The foreign subsidies regulation (FSR) is only just over a year old and yet it has already provided ample fuel for legal and political debate. Recent political initiatives and a court ruling suggest that this trend will persist.
As we already mentioned in one of our earlier posts this year, the European Commission conducted its first dawn raid under the FSR in April, which targeted the premises of the (indirectly) state-owned Chinese security equipment company Nuctech in the Netherlands and Poland. Nuctech, a supplier of security inspections systems such as body and baggage scanners for airports, was alleged to have received foreign subsidies which could distort the EU market in an unfair manner. The inspections came shortly after the Commission had started its first ex officio investigation under the FSR into the practices of Chinese suppliers of wind turbines.
Wider implications
These actions by the EC did not go unanswered. Besides Nuctech filing an appeal against the inspections (more on that in a moment), Chinese political bodies also responded to the Commission’s first steps.
In July, China’s Ministry of Commerce (MOFCOM) started a so-called “Trade and Investment Barrier Investigation” into the EU’s related practices in its investigations of Chinese companies based on the FSR. MOFCOM said that it had received a complaint by the China Chamber of Commerce. The accusation seems to be that the EU is taking unfairly targeted action against Chinese companies and in doing so is improperly revealing trade secrets. The same China Chamber of Commerce had also argued that the FSR is in breach of WTO rules.
The legal details
Nuctech appealed the inspections on 29 May to the General Court, arguing that that the underlying decision to initiate the dawn raid and related measures, such as the request for information relating to data stored outside the EU, should be annulled.
Save for standard arguments relating to procedural rights, such as insufficient evidence to conduct the inspection in the first place, Nuctech claimed that the Commission (i) unlawfully requested information located outside the EU, specifically in China, and (ii) that the decision would force Nuctech to breach Chinese (criminal) law. On the same day, Nuctech also requested interim measures claiming that the General Court should order the suspension of the contested decision together with any subsequent act or request.
Earlier this week, the General Court rejected Nuctech’s request for interim measures, holding that most of the arguments presented were not admissible in interim proceedings. Additionally, the General Court upheld the Commission’s decision for the following reasons:
- The General Court first emphasized that “addressing an inspection decision to an undertaking incorporated outside the EU but which operates in the EU […] is not novel”. In that respect, it is sufficient to establish effects of the conduct in question on the EU market.
- Consequently, according to the General Court, the Commission must also be entitled to request information from undertakings outside to EU. Otherwise, it is not able to assess whether the conduct in question infringes EU law and is likely to produce a substantial effect on the internal market. In other words, it would lose its ability to hold non-EU entities liable for conduct relating to the internal market. Companies could even be encouraged to store their data outside the EU.
- Further, the Commission held that it was not even explained nor substantiated by Nuctech that its EU branches did not have access to information stored on servers located in China. Similarly, they did not explain how Chinese law could prevent them, being entities established in the EU, from responding to the Commission’s request and why the provisions of Chinese law are relevant to them or would apply in the case at hand. More generally, the Commission notes that Nuctech argues “in an extremely laconic manner” consisting of “mere general assertions” which make it impossible for the judge to assess whether the plea is prima facie well founded.
Final thoughts
It was evident from the beginning that the FSR would have far-reaching implications beyond a standard regulatory measure. Legal and political disputes were anticipated to be closely intertwined. The first court decision shows that the EU will adhere strongly to established legal principles, whereas, at the same time, it can also be assumed that political pressure from all sides will continue to be more of an issue than ever.
Photo from Tubagus Topan auf Unsplash
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