A Union without internal borders has been one of the European Union’s main goals for many years now. One of the means of achieving that goal is the internal market. The “free movement regulations” serve to create this internal market by removing barriers between Member States. The internal market obviously affects competition: the easier it is for companies to establish operations or to provide services in a Member State (or another Member State), the greater the potential competitive playing field is. On the face of it, the free movement regulations and competition rules therefore appear to complement and reinforce each other. It is nevertheless conceivable that these two systems may clash in certain cases. In this blog we will address the relationship between the Services Directive and the competition rules.
The objective of the Services Directive is to remove barriers to the free establishment of service providers in the Member States and to the free movement of services among Member States, so that service providers are able to establish operations or to provide services in another Member State. The Services Directive sets criteria, for instance, for the use of licensing systems and the imposition of requirements regarding the access to or the exercise of a service activity. The Services Directive has been enacted in Dutch law in the Services Act. Practice has shown that the Services Directive impacts a wide range of activities.
Before addressing this issue, it should be noted that the Services Directive contains provisions on the freedom of establishment for service providers (Chapter III) on the one hand and on the free movement of services (Chapter IV) on the other hand. But the term “requirement” plays an important role in both chapters. Both chapters provide that Member States may not make the access to or the exercise of a service activity dependent on the fulfilment of certain requirements. The chapter on the free movement of services furthermore provides that the Member States may not impose requirements regarding the access to or the exercise of a service activity that do not satisfy the following conditions: (i) non‑discrimination; (ii) necessity; and (iii) proportionality. With regard to the freedom of establishment, a list is included of such “requirements to be evaluated”. Those requirements are therefore not necessarily prohibited, but it must be verified that they satisfy the conditions referred to above.
Recent Dutch and European case law shows that the scope of the Services Directive should not be underestimated. That is apparent from a judgment of the Court of Justice of the European Union (“ECJ”) in response to preliminary questions presented by the Dutch Supreme Court and the Administrative Jurisdiction Division of the Council of State in early 2018. The judgment centres on a zoning plan of the municipality of Appingedam in which an area was designated as a shopping area where only voluminous retail trade was permitted. The owner of several buildings in the area in question considered that zoning plan regulation in breach of the Services Directive. It prevented the owner from leasing a building to Bristol, which in its turn was confronted with a restriction on its freedom of establishment. The ECJ answered a number of interesting questions in the judgment. It found, for instance, that retail trade – although it essentially relates to the sale of goods – must be regarded as a “service” within the meaning of the Services Directive. Services such as retail trade therefore fall within the scope of the Services Directive. The ECJ also broadly interpreted the term “requirement” in the Services Directive by classifying the zoning plan regulation as a “condition” within the meaning of Article 4 of the Services Directive. As stated above, the Services Directive makes the stipulation of conditions (or other requirements, including obligations, prohibitions or limits) subject to restrictions and requirements. Finally, the ECJ clarified that the rules on the freedom of establishment (Chapter III of the Services Directive) also apply in purely internal situations.
In proceedings between the European Commission and Hungary, the ECJ furthermore found that a monopoly created by regulations, for instance, also falls within the scope of the Services Directive and constitutes a “requirement” for access to or the exercise of a service activity. It therefore had to be investigated whether that requirement was permissible under the Services Directive. In the ECJ’s opinion it was not, because it did not meet the proportionality requirement.
In sum, the Services Directive has a broad scope. That means that the limits and regulations of the Directive may have to be taken into account when drawing up competition regulations and other forms of market regulation.
Not surprisingly, the Services Directive is therefore considered a useful tool to challenge unwelcome regulations. A shipping company, for instance, that was not granted a permit by the municipality of Amsterdam to organise boat trips in the Amsterdam canals conjured up the Services Directive like a rabbit out of a hat. In its opinion, access to the organisation of canal boat trips is not guaranteed, because only a limited number of permits are issued and those permits are issued for an indefinite period. It is therefore uncertain whether a shipping company will ever be able to actually organise boat trips in the Amsterdam canals. The shipping company therefore believed that the freedom of establishment was jeopardised. It is apparent from a preliminary ruling of the ECJ in response to questions presented by the Council of State that the ECJ subscribes to the shipping company’s line of reasoning. The ECJ considered the issuing of a limited number of permits for an indefinite period to be in breach of the Services Directive. That ruling has given rise to a different approach by the municipality of Amsterdam in issuing permits for canal boats. On the basis of its new navigation policy, the municipality of Amsterdam has issued a limited number of fixed-term permits for vessels longer than 14 metres. But also that approach could not escape the Services Directive: the Administrative Jurisdiction Division found that limiting the number of permits for vessels longer than 14 metres is not justified by any overriding reasons relating to the public interest. It furthermore considered it relevant that modern navigation tools have a much greater impact on safe and smooth passage than a vessel’s length. The Services Directive therefore stood in the way of this approach too.
Another noteworthy case related to the municipality of Amsterdam’s approach to tourist stores: it prohibited the opening of new tourist stores in the city centre after 5 October 2017. The new cheese shop of the Amsterdam Cheese Company, which opened its doors in October 2017, fell victim to that prohibition. It relied on the Services Directive, arguing that the municipality’s prohibition was an unacceptable violation of the freedom of establishment regulations in the Services Directive. This time, however, the municipality of Amsterdam was spared another successful reliance on the Services Directive. Although the Administrative Jurisdiction Division found that the prohibition fell within the scope of the Services Directive and that a “requirement to be evaluated” was involved, it considered the prohibition necessary on the grounds of overriding reasons relating to the public interest. The prohibition was therefore justified also under the Services Directive. But the cheese shop was not entirely unsuccessful: the Administrative Jurisdiction Division considered enforcement measures unacceptable because they would disproportionately harm the cheese shop.
PostNL, finally, also weighed in this past year, by applying to the Trade and Industry Appeals Tribunal (“CBb”) in an attempt to avoid regulatory measures imposed on it by the Netherlands Authority for Consumers and Markets (see also this report). PostNL relied on the Services Directive, among other things. In PostNL’s opinion, the regulatory measures on the basis of which postal carriers are given access to PostNL’s network on competitive conditions constitute a requirement that affects the access to or the exercise of a service activity. But PostNL’s attempt failed on the grounds of the relativity requirement. In the CBb’s opinion, the provisions on the free movement of services do not serve to protect PostNL’s interests in this case, because no cross-border services of PostNL were involved. The question is what the outcome would have been if PostNL’s reliance on the Services Directive had not failed to meet the relativity requirement. The regulatory measures imposed on PostNL served to promote and safeguard competition on the postal market. If the Services Directive put a check on such measures, the question would be whether that is desirable, since such regulatory measures in fact give service providers access to the market. An important question that the CBb should have raised in that case is whether the regulatory measures (assuming that they constitute a requirement) relate to the access to or the exercise of a service activity. Postal carriers may freely access the market and provide services (without having to obtain a permit or satisfy any other requirement). Only if a postal carrier at some point in time has significant market power could the company in question be confronted with regulatory measures.
In light of the above, there is good reason to wonder why the Services Directive is not relied on more often. We believe the answer to that question is twofold: on the one hand many people are unaware of the possibilities that the Services Directive offers in specific cases, while on the other hand it should be noted that the Services Directive provides for many exceptions. It applies only to requirements regarding the access to or the exercise of a service activity, for instance, and several sectors are exempted from the scope of the Services Directive. In other words, the applicability of the Services Directive requires a case-by-case analysis.
More information on dawn raids by ACM and the European Commission can be found at invalacm.nl.