Unfair Competition and Freedoms of Movement

From Max-EuP 2012

by Matthias Leistner

1. The concept of unfair competition and the requirements of the EC Treaty

From a European perspective, ‘unfair competition’ does not exist as a clearly defined, unitary concept. However, despite all the differences in scope and characterization, all European Member States have developed instruments based on the principle of fairness to control commercial activities. A common feature of all these mechanisms is the condition that the regulated activities or practices must be of a commercial nature. Thus, unfair competition law regulates market behaviour. Beyond this common starting point, a clear-cut demarcation of unfair competition from other fields of law as well as a common identification of the objectives of the law of unfair competition can hardly be achieved, given the wide variety of statutes and case law in the Member States (see further unfair competition (basic principles)).

In particular, mere terminological reference to the concepts of ‘honest trade practices’ (see Art 10bis of the Paris Convention), ‘unfair commercial practices’ (Dir 2005/29) or concurrence déloyale (the term used by the French courts when they developed the particularly advanced French unfair competition case law in the broad framework of the general clause of tort law, namely Art 1382 Code civil) is of only limited relevance for identifying common principles of unfair competition. More important is the construction of these terms in case law and in particular the reference to the respective objectives of unfair competition law in the Member States. In this regard, however, the approaches to unfair competition differ widely throughout the Community. In some Member States, such as Germany, unfair competition has developed into a comprehensive regulation of market behaviour on the basis of a specific statute, protecting the interests of competitors, consumers, and the general public. In other Member States, such as in particular the United Kingdom, which has never developed a tort of unfair competition beyond the extended passing off action, existing case law, statutes and statutory instruments are comparatively fragmented and limited, namely to the protection of competitors (in the context of the existing, narrow actions in tort law) or consumers (in the framework of specific statutes in the field).

However, some essential common principles can be identified in all Member States. Thus, the prohibition of misleading and certain aggressive commercial practices does indeed form a common core area of unfair competition, as it is meanwhile part of the Community acquis in the area of consumer protection (unfair competition (basic principles); commercial practices, misleading; commercial practices, aggressive). Beyond this core area, the protection level and scope of unfair competition law differs considerably throughout the Community.

Naturally, these differences in substantive unfair competition law can lead to barriers to inter-state trade as ‘measures having equivalent effect’ in the sense of Art 28 EC/34 TFEU according to the wide Dassonville-formula of the ECJ (ECJ Case 8/74 – Dassonville [1974] ECR 837). This would be the case whenever unfair competition rules on the marketing and sale of a product effectively affect intra-Community trade by directly or indirectly, actually or potentially impeding access to the national market of a Member State through rules that are stricter than those that are applied in the Member State of origin (EU Treaty; fundamental freedoms (general principles)). Comparable criteria apply with respect to restrictions on the freedom to provide services. However, according to the Cassis de Dijon principle, Member States are allowed to protect domestic consumers, even where this impedes integration because of disparities between the respective national laws, when the provisions can be justified as being necessary in order to satisfy mandatory requirements relating in particular to the fairness of commercial transactions and the defence of the consumer (ECJ Case 120/78 – Cassis de Dijon [1979] ECR 649; free movement of goods). On that basis the ECJ has developed broad case law concerning the free movement of goods; meanwhile, an increasing body of case law has also developed comparable principles in the field of the free movement of services according to Art 56 TFEU/49 EC (ECJ Case C-275/92 – Schindler [1994] ECR I-1039; ECJ Case C-384/93 – Alpine Investments [1995] ECR I-1141; ECJ Joined Cases C-34/95, C-35/95 and C-36/95 – De Agostini [1997] ECR I-3843; ECJ Case 243/01 – Gambelli [2003] ECR I-13031; free movement of services). By contrast, the freedom of establishment (freedom of establishment) and the free movement of capital and payments (free movement of capital and payments) are of comparatively limited relevance in the field of unfair competition.

The Court’s moulding of Art 34 TFEU/28 EC and Art 56 TFEU/49 EC in this fashion has the consequence that the Court approaches national provisions of unfair competition law from a quasi ‘negative’ perspective, perceiving them as barriers to market integration which need to be justified. The test is whether a national provision of unfair competition law can be justified as being capable, necessary and proportional in order to achieve the fairness of commercial transactions and effective protection of consumers. Despite this ‘negative’ approach, the method of the ECJ at the same time leads to a minimum degree of harmonization, a process which has been characterized as ‘negative’ harmonization. This is because the ECJ, by removing only overly obstructive unnecessary or disproportional national provisions, at the same time established certain minimum criteria of what is necessary and justifiable in the fields of the mandatory requirements relating to fair commercial transactions and consumer protection. In that way, the ECJ has indeed developed certain distinct concepts and principles of what might be called a case law nucleus of European unfair competition and consumer protection law in the framework of its case law on the fundamental freedoms.

2. Evolution of the ECJ’s case law

While the judgment in Dassonville had paved the way for an effectively comprehensive review of national unfair competition law in light of the principle of free movement of goods, further judgments carved out the criteria for assessing the necessity and proportionality of certain national provisions in order to reach the objectives of fairness of commercial transactions and consumer protection in particular (see eg ECJ Case 261/81 – Rau [1982] ECR 3961, on the necessity of a national provision; ECJ Case 178/84 – Commission v Germany [1987] ECR 1227, on proportionality). As a result, the entire area of unfair competition was governed by a principle of mutual recognition, qualified only by the possibility to justify stricter provisions of national law (compared to the level of protection in the Member State of origin) by mandatory requirements according to the Cassis formula.

Consequently, this approach led to a comprehensive scope of review with regard to national unfair competition law regimes as well as to any national provision on the modalities of marketing and sales of products, and thus—arguably—to an over-expansion of the concept of free movement of goods beyond the main objective to eliminate market-partitioning measures (as opposed to ‘neutral’ measures simply affecting commerce in general). This eventually led to the Keck-judgment of the ECJ, in which the Court established the distinction between national rules restricting or prohibiting ‘certain selling arrangements’, such as rules on advertising, sales hours, etc, on the one hand, and product-related rules, such as provisions as to the designation, form, size, weight, composition, presentation, labelling or packaging of the product as such on the other (ECJ Joined Cases C-267/91 and C-268/91 – Keck and Mithouard [1993] ECR I-6097). According to that judgment, the ‘old’ strict benchmark of Dassonville and Cassis shall continue to apply to product-related provisions, thus resulting in comprehensive review of such national provisions along the lines of the principles of necessity and proportionality. By contrast, rules prohibiting or limiting certain selling arrangements shall not fall into the scope of Art 34 TFEU/28 EC, provided those rules apply to all traders active in the national territory and provided that they affect in the same way in law and in fact the marketing of national and foreign products.

As large areas of unfair competition law are indeed mainly concerned with the regulation of ‘selling arrangements’, at the outset it was argued that the Keck-judgment would substantially reduce the impact of Art 34 TFEU/28 EC on national rules of unfair competition law. However, that argumentation, emphasizing the formalistic distinction between rules on selling arrangements and product-related rules, underestimated the crucial condition for the ‘exemption’ of rules on certain selling arrangements from the treaty provisions on the free movement of goods, namely the condition that such rules have to affect in the same way in law and in fact all traders active in the national territory and have thus to be origin-neutral with regard to the marketing and sales of products originating in other Member States. Thus, the crucial question, namely whether products from other Member States are specifically affected by a national rule, has only been ‘shifted’ to a subsequent level of assessment by the Keck-formula. While the specific effect on inter-state trade is assumed prima facie as far as product-related rules are concerned, in the area of rules on ‘certain selling arrangements’, the specific affectation of products from other Member States has to be assessed concretely. Indeed, in many cases following the Keck-judgment, the ECJ has meanwhile clearly held that measures which apply equally (in law) to all traders active in a given national market may nonetheless (in fact) often disadvantage traders from other Member States and will then have to be assessed according to the principles of necessity and proportionality (ECJ Joined Cases C-34/95, C-35/95 and C-36/95 – De Agostini [1997] ECR I-3843; ECJ Case C-254/98 – TK-Heimdienst [2000] ECR I-151; ECJ Case C-405/98 – Gourmet [2001] ECR I-1795; ECJ Case C-322/01 – Deutscher Apothekerverband v DocMorris [2003] ECR I-4887; ECJ Case C-71/02 – Karner v Troostwijk [2004] ECR I-3025). According to the judgment in Deutscher Apothekerverband v DocMorris (ECJ Case C-322/01 –Deutscher Apothekerverband v DocMorris [2003] ECR I-4887), the application of the provisions on the free movement of goods will even be triggered if a national rule on the prohibition of certain selling arrangements only potentially has a stronger impeding effect on the entry of products from other Member States to the national market than on national products. Thus, the resulting test as to the factual origin-neutrality of national provisions on the prohibition or regulation of certain selling arrangements is rather strict, and consequently, the provisions on the free movement of goods remain of substantial relevance in that area.

However, even in this re-extended and specified form, the case law following the Keck-judgment left one main problem for the completion of the internal market. When it comes to marketing and sales activities in genuinely trans-national media, such as internet platforms or cross-border TV advertising campaigns, additional costs for Europe-wide campaigns may result from the very fact that—according to established private international law provisions (see 4. below)—all the different national laws of the affected marketplaces will potentially apply cumulatively to such activities (mosaic approach). Thus, in these cases additional costs for genuinely pan-European activities—as compared to nationally limited activities—result from the very differences of national laws and not from specific factual disadvantages for foreign traders. The problem has become obvious and more imminent through the rapid development of the internet into one of the main marketing and sales channels for certain products and services in the European market. Consequently, in particular in the fields of trans-border TV and E-Commerce the Keck judgment has become the catalyst for legislative activities of the European Commission which follow the objective to establish more or less far-reaching country of origin principles for these fields as a basis for completing the internal market and which have eventually also resulted in further legislative activity in the area of substantive unfair competition law (see 4. below).

Another question which has not yet been answered by the ECJ’s case law is the question of whether the Keck-formula can be transposed into the realm of the free movement of services (fundamental freedoms (general principles); free movement of services). When it comes to the assessment of national provisions on unfair competition, generally speaking, the broad construction of the concept of measures having equivalent effect as well as the possibility of justifying such measures with the objective of satisfying certain mandatory requirements, such as for example consumer protection or the protection of the fairness of commercial transactions, have also been applied to the concept of free movement of services. However, the specific limitations resulting from the Keck-formula have never explicitly been applied in that field. Thus, in particular in trans-border cases, the application of the provisions on the free movement of services results in a comparatively broad scope of review as to national law provisions on unfair competition (see ECJ Case C-384/93 – Alpine Investments [1995] ECR I-1141).

3. Main principles and limitations of the ECJ’s approach to unfair competition

Undoubtedly, the main objective of the Court’s case law in applying the freedoms of movement to national provisions on unfair competition has been the effective pursuit of the integrative function of the fundamental freedoms. However, in assessing the necessity and proportionality of national consumer protection measures, the Court has developed the normative benchmark of the European ‘average consumer’, who is reasonably well informed and reasonably observant and circumspect (see eg ECJ Case C-210/96 – Gut Springenheide [1998] ECR I-4657; ECJ Case C-470/93 – Mars [1995] ECR I-1923; also commercial practices, misleading). The concept of the European average consumer has allowed the Court to balance the involved interests of competitors, different groups of consumers and the general public by focusing on the protection of free and informed consumer choice. Specifically, the application of the proportionality principle has frequently led to the abolishment of strict national rules, which prohibited certain products, product shapes or advertising campaigns in general, where the provision of information (eg by respective product labelling) might have sufficed to achieve effective consumer protection (see ECJ Case 120/78 – Cassis de Dijon [1979] ECR 649; also free movement of goods). Thus, the protection of informed consumer choice through ensuring market transparency, if necessary by providing for specific duties to inform the consumer, lies at the centre of what has been characterized as the information model of consumer protection in the Court’s case law. Indeed, on the basis of the effective application of the proportionality principle, the Court has developed a genuine concept of consumer protection by information provisions which have even been backed up by the construction of an individual right of the consumer not to be impeded in the access to necessary market information by overly strict national laws on unfair competition (see ECJ Case C-362/88 – GB-Inno-BM [1990] ECR I-667).

Of late, the information model of consumer protection in the Court’s case law has increasingly been criticized in legal literature. The critics point out that a concept of consumer protection based on the provision of all necessary market information neglects more recent economic research on bounded rationality, and in particular the problem of flawed decision making in situations of ‘information overload’. Consequently, the necessity to provide and effectively present an optimal amount of information is emphasized as compared to a concept relying upon the provision of a maximum amount of information. However, in fact, the Court’s case law as to the freedoms of movement has never been necessarily focused on an exclusively integrationist concept based upon the provision of all the necessary information to ‘well informed’ (fictitious) average consumers with unlimited capacity for handling that information. Instead, it seems that the focus of the Court’s case law on the safeguarding of the necessary provision of information to the consumer as a proportionate means of consumer protection is partly of an incidental character and follows from the fact that further reaching provisions of national law, as they were referred to the Court, were simply only seldom justified by legitimate objectives. Where such legitimate and differentiated objectives can be identified, eg with regard to certain specifically vulnerable groups of consumers (ECJ Case 382/87 – Buet [1989] ECR 1235, 1242) or with regard to certain social, cultural or linguistic distinctions concerning the reception of a particular advertising campaign in a particular Member State (ECJ Case C-220/98 – Estée Lauder [2000] ECR I-117), the Court has in principle been willing to back up certain provisions of national unfair competition law, which go beyond the mere provision of information, and prohibit certain sales practices or misleading advertising campaigns. In that regard, the Court has also emphasized the additional need to protect the free decision making process of consumers against undue influence, in particular where especially vulnerable consumer groups are concerned. The future role of the ECJ in specifying the concepts and provisions of the Unfair Commercial Practices Directive, which will in the future increasingly complement and replace the case law on the freedoms of movement in the area of business-to-consumer commercial practices, will certainly consolidate this development towards a more comprehensive concept of consumer protection against unfair commercial practices on the European level (unfair competition (basic principles); commercial practices, misleading; commercial practices, aggressive; see also 4. below).

The preceding analysis shows that the ECJ’s ‘negative’ approach to unfair competition under the perspective of the freedoms of movement has resulted in the development of certain ‘positive’ core elements of a European law of unfair competition. Structural principles of this approach to unfair competition law encompass a focus on the protection of informed consumers’ choice as well as rudimental case law on the protection of the free decision making process of consumers. However, large areas of law, which in some Member States are traditionally treated as part of unfair competition, such as for example the protection against misappropriation of a competitor’s products or services by direct and systematic imitation and other forms of impediment of competitors, are not covered by this case law. Consequently, a comprehensive approach to unfair competition does certainly not exist in the Court’s case law on the freedoms of movement.

4. Perspectives: increasing relevance of secondary Union law on unfair competition

As to the private international law of unfair competition, Art 6(1) Rome II Regulation (Reg 864/ 2007) provides for a uniform European choice of law rule (non-contractual obligations (PIL)). According to that provision, in principle the law applicable to non-contractual obligations arising out of acts of unfair competition shall be the law of the country where competitive relations or the collective interests of consumers are, or are likely to be, affected (ie the law of all national market(s) affected by a commercial practice). This rule is in line with the respective existing private international law rules in the majority of the Member States. As the choice of law rule contains no specific limitations or adaptations for multi-state or overspill situations, it leads to a mosaic of applicable laws with regard to multi-state cases. Thus, the specific problems of choice of law concerning trans-border commercial practices have certainly not been solved by this new provision. However, the choice of law rule is to be read in light of the precedential framework of primary Union law, namely the freedoms of movement. Consequently, Art 6 Rome II Regulation is partly over-ridden by the (substantive law) principle of mutual recognition where stricter national rules of the affected market place, which disadvantage traders from another EU Member State in law or in fact, cannot be justified by mandatory requirements.

As for the substantive secondary Union law of unfair competition, the existing case law on the construction of the provisions of the Misleading Advertising Directive (Consolidated Dir 84/450) —as the fountainhead of secondary Union law in the field—is scant compared to the large body of case law on the application of the freedoms of movement to national rules of unfair competition. However, in the field of consumer protection against unfair commercial practices, the Community has meanwhile enacted several directives culminating in the adoption of the Unfair Commercial Practices Directive in 2005 (unfair competition (basic principles)). In that field, the narrowing of the broad Dassonville-formula in the Keck-judgment has undoubtedly become a catalyst for further harmonization. The Commission reacted to that judgment, first by enacting the E-Commerce Directive (Dir 2000/ 31), which provided for a secondary law internal market principle (country of origin principle) for information society services, ie applicable in the field of unfair competition law. This area-specific country of origin rule in turn aroused concerns about a possible race-to-the-bottom in Member States’ substantive unfair competition law, which, notwithstanding the questionable validity of these concerns, led to the demand for further harmonization of substantive unfair competition law on the Community level. The adoption of the Unfair Commercial Practices Directive in 2005 (unfair competition (basic principles)), which provides for a comprehensive harmonization of the law concerning certain unfair business-to-consumer commercial practices in the internal market, can indeed be characterized as a reaction to these calls for strengthening consumer protection in the internal market.

As a result, the emerging case law on the construction of the provisions of the Unfair Commercial Practices Directive will become increasingly relevant in the field of unfair competition law. It will complement and at least partly replace the case law on the freedoms of movement in the area of unfair business-to-consumer commercial practices in the future. However, the existing case law on the freedoms of movement will certainly keep its relevance in the field of business-to-business commercial practices which are not information society services as well as in some other areas of unfair competition law which are not covered by the coordinated field of the Unfair Commercial Practices Directive. Moreover, it has to be emphasized that central conceptions of the Unfair Commercial Practices Directive, namely the reference to the material distortion of the economic behaviour of the average consumer whom a commercial practice reaches or to whom it is addressed, lean on the ECJ’s case law on unfair competition and freedoms of movement. Specifically, the central benchmark of the average consumer, who is reasonably well informed and reasonably observant and circumspect, is explicitly adopted by the directive (see recital 18) and will thus certainly continue to influence the future construction of the main concepts of the Unfair Commercial Practices Directive 2005.

Literature

Jürgen Basedow, ‘Der kollisionsrechtliche Gehalt der Produktfreiheiten im europäischen Binnenmarkt: favor offerentis’ (1995) 59 RabelsZ 1; Stephen Weatherill, ‘Recent Case Law Concerning the Free Movement of Goods: Mapping the Frontier of Market Deregulation’ (1999) 36 CMLR 51; Peter Oliver, Free Movement of Goods in the European Community (2003); Peter W Heermann, Warenverkehrsfreiheit und deutsches Unlauterkeitsrecht (2004); Tobias Lettl, Der lauterkeitsrechtliche Schutz vor irreführender Werbung in Europa (2004); Jochen Glöckner, Europäisches Lauterkeitsrecht (2006); Frauke Henning-Bodewig, Unfair Competition Law, European Union and Member States (2006); Stefan Enchelmaier, ‘The ECJ’s Recent Case Law on the Free Movement of Goods: Movement in all Sorts of Directions’ (2007) 26 Yearbook of European Law 115; Matthias Leistner, Richtiger Vertrag und lauterer Wettbewerb—Eine grundlagenorientierte Studie unter besonderer Berücksichtigung der europäischen Perspektive (2007).

Retrieved from Unfair Competition and Freedoms of Movement – Max-EuP 2012 on 22 May 2022.

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