Retail branching schemes in violation of European law (II)?

In the Netherlands we know no other way than that not all forms of retail are allowed in every location. The reason is that not every location is suitable for every form of retail and that municipalities often want to protect the center area. Specifically, a hardware store on the edge of town and a clothing store in the center.

In an earlier edition of MIX (July 2016), I raised the question of whether these restrictions should be allowed or whether they might violate European regulations. And what the consequences would then be. Given recent European law developments, there seems to be more clarity on those questions.

'City of Appingedam' lawsuit

The reason for those questions was a ruling by the Administrative Law Division of the Council of State (hereinafter: the Division) on the zoning plan 'Stad Appingedam' by the Appingedam City Council, which, among other things, allows for a 'Woonplein' on the outskirts of Appingedam. This 'Woonplein' is intended as a shopping area for large-scale retail, such as furniture, kitchens and building materials. Regular retail - such as shoe and clothing stores or supermarkets, for example - are not allowed on site. In this case, a real estate entrepreneur argued that by including this restriction, the city council was violating the European Services Directive by only allowing retail sales of bulky goods.

The Division asked the ECJ in this case to clarify whether the Dutch system of "branching restrictions" in zoning plans is consistent with the European Services Directive, since - simply put - the Services Directive prohibits (in principle) the setting of assortment restrictions.

Why important?

This case is potentially of great importance for Dutch spatial planning policy. After all, should the Court of Justice rule that the Services Directive applies as well as that the regulations stipulating that small(scale) retail trade cannot be established on the Woonplein violate this Directive, then in fact assortment restrictions for retail trade in spatial plans violate the Services Directive.

The answer to these questions is thus of great importance for Dutch zoning practice. After all, the final judgment of the Court of Justice may well put a line through the decades-long Dutch practice of branching regulation.

Prejudicial questions Administrative Law Division

The Division put several questions to the Court of Justice. The questions asked by the Division are - briefly and simplified - :

1. Is retail trade, which consists of the sale of goods to consumers, a "service" within the meaning of the Services Directive and therefore does the Services Directive actually apply?
2. Does the Services Directive apply to zoning regulations aimed at maintaining the livability of the city center and preventing vacancy?
3. Does the (European) Services Directive also apply to a "purely internal situation" (a purely "Dutch" zoning plan)?
4. Does the zoning regulation fall under restrictions and prohibitions set forth in the Services Directive (a so-called "permit" or "requirement")?

And finally - if the Court answers all these questions in the affirmative - the Division asks the Court of Justice whether the regulation as included in the 'Stad Appingedam' zoning plan violates the Services Directive.

The "conclusion Szpunar

Before the Court of Justice issues a ruling on the questions asked by the Division, a so-called Opinion is always issued by an Advocate General to the Court of Justice. This is a reasoned and substantiated opinion to the Court of Justice, how the Advocate General thinks the Court of Justice should answer the questions posed by the Division. As a rule, such an opinion is adopted by the Court of Justice.

Meanwhile, the Opinion of Advocate General Szpunar has been published. He has advised the Court of Justice to answer - again in brief and simplified form - the Division's questions as follows:

1. Retail sales in the form of sales to consumers of goods (such as shoes and clothing) fall under the definition of "service"'' as referred to in the Services Directive.
2. The Services Directive applies to the zoning regulations as included in the zoning plan 'Stad Appingedam'. The reason is that the prohibition in this zoning plan of certain retail activities in a certain area leads to additional establishment costs and thus the 'freedom of establishment' is at stake.
3. Even when there is a case "where the facts are confined to one member state of the Union," the relevant provision of the Services Directive - with its restrictions and prohibitions - apply.
4. A zoning plan such as that in the municipality of Appingedam includes administrative provisions that constitute a sine qua non for the establishment of an economic operator in such municipality. As such, this zoning plan contains a "requirement" within the meaning of the Services Directive (= any obligation, prohibition, condition or restriction under the laws and regulations of the Member States).

Branching restrictions in a zoning plan in violation of Services Directive?

The Advocate General thus concludes that the Services Directive applies in this case and restrictions apply to the ability to include branching restrictions in the Appingdam zoning plan. These restrictions imply that three conditions for being able to impose requirements (branching restrictions) must be observed by the municipal council:

1. the requirements do not discriminate directly or indirectly by nationality or, for companies, the location of their registered office (prohibition of discrimination);
2. the requirements are justified for an overriding public interest (necessity);
3. requirements must be appropriate to achieve the objective pursued; they do not go beyond what is necessary to achieve that objective and that objective cannot be achieved by other, less restrictive measures (proportionality).

The Advocate General indicates that it is up to the Administrative Law Division itself - not the Court of Justice - to assess whether the regulation adopted by the municipal council meets these requirements.

The attorney general himself gives the answer

Thus, despite the fact that it is up to the national authorities to assess whether these conditions are met, in his conclusion the Solicitor General is already steering the Division in a direction to justify the included branch restriction.

1. In his view, the restrictions included are not economic or discriminatory in the sense that their purpose and effect is to treat certain retailers more favorably than others. This concerns the discrimination aspect.
2. The protection of the urban environment involves an overriding reason of public interest. A municipality may have an interest in promoting, through a zoning plan, that the inner city maintains its dynamism and original character. In a general sense, regulation of the establishment of stores can be part of such a policy. Moreover, a municipality may also wish to influence the amount and flow of traffic inside and outside the city. This relates to the requirement of necessity.
3. In the opinion of the Solicitor General, the restriction appears proportionate and does not go beyond what is necessary to achieve its purpose. Shopping centers outside the downtown area have a self-reinforcing effect. Once certain stores are located outside the downtown area and residents go there by car, that location also becomes more attractive to other stores previously located downtown. Thus, the only way to avoid the negative effects of increased traffic and an empty downtown is to limit the opportunities for service providers to locate outside the downtown. This concerns the requirement of proportionality.

Conclusion: branching restrictions appear permissible, if adequately justified

The judgment of the Court of Justice and the subsequent ruling of the Division on the 'Woonplein Appingedam' will now have to be awaited. These judgments will be of great importance for Dutch 'branching practice'.

With the conclusion of Advocate General Szpunar - assuming that the Court of Justice will follow this conclusion - the final verdict seems to be that the Dutch "branching practice" is in line with the Services Directive. However, governments will be subject to an additional obligation to provide justification. After all, every time someone feels restricted or excluded as a service provider, he seems to be able to demand a proportionality test from the competent authority, as included in the Services Directive.

A final article on this discussion will be published in this trade journal as soon as the Division has issued its final ruling on the "Woonplein Appingedam.

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