The 'Farrell' Case: Direct Effect and the Notion of "State"

The European Court of Justice (“ECJ”) Broadens the Criteria for Determining What Constitutes an ‘emanation of the State’ for the Purpose of Direct Effect of Directives

Pablo Figueroa, Gibson, Dunn & Crutcher LLP, Queen Mary University.  This Article does not necessarily represent the view of Gibson Dunn or its clients.

Pursuant to Article 288 TFEU, a directive “shall be binding, as to the result to be achieved, upon each Member State to which it is addressed, but shall leave to the national authorities the choice of form and methods”.

Ever since the ECJ developed the doctrine of the direct effect of directives and rendered it applicable to ‘vertical’ disputes between the individual and the State, but declined to extend that doctrine ‘horizontally’ to cover disputes between private parties (cf., inter alia Cases 152/84 Marshall and C-91/92 Dori), it has been essential to know what are the boundaries of ‘the State’ for the purposes of applying that doctrine.  Whereas non transposed directives will create rights in relation to entities which are considered to be part of the State, in principle they will not when the entity is not a part of the State. (I say in principle for the story becomes a bit more complicated with the so-called “incidental horizontal effects” - cf., ex multis, Case C-194/94 CIA Security International and C-443/98 Unilever, for a commentary of which see here.)

At the much quoted paragraph 20 of its judgment in Case C-188/89 Foster (“Foster”), the ECJ set a tests for determining the types of bodies that might be treated as ‘the State’ or ‘an emanation of the State’ in that context, indicating that it would encompass “a body, whatever its legal form, which has been made responsible pursuant to a measure adopted by the State, for providing a public service under the control of the State and has for that purpose special powers beyond those applicable in relations between individuals, is included in any event among the bodies against which the provisions of a directive capable of having direct effect may be relied upon”.  In a Ruling of 10 October 2017, replying to a preliminary reference by the Irish Supreme Court, the ECJ, in the words of AG Sharpston (Opinion delivered on 22 June 2017 in Case C-413-15 Farrell v Alan Whitty), put this question again “under the microscope” (see Case C-413/15 Elaine Farrell, “Farrell”)

In short, in Farrell, the ECJ:

First, held that the list of factors to be taken into account when determining whether a defendant is an emanation of the State (the so-called “Foster” test) is not exhaustive and simply provides the elements that may be relevant to such an assessment.  According to the ECJ, in Foster the Court was not attempting to formulate any type of general test or to cover all eventualities for the future (cf. Farrell, at para. 26).  Moreover, the ECJ drew attention to paragraph 18 of Foster, according to which unconditional and sufficiently precise provisions of a directive “could be relied against organisations or bodies which were subject to the authority or control of the State or had special powers beyond those which result from the normal rules applicable to relations between individuals” (see Farrell, at paras 24 and 27, emphasis added).  In the light of the clear wording of paragraph 18 of Foster, which includes the word “or”, the ECJ indicated that the conditions that the organisation concerned must respectively be (i) subject to the control of the State; and (ii) must possess special powers beyond those which result from the normal rules applicable to relations between individuals “cannot be conjunctive” (Farrell, at para. 28).  As a result, the ECJ concludes, Article 288 must be interpreted as meaning that direct effect may be relied against a body that does not display all the characteristics listed in paragraph 20 of Foster (Farrell, at para. 28).

Second, in order to determine whether the Motors Insurers’ Bureau of Ireland (namely, the body in Ireland with exclusive responsibility for compensating applicants injured in road traffic collisions where the responsible driver is uninsured or cannot be iden/tified), the ECJ held the starting point was the rationale for direct effect, which the ECJ held to be “to prevent the State from taking advantage of its own failure to comply with EU law” (Farrell, at para. 32).  This is the so-called “estoppel” argument for direct effect (see (C-148/78 Ratti).  Consequently, the Court held that organisations or bodies would become a part of the State for these purposes ether because they are (i) legal persons governed by public law or because (ii) they are subject to the authority or control of a public body; or (iii) because they have been required, by such a body to “perform a task in the public interest and have been given, for that purpose, such special powers” (Farrell, a para. 34).

The Farrell ruling is perhaps hardly surprising, in the light of the literality of paragraph 18 of Foster.  Indeed, professors Paul Craig and Grainne de Búrca had noted (i) that Foster does not provide an exhaustive definition of the criteria for a body to be an organ of the State and that (ii) “the [‘]Foster[‘] test embodies an unusual inverse principle of state or vicarious responsibility, whereby a body that might be regarded in some way as connected with the state is held responsible as an agent for a failing of the state itself, even though it had no control over the relevant event” (Craig, P., and De Búrca, G., EU Law.  Text, Cases and Materials, Oxford, 2011, at p. 208), a comment that becomes even more relevant in relation to Farrell. 

We are unconvinced, however, that the “estoppel” argument invoked by the Court lends itself to the sweeping conclusion the Farrell Ruling reaches in relation to the scope of the notion of “State”.  A broad interpretation of the notion of “State” appears to be at odds with the notion of estoppel in that organs and domestic administrations that have no role in the implementation of EU legislation are bound by directives.  Moreover, such sweeping interpretation is likely to extend to EU regulations (for a pre-farrell example see C-606/10 ANAFE).  As a result, plaintiffs will be able to bring solutions of EU law to many private proceedings.  Some would argue that it is through such litigation that many fundamental principles of EU law have evolved.  However, this type of judicial activism may sit ill in a context where the ECJ is drawing an incredible amount of attention and criticism, e.g., in Brexit UK (for the classic explanation of the role of the ECJ in European integration see J.H.H. WEILER, “The Transformation of Europe” [1991] Yale Law Journal, 100 2403).

In addition, EU law uses a multiplicity of notions of “State” not all of which coincide.  Examples include State aid (107 ff TFEU), public procurement and the provision of services of general economic interest (106 TFEU), and free movement.  Intellectually unsatisfying as this is, we would tend to think that this is probably a good thing.  The TFEU still embodies a heterogeneous degree of European integration that is probably not for the ECJ to homogenise.

Finally, Professor Van Calster (in a blog post available here) foresees disputes over the boundaries of the notion of “special powers”.  He is probably right.  We cannot but note that this is not as uncharted a territory as it might seem, and the ECJ has dealt with the notion of special powers in Case C-180/04 Vassallo.