State aid may affect trade even when the market concerned is not liberalised. This can happen when the aid recipient also has operations outside that market, which it can cross-subsidise. Claims for damages caused by illegal aid must be accorded the same treatment under national law as any other claim resulting from faulty decisions of the state.
A well-known principle in State aid law is that the Commission is empowered to order recovery of incompatible aid only when is not more than 10 years old. This is the so-called limitation period. The Commission may not demand recovery of aid that was granted more than 10 years earlier. Aid that is older than 10 years is considered to be “existing” aid and is not recoverable by a Commission decision.
However, the limitation period is “interrupted”, meaning that it can be extended, whenever the Commission asks the Member State concerned for information before the 10-year period is over. For example, assume that a Member State granted aid in 2005 and the Commission came to know about it in 2014 either by chance or because of a complaint. In 2014 it asked for information from that Member State, in 2016 it launched the formal investigation procedure and then in 2018 it adopted a negative decision. Although the aid was granted 13 years earlier, the Commission could still in 2018 order its recovery because it interrupted the 10-year period in 2014. Since the investigation of non-notified aid is not subject to a formal time limit, the Commission could take even longer to reach its final decision.
All this simply means that authorities that grant non-notified aid and companies that receive non-notified aid are exposed to legal risk for a very long time. An auditor who discovers non-notified aid in the accounts of a company would have difficulty quantifying the risk.
A recent judgment has determined that part of that risk is in fact unlimited in time. The power of the Commission is circumscribed by the procedural regulation [Regulation 2015/1589 and its predecessor, Regulation 659/1999]. However, the Court of Justice has ruled that national courts may take action against non-notified aid [i.e. illegal aid] that was granted at any point in time. Of course, in practice national limitation rules would apply, which implies that the risk facing recipients of illegal aid would vary from Member State to Member State.
Background to the case
On 23 January 2019 the Court of Justice explained the time-unlimited role of national courts in a judgment that it rendered in response to a request for preliminary ruling by the Supreme Court of Cassation of Italy in case C‑387/17, Presidenza dei Consiglio dei Ministri v Fallimento Traghetti del Mediterraneo.1
The request arose from a dispute between the Council of Ministers of Italy and Fallimento Traghetti del Mediterraneo [FTDM] concerning a claim for compensation for the damage it suffered as a result of subsidies that had been granted in 1976-80 to Tirrenia di Navigazione [Tirrenia] which was a competitor of FTDM.
In the 1970s, FTDM and Tirrenia ran regular ferry services between mainland Italy and the islands of Sardinia and Sicily. In 1981, FTDM brought proceedings against Tirrenia seeking compensation for the damage which it claimed to have suffered as a result of the low-fare policy operated by Tirrenia between 1976 and 1980. The case was dismissed by an Italian court of first instance in May 1993, was upheld by the appeals court in December 1996 but was dismissed again by the Supreme Court of Cassation in April 2000. By that time FTDM was in administration.
In April 2002, the insolvency administrator for FTDM initiated proceedings against the Italian state claiming that the state was liable for having granted incompatible State aid. This case led to a request for preliminary ruling which resulted in the judgment of 13 June 2006 in case C-173/03, Traghetti del Mediterraneo. A few years later, another request was submitted to the Court of Justice which issued a second judgment on 10 June 2010 in case C-140/09, Fallimento Traghetti del Mediterraneo. As a consequence, the then referring Italian court ordered the Council of Ministers to pay compensation to FTDM.
The Council of Ministers lodged an appeal arguing that the aid granted to Tirrenia was wrongly classified as new aid rather than existing aid. Now, the Supreme Court of Cassation asked the Court of Justice to provide guidance on whether the aid was new or existing, especially in view of the fact that at the time the aid was granted, the market was not fully liberalised. The Court of Justice answered the questions submitted by the Italian court as follows.
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The status of subsidies in a market not fully open to competition
The first question asked was whether subsidies granted to an undertaking before the liberalisation of the market concerned could be classified as existing aid?
The Court of Justice first pointed out that “(37) it is necessary to ascertain, in a situation such as that at issue in the main proceedings, in which the relevant market was not yet formally open to competition, whether, at the time of their grant, the subsidies concerned constituted State aid because they fulfilled the conditions that there be an effect on trade between Member States and that competition be distorted.”
“(38) In that connection, it must be noted that whilst it is true that State aid may, in principle, be treated as existing aid because it can be established that at the time it was put into effect, inter alia because of the absence of liberalisation of the market in question, it did not constitute aid, the Court has already held that such absence of liberalisation does not necessarily exclude the possibility that an aid measure is liable to affect trade between Member States or that it distorts or threatens to distort competition.”
“(40) In order for an intervention by the State or through State resources to be liable to affect trade between Member States and to distort or threaten to distort competition, it is sufficient that, at the time of the entry into force of an aid measure, there is a situation of effective competition on the relevant market.”
Therefore, competition may occur and trade can be affected even if the relevant market is only partially open to competition. In fact, past cases involving TDM and FTDM have also shown that even if the relevant market is fully closed, trade may still be affected when the operator in the closed market has activities outside that market. This is likely to be the case in the shipping sector. Aid that supports operations which are not subject to competition may indirect spill over to the activities of the aid recipient in other locations or markets.
Then the Court turned its attention to the present case and recalled that “(42) as is apparent from paragraph 50 of the judgment of 10 June 2010, Fallimento Traghetti del Mediterraneo (C‑140/09, EU:C:2010:335), it cannot be excluded, first, that Tirrenia was in competition with undertakings from other Member States on the domestic routes concerned and, secondly, that it was in competition with such undertakings on international routes and that, in the absence of any separate accounting for its various activities, there was a risk of cross-subsidisation, that is to say, a risk that the revenue from its cabotage activity, which received the subsidies at issue in the main proceedings, was used for the benefit of activities carried on by it on its international routes.”
“(43) Thus, …, even if the relevant market was not formally liberalised, it seems that, at the time of the facts in the main proceedings that market was a competitive market and that the subsidies granted to Tirrenia were likely to affect trade between Member States and to distort or threaten to distort competition.”
“(44) In those circumstances, it must be held that, in so far as the subsidies at issue in the main proceedings came, at the time that they were granted, under the concept of ‘State aid’ because they fulfil all the necessary criteria for that purpose, in particular that they were liable to affect trade between Member States and distort or threaten to distort competition, which it is for the referring court to ascertain, those measures cannot, in principle, be classified as existing aid solely because of a lack of formal liberalisation of the market concerned.”
The second question of the referring court was whether it was necessary, for the purposes of classification of the subsidies in question as existing aid or new aid, to apply Article 1(b)(iv) of the then procedural Regulation 659/1999, or whether it had to base its decision on the principles of protection of legitimate expectations and legal certainty?
The Court of Justice first noted that under Article 1(b)(iv) “(48) existing aid means all aid which is deemed to be existing aid pursuant to Article 15 of Regulation No 659/1999.” “(49) Under Article 15(3) of that regulation any aid with regard to which the limitation period has expired is to be deemed to be existing aid.” [The limitation period is 10 years.] “(50) For its part, Article 15(2) of that regulation provides that any action taken by the Commission or by a Member State, acting at the request of the Commission, with regard to the unlawful aid interrupts that period and each interruption is to start time running afresh.” “(51) It is clear from the wording of those provisions that the classification of State aid as existing aid, within the meaning of Article 1(b)(iv) of Regulation No 659/1999, depends, in principle, on whether the Commission has taken measures in respect of the aid concerned in the limitation period.”
The distinct roles of the Commission and national courts
Then the Court of Justice referred to the roles of the Commission and national courts and recalled that “(55) the assessment of the compatibility of aid measures with the common market falls within the exclusive competence of the Commission, subject to review by the EU judicature, whereas it is for the national courts to ensure that the rights of individuals are safeguarded where the obligation to give prior notification of State aid to the Commission”.
“(56) In fulfilling their tasks, national courts may be required to uphold claims for compensation for damage caused by the unlawful State aid to competitors of the beneficiary.” “(57) In the context of such actions for damages, those courts, in exercising their functions of safeguarding the rights of individuals, enjoy a degree of independence as regards intervention from the Commission so that the possibility to claim damages is, in principle, independent of any parallel investigation by the Commission concerning the aid in question.” “(58) In that regard, it is settled case-law of the Court that the initiation by the Commission of the formal examination procedure for State aid cannot release national courts from their duty to safeguard the rights of individuals”.
“(59) Similarly, it should be recalled that, concerning the level of independence of the national courts, a Commission decision finding aid that was not notified to be compatible with the internal market does not have the effect of regularising ex post facto implementing measures which were invalid because they were taken in disregard of the prohibition laid down by the last sentence of Article 93(3) of the EEC Treaty, since otherwise the direct effect of that provision would be impaired and the interests of individuals, which are to be protected by national courts, would be disregarded. Any other interpretation would have the effect of according a favourable outcome to the non-observance of that provision by the Member State concerned and would deprive it of its effectiveness”.
“(60) Therefore, when an applicant is able to demonstrate before the national court that he has suffered loss caused by the premature implementation of State aid and, more specifically, as a result of the illegal time advantage which the beneficiary gained from such an implementation, the action for damages can, in principle, be upheld even though the Commission has already approved the aid in question by the time the national court decides on the application.”
“(61) Having regard to the role played by the national courts in the State aid control system and their level of independence in relation to the Commission, particularly when hearing an action for damages where there is no Commission decision, it must be held, …, that the expiry of the 10-year limitation period laid down in Article 15(1) of Regulation No 659/1999 merely sets a time limit on the Commission’s powers regarding the recovery of State aid.”
“(62) Therefore, the expiry of the limitation period provided for in Article 15(1) of Regulation No 659/1999 cannot have the effect of retroactively legalising State aid vitiated by illegality merely because it becomes existing aid within the meaning of Article 1(b)(v) and, consequently, of depriving of any legal basis an action for damages brought against the Member State concerned by individuals and competitors affected by the grant of the unlawful aid.”
“(65) It cannot, therefore, be argued … that the definition of the concept of ‘existing aid’ in Article 1(b)(iv) of Regulation No 659/1999 is applicable in the context of an action for damages such as that at issue in the main proceedings.”
“(66) Furthermore, it must be recalled that, in so far as Regulation No 659/1999 contains rules of a procedural nature which apply to all administrative procedures in the matter of State aid pending before the Commission, it codifies and reinforces the Commission’s practice in reviewing State aid and does not contain any provision relating to the powers and obligations of the national courts, which continue to be governed by the provisions of the Treaty as interpreted by the Court”.
Then the Court turned its attention to the question whether the aid recipient could entertain legitimate expectations after more than 10 years have passed since the moment it received the aid.
“(68) Concerning the possibility of relying on the principle of the protection of legitimate expectations, it should be noted that that principle cannot be relied on by a person who has infringed the legislation in force”.
“(70) It follows that, where subsidies were granted in breach of the obligation of prior notification laid down in Article 93(3) of the EEC Treaty, State entities cannot rely on the principle of the protection of legitimate expectations”.
“(71) Finally, as regards the application of the principle of legal certainty in a situation such as that at issue in the main proceedings, it should be recalled that, in general, limitation periods fulfil the function of ensuring legal certainty … In order to fulfil their function of ensuring legal certainty, those periods must be fixed in advance and any application ‘by analogy’ of a limitation period must be sufficiently foreseeable for a person”.
“(72) In that regard, and since there is no Community legislation on the subject, it is for the domestic legal system of each Member State to designate the courts having jurisdiction and to determine the detailed procedural rules governing actions at law intended to safeguard the rights which individuals derive from Community law, provided, firstly, that those rules are not less favourable than those governing rights which originate in domestic law (principle of equivalence) and, secondly, that they do not render impossible or excessively difficult in practice the exercise of rights conferred by the Community legal order (principle of effectiveness)”.
“(73) Thus, the only limitation rules applicable in the present case are those of national law, interpreted in the light of the principles of effectiveness and equivalence.”
But then the Court went further to explain that “(74) it would be contrary to the principle of legal certainty to apply by analogy the limitation period of ten years laid down in Article 15(1) of Regulation No 659/1999 to an action for damages brought against the Member State concerned by a competitor of the company benefiting from State aid.”
“(75) A limitation period laid down by a provision which merely seeks to limit in time the powers of the Commission concerning recovery of State aid cannot be imposed on an individual. The expiry of such a period cannot preclude liability being incurred by the State before the national court for infringement of the obligation of prior notification laid down in Article 93(3) of the EEC Treaty.”
In conclusion, the competitors of a beneficiary of illegal state must receive the same treatment accorded by national law to other claims for damages resulting from maladministration.
1 The full text of the judgment can be accessed at: http://curia.europa.eu/juris/document/document.jsf?text=&docid=210173&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=10082928.