King Fung Tsang

This article attempts to highlight certain ways that litigants in the European Union could gain unjustified advantages over United States-based insurance companies in insurance litigation by comparing Council Regulation (EC) 44/2001[1] (hereinafter “Council Regulation”) and the U.S. jurisdictional rules.  New Hampshire Insurance Co. and Others v. Strabag Bau A.G. and Others[2] is utilized as an illustration herein.

I. The Strabag Bau Case

In Strabag Bau, the defendants, Strabag Bau, a German company, along with two other companies (hereinafter the “Construction Companies”) entered into a contract for the construction of Basrah International Airport in Iraq.  The Construction Companies took out an insurance policy in London through their British brokers.  The leading underwriter, New Hampshire Insurance Co., a U.S. insurer, was represented in London by its representative, and the bulk of the risk was placed with insurers based in the United Kingdom (hereinafter the “Insurers”).  There was neither a governing law clause nor a jurisdictional clause in the policy.  Subsequently, the Construction Companies filed claims totaling £20 million to £60 million, and the Insurers sought a declaration to avoid the policy.  The English Court of Appeal held that it had no jurisdiction.[3] The following are other relevant facts to keep in mind:

-                the policy was likely to be governed by English law;[4]

-                Strabag Bau is the fifth largest construction company in Europe;[5]

-                £20m – £60m in 1989 is worth £50m – £150m today.[6]

II. The Council Regulation

The jurisdiction rules on insurance are in Section 3 of the Council Regulation.[7]

Art. 9(1) - Domicile [8]

Art. 9(1)(a) allows the insurer domiciled in a member state to be sued in the courts of the member state where it is domiciled.[9] However, in order to protect the policyholder, the insured, and the beneficiary (hereinafter the “policyholder”), Art. 9(1)(b) further allows such parties to sue in the courts of the member states where they are domiciled.[10] This greatly expands the possible fora in which an insurer could be sued despite the fact that the insurance may have little connection with the policyholder’s jurisdiction.  However, the insurer could only sue in the policyholder’s home jurisdiction.[11] Applying these rules, the Court of Appeal found that the Insurers could not sue the Construction Companies in England due to the fact that the Construction Companies were domiciled in Germany.[12] If the Insurers were to sue the Construction Companies in the EU, the only possible forum was the German court.

What if the Construction Companies sue the Insurers for non-payment instead?  Here, the Construction Companies will be able to sue the Insurers in England, where the insurers bearing the bulk of the risks were domiciled.  In addition, the Construction Companies could also sue in Germany pursuant to Art. 9(1)(b).  Thus, within the EU, the Construction Companies could shop between England and Germany.  The above analysis is summarized in Table 1 below:

* The New York court will decline jurisdiction due to forum non conveniens.

Art. 9(2) – Expansion of the Domicile Rule [13]

New Hampshire Insurance was bound by the Council Regulation because the basic domicile rule under Art. 9(1) is expanded by Art. 9(2), which provides that an insurance company is deemed to be domiciled in a member state if it has a branch, agency or other establishment in one of the member states, and if the dispute arises out of such a branch, agency or other establishment.[14] Accordingly, as New Hampshire Insurance was represented by its London representative, it would be deemed to be domiciled in England through agency.

The above rules provide a policyholder with plenty of options and motivation to engage in forum shopping and are clearly unsatisfactory.  After all, the only connection with Germany was the domicile of the policyholder, whereas the connections with London were overwhelming.  While the intention of the Council Regulation is to protect the policyholder who is usually the weaker party, the Construction Companies do not deserve the protection.  The Insurers challenged on this basis, but the court rejected that argument, referring to the drafting report of the Brussels Convention which stated that the member states failed to find a “suitable demarcation line” to limit the application of Section 3.[15] In a subsequent case, Universal General Insurance Co. (UGIC) v. Group Josi Reinsurance Co. SA,[16] the European Court of Justice (ECJ) discussed the applicability of Section 3:

According to settled case-law, it is apparent…that, in affording the insured a wider range of jurisdiction than that available to the insurer and in excluding any possibility of a clause conferring jurisdiction for the benefit of the insurer, they reflect an underlying concern to protect the insured, who in most cases is faced with a predetermined contract the clauses of which are no longer negotiable and is the weaker party economically.[17]

It seems that the Insurers’ argument above might be accepted by the ECJ.  After all, the Construction Companies are all large corporations with substantial bargaining power.  The wording of the policy was also proposed by their brokers.  However, the paragraph cited above is from Gerling and Others v. Amministrazione del Tesoro dello Stato,[18] in which the policyholder was the powerful Italian Ministry of Finance.  Accordingly, it appears that the holdings in UGIC are limited to professional insurance parties, while sophisticated policyholders will continue to be protected.

Art. 13(5) and Art. 14 – Jurisdiction Clause and Arbitration Agreement [19]

Under the Council Regulation, a jurisdiction clause in a policy is effective against the Construction Companies in our case only if the insurance policy involves “large risks,” which include inter alia “miscellaneous financial loss.”[20] A jurisdiction agreement involving a “large risk” will be effective against a policyholder that exceeds two of the following criteria: (1) a balance-sheet total of €6.2m, (2) a net turnover of €12,8m, or (3) 250 employees.[21] However, it is unclear what constitutes a “financial loss.”  Even if “financial loss” covers the policy in the case, the exception only applies to large companies.[22] The only certain way that the insurers could have prevented an undesirable forum is through the inclusion of an arbitration clause in the policy according to Art. 1(2)(d).[23] However, taking the case out of the jurisdiction of the Council Regulation by an arbitration agreement is not a complete solution.  Instead of being able to rely on a uniform enforcement mechanism under the Council Regulation,[24] the enforcement of the arbitration agreement will be subject to the various domestic rules of different countries since the New York Convention only provides that “there shall not be imposed substantially more onerous conditions or higher fees or charges on the recognition or enforcement of arbitral awards . . . than are imposed on the recognition or enforcement of domestic arbitral awards.”[25]

III. The U.S. Jurisdiction Rules

Since International Shoe Co. v. Washington,[26] “minimum contacts” has been the basic jurisdictional test in the United States.  In that case, the Supreme Court held that a state could exercise personal jurisdiction over a defendant if he has such “minimum contacts” with that state to justify requiring him to defend a lawsuit there.  Commentators divide personal jurisdiction into two categories, namely specific jurisdiction and general jurisdiction.[27] Specific jurisdiction refers to the jurisdiction over claims arising out of acts specific to the dispute.  General jurisdiction, on the other hand, refers to jurisdiction founded upon a basis independent of the nature of the dispute between the parties.[28] In McGee v. International Insurance,[29] the Supreme Court held that there were minimum contacts by the insurer even though it only had a single transaction solicited in California.  Applying these rules to Strabag Bau, the Insurers cannot sue the Construction Companies in the United States due to their lack of any operation there.  However, if the Construction Companies were to sue New Hampshire Insurance in New York, New Hampshire Insurance would be subject to the general jurisdiction of New York due to the fact that its headquarters are located there.  That being said, the New York courts probably will not exercise the jurisdiction due to forum non conveniens.  Under the doctrine, U.S. courts could exercise their discretion in declining jurisdiction on the basis that there exists a more appropriate forum.[30] In our case, England is obviously the more appropriate forum due to its overwhelming connections with the insurance company.[31] Comparatively, there is no forum non conveniens principle under the Council Regulation.  Finally, a jurisdiction agreement will usually be given effect by the U.S. courts unless it is affected by “fraud, undue influence, or overweening bargaining power.”[32] Similarly, an arbitration agreement will also be enforceable.

Differences in how the U.S. jurisdictional rules will operate are illustrated in the following hypothetical case. English insurers entered into an insurance policy with California construction companies, through their respective Texas representatives, with insured risk in Iraq:

* California courts shall deny jurisdiction due to forum non conveniens.

The conclusion is simple and reasonable.  Texas, the natural forum, will have minimum contacts and hence jurisdiction, whether the plaintiffs are the insurers or construction companies.  In addition, construction companies can sue the insurers in England, which is not unreasonable given that it is their home jurisdiction.  California will not hear the case in either scenario.

IV. Criticisms and Recommendations

1. The Council Regulation is Rigid

The Council Regulation and the U.S. jurisdictional rules could be viewed as a classic “rule versus standard” choice.  The Council Regulation is rule-based.  The purpose is to reach the same result across the member states as much as possible.  Meanwhile, the U.S. jurisdictional rules are based on a standard, the “minimum contacts” test.  As we have seen above, the rule-based Council Regulation is more prone to producing absurd results and provides more opportunities for forum shopping.  Since whether the parties can litigate in an appropriate forum has significant weight in the final decision, the U.S. rules are preferable.

2. Unfairness against Insurance Companies

The Council Regulation protects the policyholders without looking beyond the labels.  This is not fair to the insurers which deal with powerful policyholders on an arms-length basis.  If the goal of the jurisdictional rules is to allocate a dispute to the forum where the combined cost to the parties will be the lowest,[33] “subsidizing” the undeserving parties will likely increase the total cost of the litigation by disturbing that equilibrium. 

3. Unfairness against Foreign Insurers

The rules are even more unfair to foreign insurers.  Art. 9(2), by deeming the U.S. insurance company as domiciled in England, thereby allows policyholders to sue in their home jurisdictions.[34] Compared to their European counterparts, it would be more costly for the U.S. insurers to defend in the European Union.  This increased cost may be reflected in a higher premium by the U.S. insurers, making them less competitive.  Comparatively, there is also no special protection for domestic policyholders per se in the U.S. 

The European Union should consider taking one of three courses: (1) creating a forum non conveniens rule; (2) excluding the large policyholders from the protection; or (3) clarifying the “large risks” exception.  The last suggestion is the easiest as it takes only judicial interpretation and avoids formal amendment of the Council Regulation.  Even if the European Union takes no action, the U.S. courts should not change its jurisdictional rules to force a change on the EU side.  The Supreme Court believes that U.S. commerce abroad would be hampered if its courts do not adopt an internationalist approach.[35] As the Supreme Court stated in Bremen v. Zapata, “[t]he expansion of American business and industry will hardly be encouraged if . . . we insist on a parochial concept that all disputes must be resolved under our own law and in our courts.”[36] The U.S. courts therefore should not take revenge by imposing unreasonable jurisdictional rules on EU insurers.

Endnotes

[1] Council Regulation 44/2001, On Jurisdiction and the Recognition and Enforcements of Judgments, 2001 O.J. (L 12) 1 (EC).

[2] New Hampshire Insurance Co. and Others v. Strabag Bau A.G. and Others, [1992] 1 Lloyd’s Rep. 361 (A.C.).

[3] Id. at 362.

[4] See Rule 214(2), Lawrence Collins et al., The Conflict of laws 1701 (Lawrence Collins ed., Oxford University Press 2006) (1896).

[5] Strabag Bau Topic Entry, http://www.absoluteastronomy.com/topics/Strabag (last visited Oct. 5, 2009).

[6] Based on calculation from Measuring Worth, http://www.measuringworth.com/ukcompare/ (last visited Sept. 29, 2009).

[7] Council Regulation 44/2001, supra note 1, art. 8.

[8] Id. art. 9(1).

[9] Id art. 9(1)(a).

[10] Id. art. 9(1)(b).

[11] Id. art. 12(1).

[12] New Hampshire, 1 Lloyd’s Rep. at 362.

[13] Council Regulation 44/2001, supra note 1, art. 9(2).

[14] Id.

[15] New Hampshire, 1 Lloyd’s Rep. at 368.

[16] Case C-412/98, Universal General Insurance Co. (UGIC) v. Group Josi Reinsurance Co. SA, 2000 E.C.R. I-05925.

[17] See id. ¶ 64.

[18] Case 201/82, Gerling and Others v. Amministrazione del Tesoro dello Stato, 1983 E.C.R. 02503.

[19] Council Regulation 44/2001, supra note 1, art. 13(5) & 14.

[20] Id. art. 14(5).

[21] Second Council Directive 88/357, On the Coordination of Laws, Regulations, and Administrative Provisions Relating to Direct Insurance, art. 5(d)(iii), 1988 O.J. (L 172) 1 (EEC).

[22] The Frankfurt Stock Exchange only requires a minimum market capitalization of €1.25 million. See Deutsche Börse Group.

[23] Council Regulation 44/2001, supra note 1, art. 1(2)(d).

[24] One will only need to register a judgment given by another EU court for it to be enforceable. See Rule 48(1), Collins, supra note 4, at 650.

[25] Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 330 U.N.T.S. 3.

[26] International Shoe Co. v. Washington, 326 U.S. 310 (1945).

[27] See Eugene F. Scoles et al., Conflict of Laws 305 (3d ed. 1992).

[28] Id. at 306.

[29] McGee v. International Insurance, 355 U.S. 220 (1954).

[30] Gulf Oil Corp. v. Gilbert, 330 U.S. 501, 508 (1947).

[31] But if the English courts cannot hear the case, how can the New York courts dismiss in favor of them? Here, since the forum non conveniens issue will only arise when Construction Companies sue Insurers (Box F instead of Box E in Table 1), the English courts will have jurisdiction in that case (Box B instead of Box A).

[32] The Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 12 (1972).

[33] Richard Posner, Economic Analysis of Law 707 (Aspen Publishers 2003) (1986).

[34] Council Regulation 44/2001, supra note 1, art. 9(1)(b).

[35] Lawrence Collins, Essays in International Litigation and the Conflict of Laws 267 (Oxford Univ. Press 1994) (1979).

[36] See Bremen, 407 U.S. 1 at 8.

Nikolaos Verras

I.        Introduction

Resale Price Maintenance (RPM) refers to an agreement between a supplier and a distributor by virtue of which the parties agree to set either a (1) fixed, (2) minimum, (3) maximum, or (4) recommended resale price. The first two forms, on which this paper will focus, are considered to have more severe anticompetitive effects such as a) elimination or reduction of intra-brand competition and b) increase in price transparency that might facilitate horizontal collusion upstream or downstream.[1] Therefore, these agreements are generally treated more strictly by competition law.

The anticompetitive or pro-competitive effects of RPM and what this diversity of effects shall mean for competition law analysis has been a long debate among economists and lawyers. The issue of how the E.C. Competition Law shall treat RPM has come to the center of interest in the context of the ongoing review of the Vertical Restraints Block Exemption by the European Commission.[2] At the same time, the appropriate treatment of RPM was brought to the center of attention in the United States in the Leegin case,[3] where the Supreme Court decided by a weak majority of 5 against 4 to abandon the long-standing Dr. Miles[4] per se rule and apply to RPM the rule of reason.

II.        Proposed Changes Under Draft BER and Draft Guidelines

Under the current legal framework in the European Union, fixed and minimum RPM falls outside the scope of the vertical agreements block exemption regulation (BER) because it is considered a hardcore restriction.[5] This means that it is “presumed illegal” and considered to have as its object the restriction of competition, and is therefore expressly prohibited by Article 81(1)(a) E.C. and very unlikely to be exempted under Article 81(3) E.C.[6]

The characterization of strict RPM as a hardcore restriction is retained under the Draft BER,[7] although the Commission tried to soften the strictness of the rules’ application by setting out in the Draft Guidelines the positive effects that RPM may have for competition and by expressly mentioning that there is ground for exemption under Article 81(3) E.C.[8] In paragraph 221 of the Draft Guidelines, the Commission acknowledges that RPM may lead to efficiencies in cases of introduction of a new brand or entrance in a new market. Moreover, fixed RPM is considered to be beneficial for consumers in cases of a short term low price campaign for the purpose of organizing a franchise or similar distribution system and in cases of a distributor’s significant market power that may lead it to use a particular brand as a loss leader.

III.     Pro-Competitive Effects

Literature regarding the effects of RPM is not consistent, and although the anticompetitive effects of RPM have been proved in many papers,[9] there are also significant pro-competitive effects. We will try to present in brief some of the main situations where RPM may have pro-competitive effects:[10]

a)      Strict RPM may help overcome the free-rider problem that occurs in cases where a retailer offers pre-sale services to consumers and includes these services in the price, while another retailer does not provide pre-sale services, and therefore does not bear the extra cost and can offer the goods at a reduced price, taking advantage of the pre-sale services provided by the first retailer.[11] Strict RPM may also be used to force retailers to provide after-sales services that increase consumers’ welfare and which the retailer may not intend to provide in order to avoid the extra cost. [12]

b)      Strict RPM may also help in cases where a retailer tries to free-ride on the reputation that another retailer who provides high quality products has developed by stocking similar products; the supplier can overcome this problem by posing minimum or fixed RPM in order to “purchase” quality certification from its distributors. [13]

c)       Strict RPM may also be used for the protection of a very well-known and prestigious brand name from widespread use that might deteriorate it. [14]

d)      Strict RPM is also very effective in treating retailers’ risk aversion in cases of uncertain consumer demand. [15]

e)      Strict RPM may also have positive effects in cases where a supplier has to decide among the already used bricks and mortar retail network and the potential online retail network. The latter bears less promotional, inventory, and distribution costs and therefore can offer lower prices and damage the viability of the bricks and mortar retail network. By posing fixed or minimum RPM the supplier can retain the bricks and mortar retail network, while providing the consumer with the option to buy the same products online.

IV.     Towards a More Effect-Based Analysis of RPM?

Usually in the literature[16] the treatment of strict RPM as an object or an effect of anticompetitive behavior is combined with the answer to the question “which of the two effects of RPM (pro-competitive and anticompetitive) is most likely to prevail?” I believe that it is impossible to balance the two effects, especially due to the lack of adequate empirical evidence. Moreover, as soon as strict RPM has some significant pro-competitive effects that cannot be underestimated,[17] the Commission shall provide this RPM with the chance to be exempted. As we mentioned above, although the Commission softened its approach against strict RPM it still considers it a hardcore restriction, and the fact that there is no case in which the Commission has exempted a strict RPM illustrates that the Commission’s approach is closer to per se illegality.[18] Therefore, the express reference in the Draft Guidelines of the possibility of an exemption under Article 81(3) E.C. does not change the current situation, as the Commission’s position and the retained strong presumption of illegality discourage companies from taking the risk to defend their RPM policies. Therefore, in my opinion, further steps for the real enforcement of Article 81(3) E.C. in cases of strict RPM have to be taken by the Commission.

The exemption of hardcore restrictions and the application of an effects-based analysis to RPM will lead to fairer treatment. An effects-based analysis means that the proof of violation of Article 81(1) E.C. rests with the Commission and it is only if it succeeds that the parties bear the burden of proving that their agreement entailing strict RPM has pro-competitive effects. Some argue[19] that this will cause a significant regulatory cost, as a) this will increase the RPM cases before the Commission and b) the Commission will have the aforementioned burden of proof of the infringement, which, given the complexity and uncertainty of the issue, will require the use of experts. I believe that this is not the case, given the existence of case-law precedents finding that strict RPM infringes competition law; the main burden of proof rests on the parties to present well-founded arguments that the agreement has a positive effect on consumer welfare.

The main disadvantage for the parties asking for an exemption of a strict RPM agreement at the moment is the lack of empirical evidence and case-law precedents. In an attempt to overcome this situation and create a clear framework for RPM, the Commission could establish, for a trial period, a notification system similar to the one that existed before Regulation 1/2003 came into force for the exemptions under Article 81(3) E.C. Adoption of a system like that would, on the one hand, allow the Commission to place the burden of proof and the relevant cost on the parties’ side and therefore make them bring forward only claims that have a strong possibility to succeed, and, on the other hand, increase the relevant case law and create a framework regarding the specific circumstances under which a strict RPM has a positive effect on consumers’ welfare. Moreover, the Commission should take into consideration the fact that, as has been argued,[20] the anticompetitive effect of strict RPM has a connection with the market powers in the two markets involved in the agreement (the suppliers’ and the retailers’ markets). The Commission could a) use the market share as a screen in prioritizing the cases and therefore deal mainly with the cases where there is a large market share and the anticompetitive effects of RPM are more likely to take place, and b) remove RPM from the hardcore restraints in the De Minimis Notice, at least for a trial period.[21]

V.        Conclusion

The attempt of the Commission to soften the treatment of strict RPM as a hardcore restriction in the context of the Vertical Restraints Review is welcome, but further steps have to be taken. The example of the United States, which moved to a more effects-based analysis by adopting the rule of reason in the Leegin case, could be an indication that time has come for a change in the European Union as well. The change does not need to be radical and immediate. A gradual change with the adoption of a trial notification procedure before the Competition Authorities could offer a chance to the parties to defend their strict RPM agreements without the Commission undertaking the entire burden of proof. This would contribute to the creation of a pool of empirical evidence that could be used as a guide for future treatment of strict RPM.

Endnotes

[1] Frank Wijckmans, Filip Tuytschaever & Alain Vanderelst, Vertical Agreements in EC Competition Law 157– 58 (2006).

[2] On July 28, 2009, the European Commission published drafts of a revised vertical agreements block exemption regulation, Draft Commission Regulation on the Application of Article 81(3) of the Treaty to Categories of Vertical Agreements and Concerted Practices (July 28, 2009), [hereinafter Draft BER], and accompanying revised guidelines on vertical restraints, Draft Commission Notice for Guidelines on Vertical Restraints (July 28, 2009), [hereinafter Draft Guidelines], and initiated the consultation period on the above documents that ended on September 28, 2009. The Draft BER will replace the current vertical agreements block exemption which entered into force for a period of ten years on June 1, 2000. Commission Regulation 2790/1999, On the Application of Article 81(3) of the Treaty to Categories of Vertical Agreements and Concerted Practices, 2009 O.J. (L 336) 21 (EC), [hereinafter BER]. The scope of the BER was to determine specific prerequisites under which a vertical agreement would be exempted from the application of Article 81(1) E.C. and therefore provide legal certainty. The BER tries to determine agreements that are likely to fall within the Article 81(3) E.C. exemption due to their characteristics and refers to all types of agreements between parties active at different levels in the production line, including selective distribution and agency arrangements. Current guidelines on vertical restraints provide a commentary on the BER and determine the methodology under which the Commission approaches vertical restraints. Commission Notice for Guidelines on Vertical Restraints, C (2000) 291 (Oct. 13, 2000) [hereinafter Guidelines]. See generally Bellamy & Child: European Community Law of Competition  405–23  (Peter Roth & Vivien Rose eds., 2008).

[3] Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U.S. 877 (2007).

[4] Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911).

[5] See BER, supra note 2, art. 4(a); Guidelines, supra note 2, ¶ 47.

[6] Fixed and minimum RPM is also treated as hardcore restrictions under the De Minimis Notice. Commission Notice on Agreements of Minor Importance Which Do Not Appreciably Restrict Competition Under Article 81(1) of the Treaty Establishing the European Community (De Minimis), ¶ 11, C (2001) 387 (Dec. 22, 2001), [hereinafter De Minimis Notice]. However it is argued that in cases of very small market shares strict RPMs may fall outside Article 81(1) E.C. See Bellamy & Child: European Community Law of Competition, supra note 2, at 436.

[7] Draft BER, supra note 2, art. 4(a).

[8] Draft Guidelines, supra note 2, ¶ 219–25. More specifically, the Commission acknowledges that in cases in which RPM will lead to efficiencies, it may have to “effectively assess—and not just presume—the likely negative effects on competition.” Id., ¶ 219.

[9] For a discussion of the so-called commitment effect theory, see Oliver Hart & Jean Tirole, Vertical Integration and Market Foreclosure, Brookings Papers on Econ. Activity: Microecon. 205 (1990); Daniel O’Brien & Greg Shaffer, Vertical Control with Bilateral Contracts, 23 Rand J. Econ. 299 (1992); Patrick Rey & Thibaud Verge, Bilateral Control with Vertical Contracts, 35 Rand J. Econ. 728, 740 (2004). For a discussion of the facilitation of manufacturers’ or retailers’ collusion, see Bruno Jullien & Patrick Rey, Resale Price Maintenance and Collusion, 38 Rand J. Econ. 983 (2007); Frank Mathewson & Ralph Winter, The Law and Economics of Resale Price Maintenance, 13 Rev. Indus. Org. 57, 65 (1998). For a discussion of the anticompetitive effects of slotting allowances and RPM, see Greg Schaffer, Slotting Allowances and Resale Price Maintenance: A Comparison of Facilitating Practices, 22 Rand J. Econ. 120 (1991).

[10] See also Frederik Van Doorn, Resale Price Maintenance in EC Competition Law: The Need for a Standardized Approach, Soc. Sci. Res. Network 12–15 (2009).

[11] Lester G. Telser, Why Should Manufacturers Want Fair Trade?, 3 J.L. & Econ. 86, 89–96 (1960); Benjamin Klein, Competitive Resale Price in the Absence of Free Riding (Apr. 3, 2009).

[12] Roger van den Bergh & Peter Camesasca, European Competition Law and Economics: A Comparative Perspective 244 (2006).

[13] Doris Hildebrand, Economic Analyses of Vertical Agreements—A Self-Assessment 15 (2005).

[14] Howard Marvel & Stephen McCafferty, Resale Price Maintenance and Quality Certification, 15 Rand J. Econ. 346 (1984); Michael Utton, Market Dominance and Antitrust Policy 238 (2003).

[15] Patrick Rey & Jean Tirole, The Logic of Vertical Restraints, 76 Am. Econ. Rev. 921 (1986).

[16] See, e.g., Van Doorn, supra note 10.

[17] For example, for a critical analysis of the pro-competitive effects of RPM, see Marina Lao, Resale Price Maintenance: A Reassessment of its Competitive Harms and Benefits, Soc. Sci. Res. Network (2009).

[18] See Linklaters LLP Submission in Response to the European Commission’s Consultation Process Regarding the Competition Rules Applicable to Vertical Agreements, 14–16 (2009).

[19] See Van Doorn, supra note 10, at 20–23.

[20] The small market share was one of the main reasons why the Court in Leegin decided that there was no fear of anticompetitive effect. For a discussion of the relationship between market share and RPM, see Foros Øystein et al., Resale Price Maintenance and Restrictions on Dominant Firm and Industry-Wide Adoption (CESifo, Working Paper Series No. 2032, 2007); Warren S. Grimes, The Path Forward After Leegin: Seeking Consensus Reform of the Antitrust Laws of Vertical Restraints, 75 Antitrust L.J. 467, 469 (2008).

[21] See White & Case LLP Comments on the Draft Commission Regulation on the Application of Article 81(3) of the Treaty to Categories of Vertical Agreements and Concerted Practices and the Draft Commission Notice—Guidelines on Vertical Restraints, 7 (2009).

Evgeniya Berezkina

In summer 2009, Russian legislative authorities amended the federal legislation in order to recognize the validity of agreements among shareholders of Russian joint-stock companies (the Amendments).[1] The Amendments address one of the most controversial issues of Russian corporate practice—the regulation of shareholders agreements in corporations registered in the Russian Federation. Amended legislation is designed to resolve a long-term uncertainty regarding the validity of shareholders agreements and to create a more attractive platform for foreign investment in Russia.[2] The Amendments recognize shareholders agreements as a special contractual type and list general issues which may be addressed in such agreements, basic legal restrictions, and disclosure requirements.

This Article outlines the most important provisions of the Amendments and analyzes the possibility of their successful use in practice. The Article refers to the background of the problem and relevant peculiarities of Russian corporate practice which may affect the application of the Amendments. Until recently, a conservative and formalistic judicial approach to the problem restricted the possibility of contracting around the issues of corporate governance and shareholder relations.[3] The Amendments are aimed to mitigate negative effects of the rigid regulatory regime and underdeveloped practice. However, the effectiveness of the Amendments may be significantly lower than is expected.

Current corporate practice demonstrates unwillingness of equity holders to take the risk of using untested mechanisms offered by the Amendments. Most shareholders agreements are still signed at the off-shore level and subject to non-Russian legislation. Therefore, the question, whether the current regulation of shareholders agreements in Russia is effective and sufficient, appears to be open.

Background to shareholders agreements in Russia

Agreements among shareholders are widely used in developed countries as an effective mechanism of regulating relations within a corporation. Until recently, this mechanism was not directly recognized in legislation and was denied by judicial practice. Such an approach was rooted in peculiarities of the Russian corporate practice, which is relatively young and underdeveloped in many aspects. Among its distinctive features, the following can be the mentioned: mainly non-discretionary federal regulation of corporate issues, a significant amount of mandatory provisions, and uncertainty of the judicial practice with respect to issues that are not directly specified in laws and regulations.

These features meant that, until recently, shareholders agreements were under an informal ban imposed by Russian judicial practice. Contractual restrictions on transferring shares, “tag-along” and “drag-along” mechanisms, contractual regulation of voting procedures and board formation, and call options and put options were all considered illegal.[4] Institutional investors traditionally used off-shore legal entities and signed agreements under the foreign law with more flexible corporate legislation. However, this way was not free from concerns, as Russian courts might invalidate such contractual relations as violating the fundamental provisions of Russian law and public order.[5] The Amendments finally recognize shareholders agreements and provide investors with a new tool for structuring their relations with respect to the investment activity in Russia.

Overview of the Amendments

After a few years of negotiations and debates, the Russian legislature altered the federal laws “On Joint-Stock Companies”[6] and “On Securities Market.”[7] The Amendments, effective from July 18, 2009, are a part of the general policy of liberalizing the Russian corporate sphere. Last year, the federal law “On Limited Liability Companies”[8] was essentially revised, allowing agreements among the participants of a limited liability company.[9]

Article 31.1 of the Amendments officially recognized a shareholders agreement as a special contractual type: an agreement on the execution of the rights vested in shares, or on peculiarities of the execution of such rights. Following are the basic elements of shareholders agreements.

Parties of an agreement. Current shareholders of a joint-stock company. The company itself can not be a party to a shareholders agreement.

Form of an agreement. Unlike some common law countries, Russian legislation requires a written form of a shareholders agreement.

Issues within the scope of an agreement:

-          Regulation of voting rights and procedures (obligations to vote in a certain way, to exercise coordinated voting, etc.);

-          rights to acquire or dispose of shares on predetermined conditions;

-          temporary restrictions on selling shares upon the occurrence of certain circumstances;

-          other contractual rights and obligations with respect to corporate governance, the company’s activity, reorganization, and liquidation of the company.

The list of possible issues within the scope of an agreement is open and depends on the discretion of the parties involved and peculiarities of a corporation.

One of the most controversial issues facing the drafters of the Amendments was an alternative between disclosure and confidentiality of shareholders agreements. As a general rule, corporate and securities laws require disclosure of the material information that can influence the activity of a publicly traded company. At the same time, parties entering an agreement are interested in confidentiality of their relations. The recent Amendments seem to represent a compromise between the two opposing tendencies. General provisions of a shareholders agreement may be confidential. However, disclosure is required if a party to an agreement obtains control over more than 5, 10, 15, 20, 25, 30, 50, or 75 percent of voting rights of a publicly traded company. Russian regulatory authority should be notified about such acquisition in due form and order.[10]

Enforcement and liability for breaches of shareholders agreements

Shareholders agreements are covered by general civil law norms regarding the liability for breaches of contractual obligations. Additionally, an agreement may provide for specific enforcement proceedings and forms of liability.[11]

Difficulties in enforcement of shareholders agreements may significantly blunt the positive effect of the Amendments. Agreements among shareholders may indirectly affect the interests of third parties (joint-stock companies, shareholders not participating in the agreement, creditors, etc.). The Amendments protect non-participating persons in the situations when enforcement of an agreement can infringe upon their interests. A contract entered into in violation of a shareholders agreement can be invalidated only if the other party knew or should have known about the limitations imposed by the shareholders agreement.[12] Designed to protect third parties, this rule limits defense mechanisms available to the non-breaching participant in an agreement.

Shareholders agreements may regulate business policy issues or fix the unique system of corporate governance and control in a corporation. In such situations, specific performance of an obligation is much more essential than the sum of damages payable to a non-breaching party. The Amendments are ambiguous about the possibility of forcing a party in a shareholders agreement to fulfill its obligations in a judicial proceeding. Additionally, the results of a shareholders meeting cannot be invalidated even if a decision is made in breach of contractual obligations (for example, if a shareholder violates an existing voting agreement).[13]

Monetary forms of liability for contractual delinquency may not always be an effective and sufficient remedy. The Russian legal system does not recognize punitive damages or lost opportunity payments. Even if substantial penalties are fixed in a shareholders agreement, Russian courts have the right to limit the sum payable if the amount is disproportional to the results of a breach.[14] It should be noted that the Russian Ministry of Economic Development actively stands against the restricted interpretation of the Amendments with the aim of preventing potential abuses.[15] However, the question of whether the Amendments establish a substantial basis for enforcement of shareholders agreements is still open.

Problematic issues of the Amendments

The Amendments provide for the basic regulation of shareholders agreements in Russia. However, many questions and practical issues are left open. Will foreign investors use mechanisms offered by the Russian legislature or prefer to sign shareholders agreements under foreign laws where the advantages of this instrument have been used for decades and risks are lower? At the moment the answer is unclear. But there are grounds for questioning the effectiveness and sufficiency of the recent legislative changes. Due to the facts described above, the contract enforcement mechanism may not be  effective. Courts may limit the monetary penalties stipulated in a shareholders agreement and therefore reduce the protection of a non-breaching party to an agreement. Measures for ensuring specific performance of contractual obligations are not clear.

Potential conflicts between a shareholders agreement and imperative norms of Russian legislation remain a subject of concern. Due to the peculiarities of Russian corporate law, the scope of contractual freedom of shareholders may be limited in comparison to other jurisdictions. For example, the law “On Joint-Stock Companies” requires cumulative voting for the formation of the board of directors and a three-quarters voting threshold for approval of major corporate decisions.[16] The Amendments do not directly eliminate these mandatory requirements. Contractual obligations inconsistent with such mandatory provisions are invalid. Thus, the possibility of establishing alternative mechanisms (like a higher threshold or the right of a party to appoint a certain number of board members) is questionable.

Conclusion

The Amendments signify a substantial shift from the restrictions on shareholders agreements to a more flexible and permissive regulatory regime. It is now up to the legal practice to determine the scope and application of the Amendments. However, narrow interpretation of the new norms may discourage investors from applying Russian law to their contractual relations. Mechanisms available in some foreign jurisdictions remain significantly broader. Moreover, lack of judicial practice creates additional risk exposure for market participants. All these factors give grounds to argue that the dispute regarding the future of shareholders agreements in Russia is not resolved.

Endnotes

[1] Sobranie Zakonodatel’stva Rossiiskoi Federatsii [SZ RF] [Russian Federation Collection of Legislation] 2009, No. 23, Item 2770.

[2] Koncepcia Razvitia Zakonodatelstva o Yuridicheskih Licah [Concept of Improvement of Legislation Regarding Legal Entities] March 2009.

[3] Postanovlenie FAS Zapadno-Sibirskogo Okruga [Decision of the Federal Arbitration Court of the Western-Siberian District] March 31, 2006, No. Ф04-2109/2005(14105-А75-11), Ф04-2109/2005(15210-А75-11), Ф04-2109/2005(15015-А75-11), Ф04-2109/2005(14744-А75-11), Ф04-2109/2005(14785-А75-11), case no. А75-3725-Г/04-860/2005 (“Megafon case”).

[4] Russian legislation does not contain a direct ban on agreements among shareholders. Contractual obligations among shareholders are possible under the general principle of contractual freedom. However, until recently none of the basic acts in the corporate law sphere provided any regulation on shareholders agreements.

[5] In the famous “Megafon case,” the Federal Arbitration Court of the Western-Siberian District invalidated the shareholders agreement under Swedish law as a violation of the public policy of the Russian Federation.  Megafon case, supra note 3.

[6] Federalni Zakon ob Akcionernih Obshestvah [Federal Law On Joint-Stock Companies], Ros. Gaz., Dec. 29, 1995, No. 248.

[7] Sobranie Zakonodatel’stva Rossiiskoi Federatsii [SZ RF] [Russian Federation Collection of Legislation] April 22, 1996, No. 17, Item 1918.

[8] Sobranie Zakonodatel’stva Rossiiskoi Federatsii [SZ RF] [Russian Federation Collection of Legislation] Feb. 16. 1998, No. 7, Item 785.

[9] Federalni Zakon O Vnesenii Izmenii v Chast Pervuyu Grazdanskogo Kodeksa Rossiiskoi Federatsii i Otdel’nie Zakonodatel’nie Akti Rossiiskoi Federatsii [Federal Law On Amendments to the Civil Code of the Russian Federation and Certain Legislative Acts of the Russian Federation], Ros. Gaz., Dec. 31, 2008, No. 267.

[10] Amendments, supra note 1, art.32 (5)–(6).

[11] Id., art. 32.1(7).

[12] Id., art. 32.1(4).

[13] Id., art. 32.1(4).

[14] Grazhdanskii Kodeks RF [GK] [Civil Code] art. 333 (Russ.).

[15] Ministerstvo Ekonomicheskogo Razvitia Rossiiskoi Federatsii, Pismo o Razyasnenii Izmemeni Vnesnnih v Federalni Zakon ob Akcionernih Obshstvah v Chasti Regulirovania Akcionernih Soglasheni  [Russian Ministry of Economic Development, Letter Regarding the Interpretation of Amendments to the Federal Law On Joint-Stock Companies] Sept. 14, 2009 No. D06-2643.

[16] See, e.g., Federalni Zakon ob Akcionernih Obshestvah [Federal Law On Joint-Stock Companies], Ros. Gaz., Dec. 29, 1995, No. 248, art.66(4), 32(4), 35(7), 39(3, 4).

Anne Dostert*

I. Introduction

During the 50 years of history of European Community (E.C.) competition law, agreements restricting parallel trade within Member States of the Community have been consistently held to be restrictive of competition by their nature and very unlikely to be exempted under Article 81(3) of the E.C. Treaty.  The strict stance towards such agreements is better explained by the role competition policy has always played in the elimination of barriers to trade in E.C. law than it is by efficiency considerations. [1]

The particular features of the pharmaceutical sector challenge the monolithic stance of Community institutions towards parallel trade restrictions.  Unlike other sectors, the price of pharmaceuticals is decisively influenced by regulation. [2] What is more, regulation diverges considerably from one Member State to another, depending on the policy choices made at the national level. [3] The resulting price differences constitute a natural incentive for parallel traders who purchase pharmaceutical products in low-price Member States and resell them in the Member States where prices for medicines are higher. [4]

If the role and the implications of regulation in the pharmaceutical sector are considered, it appears that a per se approach towards parallel trade restrictions amounts to exporting policy choices from low-price countries to other Member States or, as has been put, to defeating “the wishes of the government.” [5]

In this regulatory and economic context it is not surprising that pharmaceutical companies have taken active steps to restrict parallel trade, in spite of the clear prohibition spelled out in Article 81(1) E.C. For instance, pharmaceutical companies have attempted to circumvent the application of that provision—which can only be triggered by the presence of an “agreement”—by unilaterally restricting the supplies to wholesalers in low-price countries.[6] The issue at the center of the recent Glaxo judgment [7] of the European Court of Justice (E.C.J.) involves a different regulatory strategy.  In Glaxo, Glaxo Wellcome [8] (Glaxo) purported to implement a dual-price mechanism, whereby prices proposed to wholesalers in Spain changed depending on whether the product was intended to be sold in Spain or elsewhere through parallel trade. [9]

II. The agreement and the 2001 decision of the Commission

More than eleven years ago, in March 1998, Glaxo notified the European Commission (the Commission) of its new general sales conditions (the Sales Conditions).  The notified model contract provided for a dual-price system for the sale of eighty-two products (including eight products that Glaxo considered to be the main candidates for parallel trade between Spain and the United Kingdom).[10] More precisely, Article 4 of the Sales Conditions established different prices for (i) products financed by funds of the Spanish Social Security or by Spanish public funds and marketed at the national level and (ii) all other products. [11] Glaxo did not contest that the main intention of the agreement was to limit parallel trade between Spain and other Member States. [12] In a decision of May 8, 2001 (the Commission Decision), the Commission found that Glaxo had infringed Article 81(1) E.C. and that it could not benefit from an exemption under Article 81(3) E.C. [13] Glaxo brought an action before the Court of First Instance (C.F.I.) requesting the annulment of the Commission decision in its entirety.

III. The judgment of the C.F.I.

The C.F.I. agreed with the Commission that Glaxo’s Sales Conditions infringed Article 81(1) E.C. but rejected the Commission’s finding that the agreement [14] had as its object a restriction of competition. [15] Most significantly, the C.F.I. held that parallel trade must be protected only “in so far as it gives final consumers the advantages of effective competition in terms of supply or price,” [16] thus interpreting the market integration objective in the light of consumer welfare. Taking into account the particularities of pharmaceutical markets the C.F.I. concluded that:

As the prices of the medicines concerned are to a large extent shielded from the free play of supply and demand owing to the applicable regulations and are set or controlled by the public authorities, it cannot be taken for granted at the outset that parallel trade tends to reduce those prices and thus to increase the welfare of final consumers. [17]

The Court then turned to the analysis of the anti-competitive effect of the agreement and concluded that such an effect existed, as consumer welfare (in the form of lower prices) is diminished by the absence of the Spanish wholesalers in the intra-brand competition in the Member States of destination of the parallel trade. [18]

Concerning the efficiency claims under Article 81(3) E.C., the C.F.I. criticized the Commission for not sufficiently taking into account the arguments and evidence submitted by Glaxo to prove the existence of a contribution to the promotion of technical progress (i.e. innovation). [19] Consequently, the C.F.I. annulled the Commission Decision in so far as it rejected Glaxo’s request for an exemption.[20] Both Glaxo and the Commission appealed to the E.C.J. against the judgment.

IV. The judgment of the E.C.J.

In a judgment of October 6, 2009, the E.C.J. rejected the lower court’s approach towards Article 81(1) E.C. and provided certain clarifications on the application of Article 81(3) E.C.

B.   A confirmation of the traditional stance towards parallel trade under Article 81(1)

The E.C.J. reiterated its traditional stance towards agreements restricting parallel trade under Article 81(1) E.C.  Accordingly, the dual-pricing system was deemed to have an anti-competitive object.[21] The specific features of the sector in which the agreement is concluded do not alter that conclusion. [22] This principle is based on the fact that parallel trade restrictions “frustrate the Treaty’s objective of achieving the integration of national markets.” [23]

The E.C.J. categorically discarded the C.F.I.’s view that the above principle only applies in so far as the agreement deprives the consumer of the advantages of effective competition; the Court held that neither the text of Article 81(1) E.C. nor the case law support the position of the C.F.I. [24] More precisely, the Court noted:

[T]here is nothing in that provision to indicate that only those agreements which deprive consumers of certain advantages may have an anti-competitive object. Secondly, it must be borne in mind that the Court has held that, like other competition rules laid down in the Treaty, Article 81 EC aims to protect not only the interests of competitors or of consumers, but also the structure of the market and, in so doing, competition as such. Consequently, for a finding that an agreement has an anti-competitive object, it is not necessary that final consumers be deprived of the advantages of effective competition in terms of supply or price. [25]

Accordingly, “by requiring proof that the agreement entails disadvantages for final consumers as a prerequisite for finding an anti-competitive object . . . the [C.F.I.] committed an error of law.” [26] The E.C.J.’s strict approach towards Article 81(1) E.C. is, however, counterbalanced by taking into account the sector-specific features in the (prospective) analysis of the efficiency gains under paragraph (3) of the same Article.

B.   The features of the pharmaceutical sector are considered under Article 81(3)

The E.C.J. judgment clarified that Article 81(3) E.C. is the appropriate forum to take the particular features of the pharmaceutical into consideration.  In this regard, the E.C.J. acknowledged that there were no reasons a priori why the agreement notified by Glaxo could not qualify for an exemption under Article 81(3) E.C.

First, the E.C.J. noted that the C.F.I. had not erred in law by criticizing the Commission for not taking Glaxo’s arguments seriously into consideration.[27] According to the E.C.J., nothing in the C.F.I.’s interpretation of Article 81(3) E.C. altered well-established principles in E.C. law whereby (i) the burden of proof to establish that the conditions of Article 81(3) E.C. are fulfilled lies with the undertaking claiming the benefit of an exemption, and (ii) judges exercise limited review regarding “complex economic assessments.” [28]

Secondly, regarding the requisite standard of proof, following the Glaxo judgment, undertakings invoking the benefit of an exemption must provide evidence that the occurrence of the efficiency gains entailed by the agreement is “sufficiently likely.” [29]

Thirdly, and most significantly, the E.C.J. found that the C.F.I. had rightly criticized the Commission decision for not taking into consideration the “specific structural features” of the pharmaceutical sector. [30] Indeed, an assessment of the exemption under Article 81(3) E.C. “may require the nature and the specific features of the sector concerned by the agreement to be taken into account if its nature and those specific features are decisive for the outcome of the analysis.” [31]

V. Conclusion

There are reasons to welcome the E.C.J. judgment in Glaxo.  In line with a similar ruling in Sot Lelos, [32] the E.C.J. has acknowledged that the specific features of the pharmaceutical sector are sufficiently important to refine its traditionally inflexible approach towards restrictions of parallel trade.  There is moreover every reason to praise the legal technique through which these specific features are accommodated into the assessment.  Unlike the C.F.I., the E.C.J. chose not to interpret the notion of restriction of competition under Article 81(1) E.C. as an amalgam of consumer welfare and market integration considerations.  Instead, the Glaxo judgment of the E.C.J. clarifies that market integration is an objective worthy of being pursued in and of itself.  Finally, by shifting the assessment of the potential welfare-enhancing features of Glaxo’s pricing policy to Article 81(3) E.C., the E.C.J. reiterated one of the most important principles of E.C. competition law, which is that there is no such thing as a per se restriction of competition for which the benefit of Article 81(3) E.C. is excluded.

Endnotes

*I would like to thank Pablo Ibanez Colomo for his help and his comments on this article.

[1] See David J. Gerber, The Transformation of European Community Competition Law?, 35 Harv. Int’l L.J. 97 (1994).

[2] Opinion of Advocate General Jacobs, Case C-53/03, Syfait v. GlaxoSmithKline, 2005 E.C.R. I-4609, ¶ 77-78.

[3] Id.

[4] Id.

[5] Valérie Junod, An End to Parallel Imports of Medicines? Comments on the Judgment of the Court of First Instance in GlaxoWellcome, 30 World Competition L. & Econ. Rev. 291, 304. A similar debate took place during the 1970s and the early 1980s, when there were important divergences in the degree of protection of pharmaceuticals under national patent laws. In these cases, it was argued that favoring the free movement of goods over the national law amounted to exporting policy choices from countries granting weaker protection to pharmaceuticals. See Case 15/74, Centrafarm v. Sterling Drug, 1974 E.C.R. 1147; Case 187/80, Merck v. Stephar, 1981 E.C.R. 2063.

[6] See Joined Cases C-2/01 P and C-3/01 P, Bundesverband der Arzneimittel-Importeure v. Bayer, 2004 E.C.R. I-23.

[7] Joined Cases C-501/06 P, C-513/06 P, C-515/06 P and C-519/06 P, GlaxoSmithKline v. Comm’n and Comm’n v. GlaxoSmithKline and EAEPC v. Comm’n and Aseprofar v. Comm’n, 2009 WL 3171536 (Oct. 6, 2009).

[8] More precisely, the notification was filed by Glaxo Wellcome SA, a Spanish subsidiary of Glaxo Wellcome plc (now GlaxoSmithKline Services Unlimited).

[9] Commission Decision 2001/79/EC, Relating to a Proceeding Pursuant to Article 81 of the EC Treaty, 2001 O.J. (L 302) 1, recital 116.

[10] Id. recitals 13, 15.

[11] Id. recital 19 (reproducing clause 4 of the Sales Conditions).

[12] Id. recital 116.

[13] Id. art. 1–2.

[14] For the analysis of the existence of an agreement between Glaxo and the Spanish wholesalers, see Case T-168/01, GlaxoSmithKline v. Comm’n, 2006 E.C.R. II-2969, ¶60–90.

[15] Id. ¶ 147.

[16] Id. ¶ 121.

[17] Id. ¶ 147.

[18] Id. ¶ 190.

[19] Id. ¶¶ 303, 308.

[20] Id. ¶ 317.

[21] GlaxoSmithKline v. Comm’n and Comm’n v. GlaxoSmithKline and EAEPC v. Comm’n and Aseprofar v. Comm’n, 2009 WL 3171536, ¶¶ 59–60.

[22] Id.

[23] Id. ¶ 61.

[24] Id. ¶ 62.

[25] Id. ¶ 63.

[26] Id. ¶ 64.

[27] Id. ¶¶ 78–88.

[28] Id.

[29] Id. ¶ 93.

[30] Id. ¶ 104.

[31] Id. ¶ 103.

[32] Joined Cases C-468/06 and C-478/06, Sot. Lélos v. GlaxoSmithKline, 2008 E.C.R. I-7139.

Edward Greene [1] and Katia Kirova [2]

On Wednesday, November 18, 2009, the United States House of Representatives Committee on Financial Services (House Financial Services Committee) passed an amendment (the Amendment) sponsored by Representative Paul Kanjorski (D-Pa.) to the financial stability bill, the Financial Stability Improvement Act of 2009, which is a part of a comprehensive set of reforms rolled into an omnibus bill, The Wall Street Reform and Consumer Protection Act of 2009 (the Bill) [4], passed by the House Financial Services Committee on December 2, 2009. The Bill will be considered on the House of Representatives floor in December 2009. It incorporates nine major pieces of legislation, including the creation of an inter-agency council, the Financial Services Oversight Council (the Council) that will identify and regulate financial firms that pose systemic risk.

The Amendment, [5] unveiled by Kanjorski, Chairman of the House Financial Services Capital Markets Subcommittee, gives regulators preemptive authority to break up the fifty largest financial institutions by total assets in the United States if their “size . . . [,] scope, nature, scale, concentration, interconnectedness, or mix of activities directly or indirectly conducted by a financial holding company subject to stricter standards poses a grave threat to the financial stability or economy of the United States.” This preemptive authority would be given to the Council, which would be empowered to force a financial institution to undertake one or more of the following “mitigatory actions”: modifying the prudential standards previously set by the Board of Governors of the Federal Reserve System; “terminating [one] or more activities”; imposing conditions on the existing activities; “limiting the ability to merge with, acquire, consolidate with, or otherwise become affiliated with another company”; “restricting the ability to offer a financial product or products”; and, “in the event the Council deems [the aforementioned actions] inadequate as a means to address the identified risks, selling, divesting, or otherwise transferring business units, branches, assets, or off-balance sheet items to unaffiliated companies.” [6]

Large financial institutions in the United States that would likely be swept up by this legislation are concerned.  The implications of the Amendment could harm their international competitiveness. While the Amendment requires the Council to consider the “need to maintain . . .  international competitiveness” and the extent to which other countries are implementing similar rules, [7] these provisions are too vague and do not present, in our opinion, an efficient and timely restraint on possible action.

A few days before the vote on the Amendment, Jamie Dimon, Chairman and Chief Executive Officer of JPMorgan Chase & Co., published an article in The Washington Post entitled “No More ‘Too Big to Fail,’” [8] warning against a populist impulse to break up large, healthy financial institutions.

On November 16, 2009, members of the Financial Services Forum, an industry group consisting of chief executives of some of the world’s largest financial institutions, including Goldman Sachs and JPMorgan Chase & Co., urged Congress not to pursue “big bank break-up legislation.” [9]

Both Republicans and Democrats are reluctant to give the Council such an accumulation of power and are concerned about a potential unfair taking of private property, in spite of the “due process” clause inserted in the Amendment. [10]

We will examine briefly the situation in Europe, since Europe has quickly and dramatically embraced a breaking up authority (Part I), before coming back to the situation in the United States and assessing the U.S. approach (Part II). Finally, we will discuss the general questions that arise with respect to such a preemptive authority (Part III).

I.      Breaking Up Large Financial Institutions in Europe

The European Commission is linking the break-up authority of large financial institutions with Competition Law. The assumption seems to be that the European banking sector is concentrated, not competitive, and the result has been several financial institutions that may be too big to fail.  Thus, breaking them up addresses both problems.  Neelie Kroes, the Commissioner for Competition, mentioned in a press release dated November 13, 2009, that “[t]he European Commission is not destroying banks, it is simply helping this troubled sector to remain competitive whilst dealing with the current crisis.” [11] The first major step for the Commissioner for Competition was to break up ING Group NV in October 2009.

At the same time, the European Commission had been pressing the United Kingdom to downsize its largest banks. As a result, the British Government had to force the Royal Bank of Scotland, Lloyds Banking Group, and Northern Rock to sell off parts of their businesses. The consequences included, of course, the shrinking of their workforces.

The Governor of the Bank of England, Mervyn King, has mentioned that one option to create greater competition may be the separation of activities (similar to the Glass-Steagall Act of 1933 in the United States). [12]

European, and now British, regulators are clearly leaning toward a more competitive banking system with smaller players. Prior to the Amendment, experts were wondering whether the United States would pursue a similar approach.

II.      The U.S. Approach

President Obama’s administration pushed Citigroup to sell operations to improve its financial prospects, although the administration has neglected to place similar pressure on healthier institutions. The adoption of the Amendment is similar to the European approach, though it is not predicated on increasing competition.

A provision similar to the Amendment is also included in the Restoring American Financial Stability Act of 2009 (Discussion Draft), proposed on  November 10, 2009 by Senator Christopher Dodd (D-Conn.), the Chairman of the Senate Banking Committee. [13] The Agency for Financial Stability called for by the Discussion Draft would give regulators the authority to break up companies that are deemed to be a threat to the financial stability of the United States. The precise definition of a “threat” has not been provided.

It is important to note the differences between the U.S. market and the European markets. The U.S. banking system is not as concentrated as the European Union’s banking system. Moreover, the fifty largest financial institutions covered by the Amendment obscure the fact that problems can arise amidst mid- or small-size banks.

Such provisions raise questions that are still unanswered today.

III.      Questions with Respect to Break Up Authority

Such a preemptive authority in Europe or the United States raises business issues, as described in Jamie Dimon’s article,[11] but it also raises legal issues, inter alia:

• Interference of political authority in the corporate governance of a private company. The Council is chaired by the Secretary of the Treasury, funded by departments and agencies represented by voting members of the Council on an equal basis, and reports to the U.S. Congress.
• Interference in contractual freedom. The “mitigatory actions” described in the Amendment could result in drastic and quick change in contractual relationships between the company forced to take such “mitigatory actions” and its co-contractors. This uncertainty would foster a lack of confidence in such large financial institutions, due to the third parties’ anticipation of an adverse change in their contractual relationships. If the market suspects that financial institutions may be approaching a size limit and consequently broken up, counterparties will be concerned about credit exposure and either insist on enhanced collateral or shift their business elsewhere. Uncertainty does not contribute to stability.

In addition, an enormous uncertainty will emerge when it comes to deciding exactly which financial institution can be subject to “mitigatory actions,” because no precise definition of systemic risk exists. The Amendment gives significant discretion to the Council, which would be empowered to make decisions on a case-by-case basis.

Ben Bernanke, Chairman and a member of the Board of Governors of the Federal Reserve System, offered a broad definition of the term “systemic risk” in an October 30, 2009, letter to Senator Bob Corker (R-Tenn.). [15] The definition includes institutions with “unsafe amounts of leveraging by banks, gaps in regulatory oversight and the possibility that the failure of a large interconnected firm could lead to a breakdown in the wider financial system.” [16] An even greater uncertainty exists for multi-national institutions because, in spite of the international policy coordination mentioned in the Amendment, no precise, standardized, and sufficiently narrow definition of systemic risk exists on the international level.

IV.      Conclusion

The United States has a diversified financial institution structure unlike the United Kingdom. In the United Kingdom, and in Europe in general, competition authority is being used to create smaller financial institutions as a consequence of the cartel legislation. European legislation is not necessarily focusing solely on the size of a financial institution or being driven by the “too big to fail” issue, although that is part of the discussion.

The reforms prescribed by the U.S. Congress would, if enacted, create for the first time systemic risk oversight and procedures for reporting and collecting information, as well as give regulators the ability to review capitalization standards, control activities, and intervene when an institution becomes dangerously undercapitalized. In addition, Congressional proposals would regulate, for the first time ever, the over-the-counter (OTC) derivatives market, through the use of central clearing and trading on an exchange or electronic platform. Moreover, some institutions would be identified as posing systemic risk and would therefore be subject to higher standards to be reviewed and imposed by the regulators. Would not the foregoing proposed reforms be enough? To focus solely on the size of a financial institution and subject the fifty largest institutions to a break-up authority in addition to the aforementioned proposed regulations will create confusion in the market and for the investors. If size becomes the measure, how will the market know what the size limits are? And if there are artificial size limits, well-run institutions may curb activity as they approach the limit, which may not be in the best interest of consumers and large institutional clients. This is a belt and suspenders approach which is not necessary and will only cause confusion. The risk could be controlled by focusing on the activity that triggers that size and, in the event such a risk exists, capital requirements should be sufficient to control it. Artificial size limits may cause migration to foreign markets where such restrictions do not exist.

It is imperative to reform the financial services markets quickly, as the more the markets improve, the more the impetus for reform lessens. However, in this particular instance, it would be prudent not to implement such break-up provisions hastily, as it takes less time to break up than to build a large financial institution.

Endnotes

[1] This article is current as of December 7, 2009.

[2] Edward F. Greene is a partner in the New York office of Cleary Gottlieb Steen & Hamilton LLP. Mr. Greene served as General Counsel of the Securities and Exchange Commission from 1981 to 1982 and Director of the Division of Corporation Finance from 1979 to 1981. From 2004 to 2008, he served as General Counsel of Citigroup’s Institutional Clients Group. He originally joined the firm in 1982 and returned in 2009.

[3] Katia Kirova is currently studying at Columbia University School of Law. She has practiced Corporate and Securities Law in New York City and in Paris and has experience in cross-border transactions.

[4] The Wall Street Reform and Consumer Protection Act of 2009, H.R. 4173, 111th Cong. (2009).

[5] Id. § 1105(a).

[6] Id. § 1105(d)(1) (emphasis added).

[7] Id. § 1105(d)(2).

[8] Jamie Dimon, No More “Too Big to Fail,” Wash. Post, Nov. 13, 2009.

[9] Kevin Drawbaugh, Banks Sense Danger, Warn Congress on Breakup Power, Reuters, Nov. 16, 2009.

[10] The Wall Street Reform and Consumer Protection Act of 2009, § 1105(e).

[11] Latest News from Neelie Kroes, “The Banks Need to Change,” Nov. 13, 2009.

[12] Mervyn King, Gov. of the Bank of England, Speech to Scottish Business Organisations, at 8 (Oct. 20, 2009).

[13] Restoring American Financial Stability Act of 2009, S., 111th Cong. § 119 (Discussion Draft, 2009), Sec. 119.

[14] See Dimon, supra note 8.

[15] See Corey Boles, Bernanke Offers Broad Definition of Systemic Risk, Wall St. J. Blogs, Nov. 18, 2009.

[16] Id.

Benedetta Faedi

On June 10, 2008, the Supreme Court of Italy (Corte di Cassazione) affirmed a decision made by the Court of Appeal of Venezia condemning a defendant to one year of imprisonment for having repeatedly sexually assaulted a sixteen-year-old girl. [1] The appellant, who was in a relationship with the mother of the victim and cohabited with them at the time of the aggression, argued that the girl had slanderously misrepresented the facts. Particularly, the defendant claimed that since the plaintiff was wearing a pair of tight blue jeans at the time of the alleged episode of sexual violence, it is not conceivable that he could have inserted his hands underneath her pants without her consent. [2]

The reasoning offered by the defense harkened back to the controversial decision number 1636/99 issued by the Supreme Court of Italy on February 10, 1999. In that decision, the Court overturned a previous rape conviction on the grounds that “it is nearly impossible to slip off tight jeans even partly without the active collaboration of the person who is wearing them,” [3] thus assuming that sexual intercourse must have occurred consensually. The decision provoked outrage among female representatives of political forces differently aligned in the Italian Parliament and public opinion. On the day following the Supreme Court’s ruling, female politicians paraded in protest before the Italian parliament, wearing blue jeans and holding placards that read “Jeans: An Alibi for Rape.” [4]

This case analysis revisits the judicial developments of the “jeans defense” for rape in Italy until the recent Supreme Court decision of 2008, placing the Italian struggle in combating sexual violence against women within the larger context of European human rights law.

I.        The Jeans Defense for Rape

On July 12, 1992, an eighteen-year-old student reported to the police that her forty-five-year-old driving instructor had raped her the previous day during a driving lesson. [5] She recounted that the man had driven her to a secluded pathway outside the inhabited center, where, after flinging her down on the ground and slipping off her blue jeans from one leg, he had brutally raped her. A different version of the facts was reported to the police by the driving instructor once he was arrested. Indeed, he confirmed having engaged in sexual intercourse with his student at the time and place she had recounted, but claimed that it had been consensual. [6]

The man was then initially charged with “carnal violence,” “private violence,” “sexual abduction,” “grievous bodily harm,” and “gross indecency in public.” [7] On February 29, 1996, the Tribunal of Pomezia convicted the driving instructor only of gross indecency in public, acquitting him of the other charges. However, in 1998, the Court of Appeal of Potenza held the man accountable for all of the offenses and sentenced him to two years and ten months of imprisonment. As a last resort, the defense appealed to the Supreme Court, which quashed the previous conviction with its startling decision on February 10, 1999.

The Supreme Court reasoned in detail that the lower appellate court had failed to conduct an adequate and rigorous scrutiny of the trustworthiness of the plaintiff’s accusations and of those circumstances that were inconsistent with the alleged rape. In particular, the Supreme Court rebutted the appellate court’s decision that had evaluated the partial removal of the blue jeans as evidence of the victim’s lack of consent, stating, on the contrary, that it would have been peculiar for the girl to undress in the middle of the day even had she consented. [8] Moreover, the Supreme Court pointed out that “it is a fact of common experience that it is nearly impossible to slip off tight jeans even partly without the active collaboration of the person who is wearing them.” [9] Considering this, the Supreme Court conclusively quashed the previous conviction and remanded the case to the Court of Appeal of Naples, which ultimately acquitted the man. [10]

The judgment stirred up what the media coverage and scholars referred to as an “authentic political earthquake” [11] that “succeeded in making everyone agree. In opposition, unfortunately.” [12] Politicians and ordinary people felt outraged at the questionable rape decision and joined the swell of protest. Local and international media captured an array of female legislators wearing blue jeans on the doorstep of the Parliament, and this image soon made its way to the rest of the world. [13] The following month, legislators, activists, and ordinary women and men from Italy, Europe, and the United States inaugurated the “International Jeans for Justice Day” to symbolize the global protest as well as their continuing endeavor to combat sexual violence.[14]

II.        Rape under European Human Rights Law

The Council of Europe adopted Recommendation 1450 (on violence against women in Europe) and Recommendation 1582 (on domestic violence against women) in 2000 and 2002, respectively. These recommendations complemented the European Convention on Human Rights of 1950 (European Convention), which was not an instrument specific to women and did not explicitly refer to gender-based violence. In particular, Recommendation 1450 “condemns violence against women as being a general violation of women’s rights as human beings.” [15] Two years later, with Recommendation 1582, the Council of Europe specifically acknowledged that “domestic violence should be treated as a political and public problem, and a violation of human rights.” [16] Hence, member states were called upon to recognize “that they have an obligation to prevent, investigate and punish all acts of domestic violence and to provide protection to its victims.” [17]

Pursuant to the terms above and to the correspondent evolutionary interpretation of the European Convention, the European Court of Human Rights (European Court) has imposed positive obligations on Member States to protect women from gender-based violence. For example, in M.C. v. Bulgaria, the European Court found that the investigation of the applicant’s case fell short of Member States’ positive obligations under the European Convention “to establish and apply effectively a criminal-law system punishing all forms of rape and sexual abuse.” [18] In this case, the applicant alleged that she had been raped by two acquaintances who had invited her out to a bar and other places on the night of July 31, 1995, when she was sixteen years old. The girl reported the assaults, but confessed that she “had been scared and at the same time embarrassed by the fact that she had put herself in such a situation” and that “[s]he had not had the strength to resist violently or to scream.” [19]

After about two years of investigation, the district prosecutors eventually closed the case on the grounds that no resistance on the applicant’s part had been verified, and thus no conclusive evidence on the use of force or threats had been established beyond a reasonable doubt. The prosecutors stated that “the young age of the applicant and her lack of experience in life meant that she was unable . . . to demonstrate firmly her unwillingness to engage in sexual contact.” [20] Following the rejection of her appeal by the regional prosecutor’s office, the applicant lodged a complaint with the European Court.

In response, the European Court found violations of Article 3 (prohibition of torture or inhuman or degrading treatment or punishment) and Article 8 (right to respect private or family life), reiterating that Member States are required to take appropriate measures to ensure that individuals within their jurisdiction are not subjected to ill-treatment by both public officers and private individuals. [21] The European Court further stated that, while the choice of measures to secure compliance with Article 8 should fall within the State’s margin of appreciation, “effective deterrence against grave acts such as rape, where fundamental values and essential aspects of private life are at stake, requires efficient criminal law provisions.” [22] By imposing positive obligations on Member States to enact adequate means for the investigation and prosecution of rape cases regardless of the victim’s active resistance, the European Court has acknowledged that evidence of the lack of consent should not necessarily entail the use of force and threats, and thus has ultimately protected women’s right to sexual autonomy.

III.        Judicial Developments at the Italian Supreme Court

In light of the M.C. v. Bulgaria judgment, the controversial decision of the Italian Supreme Court in 1999 raises a few questions. Although the investigation and prosecution had been fairly conducted, the Supreme Court’s scrutiny primarily focused on the victim’s conduct to verify her credibility. In particular, the Supreme Court rejected the argument that the partial removal of the girl’s jeans could signify her lack of consent. Indeed, it contested that the difficulty of slipping off the garment and the fact that the intercourse had occurred in a public place were inconsistent with such a presumption. [23]

The Supreme Court further noted that neither signs of struggle between the student and her instructor nor evidence of the victim’s active resistance had been found. Crucially, the lower appellate court had asserted that “it is not necessary that the victim had suffered violence to establish rape and that, in this case, the girl had not resisted because she feared greater harm to her physical safety.” [24] In response, the Supreme Court claimed that “it is instinctive, especially for a young woman, to resist with all her strength one who is trying to rape her, and it is illogical to argue that a girl would supinely submit to rape . . . in fear of other hypothetical and certainly not more serious harm.” [25] The Supreme Court’s reasoning, crafted on the assumption that the lack of consent requires the use of force, differs radically from the European Court’s position in the M.C. v. Bulgaria judgment.

Three other decisions regarding rape cases and referring to the “jeans defense” opinion have ensued from 1999 to date at the Italian Supreme Court. In 2001, a defendant appealed to the Supreme Court claiming that sexual intercourse with his former wife was consensual since she was wearing blue jeans at the time of the alleged aggression. [26] The victim reported that, in the middle of the night, the defendant broke into the house where she was staying with a girlfriend and forced her violently to follow him into his car. Questioned by the police, the other woman confirmed the facts.

In contrast to its previous decision, the Supreme Court reasoned that “the fear of further consequences in addition to the ’slaps’ her former husband had already inflicted on her facilitated the removal of her jeans.” [27] On such grounds, the Supreme Court conclusively confirmed the defendant’s conviction, finally acknowledging that rape should be established regardless of the victim’s active resistance. In this specific case, however, it has been argued that the eyewitness testimony that corroborated the victim’s account of the assault probably made it easier for the Supreme Court to reach a conviction decision. [28]

A few years later, in 2006, another defendant appealed to the Supreme Court denying the accusation on the basis that his presumed victim was wearing jeans at the time of the alleged aggression. [29] The victim recounted that, on the day of the alleged rape, she was with a friend at the coffee bar where the aggressor was working. At his request, she followed the man to the upper floor flat to help him deliver some drinks. On their way back, he stopped the elevator, dragged her out to the landing, and raped her. The victim reported having been initially bewildered by the entire situation, and then having resisted and begun to cry. Her friend testified that, upon her return, she looked distraught and revealed the assault, showing bloodstains on her underwear.

The Supreme Court confirmed the conviction of the appellant and, making express reference to judgment number 42289/2001, stated that “the credibility of the rape victim cannot be invalidated by the fact that she was wearing jeans at the time of the rape, since the fear of further consequences could have determined the possibility to remove the jeans more easily.” [30] Although the deposition of the victim’s friend might have played a role in the Supreme Court’s decision, it was still a positive development that the victim’s credibility was evaluated regardless of an eyewitness testimony of the aggression and of the victim’s resistance.

A further step forward was made by the recent decision number 1457/2008 taken by the Supreme Court on June 10, 2008. In this case, a sixteen-year-old girl reported having been sexually assaulted by her mother’s partner, with whom she was also cohabiting at the time of the aggression. [31] Her declarations were further confirmed by her fiancé, to whom she had later recounted the facts, and her father, who had been promptly informed. In contrast, the alleged aggressor contested that on the day of the assault the girl had herself invited him home for lunch and had sat next to him and watched television. The defense claimed that since the victim was wearing blue jeans and was sitting down, it would have been impossible for the man to wedge his hand underneath her pants and touch her intimate parts.

The Supreme Court confirmed the lower appellate court’s decision stating that an assessment of the victim’s credibility had been accurately conducted and that the fact that the girl was wearing blue jeans was not an impediment for the man to touch her intimate parts, since he could have still forced his way underneath the garment, which “cannot be compared to a chastity belt.” [32] With such a decision, the Supreme Court finally overturned its own ruling of 1999, acknowledging that, as a matter of fact, wearing blue jeans cannot prevent a woman from being raped or imply her consent to sexual intercourse. On a larger scale, after over a decade of struggle and slow developments, this last decision has closely aligned the Italian Supreme Court with the European Court of Human Rights’ dictates, and ultimately has marked a step forward towards gender equality and women’s right to sexual autonomy.

Endnotes

[1] Cass., sez. III, 10 june 2008, n.01457.

[2] Id. at 3.

[3] Cass., sez. III, 6 nov. 1998, n.1636, Riv. Pen. 1999, 258.

[4] La “sentenza dei jeans” tra maschilismo e garantismo, La Repubblica.it, Feb. 12, 1999; see also Outrage at “Jeans Alibi” Verdict, BBC, Feb. 11, 1999.

[5] Cass., sez. III, 10 feb. 1999, n.1636. See also Samantha Frank, Jeans: An Alibi for Rape, 7 CIRCLES Bu. W. J. L. & Soc. Pol. 10 (1999) (discussing judgment n.1636/99); Rachel A. Van Cleave, Sex, Lies, and Honor in Italian Rape Law, 38 Suffolk U. L. Rev. 427, 446 (2005). 

[6] Cass., sez. III, 10 feb. 1999, n.1636, at 1.

[7] Id.

[8] Id. at 2.

[9] Id.

[10] Id.

[11] Kitty Calavita, Blue Jeans, Rape, and the “De-Constitutive Power of Law, 35 Law & Soc’y Rev. 89, 93 (2001), (quoting Antonio de Florio, Il Giudice: “Ma che Stupro? Lei dopo lo invito a pranzo,” Il Messaggero, Feb. 12 1999).

[12] Id. (quoting Francesco Mauro Iacoviello, Toghe e Jeans. Per una Difesa (Improbabile) di una Sentenza Indifendibile, Cassazione Penale (1999)). See also Dieci Firme Contro: “Sentenza che Offende,” La Repubblica.it, Feb. 12, 1999.

[13] See La “sentenza dei jeans” tra maschilismo e garantismo, supra note 4; Outrage at “Jeans Alibi” Verdict, supra note 4.

[14] Calavita, supra note 11, at 95.

[15] Parl. Ass. Counc. Eur., Recommendation No. 1450, Violence Against Women in Europe (Apr. 3, 2000), ¶ 5.

[16] Parl. Ass. Counc. Eur., Recommendation No. 1582, Domestic Violence Against Women (Sept. 27, 2002), ¶¶ 1, 2.

[17] Id. ¶ 4.

[19] Id. ¶ 17.

[20] Id. ¶ 64.

[21] Id. ¶ 149-50.

[22] Id. ¶ 150.

[23] Cass., sez. III, 10 feb. 1999, n.1636, at 2.

[24] Id.

[25] Id.

[26] Cass., sez. III, 6 nov. 2001, Foro it. 2002, II, 287.

[27] Id. at 1.

[28] Van Cleave, supra note 5, at 453.

[29] Cass., sez. III, 19 may 2006, n.22049.

[30] Id. at 1.

[31] Cass., sez. III, 10 june 2008, n.1457, Foro it. 2009, 2, 99.

[32] Id. at 3.

The book’s aim is to examine, in relation to both constitutional and substantive Community law, how the Court contributed to the forming of the EU’s legal framework as it stands today.’ Amull’s book must be viewed against the backdrop of the ongoing debate as to whether the Court’s approach to the interpretation of Community law represents unwanted and unwarranted judicial activism at the expense of the individual Member State’s sovereignty or a valuable contribution to the peaceful, stable and prosperous development of European Integration. After all, the very active and imperative role taken on by this judicial body, which is clearly based on international law, came as quite a surprise to the Member States. In addition, European Communities originally consisted only of civil law countries, which are traditionally unaccustomed to judges as law-makers. In view of the recent expansion of the Court’s powers under the Treaty of Amsterdam, this book comes at an ideal point in time. Arnull captures the most important developments until the entry into force of the Treaty of Amsterdam and hopefully creates the basis for a better understanding of developments to come.

The European Union and its Court of Justice is the author’s first book on this subject, but he has already written a number of articles on questions relating to the Court’s role.3 As Professor of European Law at the University of Birmingham, and a former legal secretary at the Court, Arnull is in an excellent position to contribute to a student’s better understanding of the stance taken by the Court on various important questions of constitutional and substantive Community law. Amull’s approach is to use the Court’s case law as the clear point of departure for the systematic analysis of various important substantive and constitutional questions of Community law. Through this explicit attention to the Court’s important role with regard to the evolution of Community law right from the outset, this book distinguishes itself from other treatises on European Law.

The book is roughly divided into three parts entitled “Legal foundations,” “Substantive law,” and “The Court’s general approach.” The first part, which deals with constitutional issues of Community law, is preceded by a brief introduction to the Court’s creation, organization and working methods as well as remarks on the creation of the Court of First Instance (CFI) and the future of the Community judicature. Here, the author also gives a good overview of the current problems facing both the ECJ and the CFI with regard to their workload and new powers as well as the possible solutions envisaged to solve these problems. Next, Amull looks at the jurisdiction of the Court. He examines the interpretation the Court has given to the powers expressly conferred upon it by the EC Treaty, most notably in the area of enforcement actions against Member States, actions for annulment and preliminary rulings. Close attention is given to the problem of standing of private parties before the Court, where the author criticizes in particular the restrictive approach the CFI has taken towards the question of standing.6 He also inspects the enlarged scope of jurisdiction accorded to the Court by the Treaty of Amsterdam, claiming that it signifies that the Member States were not altogether dissatisfied with the way that the Court has handled its responsibilities so far.

This book attempts to answer two important and controversial questions in jurisprudence. The first question is concerned with conditions that make us responsible for the harm we cause. The second is why we should be held responsible at all. The answers to these questions appear at various points in a compilation of six previously published essays and one introductory essay. Five of these pieces were written between 1988 and 1998, one essay was published as early as 1964, and the Introduction was most likely written in 1999. While the author concedes that the volume contains repetitions because of its organization, on the whole this collection registers a “development of thought” whose origins go back to Honord’s work with Herbert Hart in the 1950s. In particular, these essays expand on the themes first formulated by Hart and Honore in Causation in the Law.

Honore responds to the questions above by offering a theory of outcome responsibility, in which our intervention in the world is by itself a sufficient condition for responsibility. One broad implication of this theory, of course, is that we always intervene in the world, whether by action or omission, and in so doing always bear responsibility for our actions. More importantly, this theory addresses responsibility and fault as two distinct concepts, in the sense that being responsible does not necessarily mean being at fault. Honore argues that this view allows one to envision responsibility as a derivative of luck rather than an instance of fault. To a degree, even legal liability depends on luck. Whether or not moral fault and legal liability arise out of responsibility is an entirely separate issue. But a more interesting issue, especially from the viewpoint of jurisprudence, is Honor6’s proposed connection between responsibility and luck in the light of his causation model.

Why is it more interesting? First, from a linguistic standpoint, we normally do not associate responsibility with luck. To say that someone is responsible connotes rational choice and accountability on the part of the responsible agent. The term “responsibility” itself has no concept of luck embedded in it, insofar as we use this term in everyday speech. Second, a determination of liability at law usually rests on a well-defined set of rules and principles where luck is rarely a criterion the courts resort to in deciding cases. If this is the case, then how could anyone attribute legal liability to luck? The second essay, Responsibility and Luck, grapples with this problem. Of all essays in this volume, this is by far the most important one because it delineates the basic premises of the argument for outcome responsibility.

The European Commission in June 1999 took another step in its campaign to introduce competition into the European telecommunications market by enacting Commission Directive 1999/64/EC amending Directive 90/388/EEC in order to ensure that telecommunications networks and cable TV networks owned by a single operator are separate legal entities (“Legal Separation Directive”). The Commission adopted this Directive pursuant to Article 86(3) of the Treaty Establishing the European Community (“EC Treaty”), which protects the Community’s interest in competition and trade development with respect to “undertakings entrusted with the operation of services of general economic interest or having the character of a revenue-producing monopoly.”

This Directive will have an immediate impact on the cable telecommunications industry in Europe; all Member States must submit evidence of compliance by April 2000. The Commission adopted the Directive over the opposition of incumbent companies that are dominant in both the national telecommunications markets and voice telephony markets; the new Directive requires that incumbent companies legally separate their telecommunications companies from their cable companies. From a technological perspective, cable networks have the unique and growing potential to provide competition against ordinary telephone networks in the voice communication and data transmission markets, which makes the joint ownership of telephone and cable networks in a geographic area particularly anti-competitive. The Commission described the required legal separation as a minimal measure to counteract the conflict of interest created by cross-ownership of both telephone and cable networks. In doing so, the Commission seemed to concede that it had made serious compromises of its goal to reduce anti-competitive behavior in the cable market. Requiring that telephone and cable entities be legally separate would, alone, probably not do much more to protect competition than the accounting separation standard (which required the separation of accounts for each network and service) that it replaces. However, this legislation has prompted some affected operators to take the more extreme and effective measure of fully divesting their cable networks. It appears these companies wish to escape the risk of future regulatory uncertainty.