Country of Origin Principle

From Max-EuP 2012

by Peter Mankowski

1. Purpose and intention

The country of origin principle is a prominent feature of important parts of Union law. Its purpose is to vest exclusive jurisdiction to regulate in one Member State only and to allow the exclusive and unitary application of the law of that Member State. By such means it aims at decreasing and minimizing costs for inquiring into foreign law for businesses exporting goods or services. Providers of goods or services should be placed in a position of only having to comply with one single law and relying on regulation by one state exclusively. They should not have to inquire into the laws of 27 Member States and to make corresponding investments. The principle thus aims to facilitate Europe-wide business activities and in particular uniform marketing. The country of origin principle is believed to foster both mobility as well as the search for the most favourable location. It is based on the Member States’ mutual trust in each other’s legal systems. The countries of destination, for their part, abstain from regulating because the country of origin principle forces them to trust in the existence of adequate regulation by the country of origin.

The country of origin principle has two elements, a positive one and a negative one. The positive element requires the country of origin to affirmatively regulate and thereby justify the trust which has been vested in it. This demands effective regulation and effective exercise of control. As to the negative elements, the country of origin principle prohibits any further regulation by a country of destination. Control and regulation shall occur only once, and solely and exclusively in the country of origin. With regard to regulation and control, the country of origin acts functionally and is believed to serve as some kind of representative and agent for all other Member States.

2. Existence

a) Primary legislation

The EC Treaty did not contain a country of origin principle (ECJ Case C-233/94 – Germany v Parliament and Council [1997] ECR I-2405, I-2464) nor does the Treaty on the Functioning of the European Union (TFEU). In particular, the country of origin principle cannot be derived from the fundamental freedoms (general principles), including the free movement of goods. The fundamental freedoms in essence establish controlling yardsticks. They do not carry, or support, any positive order to apply the law of the country of origin. Moreover, the ‘passive rights’ of recipients of goods and services that also should be taken into account would speak more for the country of destination principle. In any event, a country of destination principle in Member State laws would hold its ground in respect of the freedom of trade (ECJ Case 58/80 – Dansk Supermarked [1981] ECR 181, 194), what would not be possible if this freedom necessarily demanded a country of origin principle.

b) Secondary legislation

The country of origin principle is, rather, a principle of secondary legislation. In particular the DG Internal Market promotes its introduction and expansion in order to further the liberalization of the internal market. The principle is most prevalent with regard to regulatory issues, including in particular banking and the insurance industry. In these areas, the principle manifests itself in the form of the so-called European Single Passport. The accreditation or approbation of the business in question by the country of origin allows activity by the business in all other Member States without any additional licensing requirements in the other Member States being required. The country of origin principle is a fundamental cornerstone of financial market law in the EU. Its most recent expression is Art 31(1) MiFID (Dir 2004/39). The Prospectus Directive (Dir 2001/34) also recognizes the country of origin principle in order to facilitate a Europe-wide uniform prospectus and to contribute to a reduction of costs in this regard (prospectus liability). In Union media law, the country of origin principle applies to audiovisual media, originally in Art 2(1) Television Directive (Dir 89/552); today in Art 2(2), 2a(1) Audiovisual Media Directive (Dir 2007/65); and in Art 1(2)(a), (b), 8 Satellite Directive (Dir 93/83).

The country of origin principle is also prominent in the field of e-commerce by means of Art 3 E-Commerce Directive (Dir 2000/31). But the attempt to expressly codify the country of origin principle in the Directive on Services (Dir 2006/123) failed. The respective draft recital generated considerable political controversy and, finally, insurmountable resistance from the Member States who saw a threat to their medium-sized economic structures. The country of origin principle is to be found consistently in acts which attempt to promote the internal market and which purport to reduce (supposed) hindrances established by double regulation. In contrast, the principle expands only rarely and exceptionally into the core acts of EU private international law, namely into the Rome I and the Rome II Regulations (Regs 593/2008 and 864/2007). The country of origin principle is not a basic principle of all secondary legislation. Rather, it is effectuated only where it is explicitly introduced and provided for.

3. Nature

According to its very nature, the country of origin principle is a conflicts rule. In its positive component, it mandates the application of the law of the country of origin. This is less evident in public law since in that context an exclusive regulatory competence is attributed to the country of origin and, thus, other authorities are not even competent so that the application of foreign law is consequentially not an issue. Article 1(4) E-Commerce Directive is special as, for political reasons, it does not embrace the nature of the country of origin principle as a conflicts rule.

The conflict of law character of the country of origin principle is also indirectly reflected by its non-inclusion in the Common Frame of Reference (DCFR) and in the Acquis Principles, since both solely address issues of substantive law and do not cover conflict of laws. In European contract law (which is so far mainly consumer contract law) the country of origin principle is not even mentioned. Instead, the opposing country of destination principle dominates this domain under Art 6 Rome I Regulation and previously under Art 5 Rome Convention as far as consumers are concerned.

4. Connecting factor

There is not a uniform definition of ‘country of origin’. On the contrary, this notion is defined specifically for the separate domains concerned. It finds its expression in the connecting factor which is respectively employed. Typically, the ‘origin’ relates to the relevant place of business. This can on the one hand be the primary place of business (as is mainly the case in regulatory law) or on the other hand any kind of place of business (including branches or even subsidiaries) from where the relevant activity originates (as in the E-Commerce Directive). A teleological interpretation needs to be applied in order to reveal in each separate context which type of place of business is called for. Sometimes the country of origin is equated with the country of registration; however, usually this also points towards the relevant place of business if a place of business requires registration. In general, the country of origin principle might be circumscribed as the ‘place of business’ principle.

5. Exceptions

The country of origin principle as well as exceptions to this principle are sector-specific. The respective exceptions are an important factor for determining the particular scope of the country of origin principle because they reflect political compromises and indicate where resistance to the country of origin principle was ultimately insurmountable. A typical area for exceptions is consumer protection. The E-Commerce Directive might serve as a paradigm example in this regard.

6. Principle of mutual recognition

Instead of the country of origin principle, a so-called principle of mutual recognition has been advocated in recent times. It has found refuge in Art 81 (a) TFEU with regard to judgments and decisions in extrajudicial cases. A prominent example in secondary law can be found in the Directive on Services. Whether this principle is only a politically motivated disguise for the country of origin principle or whether this term really indicates a substantive difference from the country of origin principle is open to critical review. It is telling that the principle was formulated and put forward when the country of origin principle was a topic of political discussion and had been partially discredited. However, the principle of mutual recognition has older roots. It is legitimate where it relates to the explicit official authorization of a specific, usually economic, activity by a Member State. The European Single Passport in the field of bank and insurer regulation is the most prominent expression; outside the economic arena, the principle of mutual recognition applies especially to driving licences for motor vehicles (see only as to the basis of the Driving Licence Directive (Dir 91/439) ECJ Joined Cases C-392/06 and C-343/06 – Wiedemann v Land Baden-Württemberg [2008] EuZW, 472). Yet this history of the principle of mutual recognition raises strong doubts about whether it is something qualitatively different from the country of origin principle. Rather, one can see both as complementary forms of the same basic principle: the principle of mutual recognition insofar as concrete administrative acts are at stake in the country of origin and the country of origin principle insofar as the application of law is at stake in the country of destination. Conflating formulations such as ‘services are recognized’ raise questions as to the exact object of recognition.

7. Country of destination principle as an antonym

The opposite principle to the country of origin principle is the country of destination principle. This principle compels actors to adjust to, and to comply with, the legal conditions on the relevant markets. It favours the demand side of the market and preserves the uniformity of the conditions of competition on a given market. The country of destination principle is dominant in consumer-focused areas, especially under Art 6 of the Rome I Regulation in consumer contracts law, and applies according to Art 6 of the Rome II Regulation also in the private international law (PIL) of unfair commercial practices save for special regulations.

8. Critique on policy grounds

In terms of legal policy, however, there are still valid and compelling arguments against the country of origin principle. In particular, the country of origin has minimal incentives to undertake necessary regulatory control for matters that only affect foreign markets. In cases of doubt it might not cross regulators’ minds to allocate scarce resources in order to protect foreign markets and market participants abroad. Furthermore, the principle entails information shortcomings which would challenge the viability of both internal market cooperation and the country of origin’s capacity to representatively administer justice for all Member States. To allege that legal certainty for consumers will be promoted by the country of origin principle reverses the inquiry. Effective regulation is regulation on the markets concerned. In contrast, the country of origin principle generates incentives to only lightly regulate the competitive actions of domestic companies in foreign countries. Promotion of exports by a laissez faire approach might quietly but smoothly become the dominant motivation. Foreign competitors and consumers will not have an effective, counter-balancing lobby in the domestic legislative process.

The country of origin can thus externalize political costs at the expense of foreign markets. It can subsidize competition of its own companies abroad by liberal control. Externalizing negative consequences implies under-regulation and suboptimal regulatory standards. Even those concretely affected have little opportunity and hardly any means to verify whether the country of origin is controlling effectively. Without effective regulation and control in the country of origin, the basis for mutual trust is missing. Subsequently, there will not be any effective regulation at all.

This goes far beyond the legitimate intention of avoiding double regulation. The country of origin does not provide an optimum of equal opportunities, but an optimum of opportunities for the supplier: The supplier has only advantages but no disadvantages on the foreign market. Respect for mobile suppliers and fear of their exit options is likely to dominate the law-making process. This will be to the detriment of those suppliers which are not mobile but locally fixed. Such disadvantages impact small- and medium-sized suppliers who are interested in their home market: They will have to face attacks on their home market from other competitors which can, in turn, import conditions favourable for them whereas the non-mobile suppliers cannot draw compensating advantages from the country of origin principle for lack of any interests of their own to expand onto foreign markets. Small and medium enterprises (SMEs) are primarily scrambling to secure consumer trade in their respective home markets; uniform euro-marketing is less important to them.

The country of origin principle is designed to spare suppliers the costs of investigating foreign law. Suppliers will, thus, not need to determine the national laws of all markets on which they are active in order to be law-abiding, but may instead rely on only one law, namely the law of their respective seat with which they are supposed to be familiar. For this reason the country of origin principle unilaterally emphasizes—and fosters—suppliers’ interests. This neglects the total costs for investigating the applicable law which all parties concerned have to bear. Namely, the suppliers’ demand-side counterparts as well as the courts of the country where the goods are marketed must examine a law they are not familiar with. In addition, the par conditio concurrentium suffers heavily if it is not in fact fully eliminated. In summary, the country of origin principle will not necessarily reduce overall costs and will by no means guarantee a less cost-intensive solution. In particular, it threatens to impose an incoherent and inconsistent hybrid solution if combined with the country of destination approach prevailing in the field of jurisdiction; such a combination might well increase the tertiary cost of law enforcement.

Literature

Paolo Mengozzi, ‘La seconda direttiva bancaria, il mutuo riconoscimento e la tutela dell’interesse generale degli Stati Membri’ [1994] Riv Dir Eur 447; Wolfgang Drasch, Das Herkunftslandprinzip im internationalen Privatrecht (1996); Pascal Royla, Grenzüberschreitende Finanzmarktaufsicht (1999); Peter Mankowski, ‘Das Herkunftslandprinzip als Internationales Privatrecht der e-commerce-Richtlinie’ (2001) 100 ZVglRWiss 137; Gerald Spindler, ‘Herkunftslandprinzip und Kollisionsrecht’ (2002) 66 RabelsZ 633; Alexander Thünken, Das kollisionsrechtliche Herkunftslandprinzip (2003); Peter Mankowski, ‘Wider ein Herkunftslandprinzip für Dienstleistungen im Binnenmarkt’ [2004] IPRax 385; Thorsten Kramer, Das sekundärrechtliche Herkunftslandprinzip als Regelungstechnik des Binnenmarktes (2005) <www.diss.fu-berlin.de/diss/ receive/FUDISS_thesis_000000002712>; Virgós Soriano and Garcimartín Alférez, ‘Estado de origen vs. Estado de destino: las diferentes logicás del Derecho internacional privado’ in Luis Ignacio Sánchez Rodríguez and others, Pacis Artes. Obra Homenaje a Julio D. González Campos (2005) 1787; Mathias Audit, ‘Régulation du marché intérieur et libre circulation des lois’ (2006) 133 Clunet 1352; Marie-Dominique Garabiol-Furet, ‘Plaidoyer pour le principe du pays d’origine’ (2006) 495 Revue du Marché commun et de l’Union Européenne 82; Heinz-Peter Mansel, ‘Anerkennung als Grundprinzip des Europäischen Rechtsraums’ (2006) 70 RabelsZ 631; Ralf Michaels, ‘EU Law as Private International Law?—Reconceptualising the Country-of-Origin Principle as Vested-Rights Theory’ (2006) 2 Jour PIL 195; Gerte Reichelt (ed), Das Herkunftslandprinzip im europäischen Gemeinschaftsrecht (2006); Francisco Jiménez García, ‘Variaciones sobre el principio de reconocimiente mutuo y la Directiva 2006/123/CE en el marco de la libre prestación de servicios’ (2007) 11 Revista de Derecho Comunitario Europeo 777; Achim Kampf, ‘EU-Dienstleistungsrichtlinie und Kollisionsrecht’ [2008] IPRax 101.

Retrieved from Country of Origin Principle – Max-EuP 2012 on 19 May 2022.

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