Fenin v Commission of the European Communities (Judgment of the Court (Grand Chamber), 11 July 2006)

FENIN was an association of businesses which marketed medical goods and equipment used in Spanish hospitals. The members of this association sold goods to the ‘SNS management bodies’ (26 public bodies, including three ministries, which ran the national health system). The sales of medical goods and equipment to the SNS management bodies made up over 80% of the total turnover for FENIN members.

FENIN complained to the European Commission against the delays in payment by the SNS management which they viewed as an abuse of a dominant position on the part of the purchaser under Article 82 EC. Debts owed to their other suppliers were paid more quickly. FENIN submitted that they could not exert any commercial pressure on the SNS management bodies because they had a dominant position in the Spanish market for buying medical goods and equipment.

The European Commission is the executive body of the EU that is responsible for proposing legislation, implementing decisions, upholding the EU’s treaties and day-to-day running of the EU.

The Commission rejected FENIN’s complaint because Article 82 EC only applies to ‘undertakings’, and the SNS management bodies were not ‘undertakings’ under EU competition law. The Commission also held that the activity of purchasing products could not be separated from the service subsequently provided, which, in the immediate case, was the free provision of health services to the public (or ‘members of the SNS’). Purchasing products only constituted an economic activity where the purchaser subsequently used them when offering goods or services on a given market, and on the immediate facts of this case, this was not apparent.

FENIN appealed against the Commission’s decision to the Court of First Instance (‘CFI’) by alleging the following:

1.     infringement of its rights of defence by the Commission,

2.     error in law or manifest error of assessment in the application of Articles 82 EC and 86 EC, and

3.     an inadequate statement of reasons and lack of transparency in the contested decision.

The judgment

This action was dismissed entirely by the CFI for the following reasons.

In relation to the first submission, the CFI rejected this on the basis that the Commission was entitled to dismiss the complaint referred to it anyway, given that the SNS management bodies did not act as undertakings within the meaning of Article 82 EC. They therefore held that there was no need for the Commission to consider the other aspects of the complaint.

Regarding the second plea, the CFI reaffirmed the fact that the SNS management bodies did not act as undertakings because simply making purchases on a market did not alone constitute an economic activity (and thus an ‘undertaking’). As the CFI emphasised, purchasing goods would only constitute an economic activity where the purchaser subsequently offered the relevant goods for sale on a market. Additionally,  the ‘principle of solidarity’ (the goods being funded from social security contributions and other State funding, and the provision of services free of charge to its members on the basis of universal cover), supported the conclusion that the SNS management bodies did not act as undertakings in their activity of managing the health system.

And the third proposal was rejected because, regarding the need to give reasons, the Commission had already clearly set out the legal considerations fundamental to the logic of that decision within the judgment. Additionally, the Commission was not obliged to adopt a position on all of the arguments put forward in support of the complaint anyway. The ‘transparency’ criticism was also rejected because the CFI was simply required to allow FENIN to submit written observations on the position initially adopted by the Commission, which it did.

Further, on this appeal to the CFI, FENIN additionally raised the fact that public hospitals in Spain on occasion provide private care in exchange for remuneration. This applied, for example, to tourists to Spain who were not members of the SNS. This argument was alleged to be a means of countering the ‘principle of solidarity’ argument, and used in order to bolster the case for the SNS management bodies constituting ‘undertakings’ under EU competition law. The CFI however declined to consider this further argument as it had not been made in the original complaint to the Commission and therefore could not serve as a reason for annulling the Commission’s decision.

FENIN then appealed the matter to the European Court of Justice (‘ECJ’), believing that the CFI had incorrectly interpreted the concept of an ‘undertaking’. FENIN alleged the following.

1.     The CFI had incorrectly linked the nature of the purchasing activity to that of the service subsequently provided, and therefore had wrongly held that the SNS management bodies were not  ‘undertakings’. FENIN argued that the CFI had been wrong to conclude that purchasing products only constituted an economic activity where they were subsequently offered as goods or services on a given market.

2.     Alternatively, assuming that the CFI were correct to link the purchasing activity to the subsequent activity, the subsequent activity should have been held to be economic in nature, therefore the SNS management bodies’ purchasing activity should have been held to be economic in nature.

The European Court of Justice’s judgment

In the course of the ECJ proceedings, Advocate General Maduro (the ‘AG’ whose function it is to present opinions on the cases brought before the Court (publicly and impartially)) agreed with the CFI regarding the first ground of appeal. The AG found that purchasing could not in itself constitute an economic activity, and that the act of purchasing could not be dissociated from the subsequent use to which the relevant goods were put. In relation to the second ground, the AG was of the opinion that the CFI had not sufficiently proved that the State intended to exclude the SNS management bodies from all market considerations. When assessing whether the provision of healthcare is an economic activity, the degree of solidarity should have been assessed in light of other factors, such as ‘market participation’ and whether ‘market considerations’ apply. The CFI should have classified each activity of the SNS management bodies separately. As a result, the AG’s opinion recommended that the case should be referred back to the CFI in order for further findings in fact to be made.

However, the ECJ rejected that idea and upheld the CFI’s judgment. Whilst they agreed with the AG that a body’s purchasing activity could not be dissociated from the subsequent use to which the relevant goods were put when examining whether a body was engaged in economic activity, they however declared the AG’s arguments concerning the recommendation to refer the case back to the CFI to be inadmissible. As FENIN’s arguments about the economic nature of medical treatment were put forward at the appeal stage, the ECJ was not able to authorise further economic assessments.

So the result of this case was ultimately that State purchasing for free provision, was not subject to the EU Competition legislation – and that has an obvious significance for the UK’s National Health Service, and Local Authority purchasing, it is suggested, even though social care is chargeable – it is not sold on, as such, at all, to members of the public or other bodies – it is merely supplied subject to statutory duties or powers.

On that subject, it is relevant to consider the history of social care providers’ use of Competition legislation in the UK’s own regulatory hierarchy, because it has been affected by the European legal arena.

‘BetterCare’

The BetterCare case concerned a complaint by a provider of residential and nursing care (‘BetterCare’), who alleged in 2000 that the Northern Irish North & Western Trust (‘NWT’) had abused its dominant market position by use of it to impose the contract purchase price for privately owned nursing home beds needed for members of the public, too low.  In the area as a whole there were 1019 beds, of which 189 were managed by the Trust, and the other 830 by the private sector. Of the 830, N&W purchased 604.

The issue was whether or not NWT was an ‘undertaking’ for the purposes of Articles 81 and 82 of the European Treaty, in the use of its statutory functions (a power) to contract with private sector bodies when discharging its statutory duty to provide residential and nursing social care.

The substantive complaint alleged that all requests for negotiation had been refused each year since 1994. Modifications to the terms were made without consultation. Proposals to agree the costing of the services required, or to obtain an independent assessment of the cost of provision, had always been refused. Prices had been increased by below-inflation rates. External, regulatory and statutory factors influencing the cost structure had allegedly been ignored for 6 years. The main competitor for qualified nursing staff was the Trust itself, which paid significantly higher salaries than the private sector could afford. The cost of Trust homes beds was approximately £70 a week more than the Trust was willing to pay the private sector.

Initially, the Directorate General of Fair Trading concluded that because the body exercised ‘public interest’ statutory functions of a social nature, that were funded by taxation, it could not constitute an ‘undertaking’ (Better Care I).

BetterCare appealed to the Tribunal, and others providers joined in the fray against another English authority.

At the time, the existing ECJ caselaw  distinguished between public bodies carrying out purely regulatory or administrative duties, and those involved in economic activities – that is, in or directed towards ‘trade’. The issue was whether the choice to contract for these services, or anything else about the context, made the activities ‘economic’.

BetterCare’s central submission was that the framework allows the authority to choose to ‘trade’ in care, rather than provide it, and that once that choice is made, there is no justification for regarding the public purchaser as operating outside of the remit of the Act.  The exemptions in schedule 3, and especially the exception in para 4, underline that an entity can act in the public interest, but still count as an undertaking, notwithstanding the fact that it might yet be specifically excused from the prohibitions against anti-competitive conduct which would otherwise apply – for instance where the performance of the tasks of an undertaking ‘entrusted with the operation of services of general economic interest’ would be ‘obstructed’.

However, the care provider appealed to the Competition Commission Appeals Tribunal (‘CCAT’), and this decision was overturned (in BetterCare II).

In ruling that NWT was carrying out economic activity, such that Competition law applied to purchasing, the CCAT firstly drew upon the fact that the public body was making commercial contracts. This, it adjudged, was the ‘essence’ of most economic activities. Secondly, the CCAT relied upon the public body’s ‘partnership’ with private sector bodies as a means of affirming that it was carrying out economic activity, and therefore was an ‘undertaking’.

The Tribunal observed that it was yet conceivable, despite its findings, that the provisions in para 7(4) and (5) of schedule 3 of the UK Competition legislation might apply – under the first, the Secretary of State may make an order granting exemption from the prohibitions, retrospectively if necessary, where there are exceptional and compelling reasons of public policy.  But the Tribunal commented that it would be paradoxical if the internal dispute resolution procedure which had been created at the time of the internal market in healthcare, would have given a Trust a remedy against another purchaser, whilst the Director’s reasoning denied external providers any protection.  It said ‘the Director’s argument implies that the independent providers are subject to all the burdens of the Act but unable to invoke the protections it offers, for example where a Trust seeks to take abusive advantage of its position as a monopoly buyer in a particular locality. We doubt very much whether Parliament could have intended that result.’

The CCAT then remitted the complaint to the Office of Fair Trading (‘OFT’) for investigation.

The BetterCare Group’s complaint had been solely against the NWT so the issue of whether the EHSSB and the DHSSPS were undertakings was not ever addressed by the CCAT.  But someone in government clearly saw the opportunity to hold on to the notion that Competition legislation was not applicable to government funded purchasing, and in the remission to the OFT, the government department (equivalent to the DH) and the Boards, (equivalent to strategic health authorities or PCTs/CCGs) were joined in.

NWT was the equivalent of a provider trust, but a provider trust which also commissioned services in order to provide health and social care services; whereas in England it is local authorities that have the duty (albeit funded by government) to provide or purchase such provision.

In March 2003 the judgment of the Court of First Instance (‘CFI’) in FENIN was handed down. But in December 2003, before judgment in the ECJ in FENIN was handed down (upholding the CFI, it will be recalled, to the effect that State purchasing was not an undertaking, and hence Competition legislation did not apply) the OFT, forced by CCAT’s decision to find that NWT was an undertaking, found that the NWT’s conduct did not constitute an abuse of a dominant market position.

But anticipating the ultimate ECJ judgment in FENIN, perhaps, the OFT went on to find that the Eastern Health and Social Services Board and the Department of Health, Social Services and Public Safety were not undertakings for the purposes of the Competition Act 1998, either, in ‘setting’ the rates to be paid by NWT and other Health & Social Services Trusts in the case of the Department of Health, Social Services and Public Safety, setting the budget for statutory (Trust owned) homes provision.

In the BetterCare case No. II the CCAT found that the main enquiry, when determining if something was an ‘undertaking’, was whether the body was in a position to generate the effects which the competition rules sought to prevent. Therefore the CCAT adjudged that when determining whether an entity was an ‘undertaking’, purchasing was equally as important as buying and stressing the importance of commercial contracts and ‘partnerships’ with private sector bodies here.

However, as we know, the ECJ in FENIN ultimately departed from this view. The CFI in FENN were simply concerned with the purpose of an activity when considering whether a body was an ‘undertaking’ (‘it is the activity consisting in offering goods and services on a given market that is the characteristic feature of an economic activity’). As the purpose of the SNS management bodies in FENIN was to implement a health care ‘solidarity’ scheme, rather than sell goods in a market, it could not constitute an ‘undertaking’.

Comment

What to make of all this? Our Competition Appeal tribunal found that a state-funded social care service purchaser was an undertaking, subject to Competition legislation and then the OFT decided that it was not an abuse of a dominant position because the superior funding bodies in the system ‘set’ the tariff and did that by reference to the budget that had been set. This overlooks that fact that contract intervened, as a result of choices made by the legislature and contract means that the rates were a matter of choice, not a matter of imposition.

FENIN restored the original approach of the OFT, that state funded purchasing was not an undertaking because not an economic activity and that same principle applies to day, in the NHS in England, and in the field of social care purchasing, it is suggested, on the basis of European and UK bodies’ approach to the case law. That, it is suggested, makes a nonsense of the idea that the State works in partnership with providers, and the 2013 flurry in the Administrative law court, challenging the imposition of unfeasibly low rates without consultation, and mainly successfully, in terms of consultation being required for lawful commissioning, was an inevitable result.

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