJ had taken a different approach, by focusing on the impact on service providers of national measures (e.g. deportation orders, immigration requirements) addressed to persons connected to that provider (e.g. their spouses).

The ECJ, instead, only ran an abridged, three-paragraph version of AG Bot’s anti-circumvention argument, and found that, if Essent were denied the possibility of relying on Article 56 and 57 TFEU, the Netherlands could obstruct the freedom to provide services by enforcing its work permit requirement against the principal contractor. It is worth noticing that in earlier rulings the ECJ had relied on the abuse of rights argument to achieve the opposite result: to narrow the scope of EU provisions in cases where the conditions required to invoke those provisions had been artificially created contrary to the objectives pursued by EU law (Emsland-Stärke, paras 52-53).

Once the ECJ established a link between Essent and the freedom to provide services, the fate of the work permit requirement as a precondition for the posting of non-EU workers to the Netherlands was sealed. The conditions, deadlines and administrative burden involved in obtaining the work permit obviously hindered the making available of workers on a cross border basis. The ECJ rejected the Netherlands government’s argument that the measure was designed to avoid disturbances on its labour market, noting that posted workers do not seek to gain access to that market, “as they return to their country of origin or residence after the completion of their work”. The Court then conceded that a Member State may check that an undertaking established in another Member State which posts to its territory workers from a non-member country is not availing itself of the freedom to provide services for a purpose other than the performance of the service concerned, but engaged in a merciless proportionality assessment of the measure and provided not one, but two less restrictive alternatives to achieve the same aim.

Finally, it is worth highlighting that, unlike recent rulings (such as Dogan) that exclusively concern Turkish nationals, since neither Article 41(1) of the Additional Protocol nor Article 13 of Decision no. 1/80 were found to be applicable, the Essent holding applies to the posting of workers that are nationals of any non-EU country between undertakings established in different Member States.

Barnard & Peers: chapter 14

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

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

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

The first 15 countries, including Russia and Germany, as well as six other EU Member States (Bulgaria, Denmark, Finland, Greece, Lithuania and Netherlands) signed up to the Convention as soon as it was open for signature, on September 18^th2014; Malta’s is a lone voice in opposition. UEFA and the IOC (the Olympic movement) back the Convention but the associations of regulated European bookmakers are more guarded, sharing some of Malta’s concerns.

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

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

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

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

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

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

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

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

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

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

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

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

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

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Civil liability for Internet publishing: the CJEU clarifies the law

Professor Lorna Woods, co-author of Steiner & Woods, EU Law

Introduction

Yesterday’s CJEU judgment in Papasavvas is the most recent in a line of cases seeking to trace the edges of the concept of ‘intermediary’ for the purposes of EU information technology law, a question that has become rather more problematic than when the eCommerce Directive was first drafted in 2000. Then, the role of intermediaries was much more technical and related to transmission and technical access. Since then the market has moved on with the development of many services that are now viewed as important for the access and use of content on the Internet. Many of these services blur the boundaries between transmission services and content services. To what extent are those services neutral intermediaries? While in many respects this case could be seen as quite straightforward, it hints at still yet unresolved questions and highlights difficulties about reliance on EU law in national courts.

Facts

Mr Papasavvas (‘P’) brought an action for defamation in respect of articles published in the daily national newspaper O Fileleftheros, on 7 November 2010, which were published online on two websites. He sought damages and an injunction. The national court referred the following questions:

(1)      Bearing in mind that the laws of the Member States on defamation affect the capacity to provide information services by electronic means both at national level and within the European Union, might those laws be regarded as restrictions on the provision of information services for the purposes of applying Directive 2000/31 …?

(2)      If the answer to Question 1 is in the affirmative, do the provisions of Articles 12, 13 and 14 of Directive 2000/31 …, on the question of liability, apply to private civil matters, such as civil liability for defamation, or are they limited to civil liability in matters concerning business to consumer transactions?

(3)      Bearing in mind the purpose of Articles 12, 13 and 14 of Directive 2000/31 … relating to the liability of information society service providers and the fact that, in many Member States, an action must exist in order for a prohibitory injunction to be granted which will remain in force pending full completion of the proceedings, do those articles create individual rights which may be pleaded as defences in law in a civil action for defamation, or must they operate as an obstacle in law to the bringing of such actions?

(4)      Do the definitions of “information society service” and “service provider” in Article 2 of Directive 2000/31 … and Article 1(2) of Directive 98/34 … cover online information services the remuneration for which is provided not directly by the recipient, but indirectly by means of commercial advertisements posted on the website?

(5)      Bearing in mind the definition of “information service provider”, laid down in Article 2 of Directive 2000/31/EC and Article 1(2) of Directive 98/34 … could the following, or any of them, be regarded as a “mere conduit” or “caching” or “hosting” for the purposes of Articles 12, 13 and 14 of Directive 2000/31:

(a)      a newspaper that operates a free website on which the online version of the printed newspaper, with all its articles and advertisements, is posted in pdf format or another similar electronic format;

(b)      an online newspaper which is freely accessible but the provider obtains money from commercial advertisements posted on the website, where the information contained in the online newspaper comes from the newspaper’s staff and/or freelance journalists;

(c)      a website which provides (a) or (b) above for a subscription?’

Judgment

The Court dealt first with queries raised regarding admissibility.  P raised questions about timing: the proceedings at national level are at an early stage, to the point that the defendants in the national action have not yet filed a defence.  On this basis, P argued that the questions referred must be hypothetical as the nature of the dispute had not yet been defined. The Court did not address this argument directly but instead stated that ‘the description of the legal and factual framework of the proceedings in the order for reference seems to suffice so as to permit the Court to make a ruling’. 

P had also argued that the defendants did not fall within the scope of the e-Commerce directive and therefore questions relating to its interpretation were unnecessary. This is of course a little circular and the Court rejected the argument, pointing out that the scope of the Directive and the applicability to the defendants was one of the main issues that needed to be resolved. Having determined that, the Court re-ordered the questions referred and started with question 4 on the application of the Directive.

The Court reformulated the question, asking whether ‘information society services’ (ISS) as defined in the directive ‘covers the provision of online information services for which the service provider is remunerated not by the recipient, but by income generated by advertisements posted on a website (para 26).’ The Court re-iterated that the definition of ISS has four elements:

·         ‘normally provided for remuneration’;

·         at a distance;

·         by electronic means; and

·         at the individual request of a recipient of services.

The final three seemed non-contentious, but what concerned the national court was the issue of remuneration, as the user did not pay to access the website.  The Court then referred to recital 18 of the Directive, which expressly excludes the possibility that a service will fall outside the directive merely because payment is indirect.  In this there is a similarity to the CJEU’s reasoning in Bond van Adverteerders and Others (paragraph 16).

Having determined that the directive could apply to information services such as those in issue here, the Court then considered question 1 in which the referring court is effectively asking whether the directive precludes the application of rules of civil liability for defamation to ISS providers.  The directive applies the principle of home country rule to service providers, with the corollary that Member States should not impose additional rules on services coming from other Member States.  Given that the defendants in the domestic proceedings were based in the same Member State as P, the issue of whether the civil defamation rules constituted a restriction did not apply, though the Court noted that such rules fall within the scope of the directive (at Article 2(h)).

The Court then went on to consider whether the defendants could benefit from the intermediary immunity provisions in Articles 12-14 of the Directive. The Court considered the role of these provisions, and relying on its reasoning in Google France and Google  (paragraph 113) and L’Oréal and Others (paragraph 113) stated that they applied to intermediaries and activities which are of ‘a merely technical, automatic and passive nature’, that the ISS provider has neither knowledge of nor control over the information which is transmitted or stored and takes a neutral approach to content. The Court highlighted factors such as assisting clients in drafting commercial messages, or in optimising presentation of content.  It concluded:

Consequently, since a newspaper publishing company which posts an online version of a newspaper on its website has, in principle, knowledge about the information which it posts and exercises control over that information, it cannot be considered to be an ‘intermediary service provider’ within the meaning of Articles 12 to 14 of Directive 2000/31, whether or not access to that website is free of charge. [45]

So, in such a circumstance, a newspaper cannot claim exemption from civil liability.  Given this answer, it was not apparent that the Court needed to address question (2). Nonetheless, it confirmed that it made no difference whether the case involved business to consumer or consumer to consumer cases. [50]

The final issues dealt with were those raised by question (3), though again the Court noted that answers to this question might not be necessary given that Articles 12-14 did not apply.  The Court summarised this question as asking whether Articles 12-14 preclude the adoption of interim measures (such as the injunction prohibiting publication) or whether those articles create individual rights which the ISS provider may plead as defences in law in the context of legal proceedings such as those in the main proceedings. As regards the first element, the Court noted that – subject to the principles of equivalence and effectiveness, matters as to conditions under which remedies might be available were matters for national law. [53]

The second element effectively concerns the direct effect of the immunity provisions: can they be relied on in the context of a dispute between private parties. The Court returned to the general case law on horizontal direct effect of directives, arguing that ‘with regard to proceedings between individuals, such as those at issue in the main proceedings, the Court has consistently held that a directive cannot of itself impose obligations on an individual and cannot therefore be relied on as such against an individual’ [54] but that indirect effect/doctrine of consistent interpretation from Von Colson would apply. [56]

Comment

While this case at the headline level came to the right answer - people who write or (first) publish content on the Internet are not intermediaries - the case raises a couple of issues worth pondering further.

First off, there was no Advocate-General’s opinion.  Querying this might seem churlish, given that I’ve just said the Court got to the right answer, and on the facts the judgment is a straightforward application of the Court’s existing law on Articles 12-14 in Google and L’Oreal.  It is, however, a sensitive area: currently a case, Delphi, concerning a news site and the self-same provisions is awaiting a judgment from the Grand Chamber of the European Court of Human Rights on whether there was a breach of freedom of expression in finding the journalists liable for defamation (see the Chamber judgment here).  While there is a crucial factual difference between the two cases (Delphiconcerns liability for user generated content, not journalism), it is noteworthy that although Recital 9 recognises the significance of ISS for freedom of expression, Papsavvas did not even consider whether there was a freedom of expression argument in issue.

To some extent most of the questions referred by the national court seem to reflect a lack of familiarity with the internal market system generally. So, the application of the rules in this case might seem straightforward, but they might not always be so.  While it should come as no surprise that national rules imposing civil liability on a service ‘import’ could be a restriction, nor that ‘home’ regulation should not be circumvented by reliance on provisions aimed at cross-border services, the determination of the place of establishment may in itself be problematic, as cases on cross-border television services have shown.  The eCommerce Directive seems to refer to the Court’s general case law on this point (Article 2(c), Recital 19): the Court accept the establishment point as proven here in Papasavvas. 

There is a risk of forum shopping and, by contrast to the Audiovisual Media Services Directive (which deals with television), the eCommerce Directive has no ‘anti-abuse’ clause, although Member States may derogate on limited grounds (article 3(4), Recital 24). In this case, the Court did not address the question of whether rules relating to defamation could be seen as being justified under the protection of human dignity in Article 3(4)(a)(i).  Of course, a system which allows or even encourages delocalisation to another Member State has the consequence of adversely affecting would be plaintiffs under the national rules, especially private persons and small businesses. Even in rules of conflicts allow action in the injured party’s home state, there may be questions as to applicable law in the light of the home country regulatory principle (see eDate and Martinez). So, while the eCommerce Directive claimed not to affect rules on conflicts of law (Article 1(4)), there is an interrelationship there and one which may affect the effectiveness of remedies for users. 

Similarly, and as the Court itself noted, remuneration has typically been widely interpreted.  The Court referred to Bond van Adverteerders, a case concerning free-to-air commercial television – a set-up which has clear parallels with free to user internet services.  In its case law on Article 56 TFEU (freedom to provide services), the Court has gone further, even suggesting (in Deliege) that an amateur judoka was remunerated because she took part in competitions which carried advertising and which were televised.  Essentially the Court seemed to be saying, ‘there’s money there somewhere….’. Of course, there will be hard questions in some cases- ‘amateur’ content available freely: is that an ISS, and does the answer to the question change if the platform carries advertising entirely separately? In Delphi, it was the user generated content that was problematic. This question did not arise, however, as it was the underlying website that was sued, and it clearly was a commercial entity for the same reason that the newspaper in Papasavvas was.

Perhaps the interesting questions are those which deal with the interface between the immunity provisions and national law.  The purpose of these provisions is to encourage the development of the digital environment, particularly cross border services (recital 40). It should therefore make no difference if the service the intermediary carries is between businesses, or business to consumer, as indeed the Court ruled. The national court also questioned whether injunctions were permissible. The Court handed this one off to national procedural autonomy, but it is arguable that the terms of the directive suggest that injunctions are in principle permissible: each of the intermediary exceptions state that the exemption from liability does not affect the possibility of the Member State’s legal system requiring the intermediary to terminate the offending activity.

Finally, we come to the question of whether intermediaries can rely on the exemption directly before national courts: in effect, do these provisions have horizontal direct effect? The Court dealt with this by returning to basic principles precluding such an effect, but in doing so it argued that Union law precludes the imposition of an obligation on an individual. Of course, in this case the directive is not imposing an obligation on an individual but rather removing it. In this sense, although for different reasons, the position is closer to that in cases such as CIA Security Internationalor even Wells, where a national obligation is disapplied. This area of law is problematic generally. Suffice it to note here that this approach knocks a potentially large hole in the protection of intermediaries if the Member State has not implemented, or not implemented correctly, indirect effect notwithstanding.

Barnard & Peers: chapter 6, chapter 14

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Who has jurisidiction to regulate satellite broadcasters?

Professor Lorna Woods

The current regulatory framework for electronic content is broadly divided into two: content and infrastructure.  This bifurcated design, in theory, allows platforms to be regulated in a comparable way rather than be subject to different rules based on the content they carry.  Essential infrastructure (electronic communications) is subject to a market based approach (the so-called ‘communications package’) and content is subject to specific minimum standards regulated in the country of origin (the audiovisual media services directive (AVMSD) and the e-commerce directive).

In both instances the regulatory framework is provided by EU secondary legislation (mainly directives), but it seems that the different measures ascribe regulatory competence as between Member States differently, and allow a regulator different scope of action. Moreover, there is not an exact fit with the underlying treaty free movement provisions.  This horizontal divide based on a service and technology neutral approach is neither as simple nor as complete as policymakers might have hoped, bearing in mind the range of intermediaries operating in the market and the range of services each operator might provide. The result is that there are unclear boundaries as to the applicable law and, as corollary of that, the relevant regulator. The difficulties are exemplified in the recent CJEU judgment in Case C-475/12 UPC v. NMHH.

UPC is essentially a retailer of electronic content: it provides packages of radio and audio-visual broadcast services transmitted via satellite and subject to conditional access technology (ie, a requirement to pay for a subscription).  Following a company restructuring, consumers in Hungary were provided with the service by a UPC subsidiary based in Luxembourg.  Following complaints by Hungarian consumers, the Hungarian communications regulator, NMHH, asked UPC for information which UPC refused to supply on the basis that NMHH was not the competent regulator, either in terms of the substance of the service and regulatory framework, or in terms of geographic jurisdiction.  UPC claimed that the Luxembourg authorities, if any, should regulate and that the Luxembourg authorities had stated that they had regulatory competence. NMHH fined UPC for non-compliance.  UPC appealed and the matter came before the Hungarian courts. The questions referred fell into two groups: on the scope of the communications package (specifically the FrameworkDirective (FD) on telecom regulation); and on its relationship with the underlying Treaty free movement provisions. The questions referred are:

(1)      May Article 2(c) of the Framework Directive be interpreted as meaning that a service by which a service provider supplies, for consideration, conditional access to a package of programmes which contains radio and television broadcast services and is retransmitted by satellite is to be classified as an electronic communications service?

(2)      May the Treaty on the Functioning of the European Union be interpreted as meaning that the principle of the free movement of services is applicable to the service described in the first question, in the case of a service supplied from Luxembourg to Hungary?

(3)      May the Treaty on the Functioning of the European Union be interpreted as meaning that, in the case of the service described in the first question, the country of destination, to which the service is sent, is entitled to limit the supply of that type of services by requiring that the [supplier of the] service has to be registered in that Member State and has to be established as a branch or separate legal entity, and allowing this type of services to be supplied only through the establishment of a branch or separate legal entity?

(4)      May the Treaty on the Functioning of the European Union be interpreted as meaning that administrative proceedings relating to the services described in the first question, regardless of the Member State in which the undertaking supplying that service operates or is registered, will be subject to the administrative authority of the Member State which has jurisdiction on the basis of the place in which the service is supplied?

(5)      May Article 2(c) of the Framework Directive be interpreted as meaning that the service described in the first question must be classified as an electronic communications service, or must such a service be classified as a conditional access service supplied using the conditional access system defined in Article 2(f) of the Framework Directive?

(6)      On the basis of all the foregoing, may the relevant provisions be interpreted as meaning that the service provider described in the first question must be classified as a provider of electronic communications services pursuant to European Community [sic] law?

EU legislation

Although from the perspective of the consumer, UPC looks like a broadcaster, UPC does not take editorial responsibility for the content of the programmes, so it does not fall to be regulated under the AVMSD (which in any event does not cover radio). In ruling so here, the Court follows its previous judgment in Case C-518/11 UPC Netherland.  The definition of ‘electronic communications service’ for the FD encompasses services normally provided for remuneration which consist wholly or mainly in the conveyance of signals on electronic communications networks, including transmission services in networks used for broadcasting, but excludes services providing, or exercising editorial control over, content transmitted using electronic communications networks.  The Court’s phraseology on this point (paras 36-39 of the judgment) is opaque, talking in terms of ‘not excluding’ the communications package. So while that package applies here, the question remains open the extent to which AVMSD or other content based provisions can also apply to content retailers, depending on the nature of the service provided. Of course, were UPC to have been deemed to be responsible for content within the AVMSD, it would probably have been subject to the regulation of the Luxembourg authorities, since that Directive usually confers jurisdiction upon the broadcaster’s country of origin.

Having excluded broadcasting, the question still remained as to whether UPC fell within the Communications Package, a question which turned on the meaning of ‘electronic communications service’ in Art. 2(c)FD.  Here, however, the point at issue was the fact that UPC did not use its own transmission facilities but contracted with a third party for satellite services. The Court, reasoning to ensure the effectiveness of the regime, agreed with the approach suggested by the Advocate General and held that use of third party facilities was irrelevant to the classification of the service. The defining criterion of the electronic communication service is whether the provider is responsible as regards end-users for transmission of the signal to provide the relevant service.

It had also been suggested that if the service were a conditional access system (defined in Article 2(f) FD), the provisions concerning electronic communications services would not be applicable. Both the Advocate-General and the Court dismissed this suggestion, so 'a conditional access system may be attached to an electronic communications service for the broadcasting of radio or television programmes, without that service losing the status of an electronic communications service’.

So, the Communications Package applied, but this still left the issue of whether the Hungarian authorities could regulate (and if so, to what degree). The FD contains no attribution of jurisdiction in the way, for example, the AVMSD does.  The CJEU dealt with this aspect by considering the powers of the national regulatory authorities, in particular as regards authorisation.  It noted that the Authorisation Directive(which forms part of the Communications Package and deals with the granting of licences and other forms of authorisation to provide relevant services) does not oblige the national authority of the jurisdiction in which the services are provided to recognise authorisation decisions taken in the Member State from which they are supplied (judgment, para 86) – here referring to the Luxembourg authorities’ statement that they had regulatory competence in relation to UPC.  As a result, Member States in whose territory the recipients of services reside may impose conditions on the provision of those services, as permitted by the Communications Package.  Under Article 11b Authorisation Directive, these include provisions to the effect that national authorities may request from undertakings information that is proportionate and objectively justified for verification of compliance with conditions relating to consumer protection.  In sum, the supply of electronic services may be monitored by the authorities of the Member State in which the recipients of the service reside.

Treaty rules on free movement of services

The Hungarian court asked whether Article 56 TFEU precluded rules which require undertakings which supply electronic communications services in the territory of a State to register those services, or rules requiring them to establish in that State a branch or a legal entity separate from that located in the Member State of transmission.  Note that where there has been full harmonisation via directive, only those rules in the relevant legislation are permitted; otherwise, some recourse to national law is permitted. The Communications Package also envisages the possibility of further national regulation, in addition to that specified by the package (recital 7 and Article 1(3) Framework Directive), and further provisions allow the regulatory authorities discretion to take action to further general objectives, including protecting the consumer interests.   This means that the area has not been totally harmonised and that any national rules in this area fall to be assessed by reference to the relevant Treaty freedom: here, services (see e.g. Case C‑17/00 De Coster; Case C‑250/06 United Pan-Europe Communications Belgium and Others). 

The normal rules governing the freedom to provide services allocated regulatory responsibility to the Member State of establishment, and that secondary regulation must take into account home state regulation.  There is clear potential for abuse here, and there has been a stream of cases in the broadcasting sector in particular, where companies have established in a Member State with a favourable regime and ‘broadcast back’ to a particular State. The Court has only rarely accepted that this is abuse or, alternatively, that such a company is actually established in the destination state.  These arguments were unsuccessful here, even though UPC does not provide services within Luxembourg; this is very much in line with the Court’s standard approach.

As regards the notification requirement, Article 3 Authorisation Directive contains a legal framework dealing with the conditions which the regulatory authorities of a Member State may impose in order to allow undertakings established in other Member States to supply electronic communications services in the territory of the host State. Provided that the host Member State follows the terms of Article 3, notification requirements are not precluded. Further, given that Article 3 seems to harmonise this aspect exhaustively, requirements going beyond Article 3 are not compatible with EU law – they cannot be judged by reference to the treaty freedoms. So, the Hungarian authorities may impose such notification requirements.

Note that  application of the Treaty freedoms might have led to a different result.  In Canal Satellite Digital (Case C-390/99), the Court held that a requirement on the operators of conditional access systems to register before carrying out services, in order for the Spanish authorities to check technical competence, in relation to a service provider established in another Member State, would not be proportionate if it duplicated checks in the home Member State.

Finally, the Court ruled that the requirement for an establishment is not specified by the Communications Package, so it does fall to be assessed by reference to the Treaty freedoms. While requiring an establishment may lead to more effective monitoring of authorisation conditions, such extensive monitoring is not justified.  In any event, an establishment requirement ‘is the very negation of the freedom to provide services and has the result of depriving Article 56 TFEU of all effectiveness’ (judgment, para 104) and cannot therefore be permitted under the Treaty.

The judgment in this case shows the importance (and complexity) of determining whether (and to what extent) a particular field of law is harmonised by EU secondary legislation, and therefore to what extent it remains regulated by the Treaty freedoms; and also the importance of determining which specific secondary legislative regime applies. It is interesting to note that although the EU took what might be termed a 'light touch' approach to telecom regulation in general, basing the system on competition law and policy principles, and assuming a distinction between the public interest and the use of that system, that process is not complete. In particular, the communications package allows space for a range of consumer protection issues and it is this, ironically, which gives more regulatory power to the receiving State than the Treaty freedoms or the audiovisual services legislation does.

Barnard & Peers: chapter 14, chapter 16

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

By Steve Peers

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

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

Does the Charter apply?

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

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

Comparing internal market rules and the Charter

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

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

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

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

Implications of the judgment

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

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


Barnard & Peers: chapter 9, chapter 16

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