WAS THE SQUEEZE-OUT OF HUNGARIAN SCHOOLBOOK MARKET LAWFUL? - STRASBOURG RULED

05 November 2018

Can the government take your clients by setting up a new state monopoly? What are the boundaries of state intervention into the free market under the European Convention on Human Rights? We address these questions by summarizing the ruling of the Strasbourg Human Rights’ court in the Hungarian schoolbook market case.

Facts

Together with the centralization of public-school system, in 2011 the Hungarian government has reorganized the formerly free schoolbook distribution market in Hungary, by setting up a state-owned non-profit distribution entity, the School Book Supplier.

Before the reform adopted in spring of 2011 and came into force 2013 autumn, there were 30+ market dominant schoolbook suppliers on the market, where only the price and content of schoolbooks was centrally regulated, while the distribution of schoolbooks was a free business activity on a highly competitive market.

However, from September 2013, the schools, and their pupils could only purchase schoolbooks through the School Book Supplier, which was reportedly set up to create a uniform centralized procurement of schoolbooks, aimed at making the schoolbook market more transparent, for the benefit of the pupils and their parents, and for making the use of public funds more efficient.

While the new legislation guaranteed 20% margin to the newly established School Book Supplier, the former schoolbook distributors have been effectively barred from the market from 2013.

Three of them, Könyv-Tár Kft., Suli-Köny Kft. and Tankönyv-Ker Bt., being in the schoolbook distribution business for many years, have challenged the new legislation in front of the Hungarian Constitutional Court, without success, so they decided to bring their case in front of the European Court of Human Rights in Strasbourg.

The case in Strasbourg

The three applicants complained of the violation of their rights to property, by alleging that the Hungarian State has actually squeezed them out of the schoolbook distribution market.

The Hungarian government doubted that the “clientele of the schoolbook distributors” can be considered as a property right, protected by the European Convention on Human Rights (“Convention”), by emphasizing that the former schoolbook distributors did not have any “license to operate” granting them operation on the market, and which could have been withdrawn, at all.

The government held that it was free to reorganize a market, which, in its opinion, was a distorted one, since distributors could influence the choice of teachers by giving bonuses and discounts. Finally, it argued that the incidental loss of clientele could be only indirect effect of the new law, at the same time former distributors could participate in public procurement tenders after 2013, so they were not barred from the market.

The European Court of Human Rights firstly laid down, that on a market, where the number of clients is limited, the distributors’ established business and clientele must be considered an asset, protected by the Convention, even in the absence of a formal license to operate on that market. This clientele was entirely taken over by the state-owned entity.

The Court doubted that the new legislation pursued a legitimate interest, by emphasizing that while the School Book Supplier was granted a 20% margin by the new law, before 2013 the distributors’ had only 11-16% free market margin, and the price of books was fixed in both system.

The Court stressed that although the governments enjoy a wide margin of appreciation when determining what is in the interest of the community, they must strike a fair balance between the general interests and individual fundamental rights, to respect the principle of proportionality.

The Court established that considering i) the relatively short (18 months) transitional period ii) the fact that after 2013 the distributors could not continue their business, and they were  never invited to the closed tenders organized by the School Book Supplier, iii) that no compensatory measure was adopted to offer any redress to the former distributors, iv) the absence of real benefits to the parents or pupils, the new law was disproportionate and arbitrary interference to the free market.

Based on the above, the Court has established the violation of the right to property of the school book suppliers squeezed out of the market by the Hungarian State.

The judgment is not yet final, it is subject to review by the Grand Chamber, however this is exceptional.

Summary

This judgment of the European Court of Human Rights is a very important decision, by which the Court reaffirmed its case law regarding the concept of “property right”, by including in this notion the clientele of a company, and  the protection of private individuals from disproportionate state interference into the free market.