Litigation in Spanish railroad electrification cartel highlights further inadequacies of regulation of bid rigger exclusion

In a new episode of the Spanish sainete of the railroad electrification cartel (see here for an overview), it has now emerged that one of the companies affected by the exclusion ground (prohibición de contratar) declared in the resolution of the Spanish National Commission on Markets and Competition (CNMC) of 14 March 2019 subsequently secured interim measures suspending its effectiveness on 19 July 2019.

The freezing order prevents (Spanish) contracting authorities from relying on the exclusion ground and thus shortens the maximum period of (future) exclusion of the colluding companies, unless the CJEU revises its case law on the time-limit calculation for such grounds established in Vossloh-Laeis (24 October 2018, C-124/17, EU:C:2018:855). The decision also highlights issues concerning the cross-border effects of litigation on exclusion grounds. In this follow-up post, I discuss these two issues.

The interim measures decision

Quick recap: it should be stressed that the Spanish transposition of Article 57(4)(d) has resulted in a system whereby the exclusion of economic operators on the basis of previous infringements of competition law is mandatory under Article 71 of Law 9/2017 on Public Sector Procurement (LCSP). However, the scope and duration of such exclusion generates some difficulties, in particular when they are not established in the original decision declaring the infraction and imposing the measure—which is precisely the case of the railroad electrification cartel. In such cases, a further administrative procedure needs to be completed and the scope and duration of the mandatory exclusion (prohibición de contratar) are to be established by decision of the competent Minister.

The effectiveness of the mandatory exclusion ground in the period running from the initial infringement decision and the further Ministerial decision is contested. Two opposing schools of thought exist. One that gives automatic effect to the exclusion ground despite the future specification of its scope and duration, and the opposing view that considers that the measure is incomplete and cannot generate (negative) effects against the sanctioned undertaking until the Ministerial decision is adopted.

The CNMC expressed the first view in its railroad electrification decision, when it stated that ‘regardless of the time limits within which the duration and scope [of the prohibition] must be set [by the Minister of Finance] ... it is possible to identify an automatism in the prohibition of contracting derived from competition law infringements, which derives ope legis or as a mere consequence of the adoption of a decision that declares said infraction, as established in the mentioned Article 71.1.b) of [Law 9/2017]‘ (page 319, own translation full decision available in Spanish).

The Spanish High Court (Audiencia Nacional), in a Judgment of 19 July 2019 (ES:AN:2019:1673A, hat tip to Alfonso Rincón García-Loygorri for posting it on LinkedIn) adopted the same view and recognised that the measure was bound to immediately restrict the affected undertakings’ ability to participate in public tenders. Considering that it is likely that the final decision on the main appeal of the cartel decision arrives after the expiry of the three year maximum duration foreseen for the exclusion ground and that (should the appellant prevail) the effects of such exclusion would be very difficult, if not impossible to correct at that stage, the High Court decided to suspend the effectiveness of the mandatory exclusion ground.

Implications in terms of maximum duration of the exclusion

Quick recap: the CJEU has established that ‘where an economic operator has been engaged in conduct falling within the ground for exclusion referred to in Article 57(4)(d) of that directive, which has been penalised by a competent authority, the maximum period of exclusion is calculated from the date of the decision of that authority‘ (Vossloh Laeis, above, para 42).

I criticised the CNMC for creating legal uncertainty by not establishing the scope and duration of the exclusion ground in its initial decision. I argued that the CNMC knew or should have known that, as a matter of directly applicable EU law, de facto the maximum exclusion period can run for three years, up to 14 March 2022. Therefore, by referring the file to the Minister and creating legal uncertainty as to the interim effects of the prohibition to contract with a yet to be specified scope and duration, the CNMC actually bought the competition infringers time and created a situation where any finally imposed prohibition to contract is likely to last for much less than the maximum three years.

The High Court’s Judgment raises the same criticisms. While the High Court explicitly took into account the fact that the undertakings could find themselves in a position of not being easily compensated for the undue exclusion from public tenders in case of prevailing in their appeal of the CNMC decision, the High Court ignored that its freezing order will create the reverse effect in case the appeal is dismissed. By preventing (Spanish) contracting authorities from excluding the competition infringers from tenders for an indefinite period starting on 19 July 2019, the High Court has created the risk that the undertakings are never excluded from public tenders because such exclusion is time barred by the time the CNMC decision becomes final—which does not solely depend on the outcome of the High Court’s proceedings, but is subject to a potential further appeal to the Supreme Court.

This highlights once again the inadequacy—or, at least, partiality—of the CJEU Vossloh criterion that the maximum period of exclusion starts running at the time of adoption of the initial infringement decision. It seems clear that, where that decision is contested and, in particular, where interim measures are obtained to freeze its effects—the maximum period of exclusion needs to be calculated taking that into account. Otherwise, the simple fact of litigating buys competition infringers immunity from the debarment system foreseen in Directive 2014/24/EU and thus excludes its effet utile. That cannot be right.

Territoriality of effects

The new episode of the Spanish sainete also raises questions concerning the cross-border effects of the CNMC decision. While Spanish contracting authorities are effectively enjoined from giving effect to the mandatory exclusion ground, the situation is by no means necessarily the same in other EU/EEA jurisdictions. Non-Spanish contracting authorities could (justifiably) be tempted to apply domestic mandatory or discretionary exclusion grounds based on the fact that the relevant undertakings were sanctioned for bid rigging by the CNMC. This could be the case whether they are aware or not of the High Court Judgment, in particular where they have discretion in this matter.

Should any such decision be challenged, the issue should make its way to the CJEU, which would have a hard time finding ways of squaring this practical difficulty with the differentiated treatment that Art 57 of Directive gives to grounds based on a ‘conviction by final judgment‘ (Art 57(1)) and those based on decisions and judgments not subjected to that finality requirement (notably, Art 57(4)), as well as with the self-imposed constraint of the way the maximum time-limit is calculated as per Vossloh.

Once again, we are yet to see the final act of this sainete…

CJEU toys with the one stop shop approach and muddies the waters of State Aid analysis (C-284/12)

In its Judgment of 21 November 2013 in case C-284/12 Deutsche Lufthansa, the Court of Justice of the EU has further defined the role of domestic courts hearing State aid cases and has clarified the legal effects that result from an Article 108(2) TFEU Decision whereby the European Commission decides to open a formal investigation and expresses a preliminary opinion on the incompatibility of certain State aid measures with Article 107(1) TFEU.

 

In the case at hand, Lufthansa intended to avail itself of a Commission's Article 108(2) TFEU Decision that opened an in-depth investigation on certain types of aid received by Ryanair for its activities at Frankfurt Hahn Civil Airport (operated by FFH). Prior to the Commission's investigation, Lufthansa initiated private litigation and sought an order for the recovery of certain payments made to Ryanair and an additional order that there be no future aid for the benefit of Ryanair. The initial dismissal of Lufthansa's action was under appeal when the Commission formally decided to investigate the case.

 

After learning that the Commission had opened an in-depth investigation, Lufthansa contended that the domestic courts were barred from conducting their separate assessment under Articles 107 and 108 TFEU and were bound to follow the preliminary assessment of the Commission--which indicated that 'each of the measures in question was selective and constituted State aid within the meaning of Article 107(1) TFEU, unless it satisfied the private investor principle. As regards that principle, the Commission noted that, on the basis of the information available to it at the time of the adoption of the [Decision], the airport fees paid by Ryanair were not enough to cover the costs incurred by FFH'.

 

The German courts were not satisfied and asked the Commission for its opinion under the relevant provisions in the Notice on the enforcement of State aid law by national courts. Unsurprisingly,  the Commission supported Lufthansa and replied that the domestic court itself was not required to assess whether the measures in question could or could not be classified as State aid as it could take the Commission's Decision as a basis for drawing all the necessary inferences from the infringement of Article 108(3) TFEU. The German court was still not persuaded and made a preliminary reference.

 

In its Lufthansa Judgment, the CJEU has ruled that:

37 While the assessments carried out in the decision to initiate the formal examination procedure are indeed preliminary in nature, that does not mean that the decision lacks legal effects.

38 It must be pointed out in that regard that, if national courts were able to hold that a measure does not constitute aid within the meaning of Article 107(1) TFEU and, therefore, not to suspend its implementation, even though the Commission had just stated in its decision to initiate the formal examination procedure that that measure was capable of presenting aid elements, the effectiveness of Article 108(3) TFEU would be frustrated.

39 On the one hand, if the preliminary assessment in the decision to initiate the formal examination procedure is that the measure at issue constitutes aid and that assessment is subsequently confirmed in the final decision of the Commission, the national courts would have failed to observe their obligation under Article 108(3) TFEU [...] to suspend the implementation of any aid proposal until the adoption of the Commission’s decision on the compatibility of that proposal with the internal market.

40 On the other hand, even if in its final decision the Commission were to conclude that there were no aid elements, the preventive aim of the State aid control system established by the TFEU [...] requires that, following the doubt raised in the decision to initiate the formal examination procedure as to the aid character of that measure and its compatibility with the internal market, its implementation should be deferred until that doubt is resolved by the Commission’s final decision.

41 It is also important to note that the application of the European Union rules on State aid is based on an obligation of sincere cooperation between the national courts, on the one hand, and the Commission and the Courts of the European Union, on the other, in the context of which each acts on the basis of the role assigned to it by the Treaty. In the context of that cooperation, national courts must take all the necessary measures, whether general or specific, to ensure fulfilment of the obligations under European Union law and refrain from those which may jeopardise the attainment of the objectives of the Treaty, as follows from Article 4(3) TEU. Therefore, national courts must, in particular, refrain from taking decisions which conflict with a decision of the Commission, even if it is provisional.

42 Consequently, where the Commission has initiated the formal examination procedure with regard to a measure which is being implemented, national courts are required to adopt all the necessary measures with a view to drawing the appropriate conclusions from an infringement of the obligation to suspend the implementation of that measure (C-284/12, paras 37-42, emphasis added).

So far, the solution is clear cut and seems to impose a very clear preference for Commission (preliminary) assessment over any other assessment independently carried out by domestic courts. This would strengthen the one stop shop approach derived from the Commission's monopoly over the enforcement of Article 107 and 108 [except for the direct effect of 108(3) TFEU] and would strengthen the current centralised enforcement system.

 

However, in the two followning paragraphs, the CJEU muddies the waters by further ellaborating and indicating that:

43 To that end [ie to draw the appropriate conclusions from an infringement of the obligation to suspend the implementation of that measure] national courts may decide to suspend the implementation of the measure in question and order the recovery of payments already made. They may also decide to order provisional measures in order to safeguard both the interests of the parties concerned and the effectiveness of the Commission’s decision to initiate the formal examination procedure.

44 Where they entertain doubts as to whether the measure at issue constitutes State aid within the meaning of Article 107(1) TFEU or as to the validity or interpretation of the decision to initiate the formal examination procedure, national courts may seek clarification from the Commission and, in accordance with the second and third paragraphs of Article 267 TFEU, as interpreted by the Court, they may or must refer a question to the Court for a preliminary ruling (see, to that effect, as regards requests for preliminary rulings on the validity of State aid, Case C-222/04 Cassa di Risparmio di Firenze and Others [2006] ECR I-289, paragraphs 72 to 74) (C-284/12, paras 43-44, emphasis added).

In my view, this reopens the question and destroys the one stop shop approach (or, in more clear terms, the approach in para 44 basically deactivates all the reasoning in paras 39-40 and introduces a level of uncertainty and procedural complication that seems unnecessary). And I wonder where are the concerns about the effectiveness of Article 108(3) TFEU that had previously been alluded to in para 38, particularly if the preliminary reference is made before any interim measures are adopted (and what would be the use for it otherwise?). 

 

As I already indicated when I criticised the Advocate General's Opinion in this case (here), this can create significant complications by way of parallel procedures (before the Commission, the national courts and the CJEU) in one and the same case. Such duplication of procedures can only result in a waste of resources and, most likely, in legal uncertainty and potentially contradictory outcomes.

 

Leaving the door open for a reference for a preliminary ruling (of validity) against a provisional assessment of the European Commission is excessively deferential towards domestic courts and can have significant undesirable effects. This is not satisfactory and it starts to be evident that there is a need for the adoption of a more streamlined procedural system where (in the absence of a decentralised enforcement system for State aid, which may well be superior), national courts would have to suspend their powers of interpretation of the concept of aid and limit their role to the adoption of effective interim measures when the Commission is still completing its investigation on a given measure.

In my view, this could be easily achieved by simply applying Article 4(3) of the Treaty on European Union, since the need for sincere cooperation in this type of matters seems out of the question (an argument the CJEU has used differently in Lufthansa). Nonetheless, it is now clear that the CJEU is not willing to go very far in striking a more sustainable balance between the sphere of jurisdiction/competence of domestic courts and ensuring a manageable procedural system in State aid law. In my view, domestic courts should resort to the possibilities outlined in para 44 of the Lufthansa Judgment only in very extreme cases (if ever).

AG (dangerously) stresses possibility to indirectly challenge State Aid decisions via Art 267 TFEU

In his Opinion of 27 June 2013 in case C-284/12 Deutsche Lufthansa, Advocate General Mengozzi stressed that (provisional) Decisions of the European Commission in State Aid cases are open to (indirect) challenges via a reference for a preliminary ruling on their validity under Article 267 of the Treaty on the Functioning of the European Union. 

In the case at hand, the complainant before the Commission seeked interim measures against the beneficiary of a measure that the Commission qualified as State aid in its decision to open a formal investigation. The domestic court competent in the matter remained unconvinced by the Commission's preliminary assessment and seeked ways not to adopt interim measures on the basis of such an assessment. It referred the following question to the CJEU:

Does the uncontested decision of the Commission to initiate the formal investigation procedure under Article 108 paragraph 3, second sentence, result in the national court seised of a procedure which aims to recover payments already made and the prohibition of future payments being bound by the legal assessment expressed by the Commission in that decision on the state aid character of the measure in question?

In paragraph 42 of his Opinion, AG Mengozzi indicates that:

under the combined effect of Article 108 paragraph 3, last sentence, and the qualification as a new aid of the controverted measure [in the provisional decision of the Commission], the opening of the formal investigation procedure generates the obligation of the Member State concerned to suspend its execution from the date of adoption of the decision to open the investigation and until a final decision is reached, regardless of the objective nature of the controverted measure [...]. National courts will therefore be obliged to take all necessary measures to ensure compliance with this requirement and to eliminate the consequences of any breach thereof, regardless of any previous assessment of the measure under Article 107, paragraph 1. In case national courts harbour doubts about whether the requirements to qualify the measure as aid are met in the given case, which justify the initiation of the formal investigation procedure, national courts may refer a question of validity under Article 267 TFEU, first paragraph, letter b) (Opinion in C-284/12 at para 42, own translation from Spanish).

This comes to stress the (procedural) difficulties derived from the joint competence of domestic courts and the Commission to interpret and apply the notion of aid under Article 107(1) TFEU--as stressed in paragraph 10 of the Commission Notice on the enforcement of State Aid law by national courts, which also metions the possibility for a preliminary reference in paragraph 90, but (impliedly) in a context where no concurrent Commission investigation is in place--and can create significant complications by way of parallel procedures (before the Commission, the national courts and the CJEU) in one and the same case. Such duplication of procedures can only result in a waste of resources and, most likely, in legal uncertainty and potentially contradictory outcomes.

In my view, leaving the door open for a reference for a preliminary ruling (of validity) against a provisional assessment of the European Commission is excessively deferential towards domestic courts and can have significant undesirable effects. This is not satisfactory and would justify the adoption of a more streamlined procedural system whereby national courts would have to suspend their powers of interpretation of the concept of aid and limit their role to the adoption of effective interim measures when the Commission is still completing its investigation on a given measure. 

In my view, this could be easily achieved by simply applying Article 4(3) of the Treaty on European Union, since the need for sincere cooperation in this type of matters seems out of the question. It will be interesting to see how far the CJEU is willing to go in the balance between the sphere of jurisdiction/competence of domestic courts and ensuring a mangeable procedural system in State aid law.