The European Court of Human Rights against the monopolisation of school books distribution. Lost clientele is considered as protected property
Könyv-Tár Kft and others v. Hungary 16.10.2018 (no. 21623/13)
The applicant companies, Könyv-Tár Kft, Suli-Könyv Kft and Tankönyv-Ker Bt, are Hungarian
companies which were active in the sale and distribution of text books to schools.
In 2011 and 2012 Parliament passed legislation to centralise the management of schools, which had
been under the control of the local authorities. New laws also introduced a new system for buying
and distributing school text books via a central body, Könyvtárellátó Kiemelten Közhasznú Nonprofit
Kft (the Non-profit Library Supplier Limited Liability Company; “Könyvtárellátó”.)
The way the applicant companies had operated previously was to strike agreements directly with
schools, acting as intermediaries for publishers. They provided the logistics, processed orders,
managed billing and dealt with returns. There were six large and 30 medium-sized distributors. The
market was regulated with maximum prices and the Government decided what qualified as a text
Article 1 of the First Additional Protocol
After the new system was introduced, the Könyvtárellátó company took over the procurement and distribution of the books. The reasoning for the change, according to the draft Parliament bill, was to strengthen the position of the buyer, the State, and to make distribution more transparent. The applicant companies submitted that the laws had centralised and monopolised the school book distribution market.
It had also given Könyvtárellátó a 20% margin, compared with their margins of 3-5%, without providing compensation to former participants. The applicant companies and others had effectively been barred from a market which had been either their exclusive or main field of activity. The applicant companies filed a constitutional complaint to have the new laws repealed, but the Constitutional Court terminated the proceedings in 2014 without an examination on the merits. It found that further legislation, which had come into force in 2014, had introduced a system for the supply of school books which was completely State organised, removing any free-market element. The applicants’ complaints, based on the previous legislation, had therefore become redundant.
THE DECISION OF THE COURT
Article 1 of the First Additional Protocol
a) Applicability-The Court, responding to an argument made by the Government that the case was inadmissible, first dealt with the question of whether the applicant companies could claim to have “possessions” within the meaning of the European Convention.
The Government argued that the Convention did not guarantee the right to acquire property and that future income was not generally regarded as a possession. Furthermore, the companies’ market share and future income had been affected by changes which came within the powers of discretion of Governments (“margin of appreciation”), namely changes in the organisation of education.)
However, the Court, noting the case of Van Marle and Others v. the Netherlands, found that the companies had lost their clientele, the schools, in the legislative changes and that lost clientele could be considered as a possession under the Convention
More specifically,The applicant companies, who had been in the schoolbook distribution business for years, had built up close relations with the schools located in their vicinity. Their clientele was an essential basis for the established business and had in many respects the nature of a private right, and thus constituted an asset, being a “possession” within the meaning of Article 1 of Protocol No. 1.
Merits-The new measures had introduced a new system of schoolbook distribution which had resulted in the applicant companies effectively losing their clientele. Thus, there had been an interference with the applicant companies’ rights, consisting of a measure entailing the control of the use of their property.The Court noted an attribute inherent in the schoolbook market which was unusual in some aspects. The protagonists who selected the products (that was, the schools or the teachers) were not the ones who paid for them (that was, the end-users: the pupils and their parents). That scheme could be explained by the need to ensure that all pupils in a class used the same textbook. That arrangement could have entailed some market distortions and a potentially exposed situation of the end-consumers. The latter could be balanced by market regulations, such as maximised prices or State subsidies. However, the Court was not convinced that in the applicant companies’ case this had produced a distortive effect on the competition amongst the participants of the distributing business. The distributors had maintained contractual relationships with the schools and not with the end-users; and, for their part, the schools were entirely free to select any distributor as their long– or short-term supplier. It was true that there was a constant market outlet (that was, the multitude of pupils in the need of textbooks in a given school year) ultimately corresponding to the entirety of the applicants’ and other distributors’ combined services. However, the respective shares of that constant market outlet were in no way guaranteed to the applicant companies, who had needed to acquire and preserve their clientele (the schools) in a largely unregulated and competitive market environment. Therefore, although the schoolbook market indeed had some special attributes, those did not yield any special or privileged market situation for the applicant companies which would have justified the impugned State’s intervention.
On the merits, the Court noted the Government’s argument that the changes had aimed at making budget spending more efficient. However, it doubted that the interests of the end-users, the parents and pupils, had been protected, given that prices had remained regulated. Furthermore, the new book distribution company’s profit margin of 20% was higher than that of the applicant companies.
The Court held that the applicant companies had not had a special or privileged place such as to warrant State intervention. It was also not convinced by the Government’s argument that the measures had not led to a monopolisation: in fact the companies had lost their former clientele and it had been transferred to Könyvtárellátó.
It had in theory been possible for the companies to tender for contracts with the State company, but in practice, according to a submission by the companies which the Government had not denied, such tenders had been limited in scope and open only to invited companies. They therefore had not offered realistic prospects for the companies to continue their business and maintain their clientele.
The Court noted that there had been a transition period of only 18 months to the new system and that the companies had never been invited to Könyvtárellátó’s tenders. Furthermore, they had been de facto excluded from school book distribution contracts from 2013/2014; no measures had been put in place to protect them from arbitrariness or to offer redress via compensation; and they could not continue or rebuild their businesses outside the school book market. Lastly, there had been no real benefits for either parents or pupils from the new system.
The margin of appreciation afforded to the State in identifying appropriate measures for the implementation of the reform in question was a wide one. However, they could not be disproportionate in terms of the means employed and the aim sought to be realised; and could not expose the business players concerned to an individual and excessive burden. In the present case the drastic change to the applicant companies’ business had not been alleviated by any positive measures proposed by the State.
Having had regard to various factors, including the fact that no measures had been put in place to protect the applicant companies from arbitrariness or to offer them redress in terms of compensation, the impossibility for the applicant companies to continue or reconstitute their business outside the schoolbook distribution and the absence of real benefits for the parents or pupils, the interference with the applicant companies’ right had been disproportionate to the aim pursued, in that they had had to bear an individual and excessive burden.
The Court declared the complaint under Article 13 inadmissible and saw no need for a separate examination of the complaints under Article 6 and Article 14 given its findings in the case.
Just satisfaction (Article 41)
The Court held that the question of just satisfaction was not yet ready for decision and reserved the matter.
Judge Wojtyczek expressed a dissenting opinion. Judges Pinto de Albuquerque and Kūris each expressed a concurring opinion(echrcaselaw.com editing).