Article 12 of the EC Treaty (now Article 18 of the Treaty on the Functioning of the European Union) outlines the general prohibition on Member States enacting laws which discriminate on the basis of nationality. The ECJ has interpreted the non-discrimination provisions of the EC Treaty broadly, so as to ensure that governments do not covertly enact laws which they are not permitted to enact overtly.[3] Based on the jurisprudence of the ECJ, and the policy objectives of the EU and its Member States to promote the Single Market, the outcome of the case seems as though it should be straightforward: the regulation of the Maastricht municipal council discriminates on the basis of residency, which can be seen as a proxy for nationality since the majority of Dutch residents are likely to be Dutch nationals, and is therefore contrary to Articles 12 and 49 of the EC Treaty.

The ECJ, however, ruled in favour of the Maastricht municipal council and declared that the residency requirement is “justified by the objective of combating drug tourism and the accompanying public nuisance.”[4] The Court essentially concluded that the residency requirement infringed Article 49, but was a proportionate response and therefore justifiable. In addition, the ECJ states that because marijuana is generally prohibited throughout the EU (except in cases of regulated use for medicinal purposes), the cafe owner may not rely on protection from the relevant provisions in the EC Treaty when marketing the drug.

The decision of the ECJ is flawed and unfortunate, as it seems to be inspired by political objectives and is not based on sound legal reasoning. Throughout the judgment, the Court consistently refers back to international treaties which EU Member States are party to which specifically prohibit the trafficking of marijuana, along with EU legislation which promotes the same objectives. This is done for the purpose of convincing the reader that smoking marijuana is “illegal” or “wrong” in an absolute sense, and therefore restricting its use is not really a bad thing. The problem with this smoke and mirrors trick is that it ignores the fact that recreational marijuana use is permitted (though regulated) in the Netherlands. If the international obligations which the Court speaks fondly of are so important, why are marijuana cafes permitted to exist in the Netherlands in the first place? The correct judgment is that the residency requirement imposed by the Maastricht municipal council violates the EC Treaty, and cannot be justified because it discriminates on the basis of nationality. If Dutch officials are so concerned about the public nuisance which marijuana cafes are causing they can legislate them out of existence, but they may not impose regulations which discriminate on a prohibited basis.

[1] Josemans v. Burgemeester van Maastricht, C-137/09, [2010] ECR I-0000.

[2] EC, Consolidated Version of the Treaty Establishing the European Community (EC Treaty), [2006] OJ C 321 E/37.

[3] Rewe-Zentral AG v. Bundesmonopolverwaltung für Branntwein, C-120/78, [1979] ECR I-649; see also para 58 of supra note 1.

[4] Supra note 1 at para 84.

Before addressing those arguments, a little background.

What is RPM? RPM is when a manufacturer controls the prices at which distributors sell goods.  Minimum price-fixing is where the manufacturer sets the lowest price at which distributors can resell goods.

Is minimum price-fixing anti-competitive? The lawyer’s response: “it depends.”  Minimum price-fixing has anti-competitive effects when manufacturers or distributors (a) collude to police cartels or (b) exclude competitors by eliminating their ability to compete by lowering prices.  Minimum price-fixing can however have pro-competitive effects when used to help introduce products, encourage distributor promotions, ensure uniform distribution, enhance experience-related products, and reduce free-riding.

How does EU law approach minimum price-fixing? EU law is not a friendly venue for minimum price-fixing.  Article 101(1)(a) of the Treaty on the Functioning of the European Union (“TFEU”) broadly forbids price-fixing.  The EU Block Exemption Regulation 330/2010 includes minimum price-fixing as a hardcore restriction.  To survive, an agreement to set minimum prices must meet the four conditions set out in TFEU Article 101(3).  In its May 2010 Guidelines on Vertical Restraints, the EU Commission explains that courts are to presume that minimum price-fixing will not satisfy Article 101(3).  Thus, minimum price-fixing appears presumptively illegal under EU law.

How does North American law approach minimum price-fixing? North American law reaches the opposite conclusion.  In the U.S., the U.S. Supreme Court overturned almost a century of precedent in Leegin Creative Leather Products when it ruled that minimum price-fixing agreements are subject to the rule of reason.  This means that a plaintiff must now show that the agreement is an unreasonable restraint on competition, based on: the defendant’s market share, history, nature of the product, relevant industry, and effect on competition.  Similarly, in Canada, the legislature amended the Competition Act, only offering a civilly-enforceable measure against minimum price-fixing in the Competition Tribunal if it has an “adverse effect on competition.”

Despite what your competition expert tells you, this isn’t rocket science: a good comparative competition law class and a thorough Google search will teach you all that.

Now, let’s examine (1) reasons this difference may be healthy, and (2) reasons it may not be all that important in practice.

1. A healthy difference

Any rookie comparativist can tell you that legal rules do not exist in a vacuum.   In the present context, differences between EU and North American legal systems may explain these healthy differences.

a.  EU stakeholders can benefit from the presumptive advantage

In the EU, minimum price-fixing’s presumptive illegality may serve consumer interests.  On the Old Continent, overburdened competition authorities cannot police the vast majority of price-fixing agreements.  A presumption of illegality allows these authorities to combat cartels more easily.

Likewise, competitors who suffer from competition will not likely enjoy resources to pursue costly litigation.  After all, if a dominant power is hurting competitors’ revenues–or denying potential competitors entry to the market altogether–, these “little guys” won’t have the funds–or even the legal personality–to lawyer up and bring suits against the “big guys.”

What about private enforcement?  Well you see, a key difference in almost all EU countries is that class-action suits do not exist.  In addition, some member state courts still deny individuals the right to bring suits based on EU competition law–despite European Court of Justice’s decisions (see, Courage and Manfredi)–except through individual tort action.  Though consumers might go through consumer associations to bring these claims, these few associations also lack resources when compared to the class action regime.

In addition, professional rules in EU Member States may prohibit lawyers from covering the up front costs in hopes of a contingency fee.  Without strong private enforcement mechanisms, a tough minimum price-fixing stance might do a bit of good towards evening out the playing field.

Finally, suits by competition authorities, competitors, or associations are far less likely to hurt dominant manufacturers financially.  Compared to the US system of treble damages and attorney fee awards, competition law infringers face lower penalties in the EU, usually only amounting to the actual damage caused plus lost profits.  Otherwise stated, violators only have to put the cookies back in the cookie jar, offering a small deterrent.

In this climate, the tougher EU approach may make good sense by offering the EU market some enhanced protection.

b.  US stakeholders do not need a presumptive advantage

On the other hand, US consumers probably don’t need as much protection.  Class-action suits offer a powerful tool to enforce competition rules.  Armies of sharp attorneys scour statistics to identify a competition infringement.  Once they find it, these class-action chasers can set up a class-action suit–which class members have to opt-out of–to go after the dollars attached to settlements or decisions.

Regardless of who–class actions, competitors, or competition authorities–brings legal action, the “little guys” in the US also have access to larger awards with treble damages and fee awards.  This provides more incentive and resources to allow the “little guy” to evidence that the price-fixing amounts to an unreasonable restraint on competition.

For the “big guys,” US manufacturers’ lower legal liability allows them to test out minimum price-fixing’s benefits, which may in turn offer consumers the best of both worlds–benefits of increased competition in addition to access to large awards if manufacturers use price-fixing abusively.

As seen, minimum price-fixing’s presumptive legality may better serve the US markets.

2. The difference may not matter

All that said, the difference may not matter.

After all, minimum  price-fixing faces scrutiny under both systems and both parties will have to carefully analyze the issue.  When evidence of price-fixing comes to a court or competition authority’s attention, the potential plaintiff will necessarily have to consider the potential defendant’s market share, history, the nature of the product, the relevant industry, and effects of the price-fixing (i.e., the rule of reason!) in assessing whether the agreement is indeed anti-competitive.

From a transactional standpoint, manufacturers must still carefully consider their legal risks by implementing such agreements.  That is, a manufacturer will still have to call in its competition expert to determine whether the benefits of a minimum price-fixing scheme will outweigh its legal liability.  Manufacturers will thus better analyze whether such measures will actually create profits and stimulate competition.

Finally, under either system, potential plaintiffs will logically and practically (to show damages!) only attack minimum price-fixing that actually restrains competition.  In any case, the potential plaintiffs (and, in turn, defendants) will necessarily apply the rule of reason in market analysis.  Thus, at the end of the day, the rule of reason will apply on both continents.

In sum, all this digital ink may be spilling in vain.  That said, we will begin to see the results as cases in Leegin‘s wake arise and as the Block Exemption Regulation’s transitional period expires 31 May 2011.

Thank you to Mrs. Shawna Mihala for assistance on private enforcement of EU competition law. Thank you also to Me. Sebastien Goinard for assistance in his LL.M. competition law course in Paris through the Universite de Cergy-Pontoise.

a.  Habitual Residence in the ECJ

The ECJ has endorsed a fact-based habitual residence test for cases under BIIbis in one decision so far.  The case, A (C-523/07), involved a parental responsibility dispute between a mother and a public child welfare agency.  Three children who lived with their mother and stepfather in Sweden since 2001 traveled as a family to Finland in the summer of 2005 to spend their summer holiday.  While still in Finland in October 2005, they applied for public housing.

In November, a local welfare agency removed the children to a childcare unit.  The mother unsuccessfully challenged this action in a Finnish court.  On appeal, a Finnish appellate court submitted four questions to the ECJ.
In the central question, the Finnish asked how to determine the children’s habitual residence, considering their peripatetic lifestyle in Finland.  The Advocate General’s (“AG”) opinion framed the issue with the need for a precise definition of habitual residence in light of the spirit and purpose of BIIbis and the best interests of the child.  Distinguishing between presence and habitual residence, the AG turned to other private international law treaties because of their importance in interpreting and providing uniform interpretation on this issue.

Following the ECJ’s decision in Rinau,  the AG looked to the Hague Abduction Convention’ guiding principles.  Thus, the AG considered habitual residence “by reference to all the relevant circumstances…distinguished from the legalistic concept of domicile.”

In embracing that definition, the AG parted from the Commission’s suggested definition.   The Commission, relying on the Borras Report, specified factors including intention, relevant facts, and actual residence.  Ultimately, the AG rejected intent, standing alone, as a determinant of habitual residence.

The AG posited that intent may have been important in determining habitual residence for simple divorce cases, which BIIR addressed.  However, intent is less important in BIIbis parental responsibility cases—when determining a child’s habitual residence, children often lack intent and parents’ intentions conflict.  Thus, the AG rejected the habitual residence definition in divorce law and, for that matter, social law because of those laws’ differing aims.

In applying a fact-based test based test, the AG paid particular attention to the “duration and regularity of residence” and the “child’s familial and social integration.”

First dealing with duration and regularity of residence, the AG rejected any strict time limit.  In the case, the durational relevance related to the children’s ages and their familial and social circumstances.  While habitual residence tolerates interruptions, children lose a previous habitual residence when “a return to the original place of residence is not foreseeable.”

Further, the AG noted that habitual residence can shift quickly, as evidenced by the three-month period of continuing jurisdiction in BIIbis Article 8.  Parents’ common intentions can play a role in assessing the regularity of the residence—but only when manifested towards the child’s integration—e.g., by enrolling the child in school, leasing or purchasing property, or changing an address.  This was how the AG defined the duration and regularity of the residence.

Second, the AG examined factors surrounding a child’s familial and social integration.  These factors can vary with the child’s age, but contact with relatives, “school, friends, leisure activities and, above all, command of language are important.”  Considering these factors, courts must determine whether a habitual residence exists.

The ECJ decision largely adopted the AG’s opinion regarding the need for uniform and autonomous interpretations, the unique definition of habitual residence in parental responsibility cases, and the factors to consider in determining habitual residence.  Instead of focusing on intent or the “centre of interests,” the court held that:

the concept of ‘habitual residence’ under Article 8(1) of the Regulation must be interpreted as meaning that it corresponds to the place which reflects some degree of integration by the child in a social and family environment. To that end, in particular the duration, regularity, conditions and reasons for the stay on the territory of a Member State and the family’s move to that State, the child’s nationality, the place and conditions of attendance at school, linguistic knowledge and the family and social relationships of the child in that State must be taken into consideration. It is for the national court to establish the habitual residence of the child, taking account of all the circumstances specific to each individual case.

Thus, the ECJ named roughly eight factors to consider when determining habitual residence: (1) duration, (2) regularity, (3) conditions, (4) reasons for the child’s presence, (5) school attendance, (6) linguistic knowledge, (7) family relationships, and (8) social relationships.  With those factors in mind, the ECJ returned the case to the national court.

Unfortunately, the ECJ did not exactly express the habitual residence determination by enumerating those clear factors.  Instead, a looser focus on “all the circumstances specific to each individual case” dilutes the possibility for uniform interpretation among Member States’ courts.  Soon, two examples in UK appellate courts would show habitual residence’s slipperiness.

b.    Habitual residence acquired after less than two interrupted months in England

In S(A Child), a court acknowledged—but did not effectively apply—the ECJ’s habitual residence determining factors.   In that case, a Belgian father argued that his child was not habitually resident in England.  He and the Australian mother had a daughter in December 2005 in Australia, who spent most of her life in a small Belgian village with her parents, near her grandmother.  In February 2007, the father signed a three-year lease in that Belgian village.

In March 2007, the father took a three-month job in Belfast.  A month later, the mother and child followed, staying in an apartment that his employer provided there.  In May 2007, the mother and child returned to Belgium.  The father took a two-year job in London, where, for six weeks, he stayed with a friend during the week and travelled to Belgium on the weekends.

Then, the father’s friend in England secured a projected three to nine-month job in Canada.  So, the friend offered his England home for the family’s use.  In August 2007, the family moved in but left most of their possessions in Belgium.  Then, the daughter spent two weeks with her grandmother in Belgium in September.  Unfortunately, the friend’s job in Canada fell through, and the family had to give up their English digs by the end of September.

At this time, the marriage fell apart.  The parents had differing plans for their daughter: the mother pictured her life in Australia; the father took the child to Belgium on September 28.

On appeal, the appellate judge repeatedly emphasized the indeterminate time—three to nine months—that the family planned to spend at the borrowed home in England, despite the primary home in Belgium.  The judge opined that the “constancy of that primary home [did] not prevent the acquisition of habitual residence in the work country if the other elements within the defined principles of acquisition [were] satisfied.”  The court reviewed “the facts as the [trial] judge found them,” and “whether it was open to her to conclude that those facts were sufficient to satisfy the tests set out in the authorities.”  The appellate judge then upheld the decision that, in six interrupted weeks, the young child had acquired habitual residence in England.

In reaching that conclusion, the appellate judge accepted the father’s “very substantial” legal connection with England because of his employment, tax contributions, and work permits.  The appellate judge accepted the lower court’s emphasis on the parties’ intention to remain in England for three to nine months.

The appellate court’s reasoning was troubling in light of C-523/07, because those connections and intent had little to do with the child’s actual integration in England.  The appellate court relied heavily on the trial court’s balancing, but the trial decision came down before the ECJ clarified the autonomous habitual residence test.  Considering the eight factors above, the child’s habitual residence had not likely shifted to England.

The duration was quite short—certainly less than two months.  The regularity was also lacking as the child had spent two weeks with her grandmother in Belgium during her time in England. The conditions of the residence were undeniably temporary.  The reason for the child’s presence was simply to share a rent-free home with both parents.

Further, no indication of school attendance or linguistic knowledge arose in the courts’ opinions—factors explicitly required when following the ECJ analysis.  Finally, the child’s family and social relationships were seemingly limited in England.  Her father and mother were living in England temporarily and her grandmother—who she spent a quarter of her “residence” in England with—was in Belgium.  Therefore, this case’s reasoning strays from a narrow construction of the ECJ test.
b.    Habitual residence not acquired after one year in Wales

In another 2009 case, P-J (Children), a Spanish father sought a return when his Welsh wife removed their children from Spain to Wales.   Initially the mother had taken the children from Spain to Wales to live with their grandparents and go to school in Wales for a year, with the father’s consent.  After that year, the mother and children returned to Spain and enrolled in school.  About two months later, the mother left with the children without the father’s consent.

At issue in the appellate court was the children’s habitual residence.  The mother argued the first move established Wales as the children’s habitual residence.  Lord Justice Ward agreed that “acquiring habitual [residence] … permits a stay of comparatively short time [whereas] domicile … requires an intention to remain [] indefinitely.”

However, Lord Justice Ward recalled that “[h]abitual residence of young children of married parents all living together as a family is the same as the habitual residence of the parents themselves and neither parent can change it without the express or tacit consent of the other or an order of the court.”  Without setting a fixed period, habitual residence “depends ‘more upon the evidence of matters susceptible of objective proof than upon evidence as to state of mind.’”

Applying this definition, the court decided that the children’s habitual residence was Spain.  Lord Justice Ward concluded that their:

ordered way of life was Spanish. Their education had been undertaken there and with the mother’s collaboration it was arranged that it should continue in Spain upon their return. Their schooling in Wales was for a temporary period and for the limited purpose of improving their English. Their home was in Spain, not with their grandparents in Wales. The visit to Wales was a convenient respite to meet the dual objectives of increasing their language skills and refurbishing the Spanish home. The mother actively participated in the planning of the work even whilst she was in Wales. The essential dental work was carried out in Spain…. [The f]amily life was centred on Spain, which is simply another way of saying Spain was the regular order of their life.

The court thus concluded—based on UK case law—that the habitual residence was Spain.

However, that conclusion does not comport to the ECJ factors in C-523/07.  By ignoring whether the children re-established their Spanish habitual residence, the appellate court too quickly dismissed the potential habitual residence in Wales.

After all, their presence in Wales was for a substantial duration and regularity—an entire year.  They stayed at their grandparents’ home with the father’s consent.  Their purpose was to acquire English language skills and attend school—two explicit factors that contribute to integration. The children developed relationships with their grandparents and social relationships with their classmates.  Thus, under a narrow reading of C-523/07, the children acquired habitual residence in Wales.

These two UK cases demonstrate the problems that arise from clinging to the fact-based habitual residence test.  Even with an ECJ decision on this matter, parents still face great uncertainty in parental responsibility cases before EU Member States’ national courts.