The Journal of Regulation n°2 by Mare-Anne Frison-Roche

the

Journal of Regulation www.thejournalofregulation.com directed by Marie-Anne Frison-Roche

Marie-Anne Frison-Roche Corporate Law seen through the prism of Regulation: the Financial Services industry and investor protection Wallace Baker Sustainable Development and Business Ethics The Global System for Sustainable Development (GSSD) Distinguishing and Relating the Pieces to Reach a Unitary Vision

Marc Lévis, Julien Lévis Regulation and Supreme Courts, transatlantic Perspectives Laurent Benzoni Net Neutrality: An economic perspective Alex Raiffe A comparative analysis of Internet gambling regulations

n°2 - June 2010

n째 2 - June 2010

TABLE OF CONTENTS

I: Articles 1. isolated articles 6. Corporate Law seen through the prism of Regulation: the Financial Services industry and investor protection ................................................................................................................

Marie-Anne Frison-Roche

7. Sustainable Development and Business Ethics. The Global System for Sustainable Development (GSSD). Distinguishing and Relating the Pieces to Reach a Unitary Vision.........................................................................................................................................

103

Wallace Baker

8. Regulation and Supreme Courts, transatlantic Perspectives...............................................

112

Marc Lévis - Julien Lévis

9. Net Neutrality: An economic perspective...............................................................................

122

Laurent Benzoni

10. A comparative analysis of Internet gambling regulations..............................................

132

Alex Raiffe

II: THEMATIC REPORTS 3. media 2. Ofcom (The British Office of Communication’s) Broadcasting Sanctions Committee fined Teletext Limited after Teletext Ltd. unilaterally ceased broadcasting teletext services......................................................................................................................................

140

Alex Raiffe

6. finance, banking & insurance 8 .Credit Rating Agencies: Post-Crisis regulatory measures adopted by the European Union Regulation of September 16, 2009...................................................................................

142

Margot Sève

9. healthcare 1. A United States Federal Court found that payments made by Schering Plough in order to delay the introduction of generic forms of its drugs did not violate Antitrust Law............................................................................................................................................. Alex Raiffe

146

10. environment 3. Opinion of the French Economic, Social, and Environmental Council (CESE) on Environmental Taxation and the financing of public environmental policies..........................

136 147

Béatrice Parance

11. personal data 5. Decree n°2010-219 relating to the French National Register of Trusts was published on March 2nd, 2010 ��

136 149

Sophie Schiller

III. Bibliographical reports 1. books 3. Annales de la régulation (Annals of Regulation), 2009, Volume 2, Directed by Thierry Revet and Laurent Vidal.................................................................................................................

136 152

Marie-Anne Frison-Roche

2. grey literature 2..The "Conseil Economique, Social et Environnemental CESE" (French Economic, Social and Environmental Council approves the French National Strategy for Sustainable Development ��

136 160

Marianna Sobierajska

3. The United States Postal Service published a document on March 2, 2010, detailing the challenges it faces in maintaining a universal postal service in the United States ��

136 166

Alex Raiffe

3. symposiums 3. Madame Christine Lagarde, Finance Minister presents the goals of the "Autorité de contrôle prudentiel - ACP" (French Prudential Control Authority)....................................... Marie Cullin

136 169

I Part I.

ARTICLES

CORPORATE LAW SEEN THROUGH THE PRISM OF REGULATION: THE FINANCIAL SERVICES INDUSTRY AND INVESTOR PROTECTION Recommended citation:1-1.6

CORPORATE LAW SEEN THROUGH THE PRISM OF REGULATION: THE FINANCIAL SERVICES INDUSTRY AND INVESTOR PROTECTION by Marie-Anne Frison-Roche Managing Editor and Director of the RLR

1. In France, doyen Ripert, who wrote the most eminent treatises on both Civil Law and Corporate Law1, possessed a genius that led him to be the first law scholar to study the relationship between Corporate Law and the economic organization of capitalism. In this fundamental work, he highlighted the benefits of the Société Anonyme2: its majority rule is a tribute to efficiency, and its limitation of shareholders’ liability to the amount of their capital invested produces an incentive to invest3. Ripert thereby studied law from an outsider’s perspective. Nobody has ever denied the relationship between the economic structure of the corporation and the legal structure of the corporation, just as no jurist has ever denied the link between the commercial transaction and the contract. Precisely, Ripert gave a sort of evaluation, a way of understanding law from the outside, instead of discussing law from the inside by substituting what the law is for what one wishes it would be. Economics were external to Law, Law adapted itself to Economics, and Economics were not at the heart of Law.

I-1.6

2. This is why, even though Corporate Law was careful to produce the most beneficial possible effects for the enterprise, the enterprise was exterior to the law. This explains the perturbation in law when the economic notion of the enterprise was required not to enlighten

the law’s mechanisms or to better assist lawmakers, but rather to break down its door and become part of its innermost workings4. Of course, the adoption of economics within law was less obvious in Corporate Law than in other branches of law, such as corporate bankruptcy law, labor law, or competition law, because Corporate Law remains a law of artificial forms desired by the law. Yet, the reality of the enterprise did manage to infiltrate Corporate Law, later and in a more progressive fashion. The question of naturalism in Corporate Law was introduced. Two opposing sides formed in French legal doctrine. One side believed that the Corporation only has legal existence and is subject to law because a power legitimate to create artificial legal realities (the lawmaker) allowed this to happen. We identify this school of thought as creating the thesis of the fictitiousness of corporations’ legal personality. Technically, this implies that as soon as the legislator has created a type of corporation, each economic actor can use it and incorporate as many corporations as he wants; however, symmetrically, until the lawmaker has performed the act of sovereign will creating a specific type of corporation, the economic actor cannot use that form of corporation, since the form is simply a ‘fiction’ and since the economic actor is not a political sovereign, he cannot use sovereign power to create reality. This conception is opposed to the school of thought that adheres to the theory of the ‘reality of corporations’ legal personality’. This school upholds that corporations are reflections of organizations that existed prior to the Law, which simply acknowledges

Ripert, Georges, Roblot, René, by Vogel, Louis, Traité de droit de droit commercial, Tome 1, Vol.1, 2nd ed., LGDJ, 2001 ; Planiol, Marcel, Ripert, Georges, Boulanger, Jean, Traité élémentaire de droit civil, Vol. 1, 5th ed., LGDJ, 1949. 2 Editor’s note : roughly equivalent to a Public Limited Company, the Société Anonyme is a form of Limited Liability Corporation in French Law. 3 Aspects juridiques du capitalisme moderne, Sirey, 1951. For a more historical perspective, cf.: Braudel, Fernand, Civilisation matérielle, économie et capitalisme and especially the third tome, Le temps du Monde, Librairie Armand Colin, reprinted in paperback format – Références, 1979. 4 Didier, Paul, Droit commercial, Tome 1, Introduction, l'entreprise, l'entreprise individuelle, 3rd ed., coll. « Thèmis », PUF, 1999, p. 105 s.

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I II III their existence and technically permits them to perform legal acts of commerce. Because of this reality, the lawmaker simply authenticates a preexisting reality and therefore, if an economic operator wanted to incorporate a company whose corporate form was not yet created by the law, he could do so. 3. Professor Dominique Schmidt strongly and paradoxically contributed to the strengthening of this new naturalism in Corporate Law, by showing that the true nature of Corporate Law is to propose techniques that are only valid when used as tools to further a legitimate interest. His work performed a sort of reversal of the debate between the tenets of the theses of the fiction and reality of legal personality. Truly, if you believe that legal personality is a reality, you identify it with the true nature of the thing expressed by the notion of legal personality, which causes the corporation to appear as a group of partners, whose existence is declared, but not instituted, by the law. The corporation makes sense by itself, without having to examine the nature of the group whose existence sufficed to engender the legal being. In this way, the Corporation is like the Body Politic, which emanates from social organization5. On the other hand, if you are inclined towards the idea of the artificiality of legal personality, the Corporation is a form that exists only at the pleasure of the lawmaker, and if it is necessary to identify its nature, you have to look outside of the enterprise itself. 4. Therefore, the Corporation is the form created

and superimposed upon an intrinsic nature, to which it confers an improved efficiency. More precisely, the Corporation is the instrument used to allow economic structures to access the Law’s efficiency and to perform legal acts of commerce, which alone allow for trustworthy engagements6. Therefore, even the thesis of the fictitiousness of legal personality supposes that the corporation has an intrinsic nature, or a situation of interests that—in this case, in a mediate fashion— the notion of legal personality will fulfill. In the same way that the judge can be said to be the ‘mouth of the law’— or in other words, the entity that does not create law, but rather gives it concrete expression— the Corporation can be seen as the mouth of the underlying organization, which is the union of associates or of the company. The Corporation ‘gives reality’7 to an organization. Thus, paradoxically, the more that one believes that legal personality is a fiction, the more one makes pertinent the object of which the Corporation is the instrument. The question itself must be changed, because it is necessary to determine what this object is8. 5. For some authors, this object is the enterprise itself9, which is allowed to perform legal acts of commerce by using the instrument of legal personality. Legal personality is therefore the means of giving legal power to the enterprise’s actions, but is also the strategic means of establishing a financially successful organization10. Using this form of reasoning, Corporate Law becomes part of Economic Law. Dominique Schmidt, criticizing this perspective, believes that legal personality11 is the

On the pertinence and implications of understanding the corporation using political society as a reference, either attractive or repulsive, cf. Frison-Roche, Marie-Anne, ‘Droit des sociétés et principe de gouvernement’, in Liber Amicorum Guy Horsmans, Bruylant, 2004, p. 461-470. 6 For the same demonstration made via an economics and management approach, cf. Bruslerie, Hubert de la, L’Entreprise et le Contrat : Jeu et Enjeux, Col. Gestion, Economica, 2010. 7 To use the verb (réaliser) used by Henri Motulsky to express the way that legal provisions become concrete rights thanks to judgements (Prinicpes d’une réalisation méthodique du droit privé. La théorie des éléments des droits subjectifs, Sirey, 1948, reprinted by Dalloz, 2002). 8 This is why Dominique Schmidt asked the question in terms of finalities: ‘La finalité du pouvoir dans les sociétés cotées’, JCP E, 1996, Cahier de l'entreprise 4/1996. 9 Cf. especially Paillusseau Jean, La société anonyme, technique d'organisation de l'entreprise, Sirey, 1967. For a more moderate interpretation, cf, Mercadal Barthélémy,’La notion d'entreprise’ in Les activités et les biens de l'entreprise, Mélanges Derruppé Jean, Joly/Litec, 1991, p. 9-16. 10 Champaud Claude, Le pouvoir de concentration de la société par actions, coll. « Bibliothèque de droit commercial », Sirey, 1962. 11 For his criticism, cf. Schmidt, Dominique, Les conflits d'intérêts dans la société anonyme, Coll. « Pratique des affaires », 2nd ed, Joly, 2004, n°11, p. 12 and following.

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The Journal of Regulation n° 2 - June 2010

CORPORATE LAW SEEN THROUGH THE PRISM OF REGULATION: THE FINANCIAL SERVICES INDUSTRY AND INVESTOR PROTECTION Recommended citation:1-1.6

instrument between investors, on one hand, and on the other hand, those who are in charge of making the investors’ money work for them—the elected corporate officers12. In the time that has passed since the writings of these authors and ancient academic debates, economic crises have proven that the second school of thought was right, especially through the notion of “Corporate Governance”. 6. Corporate Law cannot therefore be dissolved within a larger branch of law. Nonetheless, it is not autarchic, because Corporate Law only has meaning because of the natural, underlying relationship between investors and corporate officers. This relationship is both financial and reciprocal: the shareholder provides capital, and the officer provides the perspective of profit and the augmentation of the value of the title emitted to represent the capital provided, otherwise known as a share. With remarkable constancy, through his thesis and in his subsequent works, Dominique Schmidt not only took this financial relationship as a direct object of study, but also presented it from the beginning in terms of a power struggle, on one hand, and as an unbalanced relationship, on the other. Because of this, all of his works call for a legal system able to readjust this relationship, which presupposes that the lawmaker and the judge are aware of this irrefutable fact and that they have the will to interfere.

permanently performs readjustment13. Even if we take Regulation in the strict sense of the word, meaning the equipment used to constitute markets upon an equilibrium between various heterogeneous principles14, here, the regulation of the market for financial instruments, this notion is leaving a stronger and stronger mark on Corporate Law.

“

Corporate Law only has meaning because of the natural, underlying relationship between investors and corporate officers.

7. This conception confers upon Corporate Law a regulatory function in a broader sense, meaning that it reconstructs a relationship according to methods and principles that compensate a natural imbalance, and

Ibidem, n°15, p. 24 : « ...la personne morale est un procédé technique, ce qui signifie que, gouvernée par les actionnaires et les dirigeants sociaux, elle est à leur service » “…legal personality is a technical procedure, which means that, governed by shareholders and corporate officers, it is at their service”. 13 On these general characteristics of régulation cf. for example « Tutelles et régulations comparées », in Services publics comparés en Europe: exception française, exigence européenne, work performed by the Marc Bloch class of the Ecole Nationale d’Administration, tome 2. p. 486-561, La Documentation Française, 1997, p. 535. Especially as concerns the necessity for Corporate Law to permanently readjust particulièrement, sur la nécessité d'un droit des sociétés visant à rééquilibrer en permanence les rapports entre les mandataires puissants et les associés ne disposant que de pouvoirs résiduels ; Frison-Roche, Marie-Anne La loi sur les Nouvelles régulations économiques -, D. 200l, chron., p. 1930-1933 ; Schmidt, Dominique;« Le droit des sociétés a-t-il été intégré par la loi NRE dans la logique de la régulation? », in Droit de La régulation.' questions d'actualité. N° spéc. LPA, 3 juin 2002, p.26-28. 14 Frison-Roche, Marie-Anne, Définition du droit de la régulation économique, Recueil Dalloz, chroniques 2004, p.126-129.

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I II III

CORPORATE LAW HAS BECOME CONCERNED WITH CONFLICTS OF INTEREST AND COMBATS THEM USING REGULATORY LAW 8. Corporate Law was conceived as a system establishing procedures in order to allow decision to be taken in the most predictable, safe, and simple fashion, because internal corporate structures must mimic the structures by which human beings express their will. The question of interests was not directly addressed by the Law, with the notable exception of statutory agreements, doubtlessly because traditionally it was believed that individual interests were fulfilled by the nature of things, especially by the freedom and the power to vote. Today, the concern over interests is at the heart of the system, because interests are divergent and because individuals do not always possess the means to effectively fulfill their own interests. 9. Traditional Corporate Law is, in fact, a sort of horology, and in this sense is analogous to the trial in that it is an articulated ensemble of structures, scopes of activity, formulae, delays, and rules on legal publications and on how long documents must be kept in archives. It is a law of formalities. However, in the same way that classical authors were not unaware of the existence of the enterprises underlying legal personality15, the existence of stakeholders’ concrete interests was not underestimated. Truly, the traditional conception of Corporate Law16 is based upon the dual assumption that there is on one

hand a “common interest” between the partners, which dispenses the Law from protecting them from one another, and on the other, that the divergence between the partners’ interest and the corporate officers’ systematically benefits the former, because of the partners’ political weapon of revocation. 10. Let us begin by analyzing the interests of the partners’ interests towards one another. The notion of common interest17 is not self-evident because this interest is not provided by the nature of things, but rather, is a goal that is both safeguarded and fulfilled by the Law. Therefore, this common interest cannot be attained without the intervention of rules that construct this common interest and ensure that it is permanently maintained. Certainly, to take the French example, Article 1832, paragraph 1, of the French Civil Code18 explicitly defines the Corporation as a contract, whose goal is to create a ‘common undertaking’, while Article 1833 of the same Civil Code19 specifies that the ‘corporation…must be incorporated in the common interest of its associates’. Dominique Schmidt inscribed the text of this law on the first page of his work on Les conflits d’intérêts dans la société anonyme (Conflicts of interests in the Société Anonyme). But, the difference between an ordinary reading of these seminal articles for Corporate Law, and the reading performed by Dominique Schmidt is that Articles 1832 and 1833 are habitually seen as descriptive, while Dominique Schmidt posits that they are normative. If we follow him in his reasoning that Article 1833 is political, because it strives after a common interest, then Law must furnish the means needed for this policy—a less precise, but more complex Law, than the aforementioned Law of mechanical and formal mechanisms.

Cf. above, nos 1 and following. Cf. aforementioned Les conflits d’intérêts dans 1es sociétés anonymes. 17 Cf. for example ‘Rapport de synthèse’, in Actionnaires et dirigeants: où se situera demain le pouvoir dans les sociétés cotées ?, Cahier de droit de l'entreprise, 4/1996, p. 25-27. 18 Article 1832-1 of the Code Civil : « La société est instituée par deux ou plusieurs personnes qui conviennent par un contrat d'affecter à une entreprise commune des biens ou leur industrie en vue de partager le bénéfice ou de profiter de l'économie qui pourra en résulter. » A corporation is established by two or more persons who agree by contract to allocate property or labor to a common undertaking in order to share the profit or benefit from the savings which could result therefrom 19 Article 1833 of the Code Civil : « Toute société doit avoir un objet licite et être constituée dans l’intérêt commun des associés. » Every corporation must have a licit purpose and must be incorporated in the common interest of its associates. 16

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The Journal of Regulation n° 2 - June 2010

CORPORATE LAW SEEN THROUGH THE PRISM OF REGULATION: THE FINANCIAL SERVICES INDUSTRY AND INVESTOR PROTECTION Recommended citation:1-1.6

11. When Article 1832 states that the Corporation relies upon a common undertaking, it seems to be stating the obvious. The law’s simple reasoning allows the affirmation to accede to this logical status. Truly, unlike ordinary contracts, in which opposing interests adjust themselves to one another as best as possible, but in which one interest always wins out, and the other loses out, the principle of sharing losses and profits, associated with the prohibition of leonina societas clauses, means that when one wins, all win; when one loses, all lose. Therefore, according to this logic, no supplementary rule is needed to protect partners from one another, because when one of the partners acts in his own interest, his action automatically corresponds to the interest of the other partners. 12. This logic constitutes a mantra of Corporate Law. If it is true, therefore, it is not necessary to protect shareholders from one another, to keep them at a distance from one another, to regulate their relationships, since there is no need to consider the hypothesis of altruism and concern for others in order for everyone’s interest to be fulfilled. It is necessary to consider the role of the corporate officer, but as long as corporate officers are also shareholders, one can be automatically certain that he will serve the interest of the other shareholders, because he will be pursuing his own interest. Thereby, the notion of loyalty is not required, because taking loyalty into consideration supposes that there is a divergence of interests, on one hand, and sufficient power to act contrary to the other’s interests, on the other hand. Loyalty allows for restraining

the strength that would allow a person not to pursue any other interest than his own. The very fact that the principle of loyalty is not gaining ground in Contract Law alone—the divergence between various parties’ interests has always made it necessary to refer to the concept of good faith in the execution of an obligation—but also in Corporate Law, as shown by the incessant reminder of the purely financial character of the relationship between partners and corporate officers20 , and even by the emergence of the very category of the ‘fiduciary contract’21 are the signs of an implicit but necessary calling into question of the classical postulate. Loyalty is required only where there is a divergence of interest and when the person who must serve has the means not to fully do so22. However, the United States, remaining in the classical theory, esteem that the solely financial relationship between managers and minority shareholders does not have to be managed by the law. This results from the jurisprudence of the Supreme Court of the United States23. 13. Therefore, if Dominique Schmidt attached more importance to Article 1832 of the Civil Code than to all others, it is because he saw a situation that was not produced by nature, but that the Law is in charge of establishing, using its normative power, in spite of nature. Truly, it is false to affirm that there is a shared interest between partners. There is no natural, single interest, because on one hand, the division of the profits made by the company is not limited to distributable profits, and because certain shareholders have the legal means to obtain a division of profits in their favor. This is not an abuse of the system: it is

Bonfils, Sébastien, Le droit des obligations dans l'intermédiation financière, coll. « Droit et Economie », LGDJ, 2005. Sur cette nécessaire autonomie de cette notion de loyauté et de confiance qui postule qu’à l’état de nature, il y a déloyauté, défiance et conflit d’intérêt, voir : Frison-Roche, Marie-Anne, Considération générale sur la confiance, in La confiance au cœur de l’industrie des services financiers, Edition Y Blais 2009. Voir cependant la position du professeur Winter Ralf, ci-dessous. 22 On the necessary autonomy of the notion of loyalty and confidence that posits that in a natural state, there is disloyalty, defiance, and conflicts of interest, see: Frison-Roche, Marie-Anne, ‘Considération générale sur la confiance’, in La confiance au cœur de l’industrie des services financiers, Edition Y Blais 2009. See, however, the position of Professor Winter, Ralph, below. 23 Santa Fe Indus, Inc. v. Green, 97 S. Ct. 1292, 1303-04, 1977. See more generally Winter, Ralph. K. Jr., State Law, Shareholder Protection, and the Theory of the Corporation, Journal of Legal Studies, 6, 251, 1977, p. 251-292. For this author, the explanation of this jurisprudential position is above all pragmatic, because the protection of minority shareholders, at the expense of the freedom of corporate officers, would lead to capital flight, the law thereby becoming unproductive, and increasing economic inefficiencies and reducing the ability of the corporation to attract capital. This transfers Corporate Law back to the economic analysis of law. 21

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“

The corporation is built not upon the fact of a common interest, but rather on the ambition for a common interest.

the system itself. The current financial crisis shows this on a larger scale: the financial system was not slightly damaged by a few crooks who used a strategy of regulatory gaming, but rather the system itself imploded, because it was constructed on inexact foundations, and a global regulatory solution is today being sought. 14. Therefore, within the system, unless this system is corrected by regulation, certain shareholders have effective voting rights, when these rights correspond to the largest quotient of the corporation’s capital, while the others only have ineffectual rights: they are minority shareholders. Regulation is therefore the means to soften the brutality of this majority rule24, an efficient and savage rule. 15. Furthermore, the power of voting allows controlling shareholders to access corporate officers. Therefore, they possess the power to attain advantages, especially in terms of remuneration or institutional lifestyle, whereas minority shareholders do not. By behaving in

I II III this manner, the controlling associate diminishes the amount of dividends he will receive, but in return for direct and indirect advantages, which he in no way shares with minority associates. Since it has been demonstrated that associates do not naturally have a common interest, this interest must always be protected, even constructed. Let us return to Dominique Schimdt’s words, always so deft because they are so simple: “Every company is fundamentally a powerand profit-sharing structure: sharing of power between managers and shareholders, as well as between the shareholders themselves: profit-sharing between the latter. This structure derives its strength from the common interest of its members and the weakness of its conflicts of interest25.” 16. Thereby, the corporation is built not upon the fact of a common interest, but rather on the ambition for a common interest, an ambition that must be made reality by the Law, starting from a natural relationship which is the inverse: a conflict of interests between controlling shareholders and minority shareholders. In this way, the deed of partnership becomes an ordinary contract in that it is based on the balance between the divergent interests of various parties. Of course, there is no economic exchange26 , but there are divergent positions. Furthermore, the deed of partnership engenders an institution that functions using its internal corporate structures and whose life depends upon the initial deed of partnership. In this way, the initial divergence will continue to persist within the very internal workings of the corporation27. 17. Indeed, majority rule sacrifices certain interests to the power of others, even though these interests are contrary to one another. Traditional Corporate Law, be-

Schmidt, Dominique, Le droit des sociétés a-t-il été intégré par la loi NRE dans la logique de la régulation?, previously cited, p. 26. « Toute société est fondamentalement une structure de partage du pouvoir et du profit: partage du pouvoir entre dirigeants et actionnaires, ainsi qu'entre actionnaires eux-mêmes : partage du profit entre ces derniers. Cette structure tire sa force de l'intérêt commun de ses membres et sa faiblesse des conflits d'intérêts » Les conflits d'intérêts dans la société anonyme, previously cited in footnote n° 17, p. 27. 26 Didier, Paul, Brèves notes sur le contrat-organisation, in L’avenir du droit, Mélanges François Terré, Dalloz/PUF/Juris-classeurs, 1999, p-635-642 27 Didier, Paul, Le contrat sans l'échange, in L'échange des consentements, n° spéc. RJ com, 1995. V. aussi Libchaber, Rémy, « la société, contrat spécial », in Prospectives du droit économique, Mélanges Michel Jeantis. Dalloz, 1999, p. 281-289. 25

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The Journal of Regulation n° 2 - June 2010

CORPORATE LAW SEEN THROUGH THE PRISM OF REGULATION: THE FINANCIAL SERVICES INDUSTRY AND INVESTOR PROTECTION Recommended citation:1-1.6

cause it still relies upon the naturalist illusion of a common interest, is not very interested in this question. The natural relationship between shareholders and corporate officers is of the same order. What the famous Agency Theory—but which would be more appropriately called ‘theory of the mandate’—does is to highlight a reality that classical legal thought had already identified: corporate officers do not always pursue the same goals as shareholders, even though they depend on the shareholders for their power and they are given a mandate to serve their interests28. Today, this reality has become blinding and positive law is looking for all possible legal instruments to fight these conflicts of interest, which have been finally recognized within corporations, and within financial markets and credit rating agencies.29 18. To this problem, traditional law offers two solutions, the first is tautological but inexact, and the other is properly conceived, but inefficient. The first solution is to use the concept of a shared interest between shareholders. Indeed, the shareholders simply manage the company, and especially the largest shareholders (those who risk the most), in order that their concern for their own interests benefits passive shareholders from inconsiderate risk-taking and incites them to pursue the maximal amount of profit that they will then mechanically share with those who do not exercise management power. Therefore, the impossibility of permanently disassociating ownership from politics and the obligation to be a shareholder to access management positions are derived

not so much from the idea that shareholders should be owners of the business, but rather, from a healthy conception of the exercise of power. 19. This might have been a pertinent solution in capitalism as it existed before the explosion of financial markets and would still be so if concentration remained the characteristic structure of capital. But, financial management has replaced wealth management. The dispersal of corporate shares, the limitless game of shareholder agreements, and the prowess with which legal personality is employed in organizational arabesques (the corporate structure of certain groups are a superb example of this), has allowed certain people to exercise decision-making power while running very low financial risk. The opacity of certain shares and the incapacity of markets to self-regulate30 , the danger of the multiplication of derivatives, and the deregulation of alternative financial markets31 have greatly increased systemic risk. Therefore, external necessities for regulation have converged with internal necessities for regulation. 20. Concerning internal corporate organization, the director is no longer a ‘significant’ or ‘majority’ shareholder, except by coincidence32 ; the risk attached to his decision is financially assumed by others (the multitude of investors). The disassociation between power and risk33, increased by procedures whose incentive power has become perverted, such as stock options, on one hand, and the temporal disparity between the explosion of risk for investors compared to the immediately availa-

On Agency Theory, cf. especially Couret, Alain Le gouvernement d'entreprise, la corporate governance, Dalloz, 1995, chron. p. 163 s. ; Didier,Paul, Théorie économique et droit des sociétés, in Droit et vie des affaires, Mélanges Alain Sayag, Litec, 1997, p. 227-241 ;. Ponsard, Jean-Pierre (dir.), La montée en puissance des fonds d'investissement, Quels enjeux pour les entreprises ?, Documentation française. 2002. 29 Sève, Margot, Regulatory Law Review (RLR), 2010, II-.6.8. 30 Aglietta, Michel, Rébérioux, Antoine, Crise et rénovation de la finance, Odile Jacob, 2009) 31 Report from Pierre Fleuriot to the French Minister for the Economy, Industry and Employment on the Review of the Markets in the Financial Instrument directive (MIF) February 2010, France, Regulatory Law Review (RLR), 2010 III-2.4) 32 This is why, first of all, we tend to distinguish sole-proprietor types of corporations, because they are run by those who also own almost all the shares of the company, or even most of the company’s assets, which leads them naturally towards prudent management and an anticipated concern for the succession of corporate officers. This also explains the importance that banking regulation accords to the legal notion of ‘majority shareholder’, required by the regulator, and which allows him to know, beyond corporate officers, who he should address within the financial establishment when a systemic risk is identified, because the proper correspondent must be found, and a procedure for recapitalization must be established. 33 For a broad analysis, cf. Schiller, Sophie, Les limites de la liberté contractuelle en droit des sociétés, coll. Bibliothèque de droit privé, t. 378, LGDJ, 2002.

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I II III ble advantages for corporate officers, on the other, have brought the conflict of interest between shareholders and corporate officers to the fore.

this area. This is why economists have deemed the director of a company as benefiting from an ‘informational annuity’35 .

21. Certainly, traditional law had established a radical, almost miraculous solution: revocation. Therefore, the conflict of interest could be solved as soon as it appeared, by firing corporate officers. Providing officers with the daily power of administering the corporation, and shareholders with the exceptional power of getting rid of the former created equilibrium. Subjecting the director to the discretionary power of the shareholder over whom he usually exercises power incites the precarious director to exercise his power in a measured fashion. But, this mechanism does not work for two reasons. If the controlling shareholder is also the corporate director, which is logically required in order for the person who directs the company to be the same as the person who risks losing the most money34 , then the votes will never be enough for the director to be revoked.

23. The theme of the asymmetry of information is in this way common to markets and to corporations36. Asymmetry of information has engendered new economic theories37 but the most classical political theories had already shed light on the fact that unshared knowledge is a source of power. The analogy is so strong between the government of a corporation and the government of a political community that Corporate Law has as much to learn from political philosophy as does economics. This evolution has led to the upheaval of Corporate Law: born from the idea of a natural single interest between shareholders, and of shareholders and corporate officers, it is now being rebuilt around power struggles that have to be regulated.

22. Let us examine the hypothesis that the director is a minority shareholder and the other shareholders, particularly by using the mechanism of the joint action, have the effective power to revoke him, they must have good reason to want to do so. Truly, it is not because the Law does not demand that the revocation be justified that the revocation has no cause, and that it is not the situation of a situation or the observation of a behavior. Ad nutum revocation always has its reasons. Yet, the corporate officer holds information that might displease the shareholders, and we cannot assume that he would willingly provide them such information, even when ordered to do so by the Law, which is too general an instrument in

24. Let us return to the broader meaning of the word Regulation: the organization of relationships between persons of unequal strength, in order that, ballasted by the Law, these relations can redeploy themselves in a fairer manner. This traditional meaning of French regulation38 is all the more legitimate here because it was adopted by the French Parliament in its desire to implement ‘Nouvelle Régulations Economiques’ (NRE — New Economic Regulations), since the NRE Act of May 15, 2001 identified unequal power struggles on the markets and within corporations, and sought to make them more equal39. This is truly Regulation in its classic meaning of organizing relationships between various powers, without seeking to remove the original cause of the stakeholders’ inequality. Truly, if imbalances in power were

Cf. above n° 18. This informational annuity (rente informationnelle) was the justification for the Agency Theory, which is indissociable from the whole theoretical and practical movement of corporate governalnce. On this movement, cf. Brundney ; Victor, Corporate governance, agency costs, and the rhetoric of contract, Columbia Law Review, vol. 85, n°7, p. 1403-1444. 36 Didier, Paul, Théorie économique et droit des sociétés, aforementioned. 37 Cf. especially Bambey, G., Spremann, Klaus, Agency Theorie, information and incentives, 1987. Cf. also Dobson (dir.), Applied Agency Theory, 1993. 38 Tutelles et régulations comparées, in Services publics comparés en Europe : exception française, exigence européenne, aforementioned. 39 Frison-Roche, Marie-Anne, La loi sur les Nouvelles Régulations Economiques, aforementioned. 35

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to be removed entirely, we would have to return to the regime of unanimous decision-making, which is not an option because the system would no longer be efficient and no decision could be taken. 25. There subsists, then, the situation in which a category of shareholders has a useful vote, and the other does not, in which corporate officers have the autonomy required not to pursue the interests that they were given a mandate to serve, and in which equilibrium must nevertheless be attained. However, equilibrium exists not only between various interests and positions, but also with regards to a goal or a value. 26. This goal, political by nature, can vary. It can mean forcing different shareholders’ divergent interests to be fulfilled, including shareholders who lack the power to directly satisfy their own interests, because in their minority status, they cannot be shareholders and director at the same time. We might also consider that the corporation is not simply the legal structure created to manage the financial investment relationship, but in a less capitalistic vision of Corporate Law, it is the legal structure of the corporation itself 40 , which engenders a more complex political goal: not simply the art of managing in the shareholders’ best interests, but also in the workers’ best interest—employees41, as well as subcontractors, or even people working in dependent companies—, in equilibrium between two types of interests. If we set this political goal, Law could evolve by conferring, for example, rights quasi-analogous to those of shareholders on employees or by encouraging employees to become shareholders. This promotes the economic vision of the

corporation as a ‘knot of contracts’, regulation itself is close to this complex contractual conception.42 27. It is possible to have other sorts of conceptions about the corporation’s political goal, especially by going beyond the analogy between the political and the commercial, and veritably merging these two areas. This implies that corporations have a role to play in the public political field and in developing this field, through education, fighting discrimination, protecting the environment, etc. Corporate Law thereby takes on new obligations, and companies must provide information on their efforts in various areas, such as equality between men and women, a goal that should be promoted in the same way as it is in the political world.43 28. The question here is not one of the diversity of goals attributed to the corporation’s activities and according to which the corporation’s decisions should be evaluated, the essential is highlighting that by doing so, Corporate Law has become political and that consequently it can no longer be conceived as an ensemble of safe and simple forms, but rather as an ensemble of rules and decisions attempting to obtain the pursuit of various interests (determining what these interests are is an entirely separate question) that nature does not spontaneously provide for. All this, without renouncing majority rule. 29. This means that we have to consider what gives power. Of course, corporate officers derive their power from the fact that they express the corporation’s will and engage its liability. But, in a less legalistic perspective, power is derived from possessing information. Everything

Cf. above n° 5 Especially when control of the corporation is modified, for example, during a public offer. This concern is évident in the French NRE Act. Cf. aforementioned Lafarge, Philippe, Prise de contrôle et intérêt des salariés, in Schmidt, Dominique (dir.), La prise de contrôle, n° spécial de la Revue de Jurisprudence Commerciale, 1998, p. 101-115. On the question of whether or not the form of the corporation integrating these concerns should be a particular form, and therefore circumscribed, or a more general form, freely adopted by associates in all types of corporations, v. La Société Européenne, n° spéc. LPA, mai 2004. On the articulation between various branches of law that this would engender between Corporate Law, Contract Law, and Labor Law, cf. Supiot, Alain (dir.), Regards croisés sur le social, Semaine sociale Lamy, suppl. n° 1095, oct. 2002. 42 Cf. Bruslerie, Hubert de la, aforementioned. 43 On the sociological movement that this relies upon, especially on the question of promoting women within corporations and in society as a whole via this means, cf. Frison-Roche, Marie-Anne et Sève, René, (dir.), Le droit au féminin,n° spéc. L'Année sociologique, vol. 53, 2004/1. 41

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I II III converges towards this fact: we are in an information- and knowledge-based economy, and the Law makes the value of information even stronger, especially by enhancing intellectual property rules. Yet, corporate officers have information at their disposal, and especially information on their own behavior, in itself and with regards to the goals they pursue. This makes them the masters of the game. This is why the mortal enemy of all systems is conflicts of interest: this is not a moral, but rather a systemic consideration. Regulation must revolve around the notion of conflict of interest. Establishing equilibrium will be achieved a priori, using transparence, and a posteriori, using liability.44 The adoption of such a regulatory approach is dependent upon the welcome that the class action will have in French law, it is often proposed, and often delayed: similarly, such a test will be judged by the Supreme Court when it decides whether or not a North American court of law can hear a class action engaged against a foreign company. While North American positive law and economic doctrine leaves corporate officers a large margin of maneuver in their decision making power45—and even if these officers generally affirm that their only concern is the pursuit of shareholders’, and not stakeholders’, interests—the system insists that the power of one shareholder to sue in the name of the corporation against a corporate officer, known as an Ut Singuli action, is the best defense against misuse of power. This study has the advantage of comparing the manner that the United States and Europe apprehend the question. We should not be astonished to see that in the United States, there is great confidence in using the judge as a regulator, while in the European approach, especially the French approach, the judge is not an authority figure, and the organization of power makes no place for him. 30. The liability of corporate officers is not new in and of itself, because it is the natural consequence of autono-

mously exercising power in the pursuit of another’s interests. The movement is rather characterized by a will for greater effectiveness, which justifies the attribution of the right to act in a court of law to people whose interests must be protected, or who the lawmaker has designated as being an agent of legality. This movement does not simply express concern for these interests, but rather shows the idea that the perspective of liability incites corporate officers to be prudent. Thereby, the a posteriori becomes a priori thanks to corporate officers’ anticipative calculations. Furthermore, in order to act before a court of law and demand accountability, it is necessary to have information, doubts, and suspicions, which refers the a posteriori declaration of liability to the a priori need for information and transparency. Corporate Law in practice intertwines and puts these two places in time into a circular motion. 31. Of course, classic law gives shareholders the right to information, made reality by assemblies themselves, but also by the documents transmitted to shareholders during these meetings, or available to them beforehand, and by their right to ask questions. But information is like access rights: you have to have access to access, right to rights, and informed about what it is necessary to be informed about.46 Yet, what should questions be asked about? Where should the basic information be sought out in order to have the desire to know more? 32. To resolve this primary difficulty in information asymmetry, Corporate Law, especially through the French NRE Act (cf. above), uses a key instrument of regulation: transparency.47 Transparency differs from information in that it is not necessary to request to be informed. Therefore, transparency can be the obligation of corporate officers to spontaneously inform, or more radically, following the idea of the glass house, give a constant view of the

This regulatory form of reasoning has been adopted in environmental matters using the notion of ‘environmental liability’ being developed in various pieces of European legislation, and many cases handed down by European Union courts of justice. 45 Cf. especially the study performed by Jeswald W Salacuse, Corporate governance, Culture and convergence : corporations American Style or with a European Touch ? Law and Business Review of the Americas, vol. 9 n°33, 2003 p 33-62. 46 On this question, cf. in a broader perspective, Frison-Roche, Marie-Anne, Le droit d'accès à l’information, ou le nouvel équilibre de la propriété, in Mélanges Pierre Catala, Litec, 2001, p. 759-770. 47 Cf. Jean Carbonnier, who takes a critical distance towards this notion that seems to be him a ‘completely controlled’ corporation rather than a corporation in which freedom is allowed to develop, cf. the introduction of La transparence, previously cited. P. 9-18.

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wealth, decisions, decision making procedures, and the reasons for such decisions, etc. Transparency becomes the modality thanks to which decision-making liberty can be preserved, regulation thereby allowing economic liberalism to survive. Therefore, the justified refusal to regulate the amount of salary given to managers does not mean that it is not necessary to provide greater transparency in the advantages attributed to them.48 33. Moreover, regulation of power struggles can take on the form of a new requirement, natural in appearance only: the understandability of information. Truly, in a pragmatic regression, it is only useful to have information at one’s disposal, whenever needed without having to ask for it, in order to dispose of it, i.e. draw consequences from it, for example, the decision to sue the corporate officer, or the refusal of a capital increase, or the insertion of new resolutions on the minutes of a shareholders’ meeting. But having information at one’s disposal means also being able to understand such information. This is what is at stake in the new regulation of corporate power struggles: not information, but the ability to master such information, which means being able to understand it. 34. Yet, as it has so often been shown when it comes to transparency: the more information one has, the less mastery one has over this information, the more difficult it becomes to distinguish between the pertinent and the irrelevant, and it becomes impossible to correlate the different data. An excess of information is what deprives people of their power to act. We will not return to the time when information on corporations and markets was simple, because this simplicity was not only due to the fact that companies were relatively small and dealt with a narrow scope of activities, but also because they didn’t have truly financial activities, meaning that they had not yet integrated the markets into their internal structure, and finally, because they were both relatively connected to the so-called real

economy, while remaining independent. Today, the interdependence of markets, the financiarization of the economy, and the complexity of corporate structures, all exclude a return to such simplicity, where it was enough to provide information for this information to be understood. 35. Therefore, it is no longer enough to make the information available, or even to make it transparent to brake the informational ranks and establish equilibrium between minority shareholders and corporate officers, whose interests are opposed. If we truly want to conceive Corporate Law through Regulation, we must construct systems in terms of intelligibility and effective access to information. We note that in this case, we return to the same technical problem facing engineers and the industrial world in terms of access to a telecommunication or energy transport network, which shows the great unity of Regulatory Law, and to what extent Corporate Law is an illustration of this fact. However, network industries should never be opposed to the financial industry, as, alas! we do all too often because of historical reasons. 36. Via these conjugated movements, Corporate Law appears to be principally a problem of information regulation, in order to make sure that information leads to understanding. Because of this, not only do accounting standards take on greater importance49 than rules on internal corporate structures, but also we observe a change in internal structures in order to obtain good corporate regulation. Truly, the most important people are no longer those who take decisions or carry them out, nor even those who provide information, but rather those who make the information understandable and who approve the information: auditors, financial analysts, or financial markets authorities. The importance of these actors is a sign that regulation, in the strict sense of the word, meaning market regulation, is entering into Corporate Law.

Clement, Pascal, Gouvernement d'entreprise : liberté, transparence, responsabilité. De l'autorégulation à la loi, Rapport d'information n° 1270, A.N., décembre 2003. 49 Hoarau Christian, la régulation comptable internationale, in Le Dolley, Erik, (dir.) Les concepts émergents en droit des affaires, Coll. « Droit et Economie », LGDJ ; 2010 p.103-122.

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CORPORATE LAW HAS BECOME CONCERNED WITH DESPOTISM AND COMBATS IT USING REGULATORY LAW 37. Structures or organizations that are unique to financial markets have provided most of the new thought and rules for Corporate Law. However, at first glance, financial market regulation seems foreign to Corporate Law, because the corporation is a ‘black box’ for the markets, or at least, the financial markets only know publicly traded corporations, while Corporate Law is founded upon the summa divisio between joint-stock companies / partnerships.50Precisely and moreover, all corporations are not publicly traded, even though the imperative of equitable relationships is common to all of them. This concern is just as imperious in privately held corporations, and especially when such corporations are hidden. But the distinction between regulation for markets and governance for corporations is beginning to dissolve. This is a recent and necessary evolution. Furthermore, financial markets are de facto spearheading the reflections upon corporate functioning, which means that the publicly traded company is paradoxically becoming the ordinary model for companies. What is good for the publicly traded company is now good for all companies. 38. However, at first glance, companies look for funding on financial markets. In this, the market is supposed to be external to the company, just as is the bank that gives a loan. Similarly, the market is a place where goods are exchanged, and if we were to assimilate financial markets law to a traditional branch of law, it would be the law of property51. To take an example, the law of public offers

is entirely subject to stock market regulation, because it concerns operations using stocks. Therefore, in a first perspective, not only is the internal functioning of corporations distinct from market regulation, but furthermore, the financial market itself confirms this affirmation because the value of stocks is linked to the value of assets52, and the mechanism of listing groups of companies has made corporations as individual legal persons indifferent, and gives pertinence to the masses of assets put at the service of economic activities, which is what the notion of a ‘group’ refers to, even though French Corporate Law continues to deny legal personality to groups. 39. The disappearance of the distinction between ‘financial markets regulation’ and corporate governance is, however, in progress. This is due not only to the fact that the financial market puts power within the grasp of the person able to pay for a public offer, but also because the financial market is efficient only because it is capable of obtaining, testing, and analyzing information on companies, in order to determine the fair value of its shares.53 Companies are themselves the source of the information that the market processes. Certainly, at this stage, it is easy to distinguish between the internal structure of a corporation (its decision-making process) and its external functioning, which means the information it provides to the market. 40. However, the investor and the shareholder are often two different terms for the same person: the information given to the shareholder, in an internal perspective, is identical to the information provided to the investor, in an external perspective. Of course, in a classical perspective, the shareholder uses this information politically, since he participates in the common corporate adventure; while the

As shown by Dominique Schmidt, the French Act of August 1, 2003 was not principally focused on Corporate Law, which makes him conclude that it did more harm than good, especially by reducing legal security (Les lois du ler août 2003 et le droit des sociétés, Recueil Dalloz, Point de vue, 2003, p. 2618-2619). 51 Jeantin, Michel, Le droit financier des biens, in Prospectives de droit économique, Mélanges Michel Jeantin, préc., p. 3-10. In that the progressive transformation of the ‘stock’ to a ‘title’ and then to a ‘financial instrument’ is very significant. 52 Cf. on this point the very pertinent analysis conducted by Gérard Farjat, Entre les personnes et les choses, les centres d'intérêts, RTD civ., 2002, p 221 s. 53 Bouthinon-Dumas, Hugues, Le droit des sociétés cotées et le marché boursier - Etude des conditions juridiques de la détermination de la valeur de la société par le marché boursier, Coll. « Droit et Economie », LGDJ, 2007.

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investor uses this information financially, since he evaluates the perspectives of return on his investment. But, the traditional distinction between the political and the financial has become dubious. In one direction, from the financial to the political, the only effective political right a minority shareholder has to react to management that displeases him is to leave the company by selling his shares—which is using his financial rights. In the other direction, from the political to the financial, the evaluation of the perspectives on return on investment consists in anticipating the company’s future performance—which means evaluating the political decisions that will shape its future. 41. Furthermore, the market must benefit from trustworthy information, which primarily comes from corporate officers. Because of this, financial market regulation must have direct access to the very way that internal corporate structures function, and make sure that corporate officers do not succumb to the temptation of keeping information to themselves, in order to use it for their personal profit, or hide or mismanage a conflict of interest. Security and transparency of the financial market is a goal in and of itself, and was the subject of the French Act of August 2, 1989 relating to the transparency and security of the financial market, just as was the American Sarbanes-Oxley Act of July 31, 2002, and depends on the proper organization of the fashion in which corporate decisions are made. Therefore, even though the internal operation of the corporation used to be indifferent, it has become essential, because it is an indicator of the trust that can be vested in corporate officers. 42. The Corporation has become porous to the financial market. This means that if one wants to politically construct an efficient and unified financial market, as is the European Union’s current ambition, it is not as urgent to create a single financial markets authority as it is to obtain coherent and efficient rules for the internal organization of publicly traded corporations. Institutions had started this process while the ‘iron was cold’, or before the financial crisis, because even while the idea of a single financial markets regulator was hardly popular54 , the European

“

It is not as urgent to create a single financial markets authority as it is to obtain coherent and efficient rules for the internal organization of publicly traded corporations.

Commission’s General Directorate for the Internal Market had launched a ‘plan’ for action for the modernization of corporations and the improvement of corporate governance on May 21, 2003. Of course, the financial crisis engendered an overreaction, and institutions desire to ‘strike the iron while it is hot’ by creating a single, European financial markets regulation authority in order to ensure the necessary reactivity in case of a new banking crisis, whose systemic effects from one member state to the other might be catastrophic. 43. The French Act of August 1, 2003 relating to financial security took this porosity between financial markets regulation and the proper balance of power, or information, between shareholders and corporate officers into account, investor confidence being the link between the two. In order for the financial market to function on trustworthy information, and in order for investors to have confidence, the corporation must function correctly. Therefore, there must be convergence between financial market regulation, which tends towards security, and governance of legal persons and groups, which tends towards pursuing shareholders’ interests. This is why the financial markets regulatory authority adopts rules on corporate governance. 44. In these conditions, the essential thing is to organize this porosity, by regulating the passage of information

Frison-Roche, Marie-Anne, Les contours de l'Autorité des marchés financiers, in Vauplane, Hubert de, et Daigre, Jean-Jacques, (dir.), Droit bancaire et financier, Mélanges AEDBF, vol. IV, Revue Banque éditions 2004, P: 165-180.

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I II III between its source (corporate officers) and its recipient (financial markets). For this, the market needs to understand the information provided and believe this information. When the French Commission des opérations bancaires (COB — Banking Transactions Authority) punished auditors for providing financial markets with false information for certifying inexact documents, a judgment approved by the Court of Appeals of Paris in a March 7, 2000 decision55 , the market authority reminded the auditor of his sole responsibility: ensuring the proper functioning of financial markets. Furthermore, when the Act of August 1st, 2003 established strong links between the Autorité des Marchés Financiers (French Financial Markets Authority) and the Haut Conseil du Commissariat aux Comptes (French High Council of Auditors), it institutionalized this porosity between internal workings and external workings; between regulation and governance. 45. If financial markets regulation is in charge of investor confidence, it must make sure that information is trustworthy. In order to accomplish this, the market primarily relies upon financial intermediation by investment banks, who are able to test the information. For this, secondarily, these establishments rely upon specialists: financial analysts. But this double-embedded structure—financial analysts in banks, and banks in markets—is not exact. In reality, the market has rapidly become the direct interlocutor for financial analysts. The market has made them intermediaries, which creates a new sort of intermediation, the intermediation of the trustworthiness of information, which we might call ‘the intermediation of trust’. 46. If we follow this evolution, auditors, financial analysts, and credit rating agencies, even though they are formally distinct from one another, should be subject to the same obligations, because they all ensure this new function of being intermediaries of trust, and the market now drastically needs them. Indeed, when information was relatively simple and therefore understandable, it could be tested by each individual investor. Today, through an astonishing regression, the market no longer attempts to directly pro-

cess information by itself, but rather tries to find trustworthy people in order to trust their evaluation of the information56. Of course, such trust could because of these peoples’ ability, but according to the theory of cognitive mimetism, it could simply be that others do the same thing as ‘those who know’. But the regression continues because hardly anybody checks the credentials of financial analysts—this seems to be a detour that the market no longer has time to take—and confidence is simply placed in the professional title that the person bears. The market takes ‘the intermediary of trust’s’ word for it. 47. This regression is constituted not only by the trust placed in a professional title, which is seen as not only necessary, but sufficient in and of itself—the title of financial analyst or auditor—, even though the world of titles is usually what the market is opposed to. This can be explained by the fact that showering the market with information contributes to make this information incomprehensible. Financial market regulation therefore falls upon these intermediaries who attest to the trustworthiness of information and make them understandable, therefore usable, therefore useful. This is why financial market authorities are concerned with internal corporate structures, to the extent that such analysis is being conducted publicly and confidentiality is becoming an almost foreign notion to Corporate Law, brushed aside by the principle of transparency. This explains the major reform of the Financial Security Act, which makes the internal audit almost analogous to the external audit. 48. Therefore, financial market regulation increases control over corporate officers and readjusts conflictual relationships within corporations, but achieves this at the cost of regulatory notions such as transparency. Because information must be trustworthy, and the investor must be protected, market authorities have become directly concerned with the Agency relationship. Obligations for declarations and for transparency are means to diminish the nefarious effects of conflicts of interest that burden

Court of Appeals of Paris, 1st Chamber, H.,KPMG., RJDA, 2000. On this idea according to which the Financial market is not simply built on trust, but is made up of intersubjective links, which are the true source of value, cf. especially Orléan, André, Le pouvoir de la finance, Odile Jacob, 1999 ; Giraud, Pierre-Noël, Le commerce des promesses : petit traité sur la finance moderne, Le Seuil, 2001. 56

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the director of a company, but they are simply procedural rules, and nothing more than a palliative. 49. A more a priori and more radical solution would be to remove conflicts of interest, by requiring that the board of directors be mostly, or even exclusively, made up of independent administrators. From a Corporate Law perspective, the proposition is absurd, even sacrilegious, because it challenges the idea that shareholders should govern the company since they bear its financial risk. The intimacy between risk and power is thereby broken. If the idea persists, especially in the United States, it is because it is a regulatory notion: by composing the board of directors of independent people, whose distinction would be their ability, skills, and knowledge, we transform this body into an impartial one—since the officers are no longer shareholders—and a competent one, both internal to the corporation and as disinterested as though it were external to it. By doing this, we enshrine the regulatory authority as the ideal organizational model for good decision-making! Internal corporate structures should be modeled according to this example. 50. We understand how much financial markets regulation has impacted corporate governance, both by showing how important it is, and by changing its traditional understanding. The resonance of theories on good financial market regulation for corporate governance tightly links proper corporate governance to checks-andbalances, and protection of owners of financial instruments. However, current reflections upon governance should focus more on privately held companies. We can conceptually justify that regulation of corporate relationships should only occur within publicly traded companies and not in others, either because they are seen as structurally different from one another, or because they do not require the heavy legal framework needed

when stocks are publicly traded. But, confining the porosity of external regulation and internal governance to publicly traded companies is based upon contingent explanations: the financial market has alone brought about organizations that are sufficiently structured in order to allow us to reflect upon their governance. Therefore, market consultation methods are only available to financial market authorities, and the European Commission’s communications simply contain a summary of the authorities’ contributions57 , which, consequently, dries up other forms of reflection. However, if we return to our concern over protecting minority shareholders, there can be no single solution for all companies, because the crucial element resides in majority rule, which is not affected by the fact that the company is privately held or publicly traded. The migration begins.58 51. If we conclude that market regulation’s rules do not simply influence corporate governance, but improve it by improving information, for example, we must encourage companies to list themselves, as an indirect way of improving corporate governance. To take just one example, the liquidity of the financial market allows a shareholder to sell his shares if corporate officers’ behavior does not please him. We have seen that the exercise of this financial power to sell shares is the most efficient of political rights59. It is necessary to give minority shareholders in unlisted companies the power to easily sell their shares. This shows the interaction between market regulation and corporate governance, even within privately held companies. This interaction is just at its beginning.

The November 15, 2003 document synthesizing replies to the European Commission’s General Directorate of the Internal Market on May 21, 2003, setting out the aforementioned ‘action plan’ on the ‘modernization of corporate law and the promotion of good corporate governance in Europe’, is a perfect example of this sort of ‘idea drain’ on corporate law by the authorities. 58 On this movement, cf. Boizard, Martine, la distinction de la société cotée et de la société non-cotée comme summa divisio du droit des sociétés, thesis Paris II, 2002 ; Couret, Alain, Régulation financière, société cotées et sociétés non-cotées, in Droit de la Régulation : question d’actualité, préc., nos 33 s., p 34 s. 59 Cf. above n°4

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SUSTAINABLE DEVELOPMENT AND BUSINESS ETHICS THE GLOBAL SYSTEM FOR SUSTAINABLE DEVELOPMENT (GSSD) DISTINGUISHING AND RELATING THE PIECES TO REACH A UNITARY VISION Recommended citation:1-1.7

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SUSTAINABLE DEVELOPMENT AND BUSINESS ETHICS THE GLOBAL SYSTEM FOR SUSTAINABLE DEVELOPMENT (GSSD) DISTINGUISHING AND RELATING THE PIECES TO REACH A UNITARY VISION by Wallace Baker

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INTRODUCTION

y introduction to sustainable development occurred when David Pines invited me to a Santa Fe (SFI) 1990 workshop on sustainable development attended by world class scientists, including several Nobel Prize winners, scholars, business and media executives, lawyers and others. George Cowan, a distinguished scientist, a physical chemist and founder of the Santa Fe Institute, wrote notes on sustainability in 1991 which was a report on this workshop and his own thinking, which is in part su marized below in paragraphs a through e. David Pines is a distinguished physicist, one of the founders of the Santa Fe Institute (SFI) and colleague of my father-in-law who was the head of the Physics Department at the University of Illinois and a Director of the Radiation Laboratory at MIT during World War II. Among those attending this SFI workshop was Professor Nazli Choucri, an MIT professor of Political Science and a drafter of Agenda 21 which lists problems covered by the concept of sustainable development. Since the SFI workshop, she developed the Global System for Sustainable Development (GSSD) with some help from me and more important contributions by other academics at MIT, her students and others discussed later in this article. She, along with George Cowan, have been important teachers for me in increasing my knowledge and ideas about how to reach sustainable development. A. POPULATION

During discussions in the SFI 1990 workshop, one of the major concerns the group had then was of uncontrolled continuing population growth. According to a U.N. study released in 2005, the growth in population could decline after

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reaching 9.1 billion in 2050 if the fertility rate decreased. This leveling off, if it actually occurs, is at least in part due to more education of women and the increasing use of birth control in less developed countries. B. ENERGY

This report underlined the problem and importance of the rapidly accelerating growth in the use of energy and its effect on climate change. By 2050, it is now estimated our energy needs will at least double. He also distinguished the long term problems â&#x20AC;&#x201C;the finding and developing renewable and non-exhaustible energy sources required to fuel our modern consumer way of life, which he thought could take up to three generations of research and development. C. HUMAN BEHAVIOR

He also noted the great difficulties in changing "deeply imbedded patterns of human behavior" where change is necessary to reach sustainability. He continued with the idea that "Presumably, the less mobile aspects of human behavior are determined by genes and the more mobile parts by nurture" and added that there is often much resistance to change in governmental and social institutions. Significant change in people's behavior generally occurs when a problem becomes urgent in times of war, financial or other crisis or when there is especially charismatic leadership in a community or nation. D. OTHER PROBLEMS

His report lists sustainability problems of poverty, migration, conflicts, pollution, deforestation, appropriate management of agriculture and the need for collective security. E. SCIENCE AND TECHNOLOGY

Cowan characterized science and technology as being the "the most mobile fields" if one realizes more innovation has happened in the 20th century than in all other centuries combined.

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Since the 1990 workshop, with Nazli Choucri's encouragement and her supplying me with a number of important reading materials such as Our Common Future1 and Al Gores' bestselling Earth in Balance –Ecology and the Human Spirit2, my understanding of this subject was further advanced. After reading Al Gores' book, due to my early experience as a trial lawyer, I reached another conclusion, i.e. that this subject was too complicated for the average person to understand unless it was broken down into smaller and more comprehensible pieces, and relationships within the system explained. It seemed obvious that we needed to start to educate our children and the average citizen to understand these problems. It will probably take more than one generation to learn how to think differently and to change our culture. So in order to simplify sustainable development enough to begin educating young people, I was inspired by the Chinese saying that a picture is wo rth a thousand words and tried to draw a simplified picture of sustainable development and its different elements. See Figure 1. In this earliest sketch, my interest was particularly strong in highlighting the connection or link between different actions indicated by arrows. Note intensive agriculture pollutes ground water due to fertilizers. Increasing agricultural land by deforestation alleviates poverty but reduces the ab-

1 2

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Figure 1 PROBLEM OZONE HOLES

Fertilizers Intensive agriculture Less CO2 Absorbsion Less Oxygen

Education

Deforestation

Poverty bl ic La O ws pin ion

CFC’s Air pollution Energy needs Housing factories Transportation

Ideological Beliefs Religion

Municipal Waste

Water pollution

Aerosols A Re Refrigerators Oth harmful Other product

Human activity Industry science Technology

Manufacturing transportation

At this workshop, it became evident to me that if the business community did not take action to help solve sustainability problems, not much would happen. Such action could most easily come about by legislation and market forces if organized to make appropriate action profitable. The business community, in partnership with government, has demonstrated they can get useful research done and attempt to invent ways to find technical fixes for sustainability problems in addition to social solutions. Increase in greater social consciousness, including better ethics in business and a heightened responsibility for the public welfare will be necessary. This is part of being a good citizen so society can work well. Businesses are often our most powerful citizens and their actions cause significant social consequences for the benefit of society or they can cause severe ecological and social harm.

City growth

Hazardous H waste Cleaner product

CO2 New non exhaustable energy Nuclear, sun, other Increasein food supply

Poverty Population growth

S Solid waste

Global warming

Ocean growth Richer / Consumption Economies Education of women Nuclear accident Starvation Pestilance War

Air pollution Elimination of species

No emergency no action ? Education - consensus

SOLUTION Sustainable development meaning will vary overtime special problems of developing countries - future generations

sorption of CO2 by the trees and is one of the causes of climate change. Pestilence limits population growth as does education which also affects ideological beliefs. Human activities, i.e. agriculture and urbanization, eliminate other species at an increasing rate. Before one of her talks in sustainable development in France, I showed this sketch to Professor Choucri. She said she thought it was "interesting". With this germ of idea, she returned to MIT and began working on the Global System for Sustainable Development not for children or for the man in the street, but for policy-makers, international organizations, scholars, companies and other entities interested in gaining access to the latest detailed and usually complex reliable knowledge on specific problems of sustainable development. She was right that it was important to direct our attention this way in order to get industries and others moving in the right direction. The education of children and ordinary people should happen in parallel. This effort should profit from the useful knowledge collected, created and disseminated by a knowledge system which

World Commission on Environment and Development. 1987. Our Common Future. Oxford University Press, fourth reprint 1990. Gore, Al. 1992. Earth in the Balance: Ecology and the Human Spirit. A Plume Book, Penguin Group, 1993.

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I II III she created and called the GSSD. She enlisted the remarkable expertise available in the MIT faculty and the support of its able student body to help create this knowledge network. It took a number of years to design and define the concepts of the elements of the Global System for Sustainable Development (GSSD), to logically organize their relationships and create a useful knowledge network for sustainable development. An indirect method of securing a peer review of her accomplishment occurred when a U.S. patent was secured for the GSSD. This system has not been finished since other useful information needs to be added. In addition it needs to be dynamic and change in order to reflect new developments so it does not become out-of-date.

tion and the construction of what is included in the GSSD described as "ontology" by Professor Choucri, i.e. its "being". The MIT Artificial Intelligence Laboratory was instrumental in drawing upon a novel set of computational tools for exploring a range of system design and implementation issues. Sustainable development is subject to different definitions by different people. It is also difficult and complex because it is not easy to find affordable solutions to many environmental problems and because the way to reach

The work on the Global System for Sustainable Development continued with international cooperation of many people and institutions in order to incorporate websites of other reliable producers of knowledge and to collect, make available and encourage creation of new knowledge to add to the GSSD which will help us to reach sustainable development.

Sustainable development is subject to different definitions by different people.

Professor Choucri edited and wrote significant parts in a 2007 book: Mapping Sustainability3 which describes what she, her students, her colleagues at MIT and other providers of knowledge have accomplished since 1990. The first part of the book is theoretical and analytical as well as methodological and computational. It is computational in that it explains how the GSSD ri des on the information revolution with knowledge networking on the Internet using the power of computers to work on sustainability problems which B.R. Allenby describes as the "mutually reinforcing the dimensions of the human future". See page 48. This book gives a description or inventory of the nature, defini-

â&#x20AC;&#x153;

sustainability varies in different localities and depends on what problems occur and upon whether the focus is local, regional or global. In addition, the long term is often required for sustainable development problems to manifest themselves. The fact that most people, including leaders and politicians, are more concerned with immediate problems complicates any solution of long term problems.

This book Mapping Sustainability Knowledge: E-Networking and the Value Chain (hereafter referred to as "Mapping") of about 500 pages, which is based upon twenty years of research by political science Professor Nazli Choucri at MIT, is volume 11 of the Alliance for Global Sustainability (AGS) Book Series. The AGS annual conference reports on research done in academia and elsewhere. The AGS helped find issues of the framing sustainability and the value of knowledge and the value of networking addressed in this book. The aim of the series is to provide timely accounts by authoritative scholars of the results of cutting edge research into emerging barriers to sustainable development, and methodologies and tools to help governments, industry and civil society overcome them. The level of presentation is for graduate students in natural, social and engineering sciences as well as policy and decision makers around the world in government, industry and civil society. The Alliance is presided by the President of the University of Tokyo, the Swiss Federal Institute of Technology, the Massachusetts Institute of Technology and Chalmers University of Technology. Its members are chosen from leaders in industry, academia, foundations and government and others from Japan, the U.S., Switzerland and Sweden.

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Immediate problems get attention –long term problems tend to be ignored until they become urgent with the risk that with the passage of time it becomes too late to fix them. The French government is giving a high priority and actively seeking solutions to unsustainability through legislation, taxation or other governments actions through its Minister for Sustainable Development, Mr. Borloo. It has made instituted committees suggesting 268 commitments to move toward sustainability which subjects have been submitted to its legislature4. On the other hand, the U.S. government has in the past been more passive, in part for political reasons, apparently believing that the free market system would provide technological solutions to these problems. In the U.S., both political parties and the particular Republican Party had a preference to avoid government intervention to which many businesses are hostile on the theory that government interference in business through regulation increases costs of operation and stifles innovation. Ronald Reagan thought that the government was the problem not the answer. He was right because government action is often inefficient and ineffective but there is clearly an important role for government in providing public services and enforcing basic rules when it functions efficiently. It will be most interesting to see what President Obama can do since he has announced there will be change and policies will be different. He recognizes the unsustainability of relying on foreign oil for energy. His success will depend on whether he can convince the legislature and the major companies, including oil companies, to cooperate with his policies despite the fact that their short term interests may not favor actions necessary to reach sustainability such as inventing cheap new renewable energy sources. Exxon has just invested huge sums to increase its supply of liquefied gas in Qatar where the world's largest natural gas reserves are located. This investment is for profit and is also "green".

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SUSTAINABLE DEVELOPMENT DEFINED

he most common definition is found in our Common Future on page 8 where it is stated that humanity has the ability to make development sustainable –to ensure that it meets the needs of the present without compromising the ability of future generations to meet their own needs. The somewhat expanded definition of sustainable development given in Mapping on page 12 is: "The process of meeting the needs of current and future generations without undermining the resilience of life-supporting properties of nature and the integrity and security of social systems". This definition implies that the action of man has unfortunately begun and continues this process since many, if not most, serious observers note that evidence of this undermining has already occurred.

WHAT IS THE GSSD?

he easiest way to begin to understand the GSSD is by looking at the diagrams mapping sustainable development. This is a form of visualization, a technique of representing situations and facts in a way that facilitates understanding and analysis. For a more detailed explanation of visualization, see Carlos I Ortiz's chapter "Visualization" on pages 231 to 261 of Mapping. Figure 2 shows the different kinds of domains covered by Mapping. The domains are the first framework upon which the GSSD is based and built. Figure 3 below shows the fourteen domains chosen to represent most of the areas where sustainability problems arise in the form of slices of a circle. These are represented as slices in the circle separated by dotted lines to emphasize the fact that the relationships of these domains are

See http://www.legrenelle-environnement.fr/IMG/pdf/GE_engagements.pdf, viewed 25 February 2009.

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I II III fluid, often overlapping or joined together to create sustainability problems in various ways.

Figure 2 Domains of sustainable development. Demographic domain • Population Dynamics • Urbanization • Migration and Dislocation • Consumption patterns • Unmet basic needs Energy and natural resource domain • Energy use and source • Forest and land uses • Water used and sources • Agriculture and rural activities Technology-centered domain • Trade and Finance • Industry and Manufacturing • Mobility and Transport Domains of decisions and choices • Conflict and War • Governance and Institutions

Next comes the Dimensions, in Figure 4 below, which have circles overlaying the slices. The center circle represents the human activities which cause or have caused the problems in the next circle. Once these are described, then solutions are considered. First comes the circle of technical solutions, i.e. scientific answers. The next circle is devoted to social solutions which include laws, regulations, social solution, ethics and other solutions human beings can contribute to reaching sustainability as distinguished from technical or scientific advances. Figure 4

Conceptual Framework :Rings onal Respon nati ses r e o l Int u S t l i o ns cia So S o l a l u tio nic ns ch e e l m b T o s r P tivities Ac

Conceptual Framework : Slices Mobility Industry

Agriculture

Trade

Labd Use

Water

Energy

Conflicts

Governance

Urbanization

Migration

Population

Unmet Needs

Consuption

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lR ationa espons es ern Int Solution l a i c s So l So l u t i nica on ch s blems Te Pro tivities Ac

Figure 3

Dimensions This separation into separate circles does not imply that both types of solutions, technical and social, do not need to be applied to the same sustainable problems, which is often the case. On the contrary in most cases, solutions require both technical, financial, economic and human solutions to solve a problem. It should be specially noted that the outermost circle relates to international responses which includes both Domains and Dimensions but also includes references to international agreements, conferences, and other rubrics contaiThe Journal of Regulation n° 2 - June 2010

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which shows the circles and subdivisions in the circles relating to each domain.

Figure 5 AGENDA 21 Conventions & Global Conferences

Strategies of International Institutions Private-Public e-Public Partnerships erships ment Environment ents Agreements imes Trade Regimes ments & Agreements

New Develop Developments & Investm Investment Mechanis Mechanisms

The GSSD serves as a framework for organizing in an inclusive way, as possible, the different elements in susFigure 6

Tec Technology Agr Agreements

DOMAINS & DIMENSIONS

Moni Monitoring Perfo Performance Codes of Conduct & V Voluntary Agreem Agreements

nomic Economic stment Adjustment eements & Agreements Population Management

Financial & Investment Code Codes

Conflict Management & Peace Strategies

Global sustainability strategies ning a mixture of many technical and social solutions but on an international level. Within this circle on the top is Agenda 21 which was released at the 1992 Earth Summit in Rio and the program was adopted by 178. The program lists the (1) social and economic dimensions combating poverty, changing consumption, population concerns, integrating development and environmental concerns, (2) conservation and management of resources, combating deforestation, correct agricultural practices, (3) strengthening the role of major groups –women, children, workers and (4) deals with means of implementation –financial resources, transfer environmentally sound technology, using science, international institutional arrangements, legal instructions and the spread of information. Thus Agenda 21 at the top of this circle encompasses many elements already found in the GSSD but focuses on the international formulation of these problems. But it is a necessary complement to the other parts of GSSD. Figure 6 shows a further break down into cells, concepts and subconcepts that are found in lists in Appendix A "Guide to Core Concepts" by subjects shown in each slice throughout the various fourteen domains. For an overview and a summarizing picture see Figure 7 108

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Figure 7

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I II III Figure 8

Abstract

DOE - Fossil Energy : Carbon Sequestration State of Science Report ABSTRACT DETAILS Submission ➔ WWW Type

Title ➔ DOE - Fossil Energy : Carbon Sequestration State of Science Report URL ➔ http://fossil.energy.gov/news/techlines/99/tl_seqrpt.html English Abstract ➔ Research by the Departement of Energy on different techniques of carbon sequestration. Discusses the effectiveness of each approach, providing recommendations. Country ➔ United States Region(s) ➔ Continental North America Slice(s) ➔ Consumption; Energy Use & Sources; Industry; Mobility Ring(s) ➔ Scientific & Technical Solutions Cell(s) ➔ Consumption; Scientific & Technical Solutions Energy Use & Sources & Scientific & Technical Solutions Industry : Scientific & Technical Solutions Mobility : Scientific & Technical Solutions Concept(s) ➔ Consumption : Waste Management and Minimization Energy : Pollution Control Industry : Best S & T Practices Industry : Design for Environment Datatype(s) ➔ Bibliographies & Reports Date ➔ 08/20/1999 Entered Last Update ➔ 04/11/2001

INDUSTRY SPECIFIC REFERENCES Industry Slice(s) Industry Rings Industry Cell(s)

➔ Extraction & processing; Manufacturing; Energy; Transport ➔ Scientific & Technical Solutions ➔ Extraction & processing : Scientific & Technical Solutions

tainable development and seeks to make explicit the connectivity logic of the system, how different pieces in the system are connected and dependent upon others. It is hoped that the connections between the different concepts and subconcepts will be automatically integrated in the GSSD computer system as further progress is made, i.e. these relationships will be part of the system and be searchable electronically. Thus relationships not necessarily obvious will be delivered to researchers.

HOW DOES THE GSSD WORK?

hapters 2, 3, 4 and 5 of Mapping go into the details how the GSSD is organized to process the knowledge considered worthy of entering the system, the preparation of abstracts (see Figure 8 for a sample abstract) and the transition from one language to another. www.thejournalofregulation.com

The Global Workflow Strategy is found in Chapter 3 which includes selection and content provision, identifying content and coverage. This chapter also lists the type of materials which are included, i.e. agreements, bibliographies, reports, journals, case studies, definitions/theories, events, indicators/data, models and organizations. The multilingual workflow process is described in detail in the chapter in Figure 3.2, including non-English submissions and English submissions requiring a non English version. Chapter 4 focuses on the types of cyber partnerships that constitute the GSSD among other subjects such as GSSD operational roles and functions. The various partners are also outlined, i.e. content partner, translation partner, mirror site partner, development collaborator and general support. This chapter also raises the necessity to transcend the dominance of English.

THE GSSD IS THE RESULT OF EXTENSIVE COOPERATIVE INTERNATIONAL EFFORT

olleagues at MIT and other universities, undergraduate and graduate students, both inside and outside the United States, Lotus-IBM and other companies and organizations have worked with Professor Choucri, who masterminded Mapping, edited it and wrote substantial parts of it. The development of the GSSD has served as a useful tool for educating students who have worked with the faculty to create and operate the GSSD on the web. A network of different actors participates in this activity in their own self-interest to increase their knowledge and/or in the public interest by contributing their own knowledge. These actors are governments, universities, the United Nations, companies, non-governmental organizations and others. They are a consortium of prestigious and carefully chosen knowledge contributors through their own websites or parts of them which are chosen to become part of the GSSD. These entities are expected to update the information they provide on their website and, to the extent they do not maintain this reliability and quality of their information or do not remain current, they are removed from the system. The Journal of Regulation n° 2 - June 2010

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The subject of sustainable development is especially attractive to many young people who seek to work in activities in the public interest rather than for private profit. These efforts also serve to help private enterprise become a part of a sustainable future. This is essential because if business does not actively participate in trying to reach sustainability it will not happen. Thus the efforts in creating and operating the GSSD serves several purposes which include the education of undergraduate and graduate students who work on it. In addition it provides government policy makers with an effective tool to help them recommend solutions to politicians, allows industry to help solve its sustainability problems, and helps to educate the public which needs to understand and induce politicians to take appropriate action to move towards sustainability. This is essential to a properly functioning democracy.

OTHER IMPORTANT SUSTAINABILITY SUBJECTS ANALYZED (I) In part II of "Mapping the GSSD, ARABIC", Chapter 7 outlines problems and opportunities in the Arab world of creating an Arabic GSSD system in Lebanon at the American University of Beirut. (II) Chapter 8 "GSSD China Collaboration on Knowledge E-Networking" focuses on the work of the Administrative Center for China's Agenda 21 in the government of China Ministry of Science and Technology, the first international collaborator in the development of the GSSD. (III) "Strategies for Re-Engineering Global Knowledge E-Networks" is the subject dealt within Chapter 9. The work in this chapter reviews and assesses GSSD performance. (IV) Chapter 10 deals with the value of knowledge for extended commercial enterprises –a crucial element in decision-making necessary for survival. (V) "GSSD - Enterprise for Multinational Corporations" in Chapter 11 deals with knowledge –linkages between subsidiaries and central management in large international companies who are themselves meta-networks of smaller knowledge networks in subsidiary nodes. 110

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Part III of Mapping continues with explorations of new areas of research relevant to sustainability. (VI) "Visualization", the subject of the next chapter, highlights current visualization technologies relevant to globalization and the global system. (VII) "Exploring E-Governance - Salience, Trends and Challenges" is the subject of Chapter 13. The subject is important because individuals and institutions rely more and more upon automated systems to produce better government. (VIII) "Growing Clean?" Property Rights, Economics Growth and the Environment" of Chapter 14 examines the elusive relationship between levels of economic growth and environmental outcomes and finds that neither economic growth nor property rights protection appears to lead to an improvement in environmental quality. (IX) Chapter 15, "Globalization and International Trade", utilizes insights from graph theory or the study of networks which is a representation of a system stability and instability in the contest of sustainability. The graph theory as it develops appears to new and interesting directions for research in sustainability. (X) "Synergy for sustainability - Law, Science and Computability" is the title of Chapter 16. This chapter examines the role of law and ethics, often embodied in law, in the GSSD and its use in combination with science, technology, medicine and the social sciences. This chapter also deals with the question "Who controls the Internet?" which, like the law itself, is a complex adaptive systme. (XI) Chapter 27, "Financial Risks and Climate Change", examines how the banking system is beginning to take into account the risks associated with financing infrastructures in light of climate change and limitations of the production of CO2. (XII) "Interactive Gaming and Simulation of World Politics" is the subject of Chapter 18. (XIII) Chapter 19 compares basic and complex logic in international relations. (XIV) Chapter 20 provides a conclusion to Mapping. www.thejournalofregulation.com

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I II III

ETHICS OF SUSTAINABLE DEVELOPMENT

n the Dimensions (circles) just outside those technical solutions appear social solutions which include the social sciences, regulatory solutions, economics, politics, philosophy and ethics. But more generally and more importantly, implicit in the underlying purpose of the GSSD is the assumption that all of this effort is to safeguard the best interest of our planet and the societies of the people living on it. The GSSD is a guide for companies who, in addition to earning profit, are given the knowledge on how they can be responsible civic minded ethical citizens. They are responsible for avoiding harming our planet and its inhabitants. Up to now, we have exploited our natural surroundings, generally ignoring the harm done to the earth's systems and the damage to our citizens. The GSSD focuses on useful knowledge necessary to avoid harm to the earth's systems and human beings. The GSSD itself encourages ethical conduct by maximizing knowledge. One person should not pretend to serve another if not knowledgeable and competent. Now economy of resources will need to emphasize saving money and resources.

ving social wellbeing. Sustainable development seeks to strike a reasonable balance between these two goals. Unless we choose to live in a police state where laws and regulations govern almost every action, government regulation should only cover basic rules and to the extent possible, encourage social responsibility and ethical conduct in the interest of society. Economic freedom within reasonable limits and encouraging entrepreneurship are also important values in a society since they encourages the production of wealth. Other forces help induce ethical conduct on the part of businesses –leadership, criticism in the press of bad conduct, public opinion and litigation where laws are violated. So, ethics, law and order are a fundamental part of the raison d'être of the GSSD; not only are they reflected in the circle of social solutions but they also underlie the whole system. Failure to insure that development is sustainable in the future could result in great damage to or the end of the human race. It is surely unethical to do serious harm or exterminate the human race. by Wallace Baker

This implies a new kind of ethics that lead to sustainable development. We need a different way of thinking about the world and our roles in it. The primary focus in the past was on rapid exploitation of the earth's resources without seriously taking into account negative effects. In order to reach such an objective, new laws and regulations are required and new ethics to supplement them. We have also recently seen much soft law –declarations of principles and creation of norms which, although not laws or regulations, often are the first step to national laws or international treaties. Laws and regulations, establishment of norms and declarations and ethics are designed to protect the interest of society as a whole. Our western culture is largely dominated by individualism, self seeking and competition –not a bad thing in itself provided it does not seriously damage the interests of society as a whole and is balanced by actions impro-

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REGULATION AND SUPREME COURTS, TRANSATLANTIC PERSPECTIVES By Maître Marc Lévis avocat au Conseil d'État et de la Cour de Cassation Maître Julien Lévis avocat au barreau de New-York

I-1.8

he present Law Review was launched on January 25, 2010 at a symposium held at the Economic and Social Council, entitled "The Role of supreme courts in economics”. The present article is a continuation of this event. It is not intended to be conceptual : notions of regulation1 and jurisdictional supremacy2 are controversial. Our approach will be a pragmatic one, in line with the practical use of these terms, notwithstanding the risk of approximation.

Both notions are complex; both of them are also currently "under the spotlights". The successive waves of the current economic crisis trigger growing calls for increased regulation. Supreme Courts currently raise renewed interest: expressions and guardians of the rule of law, they invite us to contemplate it in the light of fundamental rights. The current period invites us to link up Supreme Courts and regulation as law renews itself in the wake of globalization. In some sectors - such as financial markets - issues are primarily global. In others, such as water or renewable energy - regional interests are central: North America's, Europe's, ASEAN's ... Given our theme, it may be useful to compare the United States’ experience to France’s in

a simple overview of the relevant issues. As they often conduct a thorough review of economic stakes, supreme courts apprehend regulation. But they also constitute, by essence, regulatory courts for lower tribunals. Finally, they are involved in a dialogue with other supreme courts. Hence, supreme courts regulate Rule of Law mechanisms. We will first consider regulation as it is captured by supreme courts (I) and then focus on the regulation conducted by supreme courts (II)

REGULATION AS CAPTURED BY SUPREME COURTS

he courts generally described as supreme are the ones controlling a jurisdictional order while not submitted to any form of domestic review3. This control defines supreme courts’ review mechanisms and focuses on fundamental norms (law or constitution). Through constitutional (A) and legal (B) review, supreme courts capture regulation. A. CONSTITUTIONAL REVIEW Supreme courts, around the world, share the common task of ensuring a uniform interpretation of the rule of law. At the heart of their mandate, they are generally the custodians of the fundamental norm: the Constitution. The recent French reform introducing the priority constitutional challenge highlights the topicality of this question. The United States, on the other hand, appear to be a rather

R. HADAS-LEBEL, « La régulation : un objet juridique en quête d’identité », Justice et cassation, Le temps dans le procès, 2007, p. 173. A. TUNC, « La Cour suprême idéale », Rev. Intern. Dr. comparé, 1978, p. 433. 3 See L’application de la constitution par les Cours suprêmes, Dalloz, 2007. 2

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I II III unique case, as they have a comparatively long experience in constitutional review.

with the constitutional provisions governing the activities concerned (2).

The U.S. Supreme Court's case law on regulatory authorities is characterized by two features that make its historical review relevant.

1. ENFORCING THE SEPARATION OF POWERS

First, the United States were pioneers in the establishment of regulatory authorities (e.g. Office of the Controller of the currency created in 1863, the Interstate Commerce Commission established in 1887, Federal Trade Commission 1914). Second, this country stands among the first to have adopted a Constitutional Court, with extensive powers. The United States Supreme Court's famous case of Marbury v. Madison4 granted judges the power to review, not only acts of the executive, but also of the legislative and their conformity to the Constitution. This ruling gave the Supreme Court the power to interpret laws and even to invalidate unconstitutional provisions. This broad constitutional control allows the Supreme Court to examine all issues related to regulatory authorities. Hence, the U.S. Supreme Court stands alone among constitutional courts, and has developed, throughout the 20th century, a rich constitutional doctrine on regulatory authorities. The emergence of regulatory authorities in the constitutional arena has raised numerous issues. They can be summed up around two responsibilities of the Supreme Court: • To guarantee regulatory authorities’ compliance with the separation of powers in their functioning, in order to ensure that the constitutional balance of power is respected (1) ; • To review delegations of power to regulatory authorities, in order to ensure that such delegations comply

Ensuring the separation of powers is one of the main responsibilities of constitutional courts and particularly of the U.S. Supreme Court. It requires a constitutional review of regulatory authorities’ operations. Therefore, the Supreme Court exercises a judicial review of the norms establishing the procedures used by regulatory authorities. The U.S. Supreme Court also monitors potential infringements on powers in the appointment and dismissal of members of regulatory authorities by the executive or the legislative. a. Separation of powers and the creation of regulatory agencies The U.S. Supreme Court was asked to determine if Congress could establish regulatory authorities subject to procedures that would limit their discretion. In Chadha5, it has, for example, invalidated a law that allowed veto by a single house of congress. It required a bicameral process to invalidate a decision taken by the agency. b. Appointment and dismissal of regulators Many of the decision issued by the Supreme Court of the United States on regulatory authorities have focused on the appointment and dismissal of members of regulatory authorities6. It is, indeed, the main test of the respective influences of the legislative and executive on regulatory authorities. And the balance here needs to be preserved. 2. THE CONSTITUTIONALITY OF DELEGATIONS OF AUTHORITY

This issue encompasses both the act of delegation and the exercise of delegated powers (b). It derives from balance of powers concerns, but focuses more specifically on the activities conducted regulatory authorities (b).

Marbury v. Madison, 5 U.S. (1 Cranch) 137 (1803). Immigration and Naturalization Service v. Chadha, 462 U.S. 919 (1983). 6 Myers v. United States, 272 U.S. 52 (1926), Humphrey's Executor v. United States, 295 U.S. 602 (1935); Wiener v. United States, 357 U.S. 349 (1958) ; Bowsher v. Synar, 478 U.S. 714 (1986) ; Morrison v. Olson, 487 U.S. 654 (1988). 5

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a. Regulatory authorities' legislative activities In order to implement their executive functions, regulatory agencies were allowed by American courts to interpret legislation.

the non-suspensive nature of appeals against the decisions of the Competition Council. The Constitutional Council denounced a violation of fundamental rules of due process.

The exercise of this power of interpretation necessarily implies a review by the Supreme Court, as the latter is in charge of unifying the interpretation of texts. In addition, as early as 1935, in the Schechter Poultry Case7, the U.S. Supreme Court allowed Congress to delegate to vast areas of its legislative power to regulatory authorities.

Guardians of the Constitution, supreme courts also operate a control of legality.

However, the Court expressed its desire to avoid overly broad delegations of legislative power, as illustrated by the case National Cable Television Association8. The constitutional review therefore covers both the interpretation of legislation and the enactment of normative texts – sometimes of legislative value - by regulatory authorities. b. Judicial powers of regulators Regulators, through many modalities, have been assigned judicial functions. Constitutional reviews of the exercise of that power are conducted. In the context of a delegation of legislative power to regulatory authorities, the U.S. Supreme Court, in Mistretta v. United States9, has recognized that Congress could delegate the task of elaborating sentencing guidelines. Moreover, constitutional courts control the exercise, by regulatory authorities, of their jurisdictional powers. The French Constitutional Council ruled on the exercise, by the Competition Council, of judicial functions. In its decision Conseil de la Concurrence dated January 23 1987, the Constitutional Council censored

B. THE CONTROL OF LEGALITY Examining this control as conducted by supreme courts on regulatory authorities, we will focus on French and European solutions. In the United States, pursuant to Article 3 of the U.S. Constitution, the Supreme Court's mission is to ensure an accurate application of federal law. This mission therefore entails a review of the compliance of lower courts decisions with federal laws and treaties as well as the constitution. In the 1980s, an increase in the number of federal laws increased the Supreme Court’s caseload. The current trend is towards a concentration of the Court’s activity on the constitutional review of fundamental rights (in particular the ones expressed in the "Bill of Rights") and on certain legal subjects such as criminal law. In France, the judicial review exercised by the supreme courts is characterized by a control of legal qualifications. Hence, the Council of State (Conseil d’Etat, the supreme court in charge of administrative matters) and the Court of Cassation (Cour de Cassation, the supreme court in charge of private litigation) control the qualifications used by regulatory law. Recent examples illustrate this to varying degrees. Sometimes the concepts pertaining to the regulation are the subject of control (1). Sometimes data provided by regulation, including impact studies, are part of the objectives of the control (2). 1. NOTIONS OF REGULATORY LAW, THE OBJECT OF CONTROL

We will examine, as an illustration, three decisions by the Court of Cassation (a) and one by the Council of State (b).

A.L.A. Schechter Poultry Corp. v. United States, 295 U.S. 495 (1935). 415 US 336 National Cable Television Association Inc v. United States (1974). 9 Mistretta v. United States, 488 U.S. 361 (1989) 8

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I II III a. decisions by the Court of Cassation In the case known as Mobile phones, the Court of Cassation expressed its position in two landmark decisions on June 29, 200710, and -after a rejection of the first appeal and a second appeal- on April 7th, 201011. In the first decision, the Court of Cassation overturned the first ruling by the Court of Appeal of Paris due to a lack of legal basis : gaps in the appellate court’s reasoning had not allowed the Court of Cassation to exercise its control. The Court of Cassation thus highlights the elements over which it intends to exercise its control. The decision makes this point clear: "By deciding so, without having conducted the concrete investigation- that was asked from herof whether the regular exchange of information between 1997 and 2003 between the three companies operating in the market, as it concerned data unpublished by ART or intervened prior to such publication, had the purpose, effect or potential, given the characteristics of the market, its functioning, the nature and level of aggregation of data exchanged -which did not distinguish between packages and prepaid cards- and the frequency of exchange, allowing each operator to adapt to the predictable behavior of its competitors and thus distorting or substantially restricting competition in the market concerned, the Court of Appeal did not justify its decision." The Court of Appeal of Paris, heard the case a second time after the Supreme court’s decision. The Court of Appeal upheld the sanctions issued in its initial decision. This second decision was partially overruled; the Supreme Court used the following reasoning:

"With regards to Article L. 464-2 of the Commercial Code; To rule as it did, the court held that elements allowing to measure the extent of damage to the economy are sufficient, the Council having particularly highlighted that the market size was very important and that all Operators in this market had participated in the exchange; By deciding so, without also taking into account the sensitivity of demand to price, the appellate court has deprived its decision of legal basis. " This decision12, widely published at the Court’s request, adopted a law and economics approach and included such an approach in the mandate of the competition law court and of the appellate court, as well as in the scope of the supervision conducted by the Court of Cassation. The specific elements of the market can help isolate the offense of unlawful agreement ; the judge must logically control these elements. However, this logic was not predictable, as the Court of Cassation regularly gives priority to the discretion recognized to lower court when they assess or evaluate facts and quantifiable data. The second mobile phones13 decision illustrates a new form of review by the Court of Cassation: no longer a thorough and detailed one, but rather a succinct control over an economic factor: the sensitivity of demand to price. Practitioners were surprised to see the Supreme Court's exercise its control over a concept which, prima facie, could have been left to the discretion of lower courts. We may also mention a case on the regulation of financial markets.

Cass. com., 29 juin 2007, pourvois n°07-10303, 07-10354, 07-10397, Bull. civ. IV, n° 181 ; Gaz. Pal., 9 janvier 2008, n° 9, p. 29, note J. PHILIPPE et T. JANSSENS ; Rev. trim. dr. com., n° 4-2007, p. 707, chron. E. CLAUDEL ; JCP G, 2007, Jur. II, 10153, note C. PRIETO. 11 Cass. com., 7 avril 2010, pourvois n° 09-12984, 09-13163, n°09-65940 ; La Lettre Omnidroit, 14 avril 2010, n° 94, p. 6 : « Affaire de la téléphonie mobile : suite, mais pas (encore) fin ». 12 Cass. com., 29 juin 2007, loc. cit. 13 Cass. com., 7 avril 2010, loc. cit.

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The Commercial section of the French Supreme court had the opportunity, in its Gecina decision of October 27, 200914, to clarify the concept of “acting in concert”, and more specifically the concept of common policy, a constituent of such action. There were two possible approaches, one financial, the other entrepreneurial and industrial, the Supreme Court chose the former over the latter. Here again, we see how the control of the qualifications of regulatory law places it under the control of the Supreme Court. b. Decision by the Council of State At the above mentioned conference, organized by Regulatory law review on "Supreme Courts and economic sciences”, January 5, 2010, legal security emerged as a leitmotiv. It guides the relationship between judicial and economic activities. In regulated sectors, we expect the judge, and especially the supreme judge, to guarantee that legal certainty. Therefore, the KPMG case15, handed down by the Council of State March 24, 2006, has sometimes been called the legal security decision.

example the work of the Basel Committee on Banking Regulations or the Solvency initiatives on the regulation of insurance. These instruments require professionals to improve their risk management systems, yet at the same time, these professionals face an increasing risk that they cannot control - the uncertainty of the rule of law -. The ruling in KPMG addresses this paradox. In this case, the court determined that large public and private companies, whose accounting record require thousands of hours of auditing, could only use the services of four firms that had a sufficient number of employees to run these audits. However, using their services, they would violate the incompatibility rules established by the new code of ethics, object of the appeal. Hence, applying this code upon entry into force would prevent many operators from having their accounts audited within the statutory period, thereby causing a systemic disorder. The Council of State has been very sensitive to this consideration, that is to say the impact of its decision on economic life. The Court of Cassation, as we shall see, also reacts in this way.

It ruled on an appeal criticizing the immediate effect of a newly adopted code of ethics for auditors. It states:

2. THE IMPACTS OF REGULATION, THE OBJECTIVE OF CONTROL

"In the absence of any transitional provisions in the decree attacked, requirements and prohibitions stated in the code would introduce into in the contractual relationship -established legally before its adoption- disturbances which would exceed the objective pursued and hence violate the principle of legal security”.

It would help underline the systemic effects that might result from a supreme court’s decision. This approach is consistent with positions taken by the French supreme courts on questions of regulatory law.

Today, international regulatory instruments are presented as part of the solution to the global crisis; for

The Darrois report16 recommended that some cases be supplemented with an economic impact study.

A topical decision in this respect is Credit Agricole of Anjou and French Banking Federation vs. Le Brasseur, of

Cass. com., 27 octobre 2009, pourvoi n°08-18819, Bull. civ. IV, n° 136 ; D. 2009, p. 2836, note D. SCHMIDT ; H. LE NABASQUE, « Précisions sur la notion d’action de concert… », Rev. dr. bancaire et fin. 2010, n° 1, p. 55 ; N. RONTCHEVSKY, « Affaire Gecina : la Cour de cassation précise les contours de l’action de concert », Rev. Lamy dr. aff. 2010, n° 45, p. 10. 15 CE-Ass., 24 mars 2006, n° 288460 ; Defrénois, 2006, n° 23, p. 1868, chron. R. LIBCHABER ; Rev. des contrats 2006, n° 4, p. 1038, chron. C. PERES ; JCP G 2006, n° 27, p. 1343, comm. J.-M. BELORGEY ; P. CASSIA, “La sécurité juridique, un nouveau principe général du droit aux multiples facettes », D. 2006, n° 18, p. 1190. 16 www.justice.gouv.fr/art_pix/rap_com_darrois_20090408.pdf

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I II III December 20, 200717. In this case, the Supreme Court was moving toward a decision, the impact of which it had not initially measured. Regarding floating interest rates, it would have required to inform borrowers on the impact of each review on the annual percentage rate.

by successive approaches even though this term, as we shall see, encompasses diverse functions.

The Federation of French Banks intervened in the proceeding and presented an economic study and a study of comparative law. These elements illustrated that the proposed solution would create a systemic disorder, and that its singularity among European laws would generate a distortion in relation to situations subject to the laws of our neighbors.

We will hold on to the observation that supreme courts are perceived as regulatory bodies.

It would be adventurous to seek greater precision here, and we may lose ourselves in the maze of erudition.

The term, through its etymology, suggests at least two distinct meanings : either that the Court regulates decisions under its control (1), or that it sets rules (2). 1. THE SUPREME COURT REGULATES A FLOW OF DECISIONS

These elements led the Court of Cassation to condemn this approach in light of its consequences. When they control constitutionality or legality, supreme courts contemplate the requirements of regulatory law, either by defining and detailing the components thereof, or by integrating its contribution to their jurisprudence. But if supreme courts are judges of economic regulation, their mandate also makes them regulators of the Rule of Law.

II.

THE REGULATION CONDUCTED BY SUPREME COURTS

hen they harmonized the solutions adopted by lower courts, supreme courts act as regulatory institutions (A). They also do through the dialogue they develop among themselves (B). A. SUPREME COURTS AS REGULATORY COURTS The terminology is accredited by practitioners: the French Court of Cassation Court is frequently described as a regulatory court. When did this term appear in the legal language? It did

a. In the U.S., the progress of legal publishing raised lawyers’ awareness of the multiplicity of solutions adopted by US courts, on identical legal issues. Previously, legal textbooks were based on the decision, sometimes by the Supreme Court, that they considered the most significant on each issue. The works of Oliver Holmes, Roscoe Pound and Karl Llewllyn, made possible by the publication a much wider range of decisions than in the past, have highlighted the fiction of a uniform American law. Thus, they have questioned the Supreme Court in its unifying role of regulator. b. In France, this role was, from the beginning, the essence of the Court of Cassation. If revolutionary constituents challenged the very idea of case law, the courts of appeal developed their own and diverged among themselves. It was therefore necessary to establish a Court of Cassation. The regulatory function duplicated the unifying function. For the practitioner, it remains a daily reality. Faced with a new problem of legal interpretation, the Supreme Court used to let lower courts explore the issues. Appellate courts worked as scouts and unco-

Cass. civ. 1re, 20 décembre 2007, pourvoi n° 06-14690, Bull. civ. I, n° 396 ; Rev. trim. dr. com. 2008, n° 3, p. 614, note B. BOULOC ; JCP E 2008, n° 24, p. 17, note C. LASSALAS-LANGLAIS ; Rev. des contrats 2008, p. 365, chron. D. FENOUILLET ; Gaz. Pal. 2008, n° 69, p. 15, note S. PIEDELIEVRE ; Banque et dr. 2008, n° 118, p. 14, note T. BONNEAU.

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vered the challenges that the law may raise. Only when this preliminary exploration seemed sufficient would the Court begin to take a stand18. And the Court only did it step by step, in a real dialogue with its colleagues: through a disciplinary control19 conducted on lower courts first, inviting them to a more complete reasoning on issues of law that it deemed relevant; second, through a normative control when the solution seemed mature enough to justify such intervention20. And the process does not stop there. The Court of Cassation, when it overrules a lower court’s decision21, may –and this is actually the general rule- refer the case back to another lower court for reexamination. This allows lower courts to participate iteratively in the debate and helps the Court of Cassation refine or alter its position.22

sources of legal uncertainty.24 This approach is still very relevant. Driven by core values, it itself bears values. They come down to the ontological difference between the law regulated by the judge and the law established by the legislature. Many Court of Cassation Justices are still attached to this approach. The need for more rapid interpretation of laws that are issued in growing numbers suffices to explain the request for an expedited judicial output. 2. THE SUPREME COURT PRODUCES NORMS

The Supreme Court of the United States and the French Council of State have long adopted this solution which now requires no discussion. For the Court of Cassation, this is an academic question: is case law a source of law?

The regulatory function, consubstantial with the development of case law, here refers to the phenomenon of jurisprudence.23

The literature on this point is endless, the interrogation seems worn-out, and yet it is constantly renewed.

Judges slowly construct the law, in order to avoid setbacks and reversals of precedents, as the latter are

In a spirit of openness and swiftness,25 it has been revived by the debate on reversals of precedents

One example : a law adopted on May 12 1980 legalized the clause allowing the seller to remain the owner until full payment. A debate arose on the possibility for the banker to benefit from this clause through subrogation. The court of Cassation let Appelate courts survey the possible configurations and stakes and only took a stand 8 years later : Cass. Com., 15 mars 1988, Bull. civ. IV, n° 106. 19 Disciplinary control before the Court of Cassation sanctions the lower court’s lack of response to the litigants arguments ; the normative control focuses on violations of the law, a lack of legal basis may also be sanctioned, this last type of control lies between the disciplinary and the normative, see J & L. BORÉ, La cassation en matière civile, Dalloz, passim. 20 Often, the supreme court begins to rule on the law applicable to new questions once appellate courts have considered the main issues. 21 The principle is that when the Court of Cassation's decision overrules a decision issued by a lower court, the case is referred to a different lower court. The legislation allows, in some situations, the Court to terminate the case itself. This possibility is seldom used due to the desire to maintain dialogue between Supreme Court and lower courts. 22 Ch. MOULY, « Les revirements de jurisprudence », in L’image doctrinale de la Cour de cassation, Actes du colloque des 10 et 11 décembre 1993, La Documentation française, 1994, p. 123. 23 M. SALUDEN LAMBLIN, Le phénomène de jurisprudence. Etude sociologique, Thèse Paris II Panthéon Assas, 1983. 24 See supra I. B.1. 25 See the request for a preliminary ruling by the Court of Cassation, see Articles L. 441-1 to L. 441-4 code de l’organisation judiciaire ; the advisory opinion on a legal issue before the Council of State, see. Article L. Articles 113-1 and R. 113-1 to R. 113-4 of the code de l’organisation judiciaire, the request for a preliminary ruling by the European Court of Justice concerning the interpretation of treaties, or the validity and interpretation of acts adopted by the institutions, bodies or agencies of the Union, see Section 267 EU Treaty.

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I II III and their retroactivity26 and more recently through a growing fear of the Rule of judges. The latter concern, referring to the revolutionary constituents and legislators’ hostility towards French Parliaments –the ancestors of Appelate Courts that operated as regional supreme courts-, would have seemed anachronistic a few years ago. Recent developments revived the controversy between powers. Affirming the reality of a judicial power, the Head of State and Prime Minister27 have however expressed the primacy of their authority over the judges’ ; this is partly how the recent project to reform criminal procedure was perceived. The delaying of the act’s examination also falls in this debate.28 Every debate calls for a moderator, who is a form of regulator. This regulation among powers invites to another one: a regulation among supreme courts themselves. B. REGULATION AMONG SUPREME COURTS It is one of the key missions of the U.S. Supreme Court. Its jurisdiction, established in Title 28 of the "U.S. Code", has two components: First, the Supreme Court rules on appeals against decisions of federal appellate courts ordering injunctions;

Second, and most importantly, the Supreme Court decides on appeals against decisions of the supreme courts of states. One factor of this control lies in the intensity of the debate over the legal issue raised, in particular the existence or possibility of conflict between different state supreme courts of States on the matter. This component of the Federal Supreme Court‘s jurisdiction illustrates the Court’s role as a regulator of the activity of state supreme courts. A whole array of supreme courts potentially have jurisdiction to examine the prerogatives of a French litigant. He immediately sees a half-dozen : the Council of State, the Court of Cassation, the Constitutional Council, the “Tribunal des conflits”, the Court of Justice of the European Union, the European Court of Human Rights. Diversity does not contradict supremacy – Brazil and Germany have experienced a multiplicity of internal supreme courts - but this shared supremacy needs to be regulated. This can be achieved by rules (1) and practice (2). 1. REGULATION BY RULES

In France, the “Tribunal des conflits”, first took that role. By sorting conflicts between the two French jurisdictional orders (private and administrative), it establishes an ef-

Ch. MOULY, « Les revirements de jurisprudence », loc. cit. ; N. MOLFESSIS, Les revirements de jurisprudence, Rapport remis à Monsieur Le Premier Président G. CANIVET, LexisNexis, 2005. - Conseil d’Etat : CE-Ass., 11 mai 2004, Association AC, Dr. adm. 2004, n° 115 ; Dr. soc., 2004, p. 766, note X. PRETOT ; RFDA, 2004, p. 437, concl. C. DEVYS, note J.h. STAHL, A. COURREGES ; CE, 16 juillet 2007, Société Tropic Travaux Signalisation, JCP, éd. G, 2007, II, 10156, note M. UBAUDBERGERON ; Ibid., 10160, note B. SEILLER ; Dr. adm., 2007, comm. 142, note Ph. COSSALTER ; J. ARRIGHI DE CASANOVA, « La jurisprudence ‘‘AC !’’ », Justice et cassation, Le temps dans le procès, 2007, p. 15. - Cour de cassation : Cass. civ. 2e, 8 juillet 2004, n°01-10426 , Bull. civ. II, n° 387 ; D., 2004, p. 2956, note J. BIGOT ; RTD Civ., 2005, p. 159, obs. P.-Y. GAUTIER et p. 625, obs. Ph. THÉRY ; Cass. Ass. Plén., 21 décembre 2006, n°00-20493, Bull. ass. plén., n° 15 ; D., 2007, Jur. p. 835, note P. MORVAN ; Cass. com., 13 novembre 2007, n° 05-13248, Bull. civ., n° 243. 27 N. SARKOZY, « Discours du Président de la République, audience solennelle de début d’année judiciaire, le 7 janvier 2009 », in Rapport annuel 2008 de la Cour de cassation, La Documentation française, 2009, p. 39 et s., spéc. p. 40 ; F. FILLON, « Discours du Premier Ministre, audience solennelle de début d’année judiciaire, le 14 janvier 2010 », in Rapport annuel 2009 de la Cour de cassation, La Documentation française, 2010, p. 47 et s. 28 Le Monde, 14 mai 2010, « Procédure pénale : histoire d’une réforme avortée », www.lemonde.fr

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fective and well received harmonization among the two court orders, and the two supreme courts that overlook them. It is rules again that established institutional relations between state courts and European Supreme Courts: Article 267 of the Treaty established requests, by state courts, for preliminary rulings by the European Court of Justice. An appeal against a state may be brought to the Strasbourg Court (ECHR), on the basis of Article 6 ECHR, following actions taken by its supreme court, either in its implementation of procedural rules29 or in its interpretation of the law.30 More recently in France, rules resulting from the constitutional reform have organized relationships with the Constitutional Council which became accessible to litigants: Articles 61-1 and 62 of the Constitution (Organic Law of 10 December 2009). This gave a priority to the constitutional challenge. How does this last feature coexist with the primacy of European Union law?

The question had been perceived during the examination of the law.31 By a notable decision of April 16, 2010, the Supreme Court asked for a preliminary ruling of the European Court of Justice on the issue.32 On May 12,33 the Constitutional Council provided what may appear as the first elements of a response. We see that the relationship between domestic supreme courts and European supreme courts generate their own regulation. The same can be said about the ECHR. Its relationship with the Court of Cassation has evolved. An Act of June 15, 2000 (amendment Lang) led to the insertion of Article 6 26-1 in the Code of Criminal Procedure34. Its procedural consequence is that the condemnation of the French government regarding a dispute may lead to a reconsideration of the merits of case. It may be conducted by the Court of Cassation itself or by the court of appeal the Court of Cassation may designate. France was also, on one occasion, sanctioned in Strasbourg based on a decision by the Constitutional Council.35 The development of its activity, as it just opened up to all litigants,36 can only intensify efforts to regulate the interactions between two institutions that share the mandate of assessing fundamental rights. The same is true

For example, ECHR, 21 mars 2000, Dulaurans c/ France, D., 2000, Jur. p. 883, note T. CLAY ; JCP, 2000, II, 10344, note A. PERDRIAU ; RTD Civ., 2000, p. 439, obs. J.-P. MARGUENAUD ; Ibid., p. 635, obs. R. PERROT. 30 For example, ECHR, 25 mars 1992, JCP, 1992, II, 21955, note GARE ; D., 1993, Jur. p. 101, note J.-P. MARGUENAUD. 31 Conseil d’Etat, Rapport public 2010, EDCE n°61, Doc. Fr., 2010, pp.101-104 ; AN, Rapport de M. Jean-Luc Warsmann, au nom de la commission des lois, n°1898, 2009 (auditions des 23 et 30 juin 2009) ; Sénat, Rapport de M. Hugues Portelli, au nom de la commission des lois, n°637, 20082009 (auditions du 23 septembre 2009) ; L. Burgogue-Larsen, "Question préjudicielle de constitutionnalité et contrôle de conventionnalité, Etat des lieux de leurs liaisons (éventuellement dangereuses) dans le projet de loi organique relatif à l'application de l'article 61 § 1 de la Constitution", RFDA 2009, pp.787-799 ; D. Simon, "Le projet de loi organique relatif à l'application de l'article 61-1 de la Constitution : un risque d'incompatibilité avec le droit communautaire ?", Europe 2009, repère n°5. 32 Cass. Question prioritaire, 16 avril 2010, Gaz. pal., 2010, n° 115, p. 12 ; JCP E, 10 mai 2010, comm. 2162, note S. PLATON. 33 Cons. Constit., 12 mai 2010, n° 2010-605 DC, Loi relative à l'ouverture à la concurrence et à la régulation du secteur des jeux d'argent et de hasard en ligne. 34 E. DREYER, “A quoi sert le réexamen des décisions pénales après condamnation à Strasbourg ?, D. 2008, p. 1705 ; Ch. PETTITI, « Le réexamen d’une décision pénale française après un arrêt de la Cour européenne des droits de l’homme : la loi française du 15 juin 2000 », Rev. trim. dr. h., 2001, p. 3. 35 ECHR, 28 octobre 1999, Zielinski, Pradal, Gonzalez et autres c/ France, req. n°24846/94 et 34165/96 à 34173/96. 36 See. supra.

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I II III with respect to supreme courts of all member countries. Among these entities, we must now consider the case of the European Union itself. The Lisbon Treaty37 provides that the Union adheres to the ECHR, and that its Charter of Fundamental Rights receives the status of primary law38. The questions raised deserve rich developments that we cannot to address through this study. Suffice it to say that here again, the texts themselves call, establish or even organize a regulation among supreme courts. But this is of course a matter of practice. 2. REGULATION BY PRACTICE

Regulating supremacy : the expression is somewhat provocative. What one expects from the supreme judge is for him or her to have the authority to set the norm.39 Competition in this area may affect the substance of the rule. Evidently, consultation, in this context plays a crucial role. Between the The Council of State and Court of Cassation, forums exist, commissions and authorities consist of members belonging to both courts. The “Tribunal des Conflits” operates, as we saw, a form of harmonization. The Bar Association for specialized The Council of State and Court of Cassation attorneys also represents - through

its members' knowledge of case law, procedure and experience of each of the two superior courts- a valuable mode of transmission: hence, it contributes to the regulation between these two supreme courts.40 Another bridge was built through networks of supreme courts justices: the European Supreme Courts Network, the Network of Supreme Administrative Courts,42 more recently a network of public attorneys at European supreme courts.43 These networks have grown beyond Europe. To the references cited by Ms. Burgorgne-Larsen,44 one can add the AHJUCAF.45 At the inception the Union for the Mediterranean, proposals were voiced to create a network of supreme courts of this Union.46 This forum, flexible and non-binding, could fulfill an advisory function, particularly appeasing in a space that aims to shift, with the help of the rule of law, to a dialogue of cultures. Here stands an opportunity for legal renewal, adapted to new forms of international relations and through a modernized perception of Law. By Maître Marc Lévis, avocat au Conseil d'État et de la Cour de Cassation Maître Julien Lévis, avocat au barreau de New-York

Article 6§ 2 EU Treaty ; A. BAILLEUX, « Le salut dans l’adhésion ? Entre Luxembourg et Strasbourg, actualité du respect des droits fondamentaux dans la mise en œuvre du droit de la concurrence », RTD Eur., 2010, p. 31. 38 Article 6§ 1 EU Treaty ; A. BAILLEUX, Ibid. 39 See. supra I, B. 40 See. Colloque « Les avocats au Conseil d’Etat et à la Cour de cassation », Faculté Jean Monnet de Sceaux, 2002. 41 The Network of the Presidents of the Supreme Judicial Courts of the European Union: http://www.network-presidents.eu. 42 International Association of Supreme Administrative Juridictions (IASAJ) : http://www.aihja.org ; Association of the Councils of State and Supreme adminsitrative Jurisdictions of the European Union (inpa) : http://193.191.217.21/fr/colloquiums/colloq_fr.html 43 D. BOCCON-GIBOD, « Vers la reconnaissance d’un parquet européen », in Justice et cassation, Actualités de droit communautaire, 2009, p. 263. 44 L. BURGORGNE-LARSEN, « De l’internationalisation du dialogue des juges », Mélanges en l’honneur de B. GENEVOIS, Dalloz, 2009 p. 95 et s. 45 www.ahjucaf.org 46 The Declaration of Alexandria on January 21st 2008 recommended « the creation of a network for exchange and dialogue between domestic supreme courts » among members of the Mediterranean Union ; Etats généraux culturels de Marseille, 4/ 5 novembre 2008.

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NET NEUTRALITY: AN ECONOMIC PERSPECTIVE BY LAURENT BENZONI Professor of Economy, founder and associate of Tera Consultants.

I-1.9

et Neutrality first became news in the United States in the early years after 2000. The issues arose when the Federal Communications Commission (FCC) had to take decisions regarding conflicts between Internet Service Providers (ISP) and cable-operators. The FCC decisions focused on ensuring the non discriminatory status of service providers’ access conditions to the Internet communications market via cable networks. These issues became the basis of the debate on Internet user rights, namely their right to access content and services of their choice. On September 25, 2005 the FCC published a policy statement recognizing these issues, and clearly defined around four main principles. In 2008, Comcast1 blocked its subscribers’ peer to peer file exchanges. Comcast’s action targeted BitTorrent traffic and was carried out via TCP RST packets (reset, re-initialization). The traffic was primarily comprised of file exchanges, which for the most part were pirated videos. Comcast felt that these bandwidth greedy file exchanges were saturating its networks, with negative repercussions for all subscribers. To ensure better service quality, Comcast believed it was authorized to block the file exchanges, without informing its subscribers. As the leading ISP, Comcast’s decision to curtail user access to the web, services and content, without informing users, placed network neutrality in the media limelight. The FCC consequently became the recognized guarantor of the net neutrality principles which it had laid out in 2005. As such, the FCC told Comcast it had 30 days to put an end to BitTorrent filtering. In April 2010, the Federal Appeals

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Court of the District of Columbia annulled the FCC’s decision, stating that the FCC did not have the legal authority to intervene in an operator’s traffic management. Today, the situation probably requires a law to govern Net Neutrality. While Europe will quite likely follow another road, the end result will address the same issues as in the United States. For one, Europe’s net neutrality was first referred to in 2009 with the adoption of the new electronic communications directive. While the directives do not explicitly refer to this idea, Internet access was recognized when it was adopted by the European Parliament as an essential right for European Union citizens. The European Parliament also passed the directive as a means to guarantee the preservation of public liberties as a right to information. On November 25, 2009, the European Commission published a declaration stating that Net Neutrality was a political and regulatory objective to be fully integrated in the implementation of the new electronic communications directive for all members. Concomitantly, Europe’s key telecommunication companies (Deutsch Telekom, Orange, Telefonica) declared that they would ask major Web service companies to contribute to infrastructure financing. The telecommunication companies felt that their networks were quickly saturated because of the massive rise in video traffic. These companies therefore wanted to require Web service companies to contribute to financing infrastructure as a means to compensate the offer of videos over the Web. More, as some Web service companies were posting higher profit margins than the telecommunication companies’ own profits, their request seemed all the more legitimate. In short, risk and value were not equally shared. Google was explicitly targeted. Furthermore, in December 2009, an event in America further bolstered the European operators’ position. ATT, America’s

America’s leading ISP and cable provider

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I II III number two mobile telecommunications company, had to shut down its mobile network for more than one day in greater New York. This shut down was due to congested mobile networks linked to an overwhelming rise in mobile Internet connections. The Apple iPhone, exclusively distributed in the United States by ATT, was cited as the main culprit. The following observation can be made: saturated networks may be more of a mobile problem than a landline one. Regardless of the outcome, asking Web based companies (applications and services) to financially contribute to telecommunications companies’ infrastructure to provide better quality networks led to an uprising. A number of onlookers felt that the principle of offering equal access to all Web based companies was not respected, and would lead to enhanced discrimination between companies and services based on whether or not they were controlled by ISPs. This consequently questioned the Net Neutrality principle, and even the very essence of the Internet. Moreover, the issues guaranteed by the FCC regarding the concept have neither clarified nor reunited players around common ground, but instigated controversy. This article assesses Net Neutrality from an economic viewpoint, with the crux being potential network congestion. To ensure that networks are not impacted, management priority must be defined for traffic, services and or access to networks. This also raises the question of financing the required infrastructure to enhance current capacity. To position the debate we will start by reviewing the four net neutrality principles. These four principles can be viewed in the same vein as tiered services which ISPs already implement, apparently problem-free. The next section focuses on how closely the American and European Net Neutrality frameworks are parallel, despite different legal and regulatory frameworks.

AMERICAN AND EUROPEAN OUTLOOKS CONVERGE

he Federal Communications Commission defined net neutrality as a set of 6 key principles, four of which were defined in 2005 and an additional two in 2009: 1- Freedom to access content: “consumers are entitled to access the lawful Internet content of their choice”. 2- Freedom to use applications: “consumers are entitled to run applications and use services of their choice, subject to the needs of law enforcement” 3- Freedom to choose any device: “consumers are entitled to connect their choice of legal devices that do not harm the network”. 4- Freedom to obtain service plan information: “consumers are entitled to competition among network providers, application and service providers, and content providers”; 5- Non-discriminatory principle: contents, applications and lawful services can not be discriminated; 6-Transparency principle: Service providers must be transparent about the network management practices they use. As stated in the introduction, the Federal Appeals Court of the District of Columbia contested the FCC’s legal authority regarding Comcast. With the Court deeming that the FCC’s actions were legally inappropriate, Congress may consequently enact a law in 2010 to make net neutrality an FCC prerogative. Further, legislative action will outline the net neutrality’s legal concept and regulatory mechanisms. Within the European Community, net neutrality was included in the electronic communications directive. Five directives were adopted in 20022 and reviewed in

The functioning of the five directives comprising the existing EU regulatory framework for electronic communications networks and services (Directive 2002/21/EC (Framework Directive), Directive 2002/19/EC (Access Directive), Directive 2002/20/EC (Authorisation Directive), Directive 2002/22/EC of the European Parliament and of the Council of 7 March 2002 on universal service and users' rights relating to electronic communications networks and services (Universal Service Directive), and Directive 2002/58/EC of the European Parliament and of the Council of 12 July 2002 concerning the processing of personal data and the protection of privacy in the electronic communications sector (Directive on privacy and electronic communications). 2

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20093, with a final revision on November 25, 2009. The European Commission published its views on net neutrality, and the passage is worth citing: “the Commission attaches high importance to preserving the open and neutral character of the Internet, taking full account of the will of the co-legislators now to enshrine net neutrality as a policy objective and regulatory principle to be promoted by national regulatory authorities (1) alongside the strengthening of related transparency requirements (2) and the creation of safeguard powers for national regulatory authorities to prevent the degradation of services and the hindering or slowing down of traffic over public networks (3)” (underlined by the author). Member states must transpose the new directives on a national level before May 25, 2011. Transposing the new directives will be the occasion to hear Europe’s national debates on net neutrality and, will, as usual, be a heroic feat to ensure that the 27 member states’ national policies converge. All the more as the economies, development level and consumption of the European Union monitor closely: “The Commission will monitor closely the implementation of these provisions in the Member States, introducing a particular focus on how the “net freedoms” of European citizens are being safeguarded in its annual Progress Report to the European Parliament and the Council. In the meantime, the Commission will monitor the impact of market and technological developments on “net freedoms” reporting to the European Parliament and Council before the end of 2010 on whether additional guidance is required, and will invoke its existing competition law powers to deal with any anticompetitive practices that may emerge.” The legal calendar is consequently, very similar on both sides of the Atlantic. A closer look shows that the European and American stances converge on the main issues. Indeed, the new framework directive on new Internet Freedom Provision states in article 8 : “Measures taken by Member states regarding end-users’ access to information and use of,

and use of services and applications”. These points can very explicitly be linked to the FCC’s first and second principles regarding content and applications. The directive’s articles 20 and 21 on universal service ensure that: « Consumer contracts must specify…what services they subscribe to and, in particular, what they can or cannot do with those communications services, when conditions are authorized by national member states, national telecom authorities will have the powers to set minimum quality levels for network transmission services so as to be informed about the nature of the service to which they are subscribing, including traffic management techniques and their impact on service quality. Once again we see a mirroring between the European Union and the FCC texts covering principles 3, 4 and 6. Finally, when the Commission states that it will enforce its competition skills regarding all anti-competition, this generally refers to abusive discrimination practices. Once again, the European texts are parallel to the FCC’s non-discrimination principle and also address Europe’s Internet regulation issues.

“

So, both the FCC and the European texts converge.

A closer look shows that the European and American stances converge on the main issues.

Directive 2009/140/EC of the European Parliament and the Council of 25 November 2009 (Better regulation Directive)and Directive 2009/136/EC of the European Parliament and of the Council of 25 November 2009 (Citizens rights Directive) 3

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FROM DISCRIMINATION TO DIFFERENTIATION

t is clear that the principles as they have been written do not hinder reasonable network management practices. The FCC explicitly states this point in its texts, whereas the above mentioned European Commission’s articles 20 and 21 state the potential existence of these practices and at this stage request that consumers have a right to better and more transparent information. So, network operators may be deemed as practicing reasonable network management when they seek to reduce network congestion, offer tiered service quality, limit traffic which can damage equipment, networks or other user accounts, or forbid the transfer and exchange of illicit content. As such, if these practices are acceptable, tiered service quality, traffic routing rules, etc., are possible on the basis that they are objective, transparent and non discriminatory. It is, therefore, important to talk about discrimination, since common language and legal use differ from the economic meaning, and therefore be confusing. In legal terms, and generally in common language, discrimination designates a practice which seeks to treat buyers of the same good or service differently even if they present the same usage and consumption characteristics. This type of practice is generally forbidden. In economic terms, this practice is referred to as first degree discrimination and is harmful for both consumers and welfare. Two buyers of the same good or service, however, with different consumption characteristics can be offered different conditions. A client, for example, can benefit from a lower unit price if the purchase involves large quantities. As a result, the unit sales price for the large quantity buyer will be lower than for the client buying a smaller quantity. In a legal context this differentiation between buyers points to a quantity-based discount. This type of

discount is both a recognized and accepted practice. In economics, the term second degree price discrimination is often used to qualify this type of differentiation practice, and the term is, therefore, not necessarily negative. Second degree price discrimination can be positive, since second degree discrimination or differentiation can enhance the consumer’s welfare. This explains why these practices are not per se deemed illegal. Nevertheless, in some circumstances, differentiation practices can have a negative impact on competition and/or consumers: differentiation therefore becomes discriminatory, and can be sanctioned (competition law) or forbidden (regulation). The difference between differentiation and discrimination does not lie in the different nature of these practices, but the degree of how the practice is implemented. If differentiation is authorized and discrimination is prohibited, when does a differentiation practice become discriminatory? An economic analysis views the answer as straightforward and simple: it depends on the context, intentions, the players and their position, etc.,. Regarding the subject germane to us, net neutrality, the difficulty lies in the uncertainty of ex ante qualification of discriminatory practices when they stem from a differentiation framework. While telecommunication operators can be authorized to differentiate clients regarding services or applications to optimize network management, does such reasonable differentiation pave the way to discrimination? Of course fair economic “equilibrium”, is the equilibrium which maximizes welfare. This equilibrium is situated between a total laissez-faire logic regarding differentiation, a position which a number of leading telecommunication companies have adopted4, and completely forbidding differentiation, such as fully backing the associations representing Web based service companies and their users. Congested networks, be they fixed or mobile, are the origin and therefore, the crux of net neutrality. This problem surfaced recently and is likely to become more and

David Young of Verizon later added a familiar lobbyist refrain that he "doesn't understand what the problem is that we are trying to solve" with openness rules. Verizon has already deployed 194 lobbyists at a cost of more than $13 million in 2009 to fight Net Neutrality both at the FCC and in Congress. 4

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more crucial. The core of the problem lies in the cost of additional network capacity: while cost has tumbled over the last 20 years, it does not explain the exponential rise in demand, mainly due to watching videos. The alternative seems to be rising network congestion (poor service) or a higher cost in network use to finance additional investment and passing the higher cost to consumers and/or application, service or content suppliers. This raises a number of questions: how are networks currently managed? How can these management processes be changed? How can we evaluate network congestion, at market level, at an operator level? Who assesses network congestion? Do all the networks (fixed, mobile and cable) face the same congestion problems? What does reasonable network management mean in terms of either less congestion or absorption? What type of differentiation is allowed and to what extent is differentiation acceptable in competitive terms? What about in terms of accessing information and various means of expression? What is the logic and possibility of having application and/or content providers contribute financially to the infrastructure as a means to alleviate network congestion management? The next part of this article will try to answer some of these questions.

POSITIVE DIFFERENTIATION IN QUALITY AND ACCESSIBILITY OF INTERNET SERVICES

verall, telecommunications companies and Internet Service Providers have always managed their own networks.

In both layman terms and from the beginning of the Internet, or open Internet, network management has meant that operators reserve available capacity on the network for this service. Is available capacity to be shared among all users accessing the service on a non-discriminatory basis (void of priority access). The operator never guarantees access quality to a server or a subscriber on the Web. The operator can only commit its service to a best effort network quality to connect the subscriber to the requested service. This best effort network management rule is satisfactory as long as 126

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available capacity can easily meet demand. Subscribers may, of course, occasionally note slowdowns of varying degrees in terms of receiving or sending information (peak time), and with no apparent impact on Internet use. But when network capacity cannot meet demand, service is hindered and generalized (all subscribers are impacted) for a timeframe which can be long enough for Internet subscribers to reconsider using the Internet, especially for those who are the most sensitive to ongoing service quality. To reduce the effects of network congestion for services or subscribers, operators manage their own networks. Network operators must respect network management rules which include obligations to provide specific services, such as emergency calls, security, etc. As such, these calls or specific services are considered priority services and must therefore meet specific requirements. In the same way that a physical highway has emergency lanes reserved for priority vehicles, telecommunications networks have specific obligations for priority calls such as to the police, fire stations, etc. These specific obligations mean that these calls are ensured priority handling over all network traffic, and are consequently called special services. Beyond these obligations, telecommunications operators offer a large number of specialized services to meet clientsâ&#x20AC;&#x2122; specific requests in terms of network reliability, security and availability or quality of service. These special services are dedicated to banks, telemedicine, or to corporate virtual private networks. There are many services using Internet networks, and which do not meet the open Internetâ&#x20AC;&#x2122;s best effort network management rules. Obviously, maintaining this superior quality entails a cost, and these services, are sold for higher prices to subscribers or to service providers than the ordinary best effort Internet services sold to the average customer. To differentiate these service qualities, either required or desired, the telecommunications company must ensure tiered service handling, with different types of subscribers paying different rates. Operators already implement this differentiation in their network management procedures, and for the time being, and unless otherwise proven true, this differentiation shows no characteristics of discrimination. Advocates of the open Internet do not directly contest these tiered services practices, since they are quite logically not under the aegis of the open Internet. What is, however, contested is that these practices could be extended to applications, services, or uses which are www.thejournalofregulation.com

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I II III currently applied under open Internet rules. If this were the case, the open Internet would shrivel to become the bandwidth used for network capacity, and by extension Internet use. More, services which from the beginning were only available via the open Internet could be accessed via the capacity reserved for special services and would benefit from special treatment compared to equivalent services which can only be accessed by the open Internet. Is this discrimination? Or an act of unfair competition, which in fine harms consumer welfare? It doesn’t seem to be. A subscriber buying a broadband Internet plan, or triple play service, is essentially buying three types of distinct client services: telephone communication services, open Internet access service, and television broadcasting. Without really knowing it, the subscriber accesses three different tiered service management quality levels. In this instance, quality means that the operator has established different priority management to each service depending on congestion. • In this regard, the telephone service offers the best quality since this service has priority over other services and across the entire network. The goal is to ensure that telephone conversations are not interrupted by network glitches. While the telephone continues to be the main service used by clients, operators must also guarantee the routing of special service numbers. • Customer requests for continuous service is also true for TV, and therefore, requires a certain quality level. To ensure that a client can watch TV without unsolicited interruptions, operators set aside network capacity for each channel broadcast to the subscriber. On the local loop, (copper wire), the part which is located right before the last network node and the subscriber’s outlet, a specific channel is reserved for broadcasting to the client when s/he watches TV. • The open Internet service uses the remaining available bandwidth. This is the only service for which information sent respects the “best effort” rule. Available capacity for the open Internet is maximized if other services are not used, and minimized if other services require bandwidth. Managing service priority is the operator’s obligation to the triple play subscriber. The term means that there are different service qualities between the services “managed” by the operator and services available over the open Internet. Open Internet platforms offer telephone services, such as Skype, referred to as VOIP (Voice On Internet Protocol). The VOIP service competes head-on with the operator’s triple www.thejournalofregulation.com

play service called TOIP (Telephony On Internet Protocol) and are a means to distinguish it from VOIP. While VOIP and TOIP are sold at the same price, TOIP quality and use are much better than VOIP. When TOIP is available, as is the case in France, clients prefer the TOIP service, meaning VOIP is marginalized. More, since TOIP uses the fixed line, fixed line use rises. This is the case in the French market and fixed line growth has risen with the advent of triple play and TOIP. Inversely, in countries where TOIP is not included in broadband Internet, VOIP gains ground and mobile use is greater than fixed line use, which continues to wane. TOIP consequently appears to favor consumer welfare and the economy at large. So in economic terms, existing quality differentiation between TOIP and VOIP for triple play offers are neither excessive nor discriminating since the positive effects of this practice are greater than the negative effects. In the present case, service quality was differentiated between open Internet services and other Internet services managed by operators. So, even open Internet services have tiered service quality. A telecommunications company providing open Internet services must buy an access to an operator so that the server hosting the service can be accessed by Internet surfers worldwide. And the more bandwidth the service provider buys from the telecommunications company, the greater the number of available simultaneous connections and/or the faster the upload of the service’s pages and files on the user’s computer. The capacity to access a site directly depends on the client’s capacity to buy Content Delivery Network services (Akamaï for example). These services keep the content close to Internet subscribers by implementing specific network servers to store content close to the Internet subscribers and therefore ensure enhanced access quality. Web service providers rely heavily on CDNs (namely the Web’s powerhouses, like Google). This use leads to a differentiation in accessibility as well as the quality perceived by web surfers, like premium services based on the client’s capacity to pay for specific network services. Of course, open Internet service providers have the capacity to pay for these services, ensuring that their end services are better received than direct competitors whose pockets are not as deep, and who, therefore, cannot buy these quality delivery services. Google services, namely the maps, Google Earth, Maps, etc. are successful because of the speedy upload of the services to all Web surfers. This differentiation allows The Journal of Regulation n° 2 - June 2010

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players to set themselves apart across the open Internet and for some to avoid the undesirable effects of congestion which may arise as a link in the network. The Internet uses differentiation or tiered management practices daily. Net neutrality issues have surfaced in recent debates since differentiation can also be exacerbated in a growing congestion context.

CONGESTION: A STRUCTURAL PROBLEM IN CASE OF NEGATIVE PROFITABILITY FOR ADDITIONAL NETWORK INVESTMENT

he possible prioritization of traffic flows across a network surfaces when demand is greater than a network’s capacity. In short, when there is network congestion. So, when there are no congestion problems the original open Internet management, based on the best effort logic prospers without constraints and limits. Generally speaking, demand for network capacity rises exponentially, due to ever-growing video consumption. For clients, greater available network capacity is mandatory to maintain current Internet quality. Enhanced capacity needs require additional investments. The first question to be addressed focuses on the return on investment of additional investments. Over the last thirty years, telecommunications network investments were everrewarding. Traffic volumes of all types (voice, text, sounds, images) exploded pushed by technical progress, and the unit price of transported information has plummeted. The rise in network capacity has been maintained with investment providing excellent returns. Can this dynamic end? In short, will unit costs of carrying information across telecommunications networks continue to be profitable in light of a greater need for capacity? Another question surfaces: where is lower profitability located in the network? In the network’s core or the local loop? It is likely that it is along the network elements with negative profitability that structural arbitrage crises will arise and require taking a decision between additional capacity investments and exacerbated congestion. First off, we need to objectively assess if this unrelentless 128

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demand or bandwidth capacity is accompanied by a higher average cost of access and use of telecommunications networks over the long term. If the costs rise, we need to estimate if and how demand will impact retail Internet plans, especially in light of competition among Internet Service Providers. At present, these questions have not been clearly addressed. Of course, telecommunications operators explain the need for greater bandwidth in terms of higher capacity needs across their networks, which entails higher investments. While this position is clear, it doesn’t state if profitability linked to additional bandwidth investments will be positive or negative. In economic terms, this profitability issue only arises when the additional investment is negative. In this specific instance, network congestion becomes structural and not based on the context. Pertinent economic answers are required. The first question to answer focuses on higher differentiation practices, in particular, seeking additional revenues, which until present were neglected by operators (In this instance we can refer to the possible contributions of providing Internet services over the Internet). Given the critical nature of objective evaluations regarding the reality of congestion and negative profitability of additional bandwidth capacity, only regulatory authorities can successfully evaluate the situation in transparent and opposable means to define the required guarantees for the diagnosis. Indeed, asymmetric information between operators and other Internet players regarding real network capacity and the costs to bear are crucial. The scope of possible imbalances revealed by operators alone underlines how sensitive this issue is. It is important to note that the imbalances could differ between wire and wireless networks. In wireless networks, the local loop is mutualized by users and frequency, as a resource, is intrinsically limited. This implies that the wireless local loop can bear the economic consequences of a surge in bandwidth needs stemming from higher Internet connections via mobile phones. This point, however, must also be the focus of objective evaluations, especially in light of very fast technical evolutions (the birth of the 4th mobile generation called LTE and the drastic drop in the cost of equipment). Supposing that the profitability of additional investments in capital is negative, there is no incentive for network opewww.thejournalofregulation.com

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I II III rators to spontaneously invest. When growth in demand meets limited available capacity, structural congestion must be managed by notable differentiation. And all the more when congestion levels are high. When new differentiation practices are implemented, open Internet management principles can be over-stepped and ISPs may be tempted to adopt practices with anti-competitive effects.

CONGESTION: HOW TO MANAGE IT ?

n this context, congestion means not being able to deliver the service quality that the end client expects. Service quality refers to the time required to send information in terms of client needs. So, since service quality depends on end client needs and perception, it is subjective. Depending on the type and use of services, quality can be lesser or greater. For example, an end client whose telephone conversation or live television show is interrupted, will view the service as severely downgraded. In the same vein, while end clients accept some slowdown in Internet page uploads or peer to peer site video uploads, “the accepted slowdown level varies with clients”. Overall, some services are more prone to congestion than others. This explains why the ISP will try to manage its own network traffic and favor services which are sensitive to congestion (telephone or broadcasting) over services which are not quality-sensitive (consulting Internet sites over the open Internet). So, differentiating service handling is positive since it increases the collective welfare. On an economic basis, managing congestion can take two very different routes. The ISP can manage traffic priorities based on what it believes end clients want. In this case the ISP gives priority management to quality-sensitive services and either slows or blocks services which are not qualitysensitive. In short, congestion is managed as being “rationed in terms of quantity”.This solution does not maximize collective welfare. Since the end of the 19th century, price rationing has been preferred over quantity rationing, and means that the end client with the greatest needs for quality will pay the highest price or the service provider can set prices for a higher quality level. When ISPs offer tariff plans which differ on a client by client basis, they are merely applying tested transportation tariff www.thejournalofregulation.com

plans. Plane or train tickets are not homogenously priced in terms of date of purchase and the prices are higher when there is demand, before long weekends, vacations etc. French highways practice the same timeframe tariff plans, with tariffs set to alleviate heavy end of weekend traffic. The same is true for the city of London which set up tolls for non-London residents driving into London. Other cities have opted for a different type of rationing by setting up alternate circulation based on even and odd license plates. Managing congestion is a very prevalent issue found in fields where the goal is to optimize capacity or to manage a peak in demand: electricity, postal services, hotels, etc. In this perspective, consumers take responsibility for their consumption and purchasing habits, and yet are also the cause for network congestion. We can take this analogy even further, stating that neither the vacuum cleaner (or hoover) manufacturer or the washing machine manufacturer finance electricity grids or electricity generation plants. And in the automotive industry, neither the oil companies, nor the insurance companies finance highways. Clients determine infrastructure use and bear the financial consequences of congestion management, even when goods and service suppliers directly benefit from the consumption of infrastructure use. By using available infrastructure mutualized by clients, service suppliers constantly differentiate between the different types of service quality they make available: speed, comfort, delays, guaranteed always-on access and so on. Clients, therefore, pay for quality. Bearing in mind the above-mentioned conditions to objectively measure congestion and the incremental costs of traffic on electronic communication networks, the same logic could be applied to Internet services. Regulators must, therefore, ensure that ISP offers are transparent and respect European directives, especially given the infinite possibility of tariff plans and the boundless marketing creativity of ISPs. Could tariff plans be differentiated to guarantee access quality to some services and not others (video streaming for example)? While the idea seems feasible in terms of managed services, is it true for access to services in an open Internet environment? Charging an Internet access by the hour with prices based on downloaded quantities could also become an Internet tariff plan element (which the user already has a hard time controlling: the shock bill)? Instead of focusing on their end-clients, ISPs could offer The Journal of Regulation n° 2 - June 2010

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different service qualities with variable access tariffs to content suppliers and application providers, especially since the latter would be in a position to pay to ensure access to Internet prospects. In this sense, the ISP is like a mall, and considers that its own network provides the infrastructure (the mall’s commercial space) to attract the prospects while Web content and application suppliers benefit from this environment and pay to do so (rent). This position is upheld by Europe’s key ISPs, as stated in the introduction. The vision is short-term and not necessarily optimized for two reasons. First, Web-based services and applications have always paid to access networks. The rise in the amount of bandwidth used by a service or an application is due to greater demand by Web surfers. This means that service or application suppliers must invest in additional capacity and pay network operators. Otherwise, the service quality will be downgraded meaning Web surfers will not be able to use the service or application as required, de facto threatening the livelihood of the service. Second, the political history shows that tariff prices and network quality have given Web-based service providers easy Web access with very low barriers to entry. This implies that any actor, no matter how tiny, can obtain a quasi-equal access to the world wide web’s surfer population. The birth and baby steps of the global Web stars initially began with very limited network means. The ease and equality of access to network resources, means that all players, big or small, are under constant pressure to innovate and compete, especially application providers (including the powerhouses like Google, e-bay, Facebook, etc.). In short, Web surfers push Web-based service and application providers to constantly innovate, which in turn benefits the network operators. If the service becomes a paying one, it is likely to become more limited and server requirements will drop, regardless of the type of payment adopted (even if billed as call termination data). These tariff barriers not only encourage players to sign exclusivity deals with network operators, service providers, content and content delivery providers, they also encourage vertical integration practices. Implementing a regulation based on positive tariff differentiation could counter these negative effects by making service providers pay proportionately for the services which are the 130

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most congested. Is this feasible? Can it be implemented ? We don’t think so. Unfortunately, and all too often advanced as a plausible solution, service-based congestion cannot be measured via average bandwidth (Youtube is an oft-cited example). The bandwidth which needs to be accounted for is the bandwidth used at the time of congestion (or at peak times). In other terms, positive tariff differentiation does not mean making a passenger who often takes the train at offpeak times pay a steep price. Positive tariff differentiation means making the train passenger pay for the train, even if it’s only once a year. In the World Wide Web, this means making the service or application provider pay for the share of congestion they are responsible for at the time of congestion or peak load. Given the rampant use of services and consumption, we feel this is difficult to implement both objectively and transparently. If these two conditions, objectivity and transparency, are not met, the positive effects of differentiation (improvement of collective welfare) may very well become negative (anti-competitive effect). The remaining solution and which Europe’s key ISPs are de facto thinking of is to reduce congestion by making both responsible parties pay: Web surfers and service or application providers. An operator’s network can be designed as a platform which simultaneously operates across two distinct and competitive markets: represented by end clients for one and by service and application providers for the second. Equilibrium prices on two interdependent markets, or twosided markets, can be set to maximize public welfare, and consequently develop network capacity and service diversity at a minimal cost for the end client. In short, the market segments where demand is less price-sensitive can finance the market segments where demand is price-sensitive. Here too, controls will have to be implemented. On two-sided markets, the frontier between optimized and abusive behavior is both very small and difficult to discern. All the more so, when this assessment is carried out ex post by a competition authority. Does this mean we should intervene ex ante?

IS REGULATION REQUIRED ?

lthough the ISP manages congestion over its network, it is not necessarily responsible for end-toend quality. Information moves from one point of the network to another point, and the speed at which the informa-

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I II III tion is transmitted is determined by the smallest bandwidth of all the networks crossed. The emitter of this information can be located on a different network than the current ISP meaning the quality for the end client may be degraded and not necessarily be the ISP’s responsibility. Quality may be impacted by upstream networks, or more directly due to a site which may not have rented enough bandwidth capacity to ensure a sufficient number of simultaneous connections (many sites do not often foresee enough simultaneous connections upon site opening, especially when there has been much pre-site and site opening buzz, and seems to particularly apply to institutional sites). Designating the network responsible for the congestion is just as difficult, as it is for an ISP to absorb network congestion. Both the need for highly differentiated quality which vary with services and clients, as well as the unknown origin of the degraded quality create asymmetric information between the ISP and clients. Given these circumstances, the economic analysis highlights that laissez-faire doesn’t maximize welfare. Quality is degraded at the clients’ expense, even impacting the offer. Only normalized information and transparency imposed by a third-party regulator could restore a possible equilibrium maximizing welfare. Recent European directive on electronic communications uphold this viewpoint, especially in terms of universal service and contracts potentially granting all powers and means to national regulatory authorities to impose this transparency for quality, a crucial point to instore effective competition between ISPs. To uphold the quality offered to clients and in the above mentioned context, ISPs could be incited to better manage their networks. This could also lead to better differentiate service quality depending on whether or not services are managed. An ISP, for example, can offer a quality VOD service with a high definition film catalogue. This catalogue may soon include movies in 3D as well, with fast and guaranteed download. The ISP will ensure that the download is a priority service, thereby guaranteeing subscribers with promised quality of service levels. To guarantee service quality the ISP has to have end to end control which means an agreement with the server which emits the signal. Signing a number of such agreements is not feasible since it would mean reserving major bandwidth capacity for managed services which can only be carried out at the expense of bandwidth available for the open Internet. Encroaching on open Internet bandwidth means that subscribers to other services would see a drop

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in quality—and which is also guaranteed. Finally, requiring perfect transparency in terms of quality could be a means to legitimize exclusive agreements between infrastructure operators and content suppliers. What would this mean in terms of competition between the same ISP which provides a VOD service included as part of its managed services with guaranteed quality and the same VOD service accessed via the open Internet and merely abiding by a best effort service rule? This scenario would only be plausible if bandwidth was limited and incremental bandwidth supports decreasing returns.

CONCLUSION

t least the Net Neutrality debate has the true merit of highlighting the ISP’s current network management rules and lends more transparency to the elements establishing the right practices and the behavior to condone. Albeit a few and rare exceptions, today’s auto-regulated practices have worked thus far, and have not yielded any major dysfunctions, at least in Europe. There are two reasons for this. First, the request for more network capacity has helped absorb demand with lower costs. Second, the dynamics of the Internet community provides a very positive security ring against major deviance. Looking forward where are the problems? They will arise if the dynamics of available bandwidth does not meet demand. The scarcity of a good, in this instance bandwidth, will give more clout to infrastructure providers over the global community of network users (Web surfers, content and application providers). Today’s debate focuses on avoiding a power struggle: demand versus supply which would give the ISPs the possibility of reinforcing detrimental behavior. And if bad behavior can be identified, as we have shown in the answers to the questions we have put forth in this article, controlling the ISPs will be a true challenge, unless very strict and methodical regulation is implemented, severely condoning bad behavior. And yet, this action lies at the very opposite of the Internet’s own nature. By Laurent Benzoni

Professor of Economy, founder and associate of Tera Consultants.

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A COMPARATIVE ANALYSIS OF INTERNET GAMBLING REGULATIONS Recommended citation:1-1.10

A COMPARATIVE ANALYSIS OF INTERNET GAMBLING REGULATIONS By Alex Raiffe Junior Editor

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1. Online gambling is becoming a worldwide phenomenon. Whether it be card games, lotteries, or betting on sports games and races, more and more customers flock towards websites that operate games of chance online, often without any sort of government control or supervision. 2. Customers are attracted to the facility and privacy of these services, and especially the higher rate of return on their outlay than provided in physical casinos or betting services.

3. However, physical gambling and betting are amongst the most universally regulated sectors: cultural and public policy differences play a very significant role in explaining the differences in regulation found in this sector. 4. Gambling websites are often operated under shady conditions, and can facilitate fraud, money laundering, terrorism financing, and gambling addictions. They escape government supervision, and are not subject to official controls to prevent illegal activity. 5. Furthermore, gambling is often taxed (either directly, via taxes on gaming operators, or indirectly, via taxes on winnings), and online gambling represents a fiscal loss in a difficult budgetary context for most countries. 6. Nevertheless, the European Commission addressed a “reasoned opinion” to a number of EU member states on 27 June 2007, ordering them to modify national legislation that raised obstacles or forbade access to online gambling servi-

ces operated in other countries in the European Union.1 7. Although there is no coherent European Union legal provision creating a harmonised regime for online games-ofchance regulation, Member States cannot impose a blanket-restriction on access by foreign gaming operators to their national markets, unless this restriction is justified by public policy concerns (fraud, money laundering), and social concerns (protection of players and fighting addiction). Even if such restrictions are implemented, they have to be proportionate to these goals. 8. In other words, such restrictions have to be: (I) adequate, meaning sufficient and pertinent in obtaining the desired result; (II) and necessary, which means that they must not contain more restrictive measures than necessary, and the restrictive measures must be the only means of attaining these goals. 9. It is, however, pertinent to examine compare legislation in this domain enacted in European and extra-European countries, in order to understand the context of online gambling from a comparative perspective. Such a comparative perspective is important given that (i) most betting websites are run from other countries inside and outside the European Union, and (ii) the Internet is a place without borders, and despite legislation in this area, it is difficult to implement timely and effective restrictions on citizens’ ability to access unauthorised websites of this type. 10. Furthermore, we should not forget that national access to online gambling is essentially a form of risk regulation. Risk regulation is essentially a political matter, which can only be legitimately decided by a democratically elected government, and not by technical experts. The European Court of

Free movement of services : the Commission acts to remove obstacles to the provision of sports betting services in France, Greece and Sweden. IP/07/909, European Commission, http://europa.eu/rapid/pressReleasesAction.do?reference=IP/07/909&format=HTML&aged=1&language=EN &guiLanguage=fr. 1

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I II III Justice has been developing case law in this sense, protecting Member States’ prerogatives in such domains as health policy against the European Commission. The Santa Casa decision handed down by the European Court of Justice (ECJ) on September 8, 2009, may be an expression of the ECJ’s opinion that only democratically elected governments can express a national will on how much risk that nation is willing to be exposed to. 11. We propose to articulate our analysis around two major observations, which are (A) the diverse levels of regulation in different markets; and (B) the difficulties in implementing an effective regulation in this domain. 12. This analysis should permit a better understanding of the stakes at hand in online gambling, and the way different jurisdictions have chosen to deal with them. The heterogeneity of regulation in this sector should allow us to measure how this question is essentially one of risk regulation: different cultures and different appetites for risk lead to different responses to the same question.

A TYPOLOGY OF THE DIVERSE LEVELS OF REGULATION IN DIFFERENT MARKETS 13. Different countries have adopted different responses to online gambling websites. Certain countries are more or less favourable to such sites, because of cultural reasons (gambling is disapproved), security reasons (fear of money laundering and terrorism financing, public health reasons (combat against gambling addiction), and fiscal reasons (lost taxation revenue). Because of a stronger or weaker combination of these fears in different capitals across the globe, each country has a specific response to such websites.

14. However, we can establish, for the purpose of our comparison, four major approaches to online gambling: (I) countries where online gambling is forbidden (USA, Russia); (II) countries where online gambling is a legal monopoly granted to one or two websites (Israel, France, Portugal); (III) countries where online gambling sites are legal but are required to obtain licences and are subject to surveillance; (IV) countries without specific rules concerning this sector, where online gambling is de facto legal. 15. The first set of countries, such as the United States, completely forbids online gambling.2 Indeed, the Federal Wire Act of 1961 specifically forbids electronically sending money between states or between the United States and a foreign country for the purpose of bets or wagers3. Because of this, banks and credit card companies in the United States often blocked credit card transactions towards gambling sites.4 16. However, the Unlawful Internet Gambling Enforcement Act (UIGEA)5, ratified on October 13, 2006 more specifically forbids any sort of Internet gambling that occurs between states or between any state and a foreign country. This does, however, imply that States are free to enact legislation permitting online gambling within their state. Concretely, the UIGEA does not implement an individual criminal liability for online betting (betters are not prosecuted), but rather forbids “acceptance of any financial instrument for unlawful Internet gambling”.6 17. This is similar to the situation in Australia, where it is not illegal for Australians to participate in online gambling, but where it is illegal for online gambling operators to provide such services to people located in Australia.7

Keller, Bruce P., ‘The Game’s the Same : why gambling in cyberspace violates federal law’, The Yale Law Journal, Vol. 108, N°7, May 1999, pp. 1569-1609. 3 18 USC §1801 (2009) 4 Frey, James H. ‘Federal involvement in US Gaming Regulation’, Annals of the American Academy of Political and Social Science, Vol. 556, Gambling : Socioeconomic Impacts and Public Policy, March 1998, pp. 138-152. 5 US Efforts to Restrict Internet Gambling, The American Journal of International Law, Vol. 101, n° 1, Jan. 2007, pp. 203-204. 6 §H.R. 4954, §5366, cited in Conon, Jonathan, ‘Aces and Eights’, The Journal of Criminal Law & Criminology, Vol. 99, n° 4, 2009, pp. 1157-1193. 7 Interactive Gambling Act 2001 (Law n° 84, 2001), http://www.comlaw.gov.au, accessed 13 April 2010. 2

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18. It is noteworthy that an exception is made in the American law (UIGEA §5362.1.bb.10.D) concerning betting on horse races. Indeed, the Interstate Horceracing Act of 1978 permits such wagers to be legally placed between states. 19. This provision is the subject of a World Trade Organisation dispute between the United States and Antigua, where Antigua contested the United States ban on US residents betting on horse races through servers located in Antigua, for there was a discriminatory treatment between betting within and amongst the United States, and betting between the United States and foreign countries. The WTO twice declared the United States’ law on this subject contrary to its General Agreement on Trade in Services (GATS) obligations.8 20. It is noteworthy that the betting operators located in Antigua were licensed on the London Stock Exchange and complied with all British regulatory requirements for online gambling sites.9 Despite a number of propositions to legalise online gambling and instituting a regulatory and tax mechanism to supervise such websites, the US Congress has not yet acted in this direction.10 21. The second type of country is a country where online betting is allowed, but conferred on a limited number of state monopolies. Betting on other sites is forbidden. Let us take France and Portugal as our examples of this type of country. Although France was ordered by the European Union to change its national legislation on June 27, 2007, online gambling is still allowed only by the Française des Jeux (a state-owned company with a monopoly on lotteries), and the PMU (a privately-owned company with a monopoly on betting on races and sports games). 22. Although the French government attempted to prove to the European Union that its system of online and real-life gambling monopoly was the best way to

preserve its public policy objectives of health and safety, the European Union was not convinced that France needed to ban access to legally-approved gambling services in other member states in order to fulfil its goals. 23. Indeed, France allows the Française des Jeux and the PMU to advertise its online games, and does not adopt a particularly restrictive policy towards these two organisations as concerns advertising, promotion, and participation by minors. 24. In Portugal, physical and online gambling is forbidden, except for games run by the Departamento de Jogos da Santa Casa da Misericórdia de Lisboa (hereafter “Santa Casa”), a state-owned “legal administrative person of public interest”. Santa Casa runs a lottery and football betting in Portugal, both physical and online. In a case opposing private operator Bwin and the Portuguese government in the person of Santa Casa, the European Court of Justice authorised Santa Casa’s monopoly.11 25. The Portuguese government justified Santa Casa’s monopoly by claiming that it was necessary to prevent criminality and fraud. The ECJ decided that Portugal’s restrictions were necessary and proportional restrictions on the free provision of services within the European Union, and permitted Santa Casa’s monopoly to stand. 26. It is interesting that the European Union upheld Portugal’s monopoly and declared France’s illegal. It seems that the principal difference between these two systems is that France has a fragmented monopoly, confided to different public and private operators, that allows advertising and is not directly controlled by the State. 27. The third type of country allows Internet gambling, but only by registered and licensed operators. This is the case of a majority of European Union countries. 28. Let us take the United Kingdom as an example.

World Trade Organisation, Case WT/DS285/ARB (21 December 2007) and Case WT/DS285/AB/R and WT/DS285/R (20 April 2005). ‘U.S. Efforts to Restrict Internet Gambling’, The American Journal of International Law, Vol. 101. N°1 (Jan., 2007), pp. 203-204. 10 HR 2267, introduced 6 May 2009, www.thomas.loc.gov, accessed 12 April 2010. 11 European Court of Justice, case n° C42/07, 8 September 2009. 8 9

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I II III The UK, via the Gambling Act 2005, implemented the Gambling Commission to be the regulator for the gambling sector.12 29. This Commission delivers two sorts of licences: an operating licence and a personal licence. The first type of licence authorises a corporation (legal person) to operate gambling services accessible by British residents. The second type of licence authorises a physical person to run an authorised company, or to occupy a financial, regulatory or strategic position within. 30. However, a major caveat of this system is that any corporation licensed in any other European Union country is “white-listed” in the UK and is authorised to provide gambling services to British residents without applying for a specifically British licence and without being subject to the supervision of the Gambling Commission. 31. This means that many British gambling sites are registered in Malta, where the Maltese authorities facilitate and encourage the establishment of gambling sites, which they have made a priority for economic development, and who are thereby authorised to operate in Britain.13 32. This situation strongly discourages operators from requesting British licences, which have more stringent requirements and supervision than Maltese licences, and most websites targeting a British clientele are established in Malta. We shall see in the second part of our comparison the differences in taxation and regulatory requirements in different countries.14 33. The last type of country does not require any sort of registration and does not impose any sort of regulation on online gambling websites. Such jurisdictions include the Netherlands Antilles and Curaçao. These jurisdictions allow the free establishment and operation of online ca-

sinos that can provide their services to players anywhere around the globe. 34. The possibility of such “havens” makes it difficult for the three aforementioned types of countries to regulate or forbid online gaming, for even if these countries go so far as to block access from computers located in their countries to these websites, they often cannot identify and take action fast enough for these barriers to be effective. 34. The Internet moves faster than government action. This observation is a perfect transition to the second part of this analysis, which shall present the differences in regulation and taxation in various jurisdictions across the globe.

VARIOUS LEVELS OF REGULATION AND TAXATION FACILITATE FORUM SHOPPING AND CAN FACILITATE ILLEGAL ACTIVITIES 35. There exist four principal, specific areas of regulation for online gambling: (I) taxation, (II) rate of return management, (III) what can be bet upon, the types of bets and games that are authorised, the method of financing, (IV) restricting access to unauthorised sites.15 36. Taxation of online gambling varies in level, and also on what is taxed. Indeed, there can be better-side taxes (on winnings); or operator side taxes (players’ outlay or profits), or any combination thereof. 37. Countries such as the UK tax gross profits made by companies on the games they run at a rate 15. Other countries tax players’ outlay on games they play: in Malta, online games are taxed at 0,5% of players’ outlay for betting and 5% for casino games, with a yearly ceiling of

The Gambling Commission, www.gamblingcommission.gov.uk, accessed 13 April 2010 DURIEUX, Bruno, Rapport de mission sur l’ouverture du marché des jeux d’argent et de hasard, 2008, http://www.ladocumentationfrancaise.fr/ rapports-publics/084000253/index.shtml, accessed 8 April 2010. 14 Cf. below, §41 and as follows. 15 Clarke, Roger and Dempsey, Gillian, ‘The feasibility of regulating gambling on the Internet’, Managerial and Decision Economics, Vol. 22, N° 1/3, Jan-May 2001, pp. 125-132. 12 13

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A COMPARATIVE ANALYSIS OF INTERNET GAMBLING REGULATIONS Recommended citation:1-1.10

466,000 Euros in tax per operator. In Italy, players’ outlay is taxed at a rate of between 3% and 8%. 38. Currently, in France, there is a tax on gross profits for all operators (PMU, Française des Jeux, and Casinos), and the PMU and the Française des Jeux are also taxed on players’ outlay, with rates 20-40 times higher than those practiced in the UK and Malta.16 39. None of these countries directly taxes players or their winnings.17 In fact, countries where online gambling is also illegal do not tax gamblers: Australia and Canada do not tax casino and betting, while the United States is the only country where casino and lottery winnings are treated as unearned income and is thereby subject to federal and state taxes.18 40. It is interesting that in the case of the United States, which prohibits most online gambling, winnings are taxable but there is no regulatory framework to monitor gambling services and to obtain trustworthy reports on the amount of winnings earned by American taxpayers. This may be an argument in favour of regulation in this area. 41. Secondly, countries which authorise online gambling may choose to regulate the rate of return on outlays. 42. In other words, an important policy tool is setting a maximum percentage of outlays returned to gamblers in the form of winnings. Indeed, a low rate of return discourages gambling addiction and money laundering, because it is less likely to win back the amount of money bet on a game. 43. In France, this policy is particularly strict and designed to discourage addiction and fraud: indeed, the rate of return is fixed at around 70%. Most illegal sites have a rate of return of around 95%.19 44. In the UK and Malta, the rate of return is not fixed by

the Gambling Commission. Since taxation in the UK is levied on the gross profit earned by operators from game operation, there is a strong incentive to increase the rate of return to players in order to encourage customers to play, while reducing taxable profits. 45. A system of taxation of players’ outlay seems to have less adverse effects on a high rate of return. However, in Malta, a country with this type of taxation, there is a ceiling on the amount of tax paid in a year, which means that the mechanism may be less effective for large operators. 46. In sum, regulation of the rate of return is delicately linked to taxation, and is an extremely important tool for modulating the amount of tax collected, and to combat addiction and fraud. 47. Thirdly, regulation applies to the types of games or bets allowed, and especially the mode of financing of such games. Indeed, in France, horse and sports betting is run through a ‘mutual’ system. This means that the game is financed by players’ outlays, which are redistributed to the winner. 48. Other systems permit betting against the operator. In this second type of system, there are more risks involved, because an insolvent or dishonest operator may be unable to pay the winners. 49. There is also a difference between systems that allow betting against credit, and systems that require prepayment before allowing a bet to be made. 50. Lastly, national regulations must address the question of limiting access to illegal sites. There are two possible options for this.

Geoffron, Patrice, ‘Regulating the gambling market : quality-based versus price-based competition, The Regulatory Law Review, www.regulatorylawreview.com/Regulating-the-gambling-Market.html 17 L’administration fiscale (www.impots.gouv.fr); HM Revenue (www.hmrc.gov.uk); Inland Revenue Malta (www.ird.gov.mt) 18 Commonwealth Grants Commission (www.cgc.gov.au), Canada Revenue Agency (www.cra-arc.gc.ca), the Internal Revenue Service (www.irs.gov) 19 Durieux, page 8. 16

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I II III 51. The first option involves administrative restrictions on access to certain websites. This implies setting up a system to forbid access to unauthorised sites from within a specific country. 52. Sweden, Italy, and Germany all have legal provisions to block unauthorised websites without obtaining a court order to do so, whereas in France, it is still necessary for the administration to obtain a court order prior to restricting access to a website.20 53. Although this may soon change, there is currently no country in this study actively blocking access to illegal gambling websites. 54. However, the United States, as mentioned above, forbids financial institutions from processing transactions to and from unauthorised gambling websites. This may be an important area for future regulation, because it is less means-intensive and more efficient method for preventing use of illegal gaming websites, for it prevents customers from participating in such games, and especially from receiving winnings from such sites.

never be implemented as rapidly as such sites can open. There are also major differences in regulation between countries, even within the European Union. The WTO case opposing Antigua and the United States in this area is an illustration of possible future difficulties yet to come in this area, as regards divergent legislation. 58. In any case, whatever usefulness this study may have, it does provide an overview of regulation in this domain, which is growing in economic importance. Regulation in this sector is new and experimental, but the lessons learned from this area will inform future regulatory choices concerning the provision of services on the Internet, and will show us how national regulations and legislation adapt to the borderless nature of the Internet.

55. Typologies such as the one we have established are very common in social science studies. If it is interesting in understanding major areas and issues of regulation in this domain, it is somewhat limited in usefulness because of the borderless nature of the Internet. 56. It is possible, despite national legislation, for users to access unauthorised online gambling sites. Furthermore, when a site is operated in a country where such sites are legal, the legal reasoning becomes slightly more complicated: the user has to fund his account with money. Legally, then, the money is already present in the country where the site is hosted from, and any betting he does with that money also takes place in that country. Therefore, the interdiction raised by one country cannot necessarily be applied to betting that takes place in another country. 57. Governments cannot move faster than the Internet itself, and restrictions on access to illegal websites will

Durieux, page 36.

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II PART II.

THEMATIC REPORTS

OFCOM (THE BRITISH OFFICE OF COMMUNICATION)’S BROADCASTING SANCTIONS COMMITTEE FINED TELETEXT LIMITED AFTER TELETEXT LTD. UNILATERALLY CEASED BROADCASTING TELETEXT SERVICES. Recommended citation: II-3.2

OFCOM (THE BRITISH OFFICE OF COMMUNICATION) ’S BROADCASTING SANCTIONS COMMITTEE FINED TELETEXT LIMITED AFTER TELETEXT LTD. UNILATERALLY CEASED BROADCASTING TELETEXT SERVICES. By Alex Raiffe Junior Editor

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MAIN INFORMATION

fcom (The Office of Communications), Britain’s audiovisual and telecommunications regulatory authority, revoked Teletext Limited’s public teletext license on January 29, 2010 and fined Teletext Ltd. £225,000 on May 27, 2010, for having unilaterally ceased broadcasting of teletext services on December 15, 2009, in advance of the expiration of its license in 2014.

CONTEXT AND SUMMARY

ritain’s public television channels benefit from a teletext service, which was provided by a private corporation, Teletext Limited, according to the terms of a public teletext license concluded between Ofcom (The Office of Communications), Britain’s telecommunications and audiovisual regulatory authority, and Teletext Ltd., from 1993 to 2014. In exchange for Ofcom’s attribution of distribution capacity, Teletext Ltd. was required to provide national, international, and regional news, and regional non-news information via teletext. Teletext Ltd. was also free to include commercial advertisements in its broadcast. Teletext Ltd. was selected for the public license following a competitive bidding process. Teletext Ltd. was obliged to pay an annual cash bid, and an amount of contribution to The Consolidated Fund, a public television service fund. The amount of the cash bid was last revised in 1996,

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when Teletext Ltd.’s license was revised to include terrestrial digital broadcasting in addition to the analogue broadcast it already provided. Instead of paying an annual cash bid of £1.9 million and 18% of its profits to the Consolidated Fund, Teletext Ltd. only had to pay an annual cash bid of £25,000 per year and 5% of its profits to the Fund. At that time, Ofcom estimated that Teletext’s license would earn a net profit for Teletext over the 2006-2014 period, but that profits would be strongly concentrated in the first years of the license. However, faced with declining viewers and the additional obligation of providing digital terrestrial broadcast, on one hand, and Ofcom’s announcement on April 10, 2008, that it believed that teletext service would no longer be required to secure public purposes after 2014 1, Teletext Ltd. issued a press release on July 16, 2009 announcing that it would stop broadcasting the “loss-making analogue service and a number of digital terrestrial services” in January 2010. Teletext unilaterally ceased providing teletext services on January 29, 2010, in breach of its license. In consequence, Ofcom revoked Teletext Ltd.’s license on December 15, 2009 in accordance with Section 42 of the Broadcasting Act 1990, and Paragraph 11, Part 2, of Schedule 10 to the Act. Paragraph 12 of Part 2 of Schedule 10 to the same act requires Ofcom to impose a fine limited to the greater of £500,000 or 7% of the qualifying revenue for the license holder’s last complete accounting period.

Ofcom’s second public service broadcasting review, published 10 April 2008, available at www.ofcom.org.uk/consult/con...

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I II III Therefore, the maximum penalty that could have been imposed was £500,000. Given that: • Teletext Ltd. had a good compliance record during the period when it held the public teletext service license; that the provision of the service was structurally lossmaking; • that Teletext believed its license would not be renewed beyond 2014; • that the digital capacity allocated for the carriage of public teletext services was not sufficient to allow enough commercial content to be broadcast in order to subsidize the cost of providing the service; • that over the past four years, Teletext incurred significant losses; It was decided to reduce the amount of the sanction to £225,000, even though: • the cessation of teletext services has caused and will continue to cause harm to customers unless and until a new license is accorded; • teletext is an essential means for deaf and hard-of-hearing people to access subtitling of television programs; that more than 2 million people in Britain accessed weather, regional and national news per week using teletext; • and that Ofcom had estimated that the license was overall profitable between 1996 and 2014.

BRIEF COMMENTARY This decision is interesting for several reasons.

• Secondly, the lack of flexibility shown by Ofcom in the events leading up to the aforementioned sanction seems to reveal a decision by the regulator that teletext services, invented in the 1970’s, are no longer necessary to ensure quality public television services. This may be one of the reasons that it did not allocate more frequency to Teletext Ltd. in 1996. In any case, this issue is one that will be faced by all countries in one way or another as they accomplish their changeover from analogue to digital television broadcasting. • Thirdly, the technique used by Ofcom to evaluate the ‘damages’ caused to consumers—and to public service as a whole—by Teletext Limited’s decision to stop broadcasting teletext services before the expiration of its license, is a technique of appraisal, or assessment, of a situation that is commonly employed by regulators and competition authorities, in general. In this case, Ofcom’s appraisal of the situation led to a sort of ‘half-sanction’. This can be interpreted as a form of rational punishment, because it does not examine the offender’s intention to harm; but rather examines the effects and reasons for the offender’s behavior: this reveals the very strong divergence between classical criminal law (which punishes the seriousness of the perpetrator’s intentions), and sanctions handed down by economic law, of which this affair is an example, and of which regulation is a part. • Furthermore, this decision is a perfect example of the use of economic analysis in legal reasoning, since the regulator’s reasoning in imposing the fine is a de facto use of this type of analysis (Cf. Posner, Richard, The Economic Analysis of Law, 7th Ed, Aspen Publishers, New York, 2007).

• Firstly, it reveals issues with the allocation of limited resources and the Europe-wide switchover from analogue to digital television broadcast. Indeed, there is a limited band of frequencies available for digital television broadcast. Although digital broadcast provides higher quality to viewers than analogue broadcast, this decision is a result of the ‘growing pains’ of technological modernization: following the switchover to digital broadcast, Teletext Ltd. no longer had enough carriage space available to carry its advertising content, which made its service profitable.

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CREDIT RATING AGENCIES: POST-CRISIS REGULATORY MEASURES ADOPTED BY THE EUROPEAN UNION REGULATION OF SEPTEMBER 16, 2009 Recommended citation: II-6.8

CREDIT RATING AGENCIES: POST-CRISIS REGULATORY MEASURES ADOPTED BY THE EUROPEAN UNION REGULATION OF SEPTEMBER 16, 2009 by Margot Sève, Junior Editor and Member of the Editorial Committee

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MAIN INFORMATION

he European Regulation of September 16, 2009 implements a new regulatory framework for credit rating agencies, in order to restore investor and consumer confidence, enable the supervision and transparency of credit ratings, and avoid conflicts of interest.

CONTEXT AND SUMMARY A. REASONS FOR THE EUROPEAN REGULATION: The main reason for regulating credit rating agencies lies in the assumption that they play an important role in global securities and banking markets, as their ratings are used by investors, borrowers, issuers and governments in the process of making informed investment and financing decisions. Credit institutions, investment firms,insurance undertakings, and occupational retirement funds may use credit ratings as the reference for the calculation of their capital requirements for solvency purposes or for calculating risks in their investment activity. Consequently, credit ratings have a significant impact on the operation of the markets and on the trust and confidence of investors and consumers. The European Regulation is bound to ensure that credit rating activities are conducted in accordance with the principles of “integrity, transparency, responsibility and good governance”, i.e. that credit ratings used in the Community are independent, objective and of adequate quality. The European Regulation also deals with the issue that currently most credit rating agencies have their headquarters outside the European Community and that most Member States do not regulate the activities of credit rating agencies or the conditions for the issuing of credit ratings, despite their significant importance for the functioning of the financial markets. 142

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B. PURPOSE OF THE REGULATION: Credit rating agencies are considered to have failed, first, “to reflect early enough in their credit ratings the worsening market conditions, and second, in adjusting their credit ratings in time following the deepening market crisis” (§10). The European Regulation aims at dealing with those failures by taking measures relating to conflicts of interest, the quality of the credit ratings, the transparency, the internal governance and the surveillance of the credit rating agencies. The European Regulation therefore lays down important rules ensuring that all credit ratings issued by the credit rating agencies registered in the Community are of “adequate quality” and issued by credit rating agencies subject to “stringent requirements”.The Regulation suggests laying down a common framework of rules regarding the enhancement of credit ratings’ quality, in particular those used by financial institutions and entities themselves regulated by harmonised rules in the Community. Indeed, should this common framework not be implemented, the risk is that credit agencies will continue not to be regulated by Member States despite their impact on financial markets, or that, conversely, Member States start regulating autonomously, taking divergent measures at the national level which could create obstacles to the good functioning of the common market (not to mention that diverging national quality requirements could lead to different levels of investor and consumer protection). Finally, as underscored in §11, the new framework should make it easier on users to compare credit ratings issued in the Community with credit ratings issued internationally C. NEW REGISTRATION CONSTRAINTS: In order to ensure a high level of investor and con-sumer confidence in the internal market, credit rating agencies that issue credit ratings in the Community should be subject www.thejournalofregulation.com

Recommended citation: II-6.8

I II III to registration”, especially when credit ratings are intended to be used for regulatory purposes in the Community. The Regulation therefore suggests harmonised conditions and procedure for the granting, suspension and withdrawal of such registration. An important provision demands that when endorsing a credit rating issued in a third country, agencies in the community should determine whether these third country credit ratings comply with the regulation’s requirements for the issuing of credit ratings, and achieve the “same objective and effects in practice” (§13). Indeed, as recalled by the regulation’s drafters (§13), such lack of establishment in the community could be an obstacle to the stringent supervision the European Regulation tries to implement.1 Moreover, the European Regulation also provides that credit rating agencies with headquarters located outside the Community must set up a subsidiary in the Community so as to attain an effective supervision of their activities in the Community and ensure they comply with the above mentioned endorsement regime. The main idea of the Regulation’s registration provisions is to make sure that any credit rating agency, once registered by the competent authority of the relevant Member State, may issue credit ratings throughout the Community. The regulation suggests establishing a “single registration procedure for each credit rating agency which is effective throughout the Community” (§45). The framework is organized so as to establish a single point of entry for the submission of applications for registration. It is for the Committee of European Securities Regulators (CESR) to receive applications for registration and inform

the competent authorities in all Member States. After CESR informs and advices the national competent authority on the registration process, the examination of applications for registration and the taking of individual decision is to be carried out by the latter. The regulation also provides that competent authorities should set up “operational networks (colleges) supported by an efficient information technology infrastructure” (although only the competent authorities of home member state, and not the college, have the power to issue legally binding individual decisions in regard to credit rating agencies’ registration). It is also expected from the CESR to establish a subcommittee specialised in the field of credit ratings of each of the asset classes rated by the agency, as financial instruments and assets evolve rapidly and are subject to constant innovation by financial institutions. D. SUPERVISORY MEASURES: The above mentioned “college” is intended to work as an effective platform between competent authorities for the exchange of supervisory information, coordination of their activities and supervisory measures. The college is also in charge of determining whether third countries credit ratings used in the community fulfill the certification conditions and exemptions provided for in the European Regulation (ideally, cooperation arrangements between competent authorities in Member States and the relevant competent authorities of third-country credit rating agencies should prevail). It is therefore expected from the CESR to contribute to the uniforms application of the Regulation’s rules and to the “convergence of supervisory practices”.2 The College may also designate a facilitator, to chair the meetings of the college, coordinate its actions and modulate, in liaison with the CESR, the registration process.

Therefore, the regulation reminds that such an endorsement regime should be applied to credit rating agencies which are affiliated or work closely with Community registered rating agencies. “Nevertheless, it may be necessary to adjust the requirement of physical presence in the Community in certain cases, notably as regards smaller credit rating agencies from third countries with no presence or affiliation in the Community” (§14). A specific regime of certification for such credit rating agencies will also need to be established, as it might impede the financial stability of a member state’s financial market. 2 In November 2008, the Commission set up a group charged with examining the future European supervisory architecture in the field of financial services, including the role of CESR. The new architecture is to be enforced in 2010. Indeed, the supervisory architecture as it was when the regulation was enforced in 2009 was not the long-term solution for the oversight of credit rating agencies. Colleges of competent authorities are not a substitute for the advantages of more consolidated supervision of the credit rating industry. A broader reform of the regulatory and supervisory model of the European Community’s fincial sector is therefore in process. Cf. Jacques de Larosière’s Conclusions of 25 February 2009.

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CREDIT RATING AGENCIES: POST-CRISIS REGULATORY MEASURES ADOPTED BY THE EUROPEAN UNION REGULATION OF 16 SEPTEMBER 2009 Recommended citation: II-6.8

As for the supervision of a credit rating agency, it is intended to be carried out by the competent authority of each Member State in cooperation with those of other Member States’, using the above mentioned College and keeping the CESR involved. The latter will createa central database of information on the past performances of credit rating agencies and information about credit ratings issued in the past. D. REGULATORY MEASURES TO ENSURE TRANSPARENCY AND AVOID CONFLICTS OF INTEREST: In order to avoid potential conflicts of interest, credit rating agencies must focus their professional activity on the issuance of credit ratings and not carry out consultancy or advisory services. In particular, a credit rating agency should not make proposals or recommendations regarding the design of a structured finance instrument. The regulation also provides specific rules on the rating agencies’ methodologies and ratings models, as they are expected (i) to be disclosed to the public3 and (ii) to be “rigorous, systematic, continuous and subject to validation including by appropriate historical experience and back-testing” (§23). These methodologies and models used for determining credit ratings must be maintained, up-to-date, subject and published to a comprehensive review. Should the data used by agencies for credit rating, or should the financial instruments appear as not reliable, the agency should not issue, or should withdraw the produced credit rating. Moreover, in order to preserve the independence of the credit rating process from the business interests of the agency as a company, agencies will have to ensure that at least one third, but no less than two, of the members of the administrative or supervisory board are independent. Furthermore, the compensation of independent members of the administrative or supervisory board shall not depend on the business performance of the agency.

It is expected that agencies adopt not only sound corporate governance, but also internal policies and procedures in relation to employees and other persons involved in the credit rating process in order to “prevent, identify, eliminate or manage, and disclose any conflicts of interest and ensure at all times the quality, integrity and thoroughness of the credit rating and review process” (§26). Any conflicts of interest should be disclosed in a timely manner. Finally, the Regulation also provides for measures to ensure the quality of credit ratings. For example, agencies should use independently audited financial statements and public disclosures, verification by reputable thirdparty services, random sampling examination of the information received and contractual provisions clearly stipulating liability for the rated entity or its related third parties (in case the information turns out to be false or misleading or not conducted with due diligence).

BRIEF COMMENTARY

or European institutions to have enacted such rules of supervision, registration and transparency illustrates how regulatory measures and regulatory framing are more and more often the natural recourse (not to say remedy) in complex situations, such as that of credit rating agencies – complex because of its numerous links to the economy, financial markets, insurance markets, investors and governments. Indeed, the European Regulation underlines that rating agencies play an important role in global securities and banking markets, as their credit ratings are used by investors, borrowers, issuers and governments as part of making informed investment and financing decisions. They are therefore involved with economic, political and legal issues –which explain why they were blamed, inter alia, for the financial crisis. It therefore comes as no surprise that the highest European bodies enacted measures which

‘The level of detail concerning the disclosure of information concerning models should be such as to give adequate information to the users of credit ratings in order to perform their own due diligence when assessing whether to rely or not on those credit ratings’.

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Recommended citation: II-6.8

provide for a better transparency of rating agencies, supervised, for the time being, by the Committee of European Securities Regulators (CESR). This European Regulation is the direct consequence of the Member States’ political decision to firmly react to the crisis’ aftermath, a discussion launched in 2008, following the G20 Summit.4 Indeed, when, in October 2008 the French Parliament started debating the financial and economic crisis in light of the Washington G20 summit5, many European Parliament political group leaders stressed the need for regulatory reform, in particular that of credit rating agencies, private equity and hedge funds. The Parliament also took into account some groups which criticized not only speculators but also the European Commission for its role in inciting the crisis by concentrating too much on industry’s concerns. The Parliamentary Act and the European Council’s Regulation being the legal outcome of this, it is typically regulatory for 2 reasons: First, the Act of Parliament provides for more rules on supervision and transparency, while not hindering the impact of rating agency on the operation of the markets, i.e. it simply improves the market’s functioning and incentive structures, including the role of credit rating agencies. Thus, by adopting an act which on one hand promotes the financial services provided by rating agencies, while, on the other hand, putting into the balance the principles of investor protection and systemic risk prevention, the European bodies embrace a rationale true to the definition regulatory law.

“

II III

The regulatory law method works as a triangle between law, politics and economics.

those involved in financial industry-, which was taken in order to achieve an economic effect in fine - through reforming and dealing with credit rating agencies’ accountability and responsibility. Therefore, the result of the Act of Parliament is itself regulatory by essence since it endorses, through a legal tool, a political goal aimed at restoring the balance in a flawed market. In a nutshell, the Act of Parliament and the European Council’s Regulation llustrate how the regulatory law method works as a triangle between law, politics and economics.

Secondly, through the adoption of this Regulation, the EU shouldered responsibilities for European legislation and used regulation as the tool to fulfill the political will of the Union - and its Member States - to react to the financial crisis’ effects on the global economy. The present European Regulation is therefore no less than a political decision at the offset – the regulation of all

http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+IM-PRESS+20081117IPR42160+0+DOC+XML+V0//EN Summit on financial markets and the world economy, November 14-15, 2008. 6 See Marie-Anne Frison Roche’s definition of regulatory law : a reasoning which aims at ensuring -or restoring-, a certain balance between the principle of competition and another principle(s). D.2004, chron., pp.126-129 5

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A UNITED STATES FEDERAL COURT FOUND THAT PAYMENTS MADE BY SCHERING TITRE PLOUGH IN ORDER TO DELAY THE INTRODUCTION OF GENERIC FORMS OF ITS DRUGS SOUS TITRE DID NOT VIOLATE ANTITRUST LAW, IN A 26 MARCH 2010 DECISION. Recommended citation: II-9.1

A UNITED STATES FEDERAL COURT FOUND THAT PAYMENTS MADE BY SCHERING PLOUGH IN ORDER TO DELAY THE INTRODUCTION OF GENERIC FORMS OF ITS DRUGS DID NOT VIOLATE ANTITRUST LAW By Alex Raiffe, Junior Editor

II-9.1

MAIN INFORMATION

he U.S. District Court in Newark, New Jersey, dismissed a class action suit on March 26, 2010 brought against drug manufacturer, Schering Plough, alleging that payments it made to two generic drug manufacturers in order to delay the introduction of generic forms of one of its products, violated antitrust law.

CONTEXT AND SUMMARY

n 1995, Schering-Plough filed a patent infringement suit against Upscher-Smith Laboratories, and in 1996, against ESI/Lederle Laboratories, claiming that these two generic manufacturers’ plans to introduce generic forms of its medicine for the treatment of potassium deficiency, “K-Dur”, violated its patents. These cases were settled out of court, paying $60 million to Upsher-Smith and $5 million to Lederle. These payments were described as “licensing fees”, which would allow Schering Plough to commercialise various products developed by the two laboratories. In exchange, UpsherSmith could not commercialise its generic form of K-Dur before 2001, and Lederle until 2004. In the case at hand, HIP Health Plan of Florida v. Schering Plough (2:01-cv-01652), the plaintiffs requested that the federal judge examine these payments under Antitrust Law, for they claimed that the licensing agreements were merely designed to delay the introduction of generic drugs, and that Schering Plough did not plan to sell the licensed products. The plaintiffs asked the Court to analyse these agreements 146

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under the terms of a position adopted by the Federal Trade Commission, and University of Iowa law professor Herbert Hovenkamp, which presumes that these “reverse payments” are anticompetitive. However, no court has yet applied this method of analysis, and in its decision, the District Court used the habitual analysis employed by other Federal Courts. According to this method, as long as the “reverse payments” in question only restrict competition within the market of the patent, and as long as these patents are valid, the defendant is entitled to a summary judgment on the antitrust claims. Indeed, Schering Plough’s original patent on K-Dur gave it exclusivity until 2006. Consequently, the court neither examined the merits of the original patent, nor the anticompetitive nature of the “reverse payments”. Instead, the case was dismissed because it was found that, according to the aforementioned habitual method of analysis, Schering-Plough did not seek restrictions on competition beyond those granted by its patent (the licensing agreements only excluded the introduction of generics until 2004), and did not seek to restrict competition beyond the market of the patented medicine. Therefore, the Court did not rule on the plaintiffs’ claim that the licensing agreements were fictitious, that there were never any sales of the licensed products, and they were merely intended to slow the introduction of generic forms of K-Dur.

BRIEF COMMENTARY

his decision is interesting in light of the European Union’s recent inquiry of July 8, 2009 into the possibly anticompetitive practices of the pharmaceutical industry, especially as relating to abuse of patent-related lawsuits in order to delay the introduction of generic

www.thejournalofregulation.com

OPINION OF THE FRENCH ECONOMIC, SOCIAL, AND ENVIRONMENTAL COUNCIL (CESE) ON ENVIRONMENTAL TAXATION AND THE FINANCING OF PUBLIC ENVIRONMENTAL POLICIES Recommended citation: II-10.3

I II III forms of patented products. Indeed, this case is interesting because the District Court did not examine the merits of the plaintiffs’ claims concerning the anticompetitive nature of the payments made to generic drug manufacturers by Schering-Plough. Whether Schering-Plough intended to market the licensed products, or whether it simply intended to pay the generic manufacturers in order to delay the introduction of generic forms of K-Dur, the case may be revealing of a different approach to this issue in the United States than in Europe. In Europe, drug consumers are generally price-insensitive, the cost of treatment being covered by mandatory national health plans, whereas in the United States, the cost of medicine is either paid for by private insurers, or in the case of uninsured patients, by the patients themselves. This decision may indicate that the rapid introduction of generic drugs is not as politically important in the United States as in the European Union, for in the former, the reduction of healthcare costs is not as pressing a concern for public finances as in the latter. However, it is interesting to

note that in the bill of the celebrated Medical Insurance Law, recently passed by the United States Congress, a provision to ban “pay for delay” payments by pharmaceutical companies to generic drug manufacturers was dropped in the final text of the law. This may indicate that in the coming years, the United States will adopt stricter regulation on these types of deals in order to stimulate competition in the pharmaceutical market in order to lower the cost of treatment.

OPINION OF THE FRENCH ECONOMIC, SOCIAL, AND ENVIRONMENTAL COUNCIL (CESE) ON ENVIRONMENTAL TAXATION AND THE FINANCING OF PUBLIC ENVIRONMENTAL POLICIES By Béatrice Parance, Senior Editor and Member of the Editorial Committee

II-10.3

MAIN INFORMATION

he Conseil économique, social et environmental (CESE French Economic, Social, and Environmental Council) criticises the mechanism of the “Carbon Tax” as conceived by the Parliament, and which has currently been abandoned. www.thejournalofregulation.com

CONTEXT AND SUMMARY

n an opinion on “environmental taxation” and the financing of public environmental policy, adopted in a plenary session on November 18 , 2009, the Conseil économique, social et environmental (CESE - French Economic, Social, and Environmental Council) heavily criticized the “Carbon Tax”, as presented in the bill of the Finance Act for 2010. The CESE explains that the success The Journal of Regulation n° 2 - June 2010

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OPINION OF THE FRENCH ECONOMIC, SOCIAL, AND ENVIRONMENTAL COUNCIL (CESE) ON ENVIRONMENTAL TAXATION AND THE FINANCING OF PUBLIC ENVIRONMENTAL POLICIES Recommended citation: II-10.3

of environmental, economic and social ‘transitions’ — societal evolutions towards more environmentally-friendly modes of production and consumption— require the support of civil society, and can thereby function as a vector for democracy. Substantially, the CESE thinks that ‘environmental taxation’ has to be included in a long-term reflection that includes alternative modes of productions and consumption, as well as a major overhaul of the tax system, which should take into account both environmental issues, social cohesion, and economic efficiency. From this point of view, the “Carbon Tax” was intended to promote awareness by the public and by businesses of the environmental cost of greenhouse gas emissions. However, the CESE points out that the rise in prices that the Carbon Tax would engender seems lost, due to the current, and very important, abolition of the Professional Tax. In detail, the CESE regrets that the tax redistributions planned by the law were not replaced by subsidies to households that take steps to make their homes environmentally friendly, since households are one of the most heavy sources of CO2 pollution. On the recourse to market mechanisms to limit corporate emissions, the CESE regrets that these mechanisms are not being used by the government in order to augment the financial resources being consecrated to greenhouse gas reduction policies in sectors that are not covered by quotas, especially by reallocating proceeds from quota auctions to emissions reduction measures in buildings, transport, and agriculture. To this effect, the CESE believes that the necessity of regulating the market of greenhouse gas quotas would be better served by allocating proceeds to solve the issues that justified the establishment of such markets in the first place. In this way, the incentive effect of the market would be combined with the curative effect of regulation.

See also : "Energy" section Sectorial Report (Environment) II-10.2: Decision of Constitutional Council of December 29, 2009 on the Finance Act 2010

BRIEF COMMENTARY

axation is one of the best instruments for environmental regulation on a national level, for it can apply to different categories of the population (people, businesses, local governments), and incite them to modify their behaviour in order to adopt less-polluting forms of transportation and housing. The Carbon Tax was integrated by Parliament into the Finance Act for 2010, but was sanctioned by the Constitutional Council in its December 29, 2009 decision on the Finance Act, which stated that the legislative mechanism voted on by Parliament was incoherent with the stated objective of reducing greenhouse gas emissions. The Government first declared that it would think of a new mechanism by consulting with industry, before declaring on March 24, 2010 that it had decided to abandon the project of a Carbon Tax. This abandonment was officially justified by the pursuit of a Europe-wide mechanism that would not harm the competitiveness of French businesses. However, some people analysed this retreat as a political move following the defeat of the majority party in recent Regional elections. Whatever the case, the CESE’s opinion and the fate of the Carbon Tax are highly instructive on the difficulties of implementing environmental regulation mechanisms on a national scale, which might harm business competitiveness because of the cost of anti-pollution measures. A double balance has to be achieved between environmental protection and the efficacy of the competitive market, on one hand, and between national regulation and foreign regulation ruling economic operators in competition with domestic economic agents, on the other.

Furthermore, the CESE insists on the necessity of integrating environmental taxes into a larger reflection, including consideration of household energy constraints, which is one of the priorities of environmental policy. 148

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DECREE N°2010-219 RELATING TO THE FRENCH NATIONAL REGISTER OF TRUSTS WAS PUBLISHED ON MARCH 2ND, 2010 Recommended citation: II-11.5

I II III

DECREE N°2010-219 RELATING TO THE FRENCH NATIONAL REGISTER OF TRUSTS WAS PUBLISHED ON MARCH 2ND, 2010 By Sophie Schiller, Mmember of the Editorial committee

II-11.5

MAIN INFORMATION

he national register of trusts has finally become a reality thanks to a decree published on March 2, 2010. It only use will be to inform various government administrations, in order to reinforce the tools available for fighting tax evasion, money laundering, and terrorism financing.

CONTEXT AND SUMMARY

decree of March 2, 2010 finally implemented the “registre national des fiducies” (the national register of trusts), which was created by Article 2020 of the French Civil Code, itself created by the Act of February 19, 2007. The preparatory documents for this Act had clearly stated that this register was not intended to give third-parties access to trusts, but rather, to centralise this information for use by government administrations, in order to facilitate supervision. The Decree published on March 2, 2010 confirms this goal. It specifies, from its first article, that automatic processing of personal data in the “Registre national des fiducies,” implemented by the Minister in charge of the Budget (General Directorate of Public Finances), “is intended to centralise the information about trusts necessary to facilitate the supervision necessary to combat fiscal evasion, money laundering, and terrorism financing.” Therefore, this information will also be accessible by prosecutors, investigating magistrates, agents of the “police judiciaire” (criminal investigation department), customs officials, and specially-authorised agents of the General Directorate of Public Finance in charge of tax www.thejournalofregulation.com

supervision and collection (article 5). The information collected, enumerated by Article 2, is the following: 1. Surname, name, address, date and place of birth of natural persons constituting the trust, acting as trustee, and if need be, natural persons designated as beneficiaries of the trust; 2. Corporate name, company identification number, address of the corporate headquarters or establishment of all legal persons constituting the trust, acting as trustee, or, if need be, legal persons designated by the trust as beneficiaries; 3. Date and registration number of the trust contract and any amendments, and the identification of the tax office where the formalities were completed; 4.If necessary, the date the obligatory publication of real-estate transactions was completed, the number of publication and the identification of the office where the formalities were completed. All of this information will be kept for ten years after the extinction of the trust (article 3). Perspective on older legislation: The Ministerial Order of April 12, 2010 was published in the Official Journal of the French Republic on May 21, 2010. It modifies the Ministerial Order of April 11, 2005, which authorised the ‘Direction générale des impôts’ (French General Directorate of Taxation) to use automatic data processing in a file called ‘base nationale des données patrimoniales’ (national database of personal asset data). The Order of April 12, 2010 provides that information on trusts will be extracted from this database, which will henceforth be managed by the ‘direction générale des The Journal of Regulation n° 2 - June 2010

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DECREE N°2010-219 RELATING TO THE FRENCH NATIONAL REGISTER OF TRUSTS WAS PUBLISHED ON MARCH 2ND, 2010 Recommended citation: II-11.5

finances publiques’ (French general directorate of public finances), in order to facilitate its implementation of the national register of trusts. It also specifies that data relative to trust contracts will be saved in the national database of personal asset data for ten years after the trust’s expiration.

BRIEF COMMENTARY

other hand, tax evasion is, of course, an example of illicit behaviour, but is not an example of an international criminal organisation, as in the two previously cited examples. Therefore, this violation of privacy is weakly justified. The State, through legislation, has a tendency towards expanding its law enforcement powers, justified by the first example, to the second example, where it is much less justified.

his decree implemented a file of purely private data, kept for a very long time after the formation of the trust, since this information will only be deleted ten years after the trust has ended. We understand the ratio decidendi . Truly, trusts can be masks—as are the notions of ‘trust’ and ‘nominee’ in Anglo-American law—which is why they have long been considered as illegal according to French international public policy doctrine, because they can allow people dissimulate their identity in their economic transactions. Therefore, the trust—when it is used as an instrument to disguise—can be an instrument that endangers public policy.

“

The trust—when it is used as an instrument to disguise—can be an instrument that endangers

However, we must here make a distinction that Law makes less and less often. Truly, when it is question of money laundering or sponsoring of terrorism, the breach of public policy that can be hid by a trust justifies the creation of a file of personal data. On the

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III PART III.

BIBLIOGRAPHICAL REPORTS

ANNALES DE LA RÉGULATION (ANNALS OF REGULATION), 2009, VOLUME 2, DIRECTED BY THIERRY REVET AND LAURENT VIDAL Recommended citation: III-1.3

ANNALES DE LA RÉGULATION (ANNALS OF REGULATION), 2009, VOLUME 2, DIRECTED BY THIERRY REVET AND LAURENT VIDAL By Marie-Anne Frison-Roche, Managing Editor and Director of the RLR

III-1.3

MAIN INFORMATION

his collective work describes the contours of French, European, and International healthcare regulation, and explores past, present, and future evolutions and tendencies in this sector. Original French title: Annales de la régulation, 2009, volume 2, sous la direction de Thierry Revet et Laurent Vidal, collection Bibliothèque de l’Institut de Recherche Juridique de la Sorbonne (IRJS) – André Tunc. (LGDJ)

CONTEXT AND SUMMARY

he major part of these annals is consecrated to health regulation. They begin by a summary by Laurent Vidal, which highlights both the interdisciplinary nature of healthcare regulation, and the need to find a balance, to restore order, in a word, to regulate. In this respect, Professor Frédérique Dreifuss-Netter emphasises in her article entitled Ethique et Régulation en santé (Ethics and Regulation in Healthcare), regulation’s very particular role. On one hand, science, progress, research and development (which all entail investment), are compared on the other hand to ethics, patients’ rights, and regulation. More or less formalized systems coexist, either from self-regulation or consecrated in the form of heterogeneous committees on ethics, which appear to be different attempts at emulating regulation, and most of which derive from the Kouchner Act of 4 March 2002 (Loi Kouchner). The heterogeneity of this poorly organised system reflects the complexity of the questions raised by the healthcare sector. After the initial description of the fundamental problems in healthcare regulation, the first part of the study is devoted to healthcare regulators. Professor Cécile Moiroud first 152

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introduces la regulation et les agences sanitaires françaises (regulation and French public health authorities), a presentation that bears witness to the diversity of regulatory systems: research committees, commissions, and biomedical agencies, committees in charge of protecting vulnerable people, all of which compete in producing ‘soft law’ rules, alongside and ethics, which is becoming a principle of regulation in healthcare. Therefore, the clinical ethics centre of the Hôpital Cochin in Paris was created to allow patients to ask for motivated opinions on situations they encounter, even though these decisions do not bind the doctor, who retains his decision-making responsibility. Alongside ethics committees, public health authorities are in charge of evaluating and managing risks, in an approach dictated by the idea that everyone has a right to healthcare security. In this framework, the notion of a ‘product’ is cardinal, because the major areas of healthcare regulation are built around categories of products (animal health, human health, dangerous products). These public health authorities are exceptional for the diversity of their organisation: (i) new communities of institutions through the creation of Public Interest Groups (groupements d’intérêt public), which promote the development of institutional relationships between different actors in the sector, for any relevant public or private legal person may join; (ii) new public institutions, where public health authorities replace private structures or are born from the merger of public or private organisations, or where they seem to be independent from the administration and above its supervision. The variety of structures corresponds to a broad palette of responsibilities, subtly decanted in function of each authority’s nature: (i) expertise authorities in charge of evaluating (French Food Safety Agency—AFFSA), (ii) authorities in charge of informing and monitoring (Sanitary Surveillance Institute—INVS), (iii) sanitary inspection authorities, national decision-making agencies (French Anti-Doping Agency—agence de lutte contre le dopage), or regional decision making agencies (Regional Hospitalisation Agencies—ARH). Separating decision-making from expertise; information from www.thejournalofregulation.com

Recommended citation: III-1.3

I II III management; these are the principles that form the basis for healthcare regulation’s institutional framework. Next comes an article by Mr. Laurent Degos, President of the French National Authority for Health (Haute autorité de santé), introduces the authority he manages and reminds us of its concern for (i) improving the therapeutic and humane character of healthcare, (ii) reinforcing the system’s organisational coherency, (iii) providing guidance as to the optimal allocation of resources in order to promote the longterm viability of healthcare’s solidary method of financing. As concerns these goals, a quality healthcare system is defined as a system where “healthcare is as effective, safe and accessible as possible, and provided in the fairest and most efficient way.” In order to achieve these goals, the HAS, an independent public authority with legal personality, publishes recommendations and scientific opinions for the representatives of the State, sick insurance funds, healthcare professionals and patients. The HAS is therefore at the crossroads between different actors of the healthcare sector, which allows it to cover all viewpoints in any given scientific approach, and to seek to harmonize these points of view in order to take a decision acceptable to all. At the same time, the HAS is also a regulator at the service of professionals, through the recommendations on “good practices” it publishes, and whose concrete and everyday application is ensured through the procedure of hospital certification, where hospitals are evaluated by an independent third-party. The role of the HAS was enlarged by the Social Security Finance Act of 2008, which gave the HAS responsibility for recommending the most effective strategies for care, prescription and management of different illnesses. The qualitative goal means always promoting public debate on the quality of the French healthcare system, involving patients in quality improvement schemes, having clear, coherent, and understandable tools at hand to improve professional practices, strengthening the place of ‘quality’ in decision making. These are the stakes facing the HAS for the future. Mr. Jean Marimbert, director of the French Agency for Sanitary Safety of Healthcare Products (AFSSAPS), then presents his article called La régulation et sécurité sanitaire des produits de santé (Regulation and sanitary safety of healthcare products), which is marked by the paradox of healthcare regulation: healthcare regulation’s lack of economic concern. The AFSSAPS, a public administrative establishment under the responsibility of the Ministry of Health, is emblematic of this paradox, which one must look beyond in order to understand the AFSSAPS’ economic www.thejournalofregulation.com

impact in terms of healthcare costs and the way its activity interferes in the path to market access. Furthermore, the independence inherent to regulation seems to be absent from the AFSSAPS, but we can see that this independence is truly present through its production of reference documents, evaluation criteria, and delegation of sanitary inspection powers. The AFSSAPS’ activities are therefore similar to regulatory activities, and certain core parallels can be drawn: a concern for modifying behaviours, diverse methods of intervention (opinions, recommendations, orders…), an obligation to be legitimate and therefore to produce intelligible procedures in order to be credible. The AFSSAPS is therefore a form of regulation, without needing to become independent from the Ministry of Health, and thereby participates in the revival of public intervention. The presentation of the AFSSAPS is followed by the presentation of the Agence Française de Sécurité Sanitaire des Aliments (AFSSA – French Food Safety Agency), by Madame Pascale Briand, the general director of the AFSSA, which was created in response to the food safety crises of the 1980s and 1990s, and to contribute to the protection and improvement of food sanitation. Some of the missions of the AFSSA that seek to strike a balance between product risk and benefits include the management of nutritional and health safety risks, evaluation, surveillance, representation, and the granting of veterinary authorisations. The difficulty of finding such a balance is twofold: it resides in the polymorph nature of risk, in human, economic, media, and legal aspects, but also in the specificities of each branch or each product, which means that they each need a specific approach. Moreover, health regulation is certainly a national issue, but it is also European. In this respect, the first part of the study includes a presentation of the European Food Safety Authority (EFSA), by Madame Catherine Geslain-Lanéelle, its executive director. This Authority, in charge of managing food crises and improving public confidence, operates according to a principle of separation between evaluation and risk management. The goal is therefore to evaluate food safety risks on a European level, and to publish appropriate, opportune and detailed communication in order to provide the public with coherent and detailed information. The EFSA includes an executive board, a consultative forum at the heart of the strategy of cooperation, open to Norway, Iceland and Switzerland, and a Scientific Committee in charge of producing opinions and convening meetings of experts. In five years’ time, the Authority’s workload has considerably increased. Now, it is necessary to best respond to risk The Journal of Regulation n° 2 - June 2010

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managers’ expectations. Therefore, an accelerated quality examination programme has been put into place. It is also necessary to organise a worldwide risk analysis: therefore, scientific programmes on the European level are being developed, but also internationally, with the signature of agreements on information exchange with the United States, New Zealand, and Australia. Globalisation creates new risks, so it is necessary to improve cooperation, externalise work, and deepen the projects decided upon by the consultative forum. After this presentation of regulatory authorities, Mr. Michel Lièvre, a member of the pharmacology department at the University of Lyon 1, wrote an article entitled Rôle de l’expertise à l’AFSSAPS (The role of expertise at the AFSSAPS), which introduces the question of the role of the expert within regulation. The work of commissions, committees, and groups of experts, as well as outside experts, constitutes the foundation of the AFSSAPS’ decisions. Three major functions are therefore assigned to experts: health product surveillance, preliminary supervision of biomedical research, and supervision by the healthcare products commission. Each commission has a decision making process based on expert opinions, working with agency evaluators and sometimes outside experts. Despite the existence of two categories of experts, a common regime of obligations is applicable: impartiality, independence, public declaration of interests, scientific competence, availability and assiduity, but also an obligation of discretion and professional confidentiality. This general presentation of the role of expertise in the AFSSAPS is completed by Professor Joël Moret-Bailly’s article, un point de vue externe sur le rôle des experts au sein des agences de securité sanitaire (An outsider’s point of view on the role of experts within public health authorities), which presents the activity of experts from a legal point of view. Expertise is therefore a means by which the administration makes decisions, whose legitimacy is linked to the legitimacy of the expertise. Therefore, illegal conflicts of interests by experts to the Court of Cassation are a criminal offence. Experts are, however, special actors in administrative decision-making, and they are subject to a particular normative framework. The prevention of conflicts of interest is managed by a declarative system, and experts are subject to Article 25 of the Act on the Rights and Obligations of Civil Servants (loi portant droits et obligations des fonctionnaires). These rules are unfortunately incomplete. They do not manage negative conflicts of interest, and contracts reported under the “antigifts scheme” are not accessible…It would therefore be 154

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necessary to give a bigger role to employers, increase disciplinary sanctions, and involve patients in order to avoid “intellectual corruption”. Faced with the non-respect of rules on conflicts of interest, deontological procedures are a possible, didactic, symbolic and precise response, but criminal sanctions should remain fundamental. It would be judicious to enlarge the application of such sanctions to pharmaceutical laboratories, in order to punish those who benefit from experts’ silence. The second part of the study is consecrated to medicine regulation, with an article by Jean-Marc Husson, Professor and co-director of Eudipharm, and Jean Pierre Osselaere, Professor of Pharmacy and Managing Director of EPMC Pharma, on l’ICH, conférence internationale sur l’harmonisation des demandes techniques pour l’enregistrement de nouveaux médicaments à usage humain (The ICH, international conference on the harmonisation of technical requirements for registration of pharmaceuticals for human use). The ICH was born from the realisation that a harmonisation of the rules and standards regulating the technical contents and obligatory format of pharmaceutical registration requests was necessary in order to facilitate the development of innovative medicines. The Steering Committee, at the heart of the ICH, has included, since its creation, the World Health Organisation, Canada, Switzerland, the European Union, Japan, and the United States. Rounds of conferences are organised in order to reflect on common themes and to prepare a consensus around the adoption of a tripartite harmonised text. This harmonisation activity is based on scientific consensus and fulfils a need for global security. It is nevertheless essential to limit the duration of proceedings and to lower the cost of developing innovative medicines. The third part concerns the regulation of healthcare costs, presented first from the point of view of the articulation between obligatory health insurance programmes and complementary health insurance plans. Professor AnneSophie Ginon’s article les instruments de régulation : les enseignements du nouveau partage entre assurance maladie obligatoire et assurance maladie complémentaire (Regulatory Instruments: The lessons from the new repartition between obligatory and complementary health insurance plans) presents the evolution of this articulation, and especially the reversal of the traditional opposition between these two approaches to the risk of illness.Thus, we

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I II III see that legislation¬—beginning with the Evin Act (Loi Evin) in 1989, continuing with the Universal Medical Coverage Act (CMU) in 1999, and finally the 2004 Health Insurance Reform Act (réforme de l’Assurance Maladie)—has implemented a specific right to complementary health insurance coverage, which tends to nuance the original opposition between complementary and obligatory schemes. Common rules now apply to all organisations providing complementary health insurance, and public policy rules shape the procedures for subscription and pricing, which makes the complementary sector resemble the obligatory one. At the same time, the State, through tax incentives, also encourages the rapprochement between the two regimes by setting a common goal for both of them. “Solidarity Plans” fight the classic application of principles of selection and proportionality, while “Responsible Plans” attempt to make patients aware of their responsibilities and implicate them in public healthcare cost management schemes, especially through the “coordinated care procedure” (parcours de soins coordonnées), by which patients must choose a general pratitioner, and must obtain a referral from him before visiting a specialist, in order to be fully reimbursed by their obligatory and complementary health insurance plans. These policies are supported by tax incentive measures, which, however, raise a question relating to the interdiction of State Aid in European Community Law, derived from Article 87 of the Treaty establishing the European Community. The European Court of Justice has already stated that organisations managing complementary health insurance schemes are businesses, subject to national and European competition law. Similarly, the exoneration from paying the tax on insurance contracts for “Solidarity Plans” was already deemed to be a State Aid by the European Commission. It remains to be seen if tax exonerations on “solidarity” and “responsible” health plans can be justified. To this effect, a recommendation by the European Commission says that State Aids that are social in nature are justified as long as they are attributed to individual consumers without product discrimination. The principle of solidarity is at the heart of the justification for tax breaks, which raises difficulties as to the reasons for signing “responsible plans”. It would therefore be better if Parliament paid closer attention to Competition Law when implementing rules for complementary health care insurance. This European approach to French health insurance regulation is completed by the comparative approach of Mr. Bruno Palier, a researcher at the National Centre for Scientific Research (CNRS). In his article Quelle

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régulation pour la santé ? Un regard comparatif (Which regulation for healthcare? A comparative approach), Mr. Palier begins by noting that the differing global evolutions in health spending come from divergences in defining priorities. Therefore, national health systems offer basically free and equal access to healthcare; health insurance systems organise a repartition of the supply of healthcare between the public and private sectors, leaving the patient to freely choose between the two; and liberal systems repose upon the liberty of choice and technological performance, often to the detriment of equal access. Yet, faced with these three systems, a general observation can be made: the augmentation in healthcare spending is due to longer life expectancy and an ageing population, freedom of access to healthcare and competition between healthcare providers, and doctors’ fees. Therefore, we must ask ourselves how to define healthcare regulation, and what system should be chosen? If State regulation, such as practiced in Great Britain, allows for a very precise control of the healthcare budget, it also means long waiting times for access to basic health services. Similarly, health spending can be regulated by the market, like in the United States, where the whole population, except for the very destitute and the aged (Medicaid and Medicare), has to voluntarily contract private health insurance. Germany has a third example of regulation, enabled by staunch doctors’ unions that participate in permanent negotiations. Faced with these three systems, France has not chosen a model, and is trying to find a balance, through a long string of reforms, between financial viability, equal access to care, the quality of care, and patient freedom. The regulation of experimental practices in the medical field is the subject of the fourth part of the study. As professor Jean-Pierre Boissel points out in his article on L’efficacité des thérapeutiques: régulation par la méthodologie (The efficacity of therapeutics: regulation by methodology), it is fundamental to strike a balance between medical initiatives and their efficacy. Therefore, the instrument of measurement—here, the clinical study—is essential, and the evolution towards a supervision of such studies began in the 19th century, following two essential steps: the construction of a conceptual, methodological, and statistical corpus to define the way such studies should be carried out, followed by government regulation taken to the European level. The goal of such supervision is to offer guarantees to therapeutic research, (i) against risk, first and foremost, by profiting from

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empiric advances and research into probability, (ii) secondarily, against bias, and especially the placebo effect, regression toward the mean, and the natural evolution of illness, by implementing a comparison process between treatment, placebos, and natural evolution, and conducting a double-blind study. It is also necessary to guarantee against poor quality, by controlling the respect of rules, by publishing guidebooks (of which certain are official documents), and by fighting against fraud. Therefore, in this field, professional supervision used to be the role of the State and of regulators who supported the application of such methods, introducing a rigidity that was incapable of following the necessary evolution in clinical practice, especially as concerns rare illnesses. Regulation of experimental practices includes the Committee for the Protection of People (comité de protection des personnes), in order to protect the subjects of experiments, researchers, and government authorities. To this effect, Mr. Jean-Paul Demarez, a consulting practitian, wrote an article entitled Le comité de protection des personnes (The Committee for the Protection of People), which reminds us that the idea began in the 1970s, when the importance of regulation via ethics was realised. The first step towards normative supervision was the Helsinki Declaration of 1964, which adopted the first Ethical Code on human experimentation: the researchdoctor’s equivalent of the medical practitioners’ Hippocratic Oath. This first movement also included the beginning of legal regulation, pioneered by the Institutional Review Bords (IRB) in the United States, which authorise and supervise research projects in instutions carrying out human experimentation, and can order the suspension or abandonment of such research in case of failure to respect the rules. The IRB therefore fulfil the role of a special administrative police. Furthermore, the Food and Drugs Administration gave the Helsinki Declaration a quasi-obligatory status in 1975. This impulsion reached the other side of the Atlantic, and brought about the spontaneous creation of ethics committees in France, which were completed by the creation in 1983 of the Comité consultative national d’éthique pour les sciences de la vie et de la santé (National consultative committee on ethics in lifeand health-sciences). The parallel existence of both structures led to a restructuration that created Comités Consultatifs de protection des personnes dans les recherches biomedicales (CCPPRB – Consultative committees for protection of people in biomedical research), which provide opinions to the competent authorities of a special administrative police force, created by law. Furthermore, the CCPPRB give their opinion on the respect of laws protecting people participating 156

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in biomedical research. In parallel to French evolutions in this domain, the European Union began to reflect upon the question, with a guide on “Good Clinical Practices for Medicine Experiments in the European Union”, published in July 1990, followed by contacts between Europe, Japan and the United States, through the ICH process, which show a desire for rationalisation, in order to guarantee the quality, security and effectiveness of medicine. Therefore, the ICH finalised its Good Clinical Practices, and recommended that they be given force of law. The European adoption of these recommendations took the form of two European Directives (2001/20/CE and 2005/28/CE), whose transposition in France gave birth to the Comités de Protection des Personnes (CPP – Committees for the Protection of People), the successors to the CCPPRB. The CPP is an independent organisation with legal personality, including 14 members from different fields, divided into two colleges—one medico-scientific, one social—that give opinions, either obligatory, or requiring adoption through a consultation or assent procedure, on the conditions of validity of research. In conclusion, regulation of experimental practices has gone from ethics to law, basically framing research ethics in order to prevent human biology engineers from surpassing medical practitioners. Finally, Messrs. Gunter Hennings, consultant, and Jean Huges Trouvin, professor, analyse the tendencies in European Union biotechnology regulation, showing that public health protection measures must be taken. Only products having a positive benefit-risk analysis should be approved. However, methodological questions are also addressed, and regulation should attempt to make better use scientific results in their regulatory activities. The fifth part of the study concentrates on the regulation of medical accidents, and begins with an article by Mr. Dominique Martin, director of the ONIAM, on l’aléa thérapeutique et l’office national d’indemnisation des accidents médicaux (Therapeutic Hazards and the National Office for the Compensation of Medical Accidents), who describes the principles applying to victim compensation, as provided by the law of 4 March 2002, which implements the right to be compensated by national solidarity funds when the healthcare professional did not commit a professional error. The procedure implemented is both administrative and amiable, essentially free, fast, and simple. Recourse to a Court of Law is nevertheless possible: the amiable procedure is an alternative, freely chosen by the parties involved. Its organisation is based on the principle of democratic healthcare, by

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I II III promoting active participation by healthcare actors, patients, and professionals. Three structures are at the heart of this system, the Commission nationale des accidents médicaux (CNAM—National Commission on Medical Accidents), dependent upon the Ministries of Health and Justice, and in charge of establishing a list of experts and supervising the harmonisation of the compensation scheme; a Commission Regionale d’Indemnisation des Accidents Médicaux (CRCI— Regional commission for indemnifying medical accidents), the one-stop access points for victims, spread out across the country; and lastly the ONIAM, a public administrative establishment that provides CRCI with the necessary means of operation, indemnifying victims and intervening as a substitution to defaulting insurers. The scheme is organised according to a rather complex procedure. However, as concerns the results of this scheme: the number of requests has increased, as has the number of compensations, which attests to its utility. This success should not, however, mask the risk of dispersion amongst the various means available for the compensation of corporeal damages, which might become a source of inequality between victims; nor the necessity of this scheme to be able to operate under the conditions stipulated by law, such as the respect of certain delays and the legitimacy of its decisions. This presentation of victim compensation is followed by Professor André Lienhart’s article on La réduction du risque anesthésique: passé, présent et futur (Reduction of Anaesthetic Risk: past, present, and future), which highlights the link between surgical risk reduction and the progress made in the domain of anaesthetics and resuscitation: identification of target risk reduction areas, elaboration of guidelines by scientific associations, availability of safer machinery, and a reaction (in the form of a December 1994 Decree) to chronic underfunding of anaesthetic departments by hospital managers. The new means employed have been evaluated in order to shed light on their appropriateness, their possibility of creating unintended side effects, and also to identify remaining risks. Looking at these evaluations, residual mortality is still the essential preoccupation, and this sort of reflection is not limited to anaesthetics and resuscitation departments. The general tendency is towards risk reduction and the limitation of adverse effects. Therefore, the approach to anaesthesia must be harmonised, recommendations must be made on the more human aspects of anaesthesia (like what to do before and after a complication occurs), and to familiarise professionals with the demands of medical experts: the key to understanding their professional responsibility. Great

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progress is yet to be made in this domain: a change in strategy and culture, the development of a more systemic approach, rather than the current defensive approach taken to legal risk. The second portion, and fifth part, of the study concerns vulnerable patients, such as the aged, to whom Professor Jean-March Husson, Jean Marie Vetel, head of the geriatrics ward at the Hospital of Le Mans, as well as Laurence Hugonot-Diener, geriatrist, and Patricia Mallière, director of international regulatory affairs at Servier Group, have devoted an article, highlighting the underrepresentation of the aged in clinical studies, even though they are large daily consumers of medicines. Clinical studies must be carried out in order to understand the specificities of vulnerable patients. Nevertheless, no specific regulatory framework exists in France or in Europe, even though the European Commission is taking new initiatives in this domain. The ICH has only one document specifically devoted to the aged. This should not cause us to forget the necessity of adapting research to the augmentation in life expectancy. These are precise criteria that should guide clinical studies on aged people: a correct and stratified representation, criteria of eligibility in conformity with the protocol, and free and informed consent. Moreover, studies to be conducted in geriatrics should be very precise, and highly supervised: the protocol, methodology and modelling should all be designed to optimise the results of research. The second category of vulnerable patients is pregnant women, who are the subject of an article by Timothée Fraisse. He underlines the information and research deficit, as well as the simplistic classification of the dangerousness of medicine established by the Food and Drugs Administration, despite the fact that this classification serves as a worldwide reference. Although the European Union has tried to develop its own classification, it has not become widely recognised. And yet, the situation of pregnant women is particular, especially because of the legal situation of the embryo and the risk of exposition to medicine it has while in the womb, which does not always have immediate consequences, but which can be revealed years later. The regulation of research on pregnant women reflects official reticence to allow trials to be conducted on pregnant women: there is an agreement between major medicineproducing countries and pharmaceutical laboratories not to conduct clinical trials on pregnant women unless all toxicity tests conclude that the treatment is innocuous. In France, only the direct, individual benefit that the mother and child might obtain authorises such tests. Faced with this strict limitation, it is not surprising that the market of pregnancy

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remains narrow, given the risks associated with research. Children are the last category of vulnerable patients studied by Messrs. Eric Sergheraert, Doctor of Pharmacology and Doctor of Law, and Jean-Pierre Osselaere, Doctor in Pharmaceutical Sciences, in an article called Les étapes de la mise en œuvre du règlement pédiatrique (The Steps in Implementing the European Regulation on Paediatrics). This European initiative began in 2000 and was achieved in 2006 with the adoption of European Regulation 1901/2006, prescribing the obligation to conduct clinical studies according to a Paediatric Investigation Plan (PIP) for all new medicines, to create a paediatric committee within the European Medicines Agency, a six-month extension of the Complementary Protection Certificate (CPC) in exchange for conducting paediatric studies according to an approved PIP, and included in the European Union budget financing for research on medicines intended for paediatric patients. Following the adoption of this Regulation, the Paediatric Committee was inaugurated on 26 July 2007, which evaluates PIPs that were submitted for pre-approval, according to three procedures meant to ensure a therapeutic interest for children and not to delay authorisation for medicines intended for adults: early requests for PIP approval, requests for a derogation of the obligation to conduct studies according to a PIP for medicines without interest for paediatrics, and requests for a delay in the obligation to conduct paediatric studies according to an approved PIP. Also, the Regulation planned for the implementation of a European network by 26 January 2008, in order to coordinate studies, bring scientific and administrative talents together, and avoid useless repetition of studies and trials. Since 26 July 2008, requests for marketing authorisations for a new market are valid only if the results of their studies were conducted according to a PIP. Finally, since 26 January 2009, the Regulation proposes, besides the six-month prorogation of the CPC, a new type of Marketing Approval for paediatric use when a pharmaceutical laboratory conducts paediatric trials according to an approved PIP for a medicine protected by a CPC. Trials on orphan medicines are also planned for, and the Regulation grants them extra years of marketing exclusivity when trials are conducted according to an approved PIP. The study ends with an article by Messrs. Eric Sergeheraert, Doctor of Pharmacy and Doctor of Law, and Jean-Pierre Osselaere, Doctor in Pharmaceutical Sciences, the sixth part of the analysis, entitled La réglementation des médicaments à usage humain en France et en Europe (Human Medicine Regulation in France and in Europe). This article 158

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presents applicable legal dispositions for human medicine organised according to three steps. Before the Marketing Authorisation, the first step encountered by a pharmaceutical laboratory that has discovered a new medicine is intellectual property protection. Three regimes apply to pharmaceuticals: pharmaceutical inventions, biotechnological inventions, and the European Community patent. For the first regime, three separate statuses exist: exclusion from patent for methods of treatment, surgery or diagnosing; the patentability of medicines, and the patentability of a new use for an alreadypatented medicine. There is a developing protection of biotechnological inventions, spearheaded by Directive 98/44/ CE, whose transposition into French Law limits the protection to the parts of genetic sequences that are directly linked to the function used. This is based on incomplete scientific analysis and is contrary to common law for patents. Also, it is possible for a third party to obtain a patent on the same sequence if they can prove that there is another application for that sequence. The transposition of the directive is therefore source of many divergences, which means it is necessary to harmonise the European patents system, especially since the Community Patent is not an adequate response. Even though it provides a single regime, and potentially a single jurisdiction for the first hearing following the Commission’s proposition of 1st August 2000, it would be better to follow the Commission’s plan to create a single interpretation and a single regime, in order to improve proximity with users. The second step is that of clinical trials, modelled after the principles of protection of human rights, and respect of human dignity, and regulated by Directive 2001/20/CE. This text defines the role of (i) ethics committees, whose favourable verdict must be obtained in order to start trials, and which protect participants; (ii) authorities in Member States, who authorise trials, verify the conformity of the trials with good clinical practices, and good manufacturing practices, and thereby have the power to suspend or forbid the trial, as well as (iii) promoters and investigators who must obtain the aforementioned authorisations and verdicts, with the possibility of modifying the protocol, and are required to notify any serious undesirable effects and events to the authorities and committees, as well as of the end of the study. This scheme could be improved by a European Regulation that would improve harmonisation: application of ICH standards by ethics committees, clarity of the scheme, balanced composition of ethics committees, revision and precision of definitions used by competent authorities, obligatory reports on suspicions of undesirable effects, optimisation of the use of collective

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I II III data, these are food for thought for the upcoming reform. The third step is that of the Marketing Authorisation, which can take two forms: a centralised procedure detailed in EC Regulation n° 726/2004, where the authorised product has, for an unlimited period of time, the same rights in every member state as though it had been authorised in that state; and a national authorisation procedure with mutual recognition procedures between states, according to the dispositions of Directive 2001/83/CE. There are other particular cases for Market Authorisations, however. First of all, the Temporary Use Authorisation (TUA) can be used for compassionate use of unauthorised medicines, and is derogatory to the classical procedure. Thereby, unauthorised medicines can be provided to patients suffering from serious or invalidating illnesses that cannot be treated by authorised medicines. Created by Directive 2001/83/CE, this procedure was transposed into French Law with some notable particularities: the conditions for authorisation, duration and suspension are identical to those of Directive 2001/83/CE, but French law distinguishes group TUAs from individual TUAs. Also, three categories of medicine benefit from a special regime. First of all, generic drugs have a special regime, and can benefit from an exemption of pharmacological, toxicological and clinical trials, or an exoneration from bioavailability trials, they have an abridge procedure and are subject to special industrial property rights. Next, bio-similar drugs (me-too drugs) can be submitted to extra examination if they have significant differences with the reference medicine, or submitted to the regime for generics if they correspond to the definition of a generic. Industrial property rules and market authorisations are very specific to this category, and poorly unified at the European level. Finally, orphan drugs enjoy commercial exclusivity because of the narrow market to which they are addressed. The orphan character of the drug is controlled by the EMA, which adds and removes such drugs from the register of medicines. Once the Market Authorisation has been obtained, the fourth step concerns the lifespan of the authorised medicine. First and foremost, obtaining a French or European CPC allows for compensation of the period between the request for a patent and the market authorisation, which offers a reduced level of protection. Next, and once the Marketing Authorisation has been obtained, any modification of the Marketing Authorisation must be approved. Procedures differ depending on the type of modification requested, which has led the Commission to announce its intention to implement a clearer and more understandable framework, as well as a better-harmonised regime. Furthermore, the lifespan of a medicine includes its commercialisation, and especially advertising taken in a broad

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sense, which is limited according to the medicine itself: it is forbidden to advertise any prescription medicine or any medicine containing narcotics; it is forbidden to provide advantages to healthcare professionals. Also, distribution and wholesale of medicine is subject to authorisation, and has strict conditions, such as how medicine is warehoused, and how qualified the employees are. Although importation and parallel distribution is tolerated within the European Union, they are largely limited by particular procedures and specific conditions. The last aspect of the lifespan of a medicine concerns pharmacovigilance, or the obligation to nominate a person responsible for monitoring and notifying any undesirable effects to competent member state authorities, who themselves have a responsibility for monitoring authorised medicines. This allows us to take account of the density and the number of evolutions in medicine regulation, which still has a number of challenges to overcome in terms of clarity, harmonisation and surveillance.

BRIEF COMMENTARY

his study has the merit of being exhaustive and allowing all actors to express themselves in a field where different interests are often violently opposed to one another. Reading this work allows us to measure how heterogeneous healthcare regulation is, whereas in other sectors, regulation is much more unified in terms of its principles, institutions, and modalities. Healthcare is a sector where the State, in its traditional form, and politics conserve their power, doubtlessly as a result of a political choice—and the adjective ‘political’ always keeps regulatory systems at bay. It is rather astonishing in the first part of the study that various organisations introduce themselves as regulators, whereas in reality, they are simply experts. This work demonstrates particularly well how complex the system is, especially because different rules apply in different countries for similar medicines, as a result of law’s slow unification. Moreover, rather than trying to unify itself, as Economic Law has radically done, time has not led to centralisation, but rather, stratification, product by product, and an accumulation of organisations without our being able to clearly determine their respective roles. The work shows that what is at stake is being able to identify a happy medium between the economic and non-economic nature of healthcare, which is the very essence of regulation.

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THE "CONSEIL ECONOMIQUE, SOCIAL ET ENVIRONNEMENTAL - CESE" (FRENCH ECONOMIC, SOCIAL AND ENVIRONMENTAL COUNCIL) APPROVES THE FRENCH NATIONAL STRATEGY FOR SUSTAINABLE DEVELOPMENT Recommended citation: III-2.2

III-2.2

MAIN INFORMATION

he “Conseil Economique, Social et Environnemental – CESE” (French Economic, Social and Environmental Council) expressed its approval of the “Stratégie nationale de développement durable SNDD” (new French National Strategy for Sustainable Development), on January 27 2010, which has been drawn up by the Government for the period 2009-2013. This national strategy is to become the tool for establishing a new model of economic development.

CONTEXT AND SUMMARY

he international community’s awareness of what is at stake in economic development has gradually increased since the 1992 Rio Summit. This summit gave rise to the elaboration of national strategies for sustainable development (NSSD). In France, the first NSSD was conceived for the 2003-2008 period, and was updated in 2006 to make it consistent with the European Strategy for Sustainable Development (ESSD). Since then, all aspects of French public policy have attempted to promote sustainable development. To further this purpose, the French Government launched a major consultation of civil society’s various members on environmental matters in July 2007. This programme was called the ‘Grenelle de l’environnement’, and has given rise to the first article of the « loi de programmation » of August 3rd 2009 (an Act of Parliament providing for a general framework and fixing an implementation timetable), which provides for an NSSD that has to be « élaborée par l’Etat en cohérence avec la Stratégie européenne de développement durable et en concertation avec les représentants des élus natio160

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naux et locaux, des employeurs, des salariés et de la société civile, notamment des associations et fondations » (elaborated by the State in coherence with the ESSD and in collaboration with national and local representatives, representatives of employers, of employees, and of civil society, especially associations and foundations). The CESE’s opinion is that the NSSD must facilitate the transition towards a sustainable economy, with a low level of carbon emissions and a high level of energy efficiency. Its objective is to define the path towards an effecient, socially just, and ecologically sustainable economic development. The plan for the period of 2009 to 2013 was elaborated within the framework of a public consultation, and structured in a similar way to the ESSD, while appearing at the same time shorter, more educational and more strategic than the former NSSD. Moreover, this NSSD takes into account the new global context (the worldwide economic and financial crisis, climate change and the Copenhagen summit, the « Grenelle de l’environnement » and the aims set by President Nicolas Sarkozy in his concluding speech at the « Grenelle de l’environnement »: October 25th 2007). The CESE’s opinion describes the new NSSD adopted by the Government for 2009-2013, which contains nine strategic challenges. Each of them defines "the context and issues at stake", "setting out targets in precise figures", "strategic choices" and "levers of action": 1. Climate change and energy (more environmetally friendly modes of consumption, development of renewable energy sources, modifying local infrastructures) 2. Sustainable public transport and mobility (complementarity of different means of transport, less-polluting transport, development of innovative systems) 3. Sustainable consumption and production (longer life cycles for products and services)

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Recommended citation: III-2.2

I II III 4. Sustainable management of biodiversity and natural resources (eco-innovative economy and urban development) 5. Public health, preventive action and risk management (quality of living environments, taking social inequalities into account) 6. Demography, immigration, fight against poverty and social inclusion (taking into account the multicultural dimension of French society) 7.International challenges in sustainable development and poverty across the world (an international governance contributing to food and energy security in the least-developed countries) 8. A knowledge-based society (information, education and life-long training, access to culture, increased support for research and innovation) 9. Governance (involving all concerned parties) Consulted by the Government on January 27th 2010, so as to obtain a consultative opinion, the CESE has delivered an overall positive opinion on the NSSD draft project. This enabled the NSSD to produce results, but the report attached to the CESE’s opinion also elaborates conditions. In this report, the CESE enumerates the conditions it believes necessary for improved circulation and efficiency of the strategy: • The largest possible broadcasting of the NSSD, in order to facilitate citizens’ understanding of the goals to be met, putting forward the list of indicators contained in the NSSD in order to allow citizens to become familiar with the strategy, before circulating a more detailled plan that will allow for a deeper understanding of the strategy. • The necessity to make the NSSD binding on public authorities. • Defining goals together with priorities, means, and evaluation proceedures, as well as hierarchising goals and means of action that will be used, in order to present a true strategy. • Promote sustainable development, not as a new sector-specific policy, but rather as a new approach taking

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into consideration mid-term and long-term perspectives, and involving individuals, companies, and public authorities through an appropriate institutional framework. • Granting the NSSD the status of a “mega strategy” in national policy making, just as the European Economic and Social Comity already suggested for the ESSD at the EU level. This would imply not only conferring upon the NSSD a status appropriate to tackle the challenges it is intended to solve, but also having it ratified by the Parliament, rather than by some interministerial committee. This also implies that the implementation of the strategy would be managed at the highest levels of government. • Preparing for job reconversion and transitions, in order to deal with future transformations on the job market, by making training and job security the highest priorities. The social consequences of these transformations will have to be assumed by society and therefore the NSSD should take into account investments, dividing up individual households’ responsabilities, and intergenerational solidarity in order to ensure its acceptance by society. • The NSSD’s very structure should take income disparities into account by reconsidering ‘corporate social responsability’ and the role of social dialogue and concertation in lawmaking, in order to be more transparent and informative for citizens. The CESE’s opinion highlights the main flaws and shortcomings of the NSSD, which are partly due to the fact that the project strives for exhaustiveness by including a multiplicity of levers of action. On the contrary, the CESE recommends only highlighting major priorities. The economic aspect seems glossed over, while social and cultural concerns seem to have been insufficiently apprehended. The ways in which the levers of action will be implemented do not seem sufficiently explained. The lack of targets for sustainable tourism or environmentally-friendly packaging, as well as medical care in the workplace and in schools, is also criticised. The CESE also emphasises the fact that more should have been done to promote social dialogue both in elaborating and implementing the NSSD.

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The groups consulted (professional associations, labour unions, associations, etc.) have, on the whole, agreed with the CESE’s recommendations regarding the NSSD. Their most common points of agreement are: better defining the strategy, the importance of job transitions, the obligatory nature of the NSSD, the method of prioritising goals, the clarification of indicators and evaluation methods in its implementation, the taking into account of inequalities, the strengthening of the social aspect of the NSSD, and finally, stimulating social dialogue.

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SNDD is in step with the global context and its underlying issues.

The CESE’s opinion and its attached report are structured as follows: • The first part is dedicated to the opinion adopted by the CESE during its 27 January 2010 session. The text begins with an introduction to the NSSD and its circulation. This introduction includes an analysis of the nine strategic challenges included in the NSSD, organised around transitions towards sustainable development and taking cooperation into account. It ends with a conclusion based upon the implementation of a new model of economic development. • The second part is dedicated to transcripts of the consultations with different organisation. We can find the opinions on the NSSD by the agricultural, artisanal, associative sectors; the FDT, CFE-CGC, CFTC, UNSA, and CGT-FO French labour unions; groups of private and public businesses; mutual insurance companies; French overseas territories; qualified persons; and the UNAF (National families union). • Finally, annexed documents supplement the analysis of the NSSD for 2009-2013. These documents are : the CESE’s opinion that the 2003-2008 NSSD was not a success; recommendations from the “Stiglitz” commission, which was a French presidential commission intended to create new measures of wealth and come up with a new way to measure collective performance; propositions by the CESE’s commission de concertation (Concertation Commission) on sustainable development measurement tools; a document on the creation of the 2009-2013 NSSD; and a second document on Article 1 of the Act of August 3rd, 2009 (law n° 2009-967) relative to the implementation of the “Grenelle de l’environnement”.

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CONTEXT AND ISSUES AT STAKE:

The SNDD is in step with the global context and its underlying issues. The global context has been influenced by the Intergovernment Panel on Climate Change’s (IPCC) evaluation report, which revealed: the rise in sea level and temperature since the beginning of the 1990’s; the observation that greenhouse gas emissions have doubled since the 1970s; and the necessity to limit global warming to 2°C, which means that greenhouse gas emissions will have to stop rising by 2020 and by 2050, they will have to be half of what they were in 1990; and the failure of the Copenhagen Summit. These elements all influenced the NSSD. The European Union adopted its new Energy-Climate Package in December 2008, under the French presidency, which should enable the EU to reach the target of “3 times 20” (reducing greenhouse gas emissions 20% compared to 1990; increasing energy efficiency by 20%; and arriving at a level of 20% sustainable energy consumption in the EU). However, France’s domestic context also played a role, because the SNND takes into account the ‘French exception’, which is that because most of its electricity is produced using nuclear and hydraulic plants, it is much less polluting than other members of the OECD: it it represents 1.1% of world greenhouse gas emissions for 0,9% of the world’s population and 5%

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Recommended citation: III-2.2

I II III of the world’s GDP (according to 2004 figures provided by the UN). Nevertheless, the loi de programmation implementing the Grenelle de l’environnement defined ambitious sector-specific targets for energy efficiency, especially in the construction and transport sectors. Also, the NSSD took into account the Plan climat national (national climate plan) and the Loi de programme fixant les orientations de la politique énergétique (Energy Policy Act) of 13 July 2005, which planned to reduce greenhouse gas emissions by 3% a year. TARGETS IN PRECISE FIGURES:

The European objective is to reduce greenhouse gas emissions by 20% by 2020, as compared to their 1990 level. In France, sectors exempt from the European Emission Trading Scheme (ETS) will consequently have to reduce their emissions by 14 %; and for those included in the ETS (energy, metal industry, cement works, paper industry, chemistry), 21%. Renewable energy will have to account for 50% of France’s energy production and 23% of its energy consumption. Additionally, the NSSD aims at making France’s overseas territories completely energy-independent by 2030. STRATEGIC CHOICES

• “Promote and favour less polluting methods of production and consumption”: motivate public and private actors to find more energy-efficient solutions, minimise greenhouse gas emissions, especially in industry, transportation, agriculture, construction, and urban planning. Particular emphasis is placed on energy-efficient or energy-creating buildings. • “Inform in order to allow the public and private sectors to make informed choices ”: favour a change in behaviour through a better understanding of the climate and its mechanisms; of energy consumption and its effects. Develop cost/benefit charts on national and local energy policies.

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•“Support innovation for energy-efficient and non-polluting economic growth”: change the way goods are produced and consumed (“green growth”), intensify research, development and innovation of energy-efficient procedures. • “Adapt activities and infrastructures to climate change”: dealing with the consequences of global warming, like shifts in the coastline, the necessary adaptations to be made to agriculture, forestry and tourism within the framework of infrastructure development strategies to be developed by all actors, in order to reduce the country’s vulnerablility to climate change’s effects. Ensure that long-term regional and national development projects take climate change into account. • “Take energy policy’s social consequences into account, in order to avoid increasing inequalities”: the inevitable rise in the cost of energy should not mean that certain categories of the population or certain areas of the country cannot meet their basic needs, like heating or electricity. This requires social consideration of these groups and the provision of funding to help them invest in energy-efficient solutions in adapting to climate change. LEVERS OF ACTION:

• “Establish a price tag for greenhouse gas emission and intensification of the quota market”: make the price of energy reflect the effect of greenhouse gas emissions by applying a system of discount or surcharge based on its environmental impact (or another system of energy taxation), prepare the third phase of the EETS, and implement a national accounting system of emissions of greenhouse gas and other atmospheric pollutants. • “Develop local adaptation and reduction strategies”: heighten awareness of all actors; participation between the central government and regional governments to create climate, air, and energy strategies; development of tools to help decision-making and follow-up; energy audits and reports on emissions; support for local sustainable development and energy conservation strategies.

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• “Diversify energy sources and reduce use of fossil fuels": elaborate regional climate-air-energy schemes that include developping renewable energy and linking them to the existing grid; increasing the percentage of such energy sources in urban planning; provide incentives through taxation, prices, and dedicated investment funds. • “Reduce situations of energy precariousness”: aid social categories and professions vulnerable to the fluctuation of energy prices, improve improving the extant housing stock, especially public housing; financial aid for buying energy efficient homes through zero-interest-rate loans or tax advantages. • “Promote and improve energy efficiency in construction, industry, business, and transport”: generalise energy and greenhouse gas emission auditing; promote energy saving and the quality of insulation through rules and regulations; develop implementation of energy targets; promote the use of efficient materials; recycle materials and waste; educate construction workers on renewable energy. • “Make the public sector exemplary”: generalise energy auditing, especially for government buildings; public support of innovative products and fields through purchasing; develop work-from-home schemes to reduce use of transports. • “Intensify research”: natural channeling and storage of carbon and CO2; renewable energy sources; methods of efficient production with low emissions; improve biofuels; optimise networks, improvement of the efficiency of bio fuels, optimization of networks.

Links with other documents in the same sector See Sectorial report II-1.1 on the establishment of a new regulatory authority of railway transport by the Law of December 8th 2009, the missions of which consist partly in the optimisation of allocation of railway infrastructures, in accordance with the sustainable development goals of national development programmes. See Sectorial report II-10.1 on the ruling of the Court of first Instance of the European Union (Seventh Chamber), of September 23rd 2009 illustrating the implementation of an EC market of Emissions trading system, based on quotas of greenhouse gas emissions, which relies on nationals allocation plans for the allocation of greenhouse gas emission allowances, that have to be determined by the Member States and then notified to the European Commission. See Sectorial report II-10.2 on the decision of the “Conseil constitutionnel” (Constitutional Council) on the “Loi de Finance” (French Finance Act) 2010, which approves the arrangement of the carbon tax to penalise emitters of carbon dioxide and at the same time, obliges the Government to review the scope of this device. See Sectorial report II-10.3 on the opinion of the CESE on environmental taxation and the financing of public environmental policies, published on 18 November 2009, criticising the mechanism of the “Carbon Tax” as conceived by the Parliament, which has currently been abandoned.

• “Implement shared indicators and follow-up”: evaluation method for these projects at every level of their implementation; facilitate local implementation of national objectives in greenhouse gas reduction. • “Inform citizens about energy consumption”: energy-consumption and carbon-production labelling information; a climate-energy tax; awareness campaign on energy savings; information on ways to take action.

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BRIEF COMMENTARY

he NSSD aims at producing indicators of sustainable development, which, as far as possible, will match with the strategic choices of the ESSD, while, at the same time, adapting itself to the level of local territories. In this manner, the NSSD will provide a common framework made up of strategic choices and indicators defined in advance and aimed at making it easier for the economical actors to structure their projects of sustainable development. At the national level, the NSSD is meant as a tool for the conception of a new economic model that will, in the long run, take into account the standards of sustainable development throughout its 9 strategic challenges. Thus the fact that the first place has being granted to climate change and energy, which constitutes the strategic challenge number 1, appears meaningful. On the one hand, the NSSD appears to be a regulatory method, in its very close connection to public policies, with targets, methods and means that are intended to be more and more binding. But, as it is underlined by the CESE, the view here is more and more horizontal, whereas regulatory action is sector-based. Still, although there is an energy regulator and, doubtless a High Nuclear Authority will soon be reinforced so as to become a real specific regulator, there is no regulator for sustainable development. This may be linked to the fact, first of all, that it is about strategic choices and that it is asserted that technique engenders power, which belongs to the regulator, whereas Strategy belongs to politics, which as such is a matter for the Government. Now in this case, it is about 9 strategic choices. But this distinction is very difficult to spot and to operate, because the technical choices of the regulator provide structure for the future. And that is another definition of politics. The 9 strategic choices, as they appear in the report, presented above, indicate that this is a method of the political type. Thus, since in this highly political matter that is energy, regulators are being implemented, their national character does not enter into contradiction with a globalised economy. We do not see why, as in Finance, the regulatory reasoning would not penetrate more into the environmental field.

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THE UNITED STATES POSTAL SERVICE PUBLISHED A DOCUMENT DETAILING THE CHALLENGES IT FACES IN MAINTAINING A UNIVERSAL POSTAL SERVICE IN THE UNITED STATES. Recommended citation: III-2.3

THE UNITED STATES POSTAL SERVICE PUBLISHED A DOCUMENT DETAILING THE CHALLENGES IT FACES IN MAINTAINING A UNIVERSAL POSTAL SERVICE IN THE UNITED STATES. By Alex Raiffe, Junior Editor

III-2.3

MAIN INFORMATION

report, published by the United States Postal Service (USPS) on March 2, 2010, presents the difficult economic situation facing the USPS (declines in volume of mail and huge budget deficits), and the ambitious economic and political measures that will have to be taken in order to maintain universal postal service in the United States.

CONTEXT AND SUMMARY Introduction I. An Unsustainable Business Model II. A Rapidly Worsening Crisis III. Actions Within Management Control IV. A Viable Postal Service: The Plan to Get There Conclusion: The Path Forward Appendix

his report, entitled Ensuring a Viable Postal Service for America: An Action Plan for the Future, presents the worsening budgetary context of the United States Postal Service (USPS), which it says will potentially lead to insolvency in coming years. Indeed, this report highlights the necessity of sweeping legislative reform to modify the USPS’s missions and abilities: even if the USPS were to do everything in its power to improve its situation permissible under current law, it would sustain losses of $115 billion by 2020. In 1970, the USPS was transformed from a cabinet level position (Post Office Department) to an independent administrative agency, designed to function as a business rather than an agency funded by general taxation. 166

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According to this report, this model worked well for 36 years, but in 2006, the Postal Accountability and Enhancement Act (Postal Act of 2006) limited pricing flexibility and implemented the obligation for the USPS to pre-pay its pension fund. These changes were implemented under the assumption that mail volume would continue to grow, which it has not. Therefore, the USPS is sustaining such losses that it may become insolvent in the coming years This report defines the nine points that would need to be addressed by the US Congress in order to allow it to restructure its activities in order to become profitable: 1. Retiree health benefits prefunding: The Postal Act of 2006 requires the USPS to provide between $5.5 and $5.8 billion in funding to its pensions fund every year until 2016. This report pleads for a change to a “pay-asyou-go” system, which would align the USPS pension system with other pension systems for private and public workers, where premiums are paid through payroll taxes each year. This alone could lead to $50 billion in savings over the next ten years. 2. Delivery Frequency: Currently, under its Universal Service Obligations, the USPS provides 6-day delivery to every address in the United States. This report requests a modification in order to allow the USPS to reduce delivery to 5 days per week in areas where 6-day delivery is too unprofitable because of low population density or low volumes of mail. 3. Expand Access: Currently, the USPS cannot close a post office for economic reasons, and it is therefore obliged to maintain a vast network of unprofitable post offices. This report highlights that the average cost of a transaction that take place in a post office is $0.23 per

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Recommended citation: III-2.3

I II III $1 of revenue, whereas transactions that take place in retail contractors or on the Internet cost only $0.02 to $0.13 per $1. The report suggests allowing the USPS to close unprofitable post offices, and contract postal services, collection and delivery to various independent merchants and partners. 4. Workforce: The report stresses the need to increase flexibility of its labour conditions in order to rationalise its workforce. More than 300.000 USPS employees will retire over the next decade, and collective bargaining with its labour unions would allow non-replacement of these employees, or replacement by part-time workers. It highlights that Royal Mail in the United Kingdom employs 22% part-time employees; Deutsche Post, 40%. 5. Pricing: The Postal Act of 2006 separated the USPS products into two categories. The first category is called “Competitive” and includes services open to market competition, principally express delivery services. In this category, the USPS has a relative liberty to fix prices according to demand. The second category, called “Market Dominant” is composed of services on which the USPS benefits from a monopoly, such as first-class mail. In this category, price rises are tied to inflation, and the monopoly has therefore become unprofitable because price cannot rise with demand and costs exceed revenue. Furthermore, there are certain “market dominant” services that are extremely subsidised, such as mail for the blind, library mail, and not-for-profit mail, for which the report proposes heavy rate increases in order to make them profitable. 6. Expand Products and Services: Currently, every new product requires ex ante review by both the Governors and the Postal Regulatory Commission. According to the report, this system is slow and inefficient. The USPS should be allowed to freely introduce new products and be subject to an ex post review. 7. Oversight: The USPS is subject principally to the review of Governors appointed to direct the USPS by the President, and the Postal Regulatory Commission, a body also appointed by the President. Congress, and various other administrative agencies also supervise the USPS. The report proposes clarifying and rationalising

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this oversight structure, which contains overlapping and sometimes-conflicting responsibilities. This report makes dire prophecies for the future, and it will be interesting to see the way that Congress will choose to deal with the issue of Universal Postal Service: will it choose to increase public subsidies in order to preserve the status quo, or will it prefer to reduce the scope and quality of Universal Postal Service by granting the USPS greater liberty in reducing lossgenerating services

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It will be interesting to see the way that Congress will choose to deal with the issue of Universal Postal Service.

Links with other documents in the same sector Already in 1997, the Economic Commission of the French Senate published a report on the Postal Service, taking the USPS as a reference to point out the weaknesses in the French system, in the perspective of La Poste’s (the French postal service) economic weaknesses that could have led to a situation similar to bankruptcy. This was due both to internal factors, such as rigid labour rules, especially as concerns retirement rules; and to external factors, such as government policies that continually imposed new public service obligations on La Poste, without providing for financial compensation, especially by leaving postal prices unchanged. See also : Report II-2.1 on the reform of "La Poste" (the French Postal Service).

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THE UNITED STATES POSTAL SERVICE PUBLISHED A DOCUMENT DETAILING THE CHALLENGES IT FACES IN MAINTAINING A UNIVERSAL POSTAL SERVICE IN THE UNITED STATES. Recommended citation: III-2.3

BRIEF COMMENTARY

his report is interesting principally because it is part of a greater debate taking place in all developed countries on the role of the Postal Service in an era where more and more correspondence is made through the Internet. The USPS has retained a monopoly on first-class mail delivery—a monopoly that is being progressively dismantled in European postal services pursuant to European Union legislation on the liberalisation of the postal service. If it is true that it costs less on average to send a letter in the US than in Europe ($0.44 cents per letter for the entire United States versus an average of $0.77 for a first-class letter in Europe, noting that European countries are much smaller in land-area than the United States), it is also true that depriving the USPS of any revenue through opening its monopoly to competition would worsen its financial situation. The proposition to raise prices on not-for-profit services, such as mail delivery for the blind, library mail, and not-for-profit mail, seems slightly surprising, for even though the report suggests ways to improve profitability, it seems strange that the USPS would discard its general interest services uniquely in order to improve profitability. The appendix of this report highlights options that were not retained, such as returning to the pre-1970 situation of making the USPS a publicly financed service; total privatisation; reducing standards for delivery time of first-class mail from the current 1-3 days to 2-5 days; or developing services commonly provided by European postal services, such as banking, logistics, integrated marketing or document management.

sales, to collection, to delivery. This is what Sweden chose in 2000, when it closed all post offices: currently, postal services are provided through independent shops, such as grocery shops and gasoline stations. Another one of its proposals is to create a truly independent, unique, and efficient ex post regulatory agency, which would review and regulate the Postal Service, a tool that seems essential in order to rationalise and improve efficiency in the USPS, especially in light of the proposition to rely more and more on independent subcontractors. Finally, one can conclude that the future of postal services everywhere requires a major overhaul in traditional organisations in order to remain profitable and viable. Universal Access to postal services is largely a political issue, because most people desire to have access to affordable and efficient postal services and home-delivery. It will be interesting to see the way that the US Congress will deal with the issue of declining mail volumes and the way it decides to regulate the postal service to make it viable for the future.

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The future of postal services everywhere requires a major overhaul in traditional organisations.

Finally, one can conclude that this report strives to draw lessons from experiences in European postal service organisation. One of its major proposals is to resort to greater contractualisation of postal services, relying on subcontractors at every step of the postal service, from 168

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MADAME CHRISTINE LAGARDE, FINANCE MINISTER PRESENTS THE GOALS OF THE "AUTORITÉ DE CONTRÔLE PRUDENTIEL ACP" (FRENCH PRUDENTIAL CONTROL AUTHORITY). Recommended citation: III-3.3

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MADAME CHRISTINE LAGARDE, FINANCE MINISTER PRESENTS THE GOALS OF THE "AUTORITÉ DE CONTRÔLE PRUDENTIEL - ACP" (FRENCH PRUDENTIAL CONTROL AUTHORITY). By Marie Cullin, Academic assistant

III-3.3

MAIN INFORMATION

adame Christine Lagarde, the French Finance Minister, gives a speech at the inauguration of the Autorité de contrôle prudentiel (ACP – Prudential Control Authority), implemented by the Ordinance of 21 January 2010, in which she explains the philosophy behind the ACP’s activities. Stability and solidity of the international financial system and consumer protection are the ACP’s main responsabilities.

CONTEXT AND SUMMARY

he speech given by Madame Christine Lagarde, Finance Minister, on the occasion of the inauguration of the Autorité de contrôle prudentiel (ACP – Prudential Control Authority) is based on the realization that French regulation functioned well during the financial crisis. She emphasizes, however, the necessity of drawing lessons from this crisis and of redesigning regulatory systems with efficiency and ambition. The implementation of the ACP comes in answer to this desire of ambitiously reforming banking supervision and creating a system to serve as a reference on the subject. Four principal objectives are set for this “super-authority”: (i) successfully merging the banking and insurance regulatory systems, (ii) succeeding in overcoming the crisis, (iii) successfully reforming the international financial system, and finally (iv) protecting consumers. More generally, the Authority should ensure financial stability and solidity in a delicate and changing environment, while protecting consumer interests. In this context, the reforms in banking regulation instituted

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by the Basle 3 and Solvability 2 agreements as well as a number of mergers in the insurance industry, are all factors that have to be taken into account. Therefore, on the international level, especially within the G20, the ACP is in charge of supervising the reinforcement of the stability of the financial sector, especially as concerns the elaboration of the Basle 3 agreement: more equity for risky activities, and better-quality equity, reducing pro-cyclical effects and better managing liquidity. Similarly, the reform operated by Solvability II is intended to protect insurers’ investments in business. Furthermore, the ACP is in charge of representing France within European institutions, and will currently have to intervene in two pending bills before the European Parliament: The European Banking Authority and the European Insurance and Occupational Pensions Authority, whose creation was proposed last autumn by the European Commission, in order to redefine the architecture of financial supervision in Europe. Finally, consumer protection is at the heart of the ACP’s missions, and amongst the principal goals of its regulatory activities. Meeting clients’ needs with loyalty is clearly identified as one of the Authority’s major objectives. To this effect, the ‘common pool’ created with the Autorité des marchés financiers (Financial Markets Authority) is the occasion to develop expertise and a common policy with regards to commercial practices, in cooperation with the DGCCRF (General Directorate for Competition, Consumer Affairs, and the Repression of Fraud), traditionally in charge of verifying the loyalty of commercial practices. See also : Report II-8.2 on the Ordinance of 21 January 2010 creating the ACP Report II-8.3 on the Decree of 3 March 2010 Report II-8.4 on the Ministerial Orders nominating the members of the ACP.

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MADAME CHRISTINE LAGARDE, FINANCE MINISTER PRESENTS THE GOALS OF THE "AUTORITÉ DE CONTRÔLE PRUDENTIEL ACP" (FRENCH PRUDENTIAL CONTROL AUTHORITY). Recommended citation: III-2.3

BRIEF COMMENTARY

he speech by Minister Christine Lagarde has two principal points of interest. The first is that it reflects the way in which the Government wants its economic policy to be regarded. France is therefore presented as being the avant-garde in the field of regulation, with its ambitious and efficient model. The ACP is therefore described as the essential means for France to be present in European and international forums, the motor for international financial reform, and the guarantee that its voice will be heard. Secondly, this speech bears witness to the Government’s desire to address consumers. By placing consumer protection at the heart of the ACP’s objectives, the Finance Minister is directly addressing citizens, telling them that their security holds a central place in French economic preoccupations, and emphasizes the coordination between the between the ACP and the DGCCRF (Direction générale de la concurrence, de la consommation, et de la répression des fraudes – General directorate for competition, consumer affairs, and the repression of fraud) through their “pôle commun” (common pool), which was not included in the Ordinance.

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This introduction of the ACP by Mrs. Lagarde should be read with particular attention, because it is not simply a public relations operation. Insofar as the President of the ACP is nominated by the Government (Article L142-8 of the Monetary and Financial Code), this speech also sets the tone for the immediate business to be dealt with by the ACP. The choice of words is significant: “I should like, on this occasion of this inauguration, to share with you what I perceive to be your plan of action for the coming months”; then, on the subject of Basle 3, “France has two vital interests in this negotiation. These interests are, in a sense, the mandate with which we are entrusting you.” This speech is clearly intended for regulators and demonstrates not only the political influence that the ACP will be subject to, but also the intrinsically political dimension of regulation, often smothered by technicalities, whether they be financial or procedural. Thus, the speech given by Mrs. Lagarde has the merit of being coherent. The subprime crisis had revealed the necessity of government intervention. We see clearly here that regulation is eminently political. The place given to the notion of “general interest” in this speech, especially as concerns the function of the ACP, shows that the banking and insurance sectors are not exempt from this rule.