Keywords: state aid, notion of undertaking, economic activity, initiation of formal investigation procedure, serious difficulties
§ 1. Introduction
On 11 December 2012, the EFTA Court (Court hereinafter) pronounced on an action for annulment of a decision of the EFTA Surveillance Authority (ESA) as regards an alleged aid granted to Nasjonal digital læringsarena (NDLA) by Norwegian authorities. The general contours of the legal dispute before the Court included the grant of State aid which was examined from both a procedural and substantial point of view. The procedural part of the case dealt with the determination of conditions under which the ESA is obliged to initiate formal proceedings following a complaint, as well as the designation of the notion of doubts that objectively dictate the opening of a formal investigation. Moreover, in relation to the substantive aspect of the dispute, the Court tried to tackle the volatile and ever-evolving notion of economic activity, especially within the factual setting of public education. The Court adhered to the basic principle of underscoring the importance of an as comprehensive as possible review of State aid schemes by the competent antitrust authority, by overturning the ESA’s decision which previously found that the funding of counties by the Norwegian government, for the purpose of providing pupils with necessary printed and digital learning materials free of charge, did not constitute State aid. The present annotation attempts to provide meaningful comments and clarify the path followed by the Court in order to reach its final opinion.
§ 2. Legal background
As is well-known, the aim of the EEA Agreement is to promote a continuous and balanced strengthening of trade and economic relations between the Contracting Parties enjoying equal conditions of competition, with a view to creating a homogeneous European Economic Area (EEA)[1]. However, the integration of the 28 EU Member States and of Iceland, Liechtenstein and Norway in a single market still implies a two-pillar system of supervision and judicial protection which is effected by separate administrative and judicial organs and a replicated reproduction of the relevant EU Treaties provisions into the governing texts of the EFTA, that is, the EEA Agreement, the Agreement between the EFTA States on the Establishment of a Surveillance Authority and a Court of Justice (SCA) and an array of Annexes and Protocols thereto. To the extent that the EEA legal order is modeled after the rules of the EU legal order, the legal basis of the dispute at hand lies in the respective provisions of the EEA legal framework responsible for regulating State aid control and delineating the scope of action of the Surveillance Authority in such cases. The fundamental EEA provision applied in the case is article 61 (1) EEA which, in essence, constitutes a letter-perfect reproduction of article 107 TFEU, being complemented by article 1 of Part I of Protocol 3 to the SCA which represents a largely identical version of article 108 TFEU. Furthermore, the judgment at hand is also based in other ‘loaned’ provisions comprising a mirror image of specific provisions of the Procedural Regulation 659/99[2], more precisely articles 10, 13, 4 of the latter, which delimitate all possible options available to the ESA to close the preliminary examination of any complaint on unlawful aid.
§ 3. Factual background
In 2007, the Norwegian authorities amended the Norwegian Education Act, obliging the counties to provide pupils with the necessary printed and digital learning materials free of charge[3]. In April 2007, the Ministry of Education granted funds to the counties, subject to a number of conditions. First, NDLA, the entity taking care of the counties’ responsibility for digital learning resources, should not engage in economic activity. Second, the purchase of learning materials and development services should be subject to the rules on public procurement. The complexity of the case results from the involvement of an independent body whose legal nature is not clear-cut. It is characterized as an inter-county cooperation body which has its own Board of Directors (Bod) but it genuinely lacks employees in a way that all personnel engaged in activities of the NDLA belongs organically to the work force of counties[4]. The complaint addressed to the ESA was entertained by a decision declaring that the funds and assets granted to the NDLA did not constitute State aid within the meaning of article 61 (1) EEA, since the NDLA does not engage in any economic activity by developing and distributing the learning materials for pupils.
The ESA embraced a three prong test in order to reach this finding which can be boiled down a) in the NDLA’s absence of gainful activities while fulfilling its duties towards population, b) in the existence of the element of solidarity of the aid, by virtue of the financing through public resources and not against compensation and c) in the inability of the NDLA to intervene in the determination of the statutory conditions of services which in turn intimates a complete lack of autonomy[5].
On the basis of those points in facts and law, the applicant claimed that the ESA failed to initiate the formal investigation procedure, and second, that, in any case, it failed to provide sufficient reasoning for its final conclusion[6]. While the first allegation was the centerpiece of the legal reasoning of the Court, the second assertion remained unanswered because it went beyond what was necessary to opine on the case. The applicant, in support of its allegations raised doubts as to the adequate assessment of the facts, correct understanding of the market and sound implementation of the relevant case law[7]. In addition, the applicant challenged both the solidarity and lack of autonomy attributed to the NDLA (a virtually intermediate entity of the State aid scheme) by the contested decision, maintaining that the principle of solidarity was inexpediently borrowed from the public health category of EU case law and as such was extraneous to the decision of the present dispute and that the NDLA reserved for itself the right to decide on the learning material it wished to publish.
§ 4. The judgment of the Court
The EFTA Court was initially confronted with the determination of whether the applicant’s motion was admissible in order to be subjected into further judicial assessment on its merits. This amounts to an extensive scrutiny of the legal standing of the applicant to submit the action of annulment at hand which was resolved in favor of the claimant. The Court concluded that it fell under the notion of an ‘interested party’ who was to be affected by the outcome of the case due to its direct and individual concern on the imminent decision. Going to the heart of the ruling, the Court was called to clarify whether the ESA was bound, in the light of the concrete facts of the case, to initiate the formal investigation procedure. Was the ESA confronting insurmountable doubts about the alleged economic nature and the precise legal status of the NDLA? In that regard, the Court reiterated that the ESA, as the only competent authority for acceptance and resolution of complaints concerning measures running contrary to the EEA rules, enjoys a broad discretion in evaluating possible existence of serious difficulties that should avert it from skipping a formal investigation procedure. Nevertheless, this acknowledged leeway is not limitless. It is rather circumscribed by two factors. First, the ESA cannot set aside a formal investigation of a case based on grounds other than lack of serious difficulties and second, the concept of doubts is an objective one, being determined by the comparison of the evidence at the disposal of the ESA with the eventual grounds of its decision. The Court concluded, after addressing several questions to the ESA around the legal status of the NDLA and in return collecting unsatisfactory and tentative answers, that the grounds of the decision are in conflict with the information available to ESA and therefore there exists evidence of the existence of serious difficulties. In the same vein, the Court continued to ask critical answers on the details of the State aid scheme. In view of the equally conflicting explanations provided by ESA, it also affirmed the autonomy of the inter-county body and the prevailing uncertainty as to its operation under the principle of solidarity, due to the NDLA’s Board competence to impose obligation on other participants of the scheme. The failure on behalf of the ESA to persuasively designate who was the real recipient of the aid respectively was also decisive for the above conclusion. Consequently, all aspects of the economic or non-economic nature of the NDLA remained unclarified even during the oral hearing, meaning that serious difficulties did exist because of a great deal of doubts in relation to the organizational structure, decision-making mechanism and the source of funding which stood as an obstacle to the outright adoption of a decision without the initiation of formal proceedings.
§ 5. Comments
a) Crystallizing the ‘economic nature’ of undertakings
As is the case in all branches of EU Competition law, similarly in the field of State aid, EU prohibitive rules become applicable only if an array of conditions is cumulatively met. Albeit the most important constituent elements in the context of the State aid are the concept of aid and the artificiality of the advantage thereto, the source of aid, that being a particular member state or its resources, and the selectivity of the state measure; there exists an invariable place for the concept of undertaking in the scrutiny equation, regardless of the different competition branches. The concept of undertaking, as a common denominator between all various competition areas, implies an involvement in economic activity, so that the grant of aid can be held liable for upsetting normal competition conditions. Before embarking upon the matter of when and under what conditions an undertaking is qualified as one whose business operations, market performance and overall presence are designated as economic in nature - as opposed to non-economic activities undertaken by legal entities predominantly active in markets where the exercise of public authority[8] or social policy[9] is unmistakable - we should focus on the very fundamental notion of the undertaking which is particularly relevant to the NDLA as an unconventional type of entity. Unfortunately, this part of the action was not examined by the Court, given the contested decision was eventually annulled on formal grounds, that is, the ESA’s failure to initiate formal investigation which in turn rendered the assessment of substantive aspects of the action needless. Therefore, it would be of special legal interest to probe into the question of whether NDLA would satisfy the minimum required terms of the concept of an undertaking in order to have EU State Aid rules applied in the alleged aid at hand. The starting point of our analysis should relate to the generally accepted definition of an undertaking for competition law purposes, as has been shaped by EU case-law. According to seminal cases like Pavlov[10] and Höfner[11], an undertaking is described as every entity engaged in an economic activity, which normally amounts to the provision of goods and services on a given market, regardless of the legal status of the entity and the way in which it is financed. In so holding, we have to admit that the classification of NDLA as a public body (legal form of the entity) or its financial backing by the public purse of the Norwegian state cannot eliminate in a per se fashion the exercise of economic activity on behalf of NDLA. It is also extraneous that NDLA has no employees in its own capacity as an institution . One could assert that its peculiar status of considering as working staff all personnel that organically belongs to the Norwegian counties themselves and engages to its operations putatively consists in an accessory argument in favor of both its public character, as an integral part of the broader public administration system of Norway. The prevailing principle to decide whether an undertaking is economic in nature or not, is based on a functional test. Nevertheless, even this functional test is not an absolute filter with a peremptory efficiency in safely separating economic and non-economic activities of a public undertaking. As is demonstrated in the case at hand, the ESA’s reference to EFTA Court’s previous case law, which prescribed that an activity that can be offered by private operators as an economic activity does not preclude the possibility for the latter to be legitimately offered by the State as a non-economic activity, was not adequate to fend the prospect of a valid argument to the opposite direction. In fact, our case allows the emergence of two major observations that could lead to useful developments in the exacting and subtle enterprise of defining economic undertakings. In the author’s opinion, the Private Barnehagers Landsforbund three-prong test is not fully harmonized with the functional definition of the notion of an undertaking. On the contrary, it contravenes that functional approach because it puts forward a generic and rigid, in terms of application, rule which invalidates the acknowledged practical effectiveness and resilience of the functional criterion. The attempt to shape a single criterion (that is, the Private Barnehagers Landsforbund test), in view of all possible combinations of a wide range of heterogeneous attributes that an undertaking can encompass, so that a final decision can be taken on whether it exercises economic activity appears to be a wrong option to accommodate a topic as multidimensional as the definition of the economic activity of an undertaking. The given complexity of the matter at hand does not merit any kind of categorical or dogmatic answer. Actually, it is so casuistic that a one-size-fits-all response would lead to decisional impasses. It is also indicative that the invoked case law is a past judgment of the EFTA Court and not a ruling delivered by the EU Courts which undoubtedly possess greater experience in formulating general and to the point jurisprudential criteria, whereby different groups of identical cases can be subjected to the appropriate legal rule and can be equitably accommodated. Moreover, the weakness of such a judge-made test is further accentuated by the fact that the applicant’s argument which challenges the ESA’s findings on the non-economic nature of the NDLA seems to carry its own merit. In particular, the applicant stresses that previous case law has been possibly misread, that ESA committed an unfair equation of a public service obligation and an actual blank check handed to the NDLA to dominate an already existent market and that the inference of the ESA over a natural link between the production of learning materials and the content of teaching was unjustifiable and arbitrary. Especially, as regards the last allegation, it is well drawn from the equally judge-made definition of an undertaking, that any kind of inherence or preconceived application of rules is excluded insofar as any particular type of legal status or financing source is completely irrelevant to the finding of economic features of the undertaking. Hence, it would be more efficient for the Court to buttress its final conclusion on the non-economic nature of the NDLA to disambiguated factors deriving directly from EU courts’ rulings (such as the absence of assumption of risk for the purpose of remuneration against the provision of the services to the pupils throughout the country[12], the non-profit making of the NDLA in that no gain was acquired from the distribution of the learning materials that could lead to any sense of return or coverage of the production expenses[13]) instead of risking its decisional authority by including additional or experimental considerations regarding the solidarity of the service and the autonomy of the NDLA. The procedure of enhancing already mature case law criteria leads with mathematic accuracy to unsatisfactory results.
Turning our attention to the EU case law we can reach an even more realistic estimation on the alleged economic nature of the NDLA’s activities. The pivotal decisions on this regard are the Humbel and Edel and Wirth cases, in which the Court maintained that, the State, in establishing and maintaining a secondary education system open to all, is not seeking to engage in gainful activity but fulfils its duties towards its own population in the social, cultural and educational fields and that courses given in an establishment of higher education, which is financed essentially out of public funds, do not constitute economic services [14]respectively. The above rulings might be related to the delineation of the concept of services and to original public education institutions which fall within the very core of public administration but proves to be directly relevant to the central issue of whether activities closely associated with the education are regarded as economic, pursuant to the EU legal perception. An even more identical case[15], in terms of facts, is one decided by the Commission with respect to the offer of a subsidy to a union of universities which aimed at the creation of an electronic learning environment and the operation of on-line teaching material for education establishments and business. The Court adhered to its previous case law principle asserting that to the extent that a State meets its responsibilities under a public education system it does not engage in economic activities. It then opined that on the grounds that the union of universities was operating within the framework of this system because of the provision of assistance to the state in discharging its duties, it was a non-profit foundation established under public law[16]. The latter decision is also relevant to the interpretation of the present EFTA Court ruling. Its relevance can be supported by a shared unofficial pattern in both cases regarding the inclusion of third-party bodies into the notion of the education system and their fictitious consideration as State bodies by virtue of their supporting performance. It is obvious that we can draw an analogy to the facts of the case under examination here, since the NDLA was formed with the exclusive purpose of supporting the production and distribution of all the learning materials to pupils. However, this stream of case law came to be challenged by a later Commission decision dealing with an Italian aid scheme for the reform of training institutions. That decision overturned the uniform line of case law by establishing that the crucial issue is not any inherent quality or the activity or who carries out the activity or the context (hereupon public education system) in which it is conducted but whether there can in principle exist a market for it where the product can be offered for consideration[17].Thus, a combination of the said case law reversal with the fact that the market for learning materials was in place and operated under the rules of normal competitive forces until the State decided to enter the market intimates that there is nothing to dictate that the functioning of the NDLA was to be deemed by the Court as non-economic just because education activities are invariably classified as some sort of public interest mission of Member States. In other words, we presume that an activity is non-economic when there can be no market for comparable goods & services either because there is no voluntary participation or interaction or transactions by sellers and buyers (because costs cannot be covered) or because the state has reserved it for itself[18]. Yet, in our case there was voluntary participation in a given and present market which came to be upset by State intervention and entrustment of the production, distribution and management of learning materials to a public body. In addition to that, the CJEU has held that where a body is entrusted with some public interest tasks, this does not prevent the activities at issue from being regarded as economic activities[19]. Hereupon, the nature of the NDLA as a legal entity was not clarified, even during the hearing, since the ESA kept giving contradictory answers with respect to the precise time of its entry into force and its concrete organizational and legal status.
What is the corollary of the above analysis? First, the uneasy case of determining the concept of an undertaking being engaged in economic activity does not deserve a single -either legislative or judge-made- answer. The market participants can take on so many different forms and shapes, resulting in a complex amalgamation of economic and non-economic features, so that a definitive classification of undertakings can be sometimes nearly unrealistic, even after invoking the functional test of their overall activity. Secondly, it could be a legitimate proposal to add a supplementary scrutiny step, when the functional test proves to be incapable of entertaining all doubts. It could be said that an effects based test, in the form of evaluating the level of disturbance of competition by an undertaking whose nature cannot be safely determined with the application of the functional criterion, could restore the competitive equilibrium. It could also put an end to the ever-evolving contention around the notion of the economic activity by partially shifting the centre of gravity from when an activity of an undertaking shall be considered as economic to what can be done to sidestep that insurmountable evidentiary burden, and ascribe an economic nature to mongrel undertakings whose nature is obscure. Finally, to clarify an associated concern emerging out of this proposal, it cannot be claimed that the notion of the undertaking is affected at all. First the accessory step of the effects based review is only a methodological tool which leaves the definition as such completely intact. Secondly, it shall be deemed to take place only when the functional definition of an undertaking is ineffective or is accountable for producing unfair results due to the built-in inchoate nature of the functional criterion. The major concern of the judicial assessment should be the actual spotting of anti-competitive effects and the avoidance of jeopardizing the competitive balance, beyond blindfold adherence to collateral criteria (meaning the functional test itself) which have been established to facilitate the anti-competitive control but they do not constitute an end in themselves.
b) The‘serious difficulties’ threshold
Closely linked to the subject of the economic activity exercised by the NDLA was the issue of whether the conclusion on its commercial or non-commercial standing was so intelligible, so as to justify ESA’s final decision to decide the case without initiating the formal investigation procedure prescribed by article 4 of Part II of Protocol 3 SCA. Therefore, the question as to the economic activity of the NDLA and its anticipated clarification on behalf of the ESA also had, apart from a substantive perspective in connection to the application of substantive rules on State aid, a procedural facet as well, since the extent of its ambiguity was to determine either a simplified or a more analytical procedural path to be followed. As is underscored in the decision at hand, the formal investigation procedure has a twofold objective. On one hand, it aims at protecting the rights of third parties since in the event of its initiation, interested parties have an active role to play and enjoy rights of material participation in shaping the antitrust authority’s findings. On the other hand, it is a means of protecting ESA’s competence to decide each case based on an informed and rudimentary amount of information stemming from independent and objective third sources.
At the outset, two major indicators can be safely relied upon according to the judgment at hand, in order to rule on the existence of serious doubts, namely the temporal length of the preliminary examination and its straight comparison with the average time needed to reach a decision and the level of independence of the antitrust authority in assessing the information before it. It is clear that the more extensive the request for supplementary information or clarification from the parties[20], as well as the more frequent the recourse to external information, the lesser the independence of the ESA is. Those two indicators render the ‘serious difficulties’ threshold more easy to be appraised. Besides that, it is well-settled in case law that the concept of serious difficulties is an objective one. Whether or not such difficulties exist requires investigation of both the circumstances under which the contested measure was adopted and its content[21]. The Court was bound[22] to follow the second option of establishing the occurrence of serious doubts, that is, the content-wise analysis of the contested ESA’s decision. According to the fundamental principle that the subject matter of the case is strictly delimited by the parties, the Court could not take into consideration pleas of fact or law not submitted by the parties. However, the Court could be deemed to have violated the above principle in a subsequent point of its reasoning while attempting to substantiate the presence of serious doubts on the basis of the content of the contested decision. The Court’s decision states that: the applicant has argued that ESA misunderstood the principle of solidarity with regard to the activities of the NDLA. Even though the applicant only refers directly to the funding in relation to that argument, it is clear from the application that the argument also covers the finding of ESA in the contested decision that the NDLA provides its services free of charge as part of the finding that the NDLA does not exercise an economic activity[23]. While certain pleas may, and indeed must, be raised by the courts of their own motion[24], a plea going to the substantive legality of that decision, which falls within the scope of infringement of the Treaties or of any rule of law relating to their application, within the meaning of Article 263 TFEU, can, by contrast, be examined by the Courts of the European Union only if it is raised by the applicant[25]. It cannot be held that the Court sought an amplification of the plea raised by the applicant. The finding of the ESA as to the provision of services free of charge is not expressly challenged by the applicant and the Court cannot substitute the applicant’s implied volition to put it forward by extending the already submitted plea in law or by adding an argument which is distinct from the one actually submitted. The principle of the determination of the dispute’s contours exclusively by the parties precludes any kind of second-guessing of pleas in law that the applicant did not include in its application. An opposite admission would jeopardize the applicability of the obligation inflicted on the Court not to act arbitrarily and in contravention to the ne eat judex ultra petita partium principle, which dictates that the judge is not entitled to transcend the applicant’s requests and risk his intrinsically neutral position against the terms of the dispute.
The EFTA Court could be held to have fallen in a deadfall, because it was bound to investigate the fulfillment of the serious difficulties threshold only according to the content of the contested measure.
[1] Article 1 EEA Agreement
[2] Council Regulation (EC) 659/1999, 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty, (OJ L 83, 27 March 1999, p.1)
[3] Paragraph 9 of judgment at hand
[4] Paragraph 8 & 14 of the judgment at hand
[5] Paragraph 29 through 36 of the judgment at hand
[6] Paragraph 79 of the judgment at hand
[7] Paragraph 80 of the judgment at hand
[8] C-343/95 - Calì & Figli v Servizi Ecologici Porto di Genova, [1997] ECR I-1547, C-30/87 - Bodson v Pompes funèbres des régions libérées, [1988] ECR 2479
[9] Case C-159/91, Poucet and Pistre v AGF and Cancava, [1993] ECR I-637, Case C-244/94, FFSA and Others v Ministère de l'Agriculture and de la Pêche, [1995] ECR I-4013
[10] C-180/98 - Pavlov and Others, [2000] ECR I-06451
[11] C-41/90 - Höfner and Elser v Macrotron, [1991] ECR I-01979
[12] C-180/98 - Pavlov and Others , [2000] ECR I-6451, Case C-475/99, Firma Ambulanz Glöckner v Landkreis Südwestpfalz [2001] ECR I-8089
[13] Case C-159/91, Poucet and Pistre v AGF and Cancava, [1993] ECR I-637
[14] C-263/86 - Belgian State v Humbel and Edel, [1988] ECR 5365, para.18 & C-109/92 - Wirth v Landeshauptstadt Hannover, [1993] ECR I-6447, para.19
[15] Commission Decision of 15 January 2002, NN 152/2001, Netherlands – Digitale
Universiteit
[16] Maria Kleis & Phedon Nicolaides, The concept of undertaking in education and public health systems, p. 3
[17] Ibid
[18] Ibid
[19] Joined Cases T‑231/06 and T‑237/06, Netherlands and NOS v Commission, [2010] ECR II-5993, C‑475/99 Ambulanz Glöckner [2001] ECR I‑8089, para.21 & Case C‑237/04 Enirisorse [2006] ECR I‑2843, para.34
[20] In our case, the ESA requested six times for additional information from the parties
[21] Case T-36/06, Bundesverband deutscher Banken eV v European Commission, [2010] ECR II-537, Case C-47/10 P, Republic of Austria v Scheucher-Fleisch GmbH and Others, [2011] ECR I-10707, Case T-359/04, British Aggregates Association and Others v European Commission, [2010] ECR II-04227, Case C-431/07 P, Bouygues SA, [2009] ECR I-02665
[22] ‘Bound’ means that the Court could not investigate the circumstances under which the contested decision was taken because the applicant had not raised any plea concerning the lengthy duration of the preliminary examination or the limited ability of the ESA to assess the information in its disposal without repeatedly asking clarifications from the parties.
[23] Paragraph 120 of the judgment at hand
[24] Such as the question whether a statement of reasons for the decision at issue is lacking or is inadequate, which falls within the scope of essential procedural requirements
[25] C‑272/12 P, Commission v Ireland and others,not yet published, para.28