The Mysterious “Substantial” Competitive Effect

State aid has a “substantial” effect on competitors when it has a direct and negative impact on their market positions that goes beyond the typical influence of aid on competitive relationships.

Introduction

State aid always harms competition and competitors. A public measure that has no effect on competition is not State aid. Therefore, it is not enough for a company to claim that it is affected by State aid in order to challenge the compatibility of the aid with the internal market. If that were possible, then the exemptions allowed by the TFEU would be irrelevant.

It is, however, possible, at least in theory, for a company to argue that the European Commission should take the extent of the impact of State aid on competition in its assessment of compatibility. Competitors who are directly affected by a State aid measure may have legal standing to challenge a Commission decision authorising state aid.

On 20 January 2022, the Court of Justice, in case C-594/19 P, Deutsche Lufthansa v European Commission, examined, among other things, the question whether Lufthansa was substantially affected by aid that had been granted to Frankfurt-Hahn airport in Germany.

Lufthansa sought the annulment of the order of the General Court in case T-764/15, Deutsche Lufthansa v European Commission by which the General Court dismissed as inadmissible its action against Commission decision 2016/788 on State aid for Frankfurt-Hahn airport.

Until 2016, Land Rheinland-Pfalz held a majority stake of 82.5% in Frankfurt-Hahn airport. The remaining 17.5% was held by the Land Hessen.

Frankfurt-Hahn airport was a military airfield that was converted to civilian use with the help of public funds. The public funds consisted of numerous measures implemented at different points in time, mostly in the form of credit lines, loans and guarantees.


The full text of the judgment in languages other than English can be accessed at:

CURIA – Case information (europa.eu)


The Commission, in a related decision [decision 2016/789], found that certain aid received by Frankfurt-Hahn airport was compatible with the internal market and that agreements between Frankfurt-Hahn airport and Ryanair were free of State aid because they conformed with the private operator principle. Lufthansa appealed against decision 2016/789, but the General Court, in April 2019, dismissed it [case T-492/15, Deutsche Lufthansa v European Commission].

In another related case, T-218/18, Deutsche Lufthansa v European Commission, concerning operating aid granted to Frankfurt-Hahn airport, the General Court, in May 2021, annulled Commission decision SA.47969.

In the case before the Court of Justice, Lufthansa argued that the General Court erred in its interpretation of Article 263 TFEU. According to that article, an undertaking that challenges a Commission decision that is not addressed to it must show that the decision is of “direct and individual concern” to it.

Who is individually concerned?

The Court of Justice began its analysis by reiterating that a natural or legal person has legal standing to bring action against an act that is not addressed to him only in two situations. First, the act is of direct and individual concern to it. Second, a person may bring an action against a regulatory act that does not entail implementing measures if it is of direct concern to him. [paragraph 29 of the judgment]

Persons other than the addressee(s) of a decision can claim to be individually concerned only if that decision affects them differently from other persons. [para 31]

Then the Court of Justice went on to agree with the General Court that Lufthansa’s participation in the administrative procedure of the formal investigation carried out by the Commission before it adopted decision 2016/788 did not establish that Lufthansa was individually concerned. [para 43]

In reaching this conclusion, the Court of Justice made a distinction between the position of an “interested person” who may submit comments following the opening of a formal investigation and that of a person who is individually concerned in the meaning of Article 263 TFEU. The set of interested persons is much wider than that of individually concerned persons. Simply, anyone can be an interested person, while very few can be individually concerned.

Regulatory acts and directly concerned persons

Next, the Court of Justice recalled that with respect to the admissibility of actions for annulment brought by natural and legal persons against regulatory acts the only requirement is that they are directly concerned, provided that the act does not entail implementing measures. [para 49]

A Commission decision the purpose of which is to authorise or prohibit an aid scheme is of general application and, therefore, the Court of Justice said, it can be classified as a regulatory act. [para 50]

The Court of Justice then noted that the General Court had held that the measures in question were not granted on the basis of an aid scheme but that they were individual measures. [para 51] Lufthansa disputed this finding and claimed that they formed a scheme. The Court of Justice rejected that claim on the grounds that Lufthansa was challenging the Commission’s classification of the measures rather than the reasoning of the General Court. Therefore, Lufthansa was not directly concerned.

The “mysterious” substantial effect

Next, Lufthansa argued that the General Court was wrong in finding that the aid in question did not have a substantial effect on its market position.

The Court of Justice, first, explained that in order to demonstrate a substantial effect of its market position, Lufthansa was required to indicate the reasons why the Commission decision was likely to adversely influence its legitimate interests by substantially affecting its position on the market. [para 74]

The substantial effect of the applicant’s competitive position on the market cannot be merely shown by an analysis of the various competitive relationships on that market that makes it possible to establish the extent of the impact on its competitive position. The substantial effect results, in principle, from a prima facie finding that the granting of the aid would lead to a substantial effect of that position. [para 75]

That condition may be satisfied when there is evidence that shows that the aid is liable to substantially affect the position on the market concerned. [para 76]

The reasoning of the Court in paragraphs 75 and 76 is abstruse. It seems to imply that the legal standard for proving the existence of a “substantial effect” is not harm on the market through market mechanisms [e.g. loss of revenue or customers] or through the increased competitiveness of the aid recipient but some direct impact of the aid on the ability of the competitor to compete. At this point the Court cited its judgment on Lufthansa of 15 July 2021, C-453/19 P, Deutsche Lufthansa v Commission, paras 58-59. The wording of the 2021 judgment is exactly the same as in the present case, so it sheds no light in the meaning of “substantial effect”. The 2021 judgment, in turn, cited the judgment of 22 December 2008 in case C-487/06 P, British Aggregates v Commission, para 38. In the 2008 judgment, the Court of Justice merely stated in para 38 that the General Court, in case T-210/02, British Aggregates v Commission, had examined the reasons why the measure at issue “was liable to have a substantial effect” without explaining what those reasons were. When, however, we go to the judgment of the General Court in case T-210/02 we see that it established the existence of a substantial effect by confirming that the tax exemption at issue “offer[ed]” to the aid recipient “a competitive advantage on the market” [para 66]. In the immediate preceding paragraph, the General Court pointed out that the “exemption also has a negative impact on the competitive position” [para 65].

Back in the present case, the Court of Justice observed that, in paragraphs 63 and 64 of its judgment of 15 July 2021, in case C-453/19 P, Deutsche Lufthansa v European Commission, and contrary to what the General Court held in paragraph 116 of the order under appeal, the prima facie finding that the granting of the aid led to a substantial effect of the appellant’s competitive position did not require definition of the relevant market or information on its size and structure and on the competitors active on that market. [para 77]

So we see that, for the Court of Justice, the meaning of “substantial effect” is something other than the impact on the relations between competitors on the market. Yet, there is hardly any doubt that the General Court in the British Aggregates case did examine the competitive relations on the market.

The Court of Justice went on to state that the General Court rightly pointed out, in paragraph 112 of its order, that the mere fact that the aid measure could have some influence on the competitive relationships on the market and that the applicant had a competitive relationship with the aid beneficiary were not sufficient to prove that it was individually concerned. [para 78] In other words, an undertaking cannot confine itself to relying on its status as a competitor of the aid beneficiary to prove that it is individually concerned or that the aid would substantially affect it.

In addition, the Court of Justice found that the General Court had also held correctly that the demonstration of a substantial effect of a market position cannot be limited to indicators of deterioration in the commercial or financial performance of the appellant such as a significant drop in turnover, financial losses or decrease in market shares. [para 79]

Also, the Court of Justice agreed with the General Court that Lufthansa did not prove that it had suffered losses as a result of the aid in question. Furthermore, the general competitive pressure exercised by low-cost carriers was not linked to the aid in question. [paras 82-84]

Since none of the pleas of Lufthansa were successful, its action was dismissed.

Conclusion

This judgment makes it clear that it is very difficult to demonstrate that aid has a substantial effect on the market position of the competitors of the aid beneficiary or beneficiaries. Loss of market share or revenue resulting from the expansion of the subsidised activities is not enough. The aid must have a direct negative impact on the competitors [perhaps by enabling the aid recipient to acquire a source of essential inputs or to attract and lock-in the main customers of the competitors], something that is rarely seen in the case law. It is clear that the standard for proving “substantial effect” is very high. The problem is that it is not clear at all how high it is or high it can be proven.

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About

Phedon Nicolaides

Dr. Nicolaides was educated in the United States, the Netherlands and the United Kingdom. He has a PhD in Economics and a PhD in Law. He is professor at the University of Maastricht and the University of Nicosia. He has published extensively on European integration, competition policy and State aid. He is also on the editorial boards of several journals. Dr. Nicolaides has organised seminars and workshops in many different Member States, and has acted as consultant to several public authorities.

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