The resurgence of protectionism: A brief discussion on the discriminatory enforcement and judicial practice of the EU's Foreign Subsidies Regulation

LABEL： Automotive, Manufacturing & Industrial , One Belt One Road International LegalBusiness , Corporate and M&A ,

1、 Background

In April 2024, the European Commission ("Commission") conducted its first dawn raid inspection ("Assault Inspection") on the Polish and Dutch subsidiaries of Tongfang Weishi Technology Co., Ltd. ("Tongfang Weishi") under Article 14 of the Foreign Subsidies Regulation ("FSR"). According to the information published in the Official Journal of the European Union on July 8, 2024, [1] in response to the investigation decision of the European Commission and subsequent requests for information provision and litigation retention (especially requests for information stored in China), the European subsidiary of Tongfang Vision has submitted its first application for temporary injunction and appeal to the General Court of the European Union ("ECJ"), requesting the court to suspend the execution of the investigation decision by the European Commission and further rule that the investigation decision is invalid ("this case"). On August 12, 2024, the European Court of Justice rejected the temporary injunction application of Tongfang Vision's European subsidiary without a hearing (the "Rejected Order").

Although the European Court of Justice has not yet heard the main complaint filed by Tongfang Weishi, the discriminatory issues of the FSR system at the legislative, enforcement, and judicial levels are evident from the court's approach in the case and its reasoning in the rejection decision. The EU Court of Justice's tendency towards national protectionism in the FSR language is clear.
2、 Discriminatory provisions of the FSR system against non EU member state enterprises

The European Union has introduced different rules for state aid and foreign subsidies within its member states. The former is governed by the State Aid Law under the Treaty on the Functioning of the European Union (TFEU), while the latter is governed by the Foreign Subsidies Regulation (FSR). Compared to the National Aid Law, the FSR grants the European Commission broader enforcement powers and exhibits a clear discriminatory tendency towards non EU member state enterprises. Although FSR explicitly requires ensuring equal treatment of state aid and foreign government subsidies to EU member states and maintaining fair competition in the internal market in its legislative objectives, based on our observation of actual law enforcement and judicial practices under the FSR system, there is a clear "double standard" both internally and externally.

There is a double standard in the enforcement powers created by the European Commission for the national subsidy system for EU member states' aid and the FSR system for foreign government subsidies

The FSR allows the European Commission to conduct surprise inspections on EU companies suspected of receiving distorted foreign government subsidies, while the National Aid Law does not authorize the European Commission to conduct similar surprise inspections on illegal subsidies from member states. The European Commission can only investigate illegal subsidies from member states through routine enforcement measures such as Request for Information (RFI). Assault inspection is one of the most impactful and lethal administrative enforcement measures on the normal business activities of enterprises. However, this "lethality" only applies to enterprises under FSR investigation (mostly foreign-funded enterprises operating in the EU), while enterprises receiving assistance from EU member states (mostly local enterprises in the EU) are exempt from such harm. This differential treatment clearly violates the principle of non discrimination under EU case law and goes against the legislative intent of the FSR.

In addition, regardless of whether the two systems stipulated by EU law themselves constitute discrimination against member state and non member state enterprises, from the perspective of the FSR rules themselves, the European Commission's power to conduct surprise inspections under Article 14 of the FSR should be limited to a "necessary" level. [2] In other words, considering that the European Commission can request the collection of investigation materials through a series of information provision requirements, and that the investigated enterprise has a high obligation to cooperate (otherwise facing huge fines and unfavorable investigation results), the European Commission should only use the power of surprise inspections in extremely exceptional "necessary" situations, such as when the investigated enterprise has the possibility of destroying evidence, clearly indicates that it will not cooperate in providing relevant information, or has a "case record" of destroying evidence and not cooperating with the investigation.

However, based on our observation of the actual enforcement situation of the European Commission, the constraint of FSR rules on the Commission's power to conduct "surprise inspections" only in "necessary" circumstances has almost become a "piece of paper". Unlike in anti-monopoly investigations where the investigated company can easily destroy important evidence materials such as emails and documents, subsidy information related to the company is mostly public information or information that must be obtained from the company's business and financial records, and there is no risk of being easily destroyed. Therefore, the "surprise inspection" power under the FSR system should only be exercised by the investigating authority in very limited special circumstances. In the FSR investigation against Tongfang Weishi, the European Commission could have taken a less impactful approach by issuing information requests to Tongfang Weishi in advance to conduct the investigation. But it did not make such a request in advance, and without evidence to prove that Tongfang Weishi may refuse to cooperate with the investigation or destroy important documents and materials, it directly adopted the approach of surprise inspection. Therefore, the European Commission's surprise inspection of Tongfang Weishi clearly lacks the necessary basis. Although the FSR grants the European Commission significant enforcement powers, in this case, the enforcement powers exercised by the European Commission may even exceed the provisions of the FSR and may violate the principle of proportionality under EU case law.

There is a double standard in the regulations regarding state-owned enterprises in EU member states and non member states

According to Article 10 of the FSR, as the first step in a preliminary investigation, the European Commission has the right to require the investigated enterprise to provide information on foreign financial assistance to assess whether such foreign financial assistance constitutes a foreign subsidy - if a foreign financial assistance directly or indirectly grants benefits ("benefits") to enterprises engaged in economic activities in the EU market, and such benefits are limited in law or fact to specific enterprises or industries ("specificity"), it may be recognized as a foreign subsidy. In addition, if the European Commission considers that such foreign subsidies have a distorting effect on the EU internal market and their negative impact on the EU internal market is greater than their positive impact, it has the right to impose restrictive commitments or relief measures on the investigated enterprise.

According to Article 16 (3) of the FSR, if the investigated enterprise is a foreign state-owned enterprise and fails to provide the necessary information as required by the European Commission, the European Commission may infer that a foreign financial aid has granted benefits to such enterprise without providing sufficient evidence ("relevant indications") as required by Article 10 (3). It is worth noting that the EU State Aid Law does not impose similar presumption rules on state-owned enterprises of EU member states. On the contrary, Article 345 of the Treaty on the Functioning of the European Union (TFEU) stipulates the principle of neutrality regarding the ownership of enterprises in EU member states, that is, TFEU shall not discriminate between state-owned enterprises and private enterprises within the EU. [3] Compared with TFEU, FSR's adoption of unfavorable presumption rules against state-owned enterprises in non EU member states once again reflects its discriminatory approach towards foreign-funded enterprises within the EU.
3、 The European Court of Justice rejected the ruling due to legal errors and obvious protectionist tendencies

In addition to the discriminatory nature of the FSR system itself, the rejection ruling of the European Court of Justice in this case also contains obvious legal errors and protectionist colors. From a procedural perspective, the absence of a court hearing in this case resulted in Tongfang Weishi not having the opportunity to make oral statements and arguments, depriving Tongfang Weishi of its important procedural rights.

According to the rejection ruling published by the European Court of Justice, Tongfang Weishi raised five reasons for litigation in the main complaint: [4]

The European Commission's requirement for applicants to provide information stored outside the EU violates EU law and international public law.

Implementing the investigation decision of the European Commission will force the applicant and their affiliated corporate group to violate Chinese law, including Chinese criminal law.

The investigation decision violates the applicant's right to maintain their place of business and privacy.

The investigation decision is arbitrary due to the lack of sufficient evidence to suspect that the applicant has received foreign subsidies that distort the internal market of the European Union.

The investigation decision violates the obligation to provide reasons for the investigation under Article 14 (3) of the FSR and Article 296 (2) of the TFEU, and damages the applicant's right to defense.

In response to the first and second grounds of action raised by Tongfang Vision, the European Court of Justice has provided a broad interpretation of the European Commission's extraterritorial jurisdiction, stating that the Commission's request for information from entities outside the EU is not "novel": according to the "qualified effects test" under international public law and EU competition law, the Commission has the authority to exercise extraterritorial jurisdiction over acts that occur outside the EU but have a foreseeable, immediate, and substantial impact within the EU. In addition, the court emphasized that if the European Commission does not have the authority to request information from entities outside the European Union, it cannot effectively exercise its enforcement powers. However, for the FSR system involved in this case, the court chose to ignore the explicit limitations of its legal framework and provisions on the European Commission's extraterritorial enforcement power. Articles 14 and 15 of the FSR clearly distinguish the territorial boundaries of the European Commission's enforcement powers, and provide different restrictions for different situations of enforcement within and outside the EU: (1) According to Article 14 of the FSR, the European Commission has the power to conduct necessary investigations within the EU; (2) According to Article 15 of the FSR, the European Commission may conduct investigations in third countries outside the European Union, provided that the third country government has been formally notified and has not objected to the investigation. It can be seen that the European Parliament and the Council of the European Union foresaw the possibility of extraterritorial enforcement by the European Commission in investigating foreign government subsidies when drafting the FSR, and set clear restrictions while empowering it, that is, to request enforcement assistance through intergovernmental channels and obtain consent in accordance with international practice. In this case, the European Commission requested the provision of parent company data stored on servers outside the European Union, which cannot be obtained by the European subsidiary of Tongfang Vision, during the surprise inspection process. This clearly broke through the power boundary of "surprise inspection" that is restricted by geography, and used the name of "surprise inspection" to carry out "extraterritorial law enforcement". The first instance court in this case supports the European Commission's approach, which improperly expands the power boundary of the European Commission's extraterritorial enforcement under the FSR system. If this judgment cannot be corrected, it will result in all foreign-funded enterprises operating in the EU facing a huge burden of the European Commission's supervision and enforcement of their domestic parent company's data information at any time.

In addition, while emphasizing the effectiveness of the European Commission's enforcement power, the court repeatedly emphasized that compliance with the European Commission's investigation decision by Tongfang Weishi would force it to avoid emphasizing the importance of violating Chinese law, which has obvious logical confusion and contradictions. Specifically:

(1) The court proposed that when evaluating the legality of the European Commission's investigation decision, EU law and international public law should be applied instead of Chinese law. However, in the application of international public law, the court failed to explain why the European Commission's forcing of the applicant's parent company to violate its home country law is in accordance with international law rules, nor did it explain why forcing the applicant's parent company to violate its home country law would not affect the applicant's substantive interests. In particular, the court held that the European Commission has the authority to directly request the parent company outside the European Union to submit information by serving the investigation decision on the European subsidiary (i.e., the parent company needs to comply with the investigation decision), but at the same time, it believed that the Chinese law that the parent company needs to comply with is not relevant to this case and did not provide any convincing explanation or reasoning.

(2) In addition, the court found that the European subsidiary of Tongfang Vision failed to prove that it could not obtain the information stored in China, nor did it prove that the company had cooperated with the European Commission in making data export related applications. However, the European Court of Justice failed to respond to a more substantive question: whether the European Commission has the authority to compel the European subsidiary of Tongfang Vision to obtain relevant information from its Chinese parent company through EU technology channels, without requesting enforcement assistance under relevant international mutual assistance treaties, intergovernmental enforcement memorandums of understanding, or diplomatic procedures. The European Court of Justice's attempt to find a "shortcut" to uphold the enforcement power of the European Commission in its rejection of the ruling reflects its protectionist stance in the FSR context.

(3) In response to the third to fifth grounds of action raised by Tongfang Weishi, the European Court of Justice did not even conduct any substantive review, but instead made a simple rejection ruling. Although according to EU law, in an application for a temporary injunction, the applicant only needs to provide "prima facie case" to prove that their reasons for action are not unfounded, and does not need to provide conclusive evidence to prove the validity of their reasons for action, the court in this case still considers that the reasons for action proposed by Tongfang Weishi lack sufficient evidence to prove their sufficient possibility.

In summary, the handling of this case by the European Court of Justice has led to numerous loopholes in its decision to reject the application of Tongfang Weishi, and further reflects the Court's unprincipled adherence to the position of the European Commission in a protectionist manner, which has failed to substantially balance the role of EU law enforcement agencies.
epilogue

Although this case has not yet entered the substantive trial stage, the discriminatory issues of the FSR at the legislative, enforcement, and judicial levels have been fully exposed during the injunction application stage, as well as the protectionist stance and political motives demonstrated by the European Court of Justice within the FSR framework. This not only deviates from the legislative intention of maintaining fair competition in the internal market as stated by the EU's FSR system, but also further exacerbates the questioning of the fairness of the EU legal framework and enforcement practices in situations involving foreign-funded enterprises within the EU. Against the backdrop of numerous challenges facing China EU economic and trade relations, the EU urgently needs to re-examine and adjust its legal framework, law enforcement, and judicial practices to avoid further exacerbating China EU trade frictions.