In its Judgment of 1 March 2016, Secop v Commission, T-79/14, EU:T:2016:118, the General Court (GC) has ruled on the procedural rights of interested parties in a State aid case (for discussion of related case law in this area, see here). The Secop Judgment is interesting because it includes some analysis of the similarities and differences of the rights of interested (third) parties for the purposes of, on the one hand, State aid control (Arts 107-108 TFEU and Reg 2015/1589 and its predecessor Reg 659/1999) and, on the other, merger control (Reg 139/2004) under EU law.
The analysis in the Secop case is complicated by two elements. First, by the fact that the State aid was given under the guidelines on rescue and restructuring aid (in their 2004 version) and, because parts of the restructuring plan implied the acquisition of assets of the financially distressed group (ACC) by a competitor (Secop), this required merger control clearance from the European Commission. Second, the analysis is complicated by the subsequent emergence of a patent litigation between the two industrial conglomerates involved in both State aid and merger procedures (ie between the 'surviving' parts of the distressed ACC group and Secop as the acquirer of some of its assets), which have an open dispute as to whether a valid licence agreement for the use of proprietary patented technology was entered into as part of the rescue plan. This dispute has led to two sets of proceedings concerning those patents, respectively before the German and Italian courts. It is interesting to look at the case and the GC's reasoning.
background of the case
The case concerned two industrial conglomerates: ACC and Secop. ACC was an industrial conglomerate with an Italian holding company and a number of subsidiaries at different levels. For the purposes of the case, it is only necessary to note that HCH was the holding company of the group, ACC Compressors was the operating subsidiary of first level, and ACC Austria was an operating subsidiary of second level. Following financial difficulties within the ACC group, all its subsidiaries and the holding company itself were eventually declared insolvent. As the GC summarises, 'following a call for tenders launched in the context of ACC Austria’s insolvency proceedings, a purchase agreement for the assets of ACC Austria was signed between [Secop] ... and ACC Austria’s insolvency administrators. That contract was made subject to the suspensive condition of a declaration by the European Commission that the transaction was compatible with the internal market' (para 3).
In order to cover the liquidity needs of the ACC group and to allow it to continue its activities pending the preparation of a restructuring or liquidation plan, Italy gave ACC Compressors (the parent company ACC Austria) a State guarantee of 6 months for credit lines in support of liquidity needs of a total amount of EUR 13.6 million. Subsequently, the European Commission decided not to raise objections to the acquisition of ACC Austria’s assets by Secop (see Case No COMP/M.6996 - Secop/ ACC Austria, the ‘merger decision’), thereby validating the contract between Secop and ACC Austria's insolvency administrators. Shortly afterwards, the Commission also decided not to raise objections to the State aid given by Italy to ACC Compressors (see Case No COMP/SA.37640 - Rescue aid for ACC Compressors S.p.A. - Italy, the 'contested State aid decision').
What I find interesting in the case is that the challenger of the State aid (Secop) is the beneficiary of the asset disposal under the merger procedure, which was in turn opposed by ACC Compressors as the parent company of the 'traded subsidiary' under insolvency administration (ACC Austria). Thus, Secop and ACC, as industrial conglomerates, hold opposite interests in the merger and the State aid cases.
It would seem that, by aiming to enforce the exclusive rights deriving from the patents acquired together with ACC Austria's assets against the former parent company (ACC Compressors), as well as challenging the State aid given by the Italian Republic to that same company, Secop is clearly engaging in an all-out strategy to eliminate a competitor at at time when it faces financial difficulties (which would nullify the Italian intervention to rescue it). Conversely, it could also seem that by selling assets linked to specific patents and claiming to have retained a right of use of the patents (through the entering of a valid licence agreement, or otherwise), and at the same time receiving State aid from Italy, ACC could be trying to obtain dual support in times of financial difficulty--ultimately at the expense of a competitor (Secop) that acquired assets at a time of distress. These issues and considerations are not particularly clear in the Secop Judgment, but my intuition is that they influenced the outcome of the case.
In particular, the GC's Secop Judgment refers to the action by Secop seeking the annulment of the State aid received by ACC Compressors after the transfer of ACC Austria's assets took place. For the purposes of our discussion, the two main arguments submitted by Secop are that: 1) the European Commission should have taken into account that, following the transfer of ACC Austria's assets, ACC Compressors would not be legally entitled to keep on using certain patents now held by Secop, which would prevent ACC from carrying on with its industrial activity and, ultimately, infringe the 2004 guidelines for rescue and restructuring aid; and 2) that it is discriminatory for ACC Compressors to have been able to oppose the acquisition of ACC Austria's assets by Secop in the framework of the merger control procedure (where ACC Compressors was recognised as an interested party), whereas Secop has been denied the equivalent possibility in the State aid case because the Commission decided not to open a formal investigation. The discussion focuses on each of these arguments in turn.
Arguments regarding the use of patents
On the substance of the dispute, primarily, Secop contends that 'following the disposal of ACC Austria’s assets, the patents at issue can no longer be used by ACC Compressors, which must, therefore, be considered to be a firm emerging from the liquidation of an existing firm and, consequently, a newly created firm ... failing the ability to use the disputed patents, ACC Compressors does not have sufficiently developed structures to be eligible for rescue aid' (para 30). This argument concerns point 12 of the 2004 guidelines for rescue and restructuring aid, which indicated that 'a newly created firm is not eligible for rescue or restructuring aid even if its initial financial position is insecure. This is the case, for instance, where a new firm emerges from the liquidation of a previous firm or merely takes over that undertaking’s assets. A firm is in principle considered to be newly created for the first three years following the start of operations in the relevant field of activity. Only after that period will it become eligible for rescue or restructuring aid …’. The GC dismisses this argument on the following grounds:
35 First, ACC Compressors and ACC Austria were initially part of one and the same undertaking in that the two companies produced the same products, on two different sites, but under the same economic management. Upon the transfer of ACC Austria’s earning assets ... it is true that the volume of activity of this firm had been reduced, since the activities corresponding to the production site located in Austria no longer formed part of it. Thus, the undertaking to which the contested aid ... was granted comprised only ACC Compressors’ earning assets. Nevertheless, ACC Compressors managed the undertaking concerned, both before and after the transfer, and ... it carried on ... albeit in a reduced fashion, the production and marketing of compressors, which was the traditional activity of that undertaking. Therefore, contrary to the applicant’s claims, it was the same undertaking as that which had been making compressors since 1960.
36 Second, ... in the situation in which the assets are transferred, it is not the entity formed of the economic activities retained by the transferor company that is relevant, for the purpose of the classification ‘newly created firm’ but the entity made up of the economic activities of the transferee company, within which the transferred assets were integrated. It is also normal and reasonable for a firm in difficulty to dispose of certain assets and focus its activity on its core business, whether from a geographical or sectoral perspective, in order to improve the chances of economic recovery. Point 39 of the Guidelines thus expressly envisages the divestment of assets as a means of preventing undue distortions of competition, in the context of the examination of a restructuring plan for the purpose of granting restructuring aid. It would be contrary to the overall purpose of the Guidelines for such a sale of assets to lead systematically to the exclusion of the transferring company from the benefit of rescue aid.
37 The fact that a legal dispute over the ... patents is under way between ACC Compressors and [Secop] cannot lead to a different assessment.
38 Indeed, at the time the contested [State aid] decision was adopted, the Commission could take into account only the factual and legal situation of ACC Compressors as it was at the date of that adoption; at the most, it had to take into account the foreseeable evolution of that situation, for the period for which rescue aid was granted, namely, six months ... However ... at the date of the adoption of the contested [State aid] decision, ACC Compressors was still using the disputed patents to manufacture compressors ... and there was nothing to indicate that this situation could have changed in the six following months.
39 In addition, the existence of the patent dispute was not relevant for the purposes of assessing the compatibility of the contested aid with the internal market. It is true that, had [Secop] won the case in the patent dispute, it would have been conceivable that ACC Compressors could no longer have used the disputed patents and would, accordingly, have had to cease production of a significant range of compressors ... However, this also depended on the question of whether, after a possible defeat in the courts, ACC Compressors could obtain a user license for those patents. Moreover, it could not be ruled out from the outset that it could offset the possible disposal of its activity producing ... compressors against the development of other lines or activities. In any event, it must be considered that it was not for the Commission to anticipate the outcome of the patent dispute, pending before the national courts at the date of adoption of the contested decision, by substituting its assessment for that of the competent courts, seized of that dispute.
40 Finally, it is appropriate to reject the applicant’s argument ... that the Commission ought to have taken into account that, in the context of the merger procedure, ACC Compressors itself had indicated that, if [Secop] were to purchase the assets of ACC Austria, it could not pursue its production of compressors, since it would not then be able to use the disputed patents any longer.
41 In the merger decision, the Commission considered ACC Compressors’ claims and found that, given, in particular, the patent dispute between the two parties, it was not inconceivable that an agreement on a licence should be concluded between them. The Commission had therefore already found, in the merger proceedings, that ACC Compressors’ claims that it could not pursue the production of compressors when there was no licence for the disputed patents were hypothetical (T-79/14, paras 35-41, emphasis added).
I find the second part of the GC's position difficult to share. In particular, I struggle to understand why the Commission did not require the granting of a sufficient licence as a condition for the clearance of the merger. This would have avoided all issues leading to the existing patent litigation and, in the specific circumstances of the State aid case, it would have also allowed for the rescue and restructuring plan to avoid a major risk of discontinuation of industrial activity by the beneficiary of the aid, which would have seemed desirable.
It is clear that the GC cannot review or alter the merger decision when reviewing the contested State aid decision, but it seems strange that it shows such deference to the Commission's argumentation in the merger decision, which is very weak. Indeed, the Commission's considerations (as presented by the GC in para 40 and 41) are equally hypothetical and rather counterintuitive--why would the companies reach a licence agreement now, when they could have included it in the negotiations leading up to the contract for the purchase of the assets? Were there any impediments for ACC Compressors to obtain that licence via the insolvency administrators of its subsidiary ACC Austria.
Somehow, it seems that the Commission was cutting corners in its analysis during the merger control procedure, particularly by failing to impose a behavioural remedy that could certainly have dispelled uncertainties in the market prognosis. Then, it seems once again too lenient for the GC to allow the Commission to also cut corners in the State aid case by refusing to open a formal investigation, where it would have had to take Secop's arguments into consideration and dispose of them in a more robust manner.
Arguments regarding the asymmetrical access by interested parties to merger and State aid procedures
On the procedural side of the dispute, in short, Secop submits that 'it has not had the opportunity to present its views in the State aid procedure, initiated for the benefit of ACC Compressors, in order to oppose the grant of the contested aid to the latter ... On the other hand, ACC Compressors has had the opportunity, as part of the merger procedure, to oppose the takeover of ACC Austria’s assets by [Secop]. In its view, it is a violation of the principle of equal treatment, since the competitive relationship between the ACC group and the Secop group ought to have been assessed in both procedures' (para 61). The GC also dismisses this argument, following this reasoning:
62 ... the principle of equal treatment, as a general principle of EU law, requires comparable situations not to be treated differently and different situations not to be treated in the same way, unless such treatment is objectively justified ...
63 ... both in the context of a State aid procedure and in a merger procedure, the competitors of the firms at issue have no right to be automatically associated with the procedure, and this is particularly so in the context of the initial phase of the procedure, in the course of which the Commission makes a preliminary assessment of either the aid at issue, or the notified merger.
64 Indeed, first, as far as concerns State aid ... It is only in connection with the [the actual investigation stage referred to by Article 108(2)], which is designed to allow the Commission to be fully informed of all the facts of the case, that the FEU Treaty imposes an obligation, for the Commission, to give interested parties notice to submit their comments ... It follows that interested parties, other than the Member State concerned, including competitors of the aid recipient, such as the applicant in the present case, have no right to be associated with the procedure in the preliminary examination stage.
65 Secondly, as regards mergers, ... the Commission may hear — on its own motion — natural or legal persons other than the notifiers and other parties to the proposed merger, but it is obliged to do so only on the two conditions that those persons have a sufficient interest and that they make such a request ...
66 ... ACC Compressors’ position in the merger procedure was not only that of a competitor of [Secop], the undertaking notifying the merger, but also one of an ‘interested party’ ... in that, as ACC Austria’s parent company, all assets of which were to be sold, it had to be assimilated to the vendor of those assets and, therefore, had the status of party to the proposed merger. However, unlike its competitors ... interested parties have the right to express their view at all stages of the procedure, including the preliminary phase ...
67 It must therefore be stated that the situation of the applicant, under the State aid procedure that led to the contested decision, is different from that of ACC Compressors under the merger procedure that led to the decision on the merger, in that ACC Compressors had a right to be heard before the adoption of that latter decision. Consequently, the fact that the Commission did not, before adopting the contested decision, give the applicant the opportunity to state its point of view does not infringe the principle of equal treatment (T-79/14, paras 62-67, emphasis added and references to further case law have been omitted).
I find this analysis too formalistic and, in my view, the GC has ultimately failed to engaged with the argument on discrimination at a substantive level. The recognition of specific rights to interested parties in merger proceedings is not a useful comparator in this case. Rather, the GC could (should) have focused on the different access to the Commission given to competitors in merger cases and in State aid cases, particularly at the initial stage of proceedings, and assessed from a functional perspective whether that difference makes sense (ie is justified and proportionate). In my view, it is not.
More importantly, the Secop Judgment moves in the same direction as a line of case law where the GC is making it increasingly difficult for competitors to challenge State aid decisions. This is very counter-productive for the consolidation of a State aid 2.0 control system, where the Commission needs to increasingly rely on market intelligence provided by third parties and market complaints raised by competitors. This line of case law will, ultimately, consolidate the ineffectiveness of the EU State aid rules [as discussed in detail in A Sanchez-Graells, “Digging itself out of the hole? A critical assessment of the Commission’s attempt to revitalise State aid enforcement after the crisis” (2016) Journal of Antitrust Enforcement, forthcoming]. This is an undesirable development of EU economic law in this area.
