Brexit: Recent Developments—The EEA Option

Concerning Brexit, Japan has much at stake considering the amount of its investment in the United Kingdom. When the United Kingdom leaves the European Union, it will also leave the European Union Customs Union and the European single market and will no longer be subject to the surveillance of the European Commission and the jurisdiction of the European Court of Justice (ECJ). Leaving the jurisdiction of the ECJ has been a major goal of the UK government. British access to the single market has been part of its European Union membership. The official position from the beginning has been and continues to be—although it has changed to a certain extent in recent weeks—that the United Kingdom will pursue a hard Brexit and leave everything.

Is it possible for a non-European Union state to allow its citizens and economic operators to continue to participate in the single market? This is called "soft Brexit." Yes, it is possible, but it would require careful work.

The Prime Minister of Great Britain has given speeches indicating a preference for a hard Brexit. However, the United Kingdom wants to continue to enjoy the greatest possible market access for goods and services. Can you conclude such a market access agreement, which would create a deeply integrated market between the European Union and Britain, without a non-national court? Experience shows that to have access to a court in Luxembourg is not only important to defend domestic industry from discrimination by foreign governments, but in many cases, also to prevent discrimination from your own government.

With regard to enforcement, the UK government has always spoken of arbitration. The Brexit White Paper includes a long list of various arbitral mechanisms for dispute resolution, including the ones of the North American Free Trade Agreement (NAFTA) and of Mercosur. The UK government continued to advocate arbitration in its most recent paper of August 23, 2017, but it also has begun to mention the possibility of using the EFTA Court.

Since the snap election was not a big success for Prime Minister Theresa May, soft Brexit is now occasionally mentioned even in government circles. The government has continued to publicly advocate a hard Brexit approach as a matter of principle, along with arbitration, but it also has started to discuss an EFTA solution.

Is arbitration a feasible solution? Some Japanese commentators have indeed advocated arbitration as a workable dispute resolution mechanism. First, what would arbitration mean? Would it be ad hoc arbitration on a case-by-case basis in a manner similar to commercial law, in which each party nominates one arbitrator and the two arbitrators then agree on a third chairperson after the facts have occurred? That would be a very weak mechanism for inter-state arbitration. Could there instead be a permanent court-like arbitration body? Permanent arbitration bodies are currently being discussed in the context of investment protection. Drafts exist, but such a mechanism is untested, so we do not know how it would function.

One disadvantage of arbitration would be that standing would be limited to states, leaving corporations without access. The national courts and international arbitration would no longer be connected because the British courts would be unable to make reference to a court in Luxembourg. From the European Union's perspective, would arbitration be positioned above the ECJ? The European Union has been very reluctant to accept any type of binding arbitration.

Article 218(11) of the Treaty on the Functioning of the European Union provides that every new court system will be submitted to the ECJ for approval. Article 111(4) of the Agreement on the European Economic Area (EEA) provides for arbitration with regard to sanctions and compensatory measures only, but not on the substantive provisions of the agreement. What most people do not know is that much of this was already discussed between Switzerland and the European Union; the question poses itself whether this is relevant for the United Kingdom. The European Union told the Swiss in 2008 that they could only have market access in the future if they accepted surveillance and the court mechanisms. The Council of the European Union has published conclusions regarding the EFTA states in every other year since 2008, and the mantra has always been the same: market access only with surveillance and the court.

Three of the four current EFTA States fulfill this condition: Iceland, Liechtenstein, and Norway. Switzerland does not. Switzerland is linked to the European Union by a network of bilateral sectoral agreements without surveillance and without a court, and the Union doesn't want this anymore. It says that such a system does not provide sufficient legal certainty. In fact, since 2008, the European Union has been playing hardball with the Swiss. No new access to the market agreement has been concluded since then, and for a certain period, the union even refused to update the existing agreements, which were concluded after 1999. It only gave in recently when accused of violating the principle of good faith in public international law.

The surveillance and court requirement will probably continue to apply to a post-Brexit UK-European Union agreement, because the United Kingdom wants to have as much market access as possible. This situation could then be called "Britzerland."

More than one EEA option exists in theory. The first would be joining the EEA on the EFTA side and thus adopting the EFTA Surveillance Authority and the EFTA Court. These institutions have been tested for almost 25 years and they are working. The operators of the EEA/EFTA States do have access to the single market. The novelty of the EEA Agreement—which was revolutionary at the time—is that it was based on a two-pillar structure with a European Union pillar and an EFTA pillar, and each pillar has its own institutions. The United Kingdom is currently not only a European Union Member State but also an EEA Member State in the European Union pillar.

A precondition for joining the EEA agreement on the EFTA side would be EFTA membership. The Swiss would have a say on EFTA membership. EFTA is not a customs union, it is a free trade entity which entertains a network of free trade agreements around the world. The current EEA/EFTA States—Iceland, Liechtenstein, and Norway—would, together with the European Union, have to agree if Britain would then also like to join the EEA, and they have basically signaled openness. The Norwegians have been the most reluctant. They think they would lose their superpower position in the EFTA pillar if the United Kingdom joined. Under the two-pillar structure, we have the European Union pillar with 28 countries, surveillance by the Commission with 28 commissioners and judicial control by the ECJ with 28 judges and 11 advocates general. The EFTA pillar by contrast has a surveillance authority with three college members, and our court with three judges.

In Britain, there is some confusion. A single market is not the same as a customs union. The EEA is not a customs union. Sovereignty in foreign trade is with the EFTA states. The same goes for agriculture, fisheries, taxation, currency, etc. In the United Kingdom, this is seen as a major advantage because the United Kingdom would like to conclude its own free trade agreements and not be subject to the Union in this regard. The EFTA States may conclude free trade agreements with the rest of the world as part of the EFTA, including Switzerland, or individually. Only Switzerland concluded a free trade agreement with Japan, while the Swiss and the Icelanders concluded agreements with China.

The second EEA option could be docking to the institutions. The United Kingdom would not join the EEA as a whole: it would conclude an agreement with the European Union, but subject it to the competence of the EFTA Surveillance Authority and the jurisdiction of the EFTA Court. In London, they were flabbergasted when I mentioned "docking." They could negotiate for the inclusion of both a British College Member in the EFTA Surveillance Authority and a British judge on the EFTA Court for British cases. Given the size of the United Kingdom, this would still give the country a strong presence in the Court.

The docking solution has some sort of a precedent. It was proposed to Switzerland by the European Union in May 2013 in a secret "non-paper" of the chief negotiators. The Swiss government still claims that the non-paper is secret, but everyone seems to know about it. In the paper, the European Union said that it was basically prepared to accept the competence of the ESA and the jurisdiction of the EFTA court for its sectoral bilateral agreements concluded with Switzerland. Obviously, the Swiss would then need to negotiate this with the EEA/EFTA States. The Union made this very generous offer. Again, a College Member and judge nominated by Switzerland would then participate in these cases. This was rejected by the Swiss. The enforcement and dispute resolution paper of August 23, 2017 by the British Ministry for Brexit implicitly discusses docking.

The third EEA option would be to use the EFTA Court as a transitional solution. This has been alleged even by the European Union in a paper earlier in the year which said: We would like to maintain the jurisdiction of the ECJ after Brexit for a period of time. We could imagine, however, that there would be another court if it provides equivalent guarantees of independence and impartiality to the ECJ.

Many may doubt the impartiality of the ECJ concerning the British on their way out. It would probably not be acceptable to the United Kingdom. More and more voices are now saying that even if Britain doesn't want to permanently join the EEA, it could do so for a transitional period. The academic advisory board of the German Ministry of Economic Affairs and Energy wrote in April 2017 that EFTA and EEA membership for the United Kingdom would be a transitional solution to allow the negotiations to last longer than two years. UK parliamentarians, industry, the City of London, and the Governments of Scotland and Wales concur.

Leaving aside the EFTA Surveillance Authority for reasons of time, why would the United Kingdom accept another supranational court in Luxembourg when it wants to leave the ECJ in the first place? When talking about the EFTA Court, we have to distinguish between the law on the books and the law in action. Most diplomats and politicians only read the law on the books. They do not read judgments. They thus often do not know what's going on in the real world. The distinction between books and action comes from the American legal realists. As far as the written law, the law on the books, is concerned, the starting point is that EEA law originates from European Union law. It is identical in substance in many cases but not in every case. It is said on the books that the case law of the two courts—the ECJ and the EFTA Court—shall develop in a homogeneous way. This is important because there needs to be a level playing field for companies. According to the written homogeneity rules, we are supposed to follow or to take into account relevant ECJ case law whereas the ECJ is under no obligation to take into account our case law. However, the development has gone another way. In most cases, my court has to tackle novel legal questions. Altogether we in the EFTA Court have decided 210 contested cases, and this has led to an intense dialogue where the ECJ, the Advocates General and the General Court have referred to us 213 times in 145 cases. We are the only court of general jurisdiction whose case law is regularly cited by the ECJ in the context of EU law.

But even if there is relevant ECJ case law, we do not follow it automatically. A famous example is the Kellogg's case. Kellogg's corn flakes were fortified with vitamins and iron. The Norwegian government prohibited the marketing on the grounds that these corn flakes could harm certain segments of our population. It relied on an ECJ precedent which held that the marketing of food containing nutritionally unnecessary additives may be prohibited. We did not follow the ECJ, but held that the nutritional need argument was unconvincing. Eighteen months later, the ECJ overruled its previous case law and precisely following our Kellogg's judgment.

Many law professors often overlook the important fact that the case law must be viewed over the long term. Maybe 20 years ago we were less courageous than we are now; we have gained self-confidence over time. We have occasionally adjusted our case law to ECJ case law, but the ECJ has done likewise with our case law.

In another interesting case concerning the repackaging of pharmaceuticals, we held that a parallel importer who is entitled to repackage pharmaceuticals under certain conditions may even add its own design to the boxes of the repackaged pharmaceuticals despite the fact that the importer is not the manufacturer. The Court of Appeal of England and Wales then asked the ECJ whether it shared the view of the EFTA Court, and the ECJ affirmed that it in fact did.

An additional factor to bear in mind is Europe's third court: the European Court of Human Rights in Strasbourg, France. It is increasingly tackling economic law issues, including property law, unfair competition law, trademark law, antitrust law, and so on. When the Swiss were considering joining the EEA, some of them wrote that the homogeneity rules required the EFTA Court to follow the ECJ in the event of a conflict between the ECJ and the European Court of Human Rights. This is not what we are doing. In fact, in such a case, we will evaluate which court's argument is the most convincing. We have made quite a number of references to the European Court of Human Rights, and, in at least one case, that court made reference to us.

Europe is to a certain extent divided between free trade advocates in the north and mercantilists in the south. The two courts are condemned to dialogue because the written law does not really provide solutions. The written law provides that in the event of a conflict between the ECJ and the EFTA Court, the Contracting Parties may refer the dispute to the ECJ, but they will hardly ever do that in practice. It also states that the Contracting Parties may take safeguard measures or declare the provisional suspension of part of an agreement. This could put the entire agreement at risk, so it is not a solution. These provisions are not practical.

Homogeneity is a process. There are many more actors than the ECJ and the EFTA Court. To have own institutions is an advantage. To have your own people sitting in the court is an advantage. Judging is not an exact science. Given the size of the EFTA Court, the Brits would always have their own judge.

The EFTA pillar leaves more sovereignty to the EFTA states than the European Union pillar leaves to the European Union states. In our pillar, there is no direct effect, no primacy, no penalty payments if an infringement judgment is not implemented, and, most importantly, no court in an EFTA state is under a statutory obligation to refer a question to us, whereas in the European Union, the supreme courts are under such an obligation. There is more flexibility in the EFTA pillar.

Decisions of the EFTA Surveillance Authority in competition law are subject to full judicial review. The ECJ still seems to leave a margin of discretion to the Commission whereas we went for full judicial review. That's important because we are talking about fines which can reach billions of euros. We issued very interesting rulings on the right of in-house counsel to represent their own company in court. We also had to reconcile collective bargaining and industrial action (strikes, boycotts, etc.) with competition law and the fundamental freedoms.

Intellectual property (IP) law is important in Japan. In one case, we had to deal with a very fundamental issue: whether a copyrighted work which falls into the public domain when the copyright term expires can be re-monopolized using trademark rights. The City of Oslo, the owner of the copyright, wanted to obtain trademarks for all sorts goods based on the work of a famous sculptor after it fell into the public domain. We held that copyright is an incentive to contribute to the enrichment of society. Registration as a trademark is in theory possible, but it could be contrary to "accepted principles of morality" where artworks form part of a nation's cultural heritage or act as an emblem of sovereignty.

We have our own judicial style which we developed because we did not have a choice. We are only three judges. As a small court, we have to write judgments which are supported by thorough reasoning. We are more fact-based than our sister court. Some say that we are more ready to deal with economics than our sister court. We believe in free trade, liberalism and are rather market oriented. We believe in pragmatism.

Q1. I understand that the European Union is very strict in requiring surveillance and submission to the jurisdiction of a court in exchange for access to its market. I have heard about several types of Brexit, including the Swiss type. The Swiss type of implementation seems impractical. If this is the case, why is the European Union so strict in enforcing this kind of mechanism? Is there any particular area in which the European Union wants to ensure full implementation of the rules?

Carl BAUDENBACHER
Yes, the European Union is very strict on that. A national court may ask the ECJ for an interpretation. The court of last resort is obliged to ask the ECJ for an interpretation if a case is unclear, and its interpretation is binding upon the national court. Under our structure, no written obligation is imposed on the courts of last resort to make reference to us. The Norwegian Supreme Court has not made a single reference to us during 13 years, obviously because it wanted to avoid unwelcome answers. Also, our judgments are advisory opinions rather than binding rulings. EFTA states enjoy greater sovereignty.

Q2. You presented a very convincing case for the United Kingdom to dock with the EEA, especially in terms of court jurisdiction. This is a very dramatic proposal. I have a rather simple question. If the United Kingdom were to join the EEA through the EFTA pillar, what would become of passports?

Carl BAUDENBACHER
Financial operators have full passporting rights in the EEA. That was actually a major reason why the Liechtenstein people voted in favor of the EEA.

Q3. If the United Kingdom rejoins the EFTA and the EEA, would it be a more familiar option for them?

Carl BAUDENBACHER
In my view, yes. The common law is very different from French civil law. The common law developed historically in order to control the power of the crown, the king, the government. French civil law is more to stop the courts from interfering in the government. In the Nordic countries, it is different, but they too are close to the common law tradition.