Opinion of Mr Advocate General
My Lords,
I — Introductory
This action is brought against the Commission under Article 173 of the EEC Treaty by the Coöperatieve Stremsel- en Kleurselfabriek of Leeuwarden in the Netherlands (which I shall call the Cooperative) to challenge a Decision adopted by the Commission under Article 85 of the Treaty on 5 December 1979, which was addressed to the Cooperative and to its members 80/234/EEC — OJ L 51/19 of 25. 2. 1980.
The facts as found by the Commission are clearly and succinctly summarized in the decision, and I do not think it necessary to rehearse them.
The Commission's conclusion was, Your Lordships remember, that the rules of the Cooperative infringed Article 85 in two respects :
The decision ordered the undertakings to which it was addressed to bring those alleged infringements to an end without delay.
In challenging the decision before us, the Cooperative has put forward seven contentions, of which four relate to the applicability of Article 85 (1), one relates to the applicability of Regulation No 26/62, and two relate to the applicability of Article 85 (3). I propose to begin by considering those contentions seriatim under those three headings.
The French Government intervened in the action. In its written observations it contended that the decision should be set aside. At the hearing, however, after having heard the Commission's comments on those observations, it adopted a less extreme stance. I propose to consider the French Government's contentions, as so modified, afterwards.
II — The applicability of Article 85 (1)
1. The Cooperative's first contention was that the Commission had been wrong in holding that the exclusive purchasing obligation imposed on the members appreciably restricted competition in the common market.
2. The Cooperative's second contention was that the Commission had been wrong in holding that the exclusive purchasing obligation was liable to affect trade between Member States to an appreciable degree.
3. The Cooperative's third contention was that the Commission had been wrong in holding that the obligation on a member to pay a fine on resignation made resignation very difficult, if not impossible, for any member wishing to obtain supplies from another source.
4. The Cooperative's fourth contention was that the Commission had been wrong in holding that the obligation to pay a fine on resignation could prevent members from setting up a competing production centre which could also sell rennet in other Member States.
III — The applicability of Regulation No 26/62
Your Lordships will remember that Article 42 of the Treaty provides, to put it shortly, that Articles 85 to 94 are to apply to production of and trade in agricultural products only to the extent determined by an act of the Council. Agricultural products are defined by Article 38. Paragraph 1 of that Article states that Agricultural productsmeans the products of the soil, of stockfarming and of fisheries and products of first-stage processing directly related to these products; whilst paragraph 3 states that The products subject to the provisions of Articles 39 to 46 are listed in Annex II to this Treaty. Article 38 (3) went on to empower the Council to add to the list in Annex II within two years of the entry into force of the Treaty. Annex II lists the products in question by reference to what was known, at the time when the Treaty was signed, as the Brussels Nomenclature, and is now called the CCC Nomenclature.
Regulation No 26/62 was adopted by the Council pursuant to Article 42 of the Treaty. Article 1 of it provides, so far as here material, that, subject to Article 2, Article 85 of the Treaty is to apply to all agreements relating to production of or trade in the products listed in Annex II to the Treaty. Article 2 provides that Article 85 (1) shall not apply to such of the agreements referred to in Article 1 of the regulation as form an integral part of a national market organization or are necessary for attainment of the objectives set out in Article 39 of the Treaty. It goes on to provide that, in particular, Article 85 (1) shall not apply to agreements, decisions and practices of farmers, farmers' associations, or associations of such associations belonging to a single Member State which concern the production or sale of agricultural products or the use of joint facilities for the storage, treatment or processing of agricultural products, and under which there is no obligation to charge identical prices, unless the Commission finds that competition is thereby excluded or that the objectives of Article 39 of the Treaty are jeopardized.
The Commission, in paragraphs 26 and 27 of its decision in the present case, held that rennet and colouring agents for cheese were not products listed in Annex II of the Treaty, so that Regulation No 26/62 was inapplicable.
The Commission's view is that rennet, being an enzyme, is within heading 35.07 of the CCC Nomenclature, which comprises Enzymes; prepared enzymes not elsewhere specified or included. That heading is not among those listed in Annex II. The Commission's view accords with the Explanatory Notes to the CCC Nomenclature which, in relation to that heading, say, among other things, this :
The Cooperative challenges the Commission's view on two grounds.
First it argues that in the context of the Treaty, rennet of animal origin should be classified under heading 05.04 of the CCC Nomenclature, which comprises Guts, bladders and stomachs of animals (other than fish), whole and pieces thereof or under heading 05.15 comprising Animal products not elsewhere specified or included; dead animals of Chapter 1 or Chapter 3, unfit for human consumption. Those headings are both listed in Annex II. Such an interpretation is called for, the Cooperative argues, because rennet of the kind that it produces, being extracted solely from the fourth stomachs of calves, is a product of first-stage processing related to a product of stockfarming within the meaning of Article 38 (1) of the Treaty. Heading 35.07 should be regarded, the Cooperative submits, as comprising only synthetic rennet.
In my opinion, that argument must be rejected.
In the first place I agree with the Commission that Article 38 (1) of the Treaty gives only a general indication of the kind of product that is to be regarded as an agricultural product for the purposes of the Treaty. The binding definition is that contained in Article 38 (3) which refers to Annex II. That must be so, in my opinion, first because of the express power for the Council to add to Annex II within two years of the entry into force of the Treaty; secondly because the list in Annex II conspicuously and, one must take it, deliberately omits some products that would clearly be within the general terms of Article 38 (1), for instance, as the Commission pointed out, wool; and thirdly because the inference is irresistible that the intention of the authors of the Treaty, when they drew up Article 38 (3) and Annex II, was to eliminate possible disputes as to what did or did not constitute an agricultural product for the purposes of the Treaty.
In any case, the Cooperative's rennet is not, in my opinion, a product of first-stage processing within the meaning of Article 38 (1). The relevant product of first-stage processing (of a product of stockfarming) is the calves' fourth stomachs, which are the Cooperative's raw material. They are the product of the slaughtering and cutting-up of the calves, which is the first process.
Thirdly, and more importantly, rennet cannot be brought within heading 05.04, the wording of which, whilst no doubt apt to cover the calves' fourth stomachs used for the extraction of rennet (as the Explanatory Notes to the CCC Nomenclature relating to that heading expressly confirm), cannot be stretched to cover the extract itself. Nor can rennet of animal origin be brought within heading 05.15, because to prefer the general description Animal products not elsewhere specified or included in that heading to the more specific description Enzymes in heading 35.07 woula be to do precisely the reverse of that which Rule 3 (a) of the Rules for the Interpretation of the CCC Nomenclature enjoins.
The Cooperative's second argument on this part of the case was, if I understood it correctly, that Article 2 of Regulation No 26/62 ought to be held to apply because the Cooperative was, in the final analysis, an association of associations belonging to a single Member State, concerned with the processing of milk into cheese, whose activities were necessary for attainment of the objectives set out in Article 39 of the Treaty.
To my mind there is a short answer to that argument, which is that it disregards what the relevant provisions of the Treaty and of Regulation No 26/62 actually say. It is true, but in my opinion irrelevant, that the members of the Cooperative process milk into cheese. What matters is whether the agreement between them, constituted by the rules of the Cooperative, relates to production of or trade in agricultural products within the meaning of the Treaty. It does not because it relates to production of and trade in rennet and colouring agents for cheese, which are not agricultural products as defined by the Treaty.
So, in my opinion, the Cooperative is not entitled to succeed on its fifth contention. I turn to its sixth and seventh contentions, which are, Your Lordships remember, about the applicability of Article 85 (3).
IV — The applicability of Article 85 (3)
Article 85 (3) requires four conditions to be satisfied for an agreement to be exempted thereunder:
The Commission held that, in this case, the first and second conditions were satisfied in that the existence of the Cooperative had contributed to improving production of rennet and of colouring agents for cheese in the Netherlands; in that the Cooperative's stock-holding arrangements ensured a constant and regular supply of those products; in that since the Cooperative was non-profit-making, cost savings that it achieved had always been passed on to its customers, whether members or non-members; and in that final consumers had, in the result, been able to buy cheese made with better quality rennet at a low price. See paragraphs 29 and 30 of the decision.
The Commission held, however, that the third and fourth conditions were not satisfied. The Cooperative's sixth and seventh contentions challenge the Commission's holdings as to the fulfilment of those conditions respectively.
Thus the Cooperative's sixth contention is that the Commission was wrong in holding that the requirement that members should purchase rennet and colouring agents exclusively from the Cooperative and the requirement that a member should pay a fine on resignation were not indispensable for the attainment of the benefits that the Commission acknowledges flow from the existence of the Cooperative.
I have found this the most difficult point in the case.
The Cooperative's main argument on it is, if I have correctly understood it, that, since the Cooperative has no share capital, so that its only source of money consists in the proceeds of its sales of -rennet and colouring agents, no member would readily concur in decisions that the Cooperative should invest in such things as stocks, new production facilities and the like, unless assured that every other member was bound to buy rennet and colouring agents only from the Cooperative and could not easily resign from the Cooperative. In the absence of those obligations a member could not be sure that expenditure incurred by the Cooperative as a result of such decisions would be covered. There was strong support for that argument in the submissions of the French Government. The Cooperative also argued that, in the absence of those obligations, it would need a sales organization, which would add to its costs; and that its system of ex post facto pricing would have to be abandoned.
The Commission conceded that some obligation for members to purchase from the Cooperative was necessary. We were told at the hearing, in answer to a question by one of Your Lordships, that, in discussions between the parties, the Commission had suggested that a member should be obliged to buy a minimum of 33 1/3% of its supplies from the Cooperative. The Cooperative, however, though prepared, in order to avoid this litigation, to abandon the obligation for a member to buy 100% of its supplies from the Cooperative, could not agree to any figure below 70%.
The Commission also conceded that some restriction on a member's freedom to resign was necessary, but it considered that an obligation to give notice of withdrawal would be sufficient.
I have, after some hesitation, come to the conclusion that the Cooperative has not made good its case on this point, because, in truth, that case, as presented to us, rested on forceful and repeated assertion rather than on proof. No evidence was adduced to show that in fact nothing short of a 100% purchasing obligation and nothing short of a fine on resignation would do. The arguments placed before us, whilst, some of them, impressive, fell short, to my mind, of demonstrating that that was so.
I am, however, less troubled than I might have been about reaching that conclusion because I am clearly of the opinion that the Cooperative's seventh contention must be rejected. The Commission held that the exclusive purchasing obligation and the obligation to pay a fine on resignation had the effect of virtually eliminating competition on almost the entire Dutch market in rennet and colouring agents for cheese — see paragraph 33 of the decision. If that is correct, it is enough to render Article 85 (3) inapplicable.
Bearing in mind that the members of the Cooperative account for over 90% of Dutch cheese production, that the Cooperative is the only Dutch producer of rennet and that it is responsible for 90% of Dutch production of colouring agents for cheese, the Commission's conclusion seems to me almost self-evidently correct. It was attacked by the Cooperative on the ground that a member could leave the Cooperative on payment of a fine, the amount of which was not prohibitive. That fact, however, if it be a fact, does not make it untrue to say that the rules of the Cooperative afford its members, in the words of Article 85 (3), the possibility of eliminating competition in respect of a substantial part of the products in question.
In the result I am of the opinion that this action must fail. I turn to the observations of the French Government.
V — The observations of the French Government
I hope I shall be acquitted of any discourtesy if I deal with them briefly. I can do so, I think, because, as modified at the hearing in the light of what Counsel for the Commission had said, they amounted to a plea that the Court should not express its judgment in such a way as to jeopardize the survival of small local farmers' cooperatives, of which, we were told, there were some 6000 in France.
The Court cannot of course rewrite Article 85 of the Treaty or Regulation No 26/62. But it seems to me that this case is not comparable to that of a small local farmers' cooperative. An essential feature of it, as Counsel for the French Government appreciated, is the monopoly or near-monopoly position of the Cooperative in the Netherlands. One may doubt whether, in the case of a cooperative of the kind the French Government seeks to protect, it would be found:
though I realize, of course, that Article 2 of Regulation No 26/62 would not apply to, say, a cooperative hiring agricultural machinery or supplying fertilizers to its members.
More than that I do not think I can usefully say.
VI — Conclusion
This action should, in my opinion, be dismissed with costs.