Foreign Subsidies Regulation: EU Court approves dawn raid and confirms legitimacy of Commission’s request for electronic company information stored abroad

For the first time, the EU General Court decided on investigation measures of the European Commission under the relatively new Foreign Subsidies Regulation (FSR).¹ The FSR addresses distortions caused by foreign subsidies and shall therefore allow the Commission to ensure a level playing field for all companies operating in the European Union.

Facts

In this case, the companies under investigation were ultimately owned by a Chinese parent company. During the investigation and by the contested decision, the Commission requested the content of various mailboxes of employees who were Chinese citizens. A legal hold was placed on these accounts whose data were on servers located in China. By way of application for interim measures, the applicants were seeking the annulment of the contested decision.

The applicants argued the Commission infringed EU and international law by requesting documents stored on servers in China, and that complying would force them to violate Chinese law. They claimed the inspections caused reputational damage and threatened their financial viability.

The decision

In its preliminary ruling, the President of the General Court rejected the application, finding:

1. The applicants failed to establish a prima facie case that the Commission's actions were unlawful. The Commission can investigate non-EU entities affecting the EU market, and the applicants did not adequately explain why they could not access or provide the requested information.
   
   The Court rejected the applicants' arguments that the Commission's actions were unlawful. It emphasized that the Commission's approach of inspecting EU-based premises of non-EU companies is not new and has been endorsed in competition law cases. The Court cited established legal principles, including the "implementation test" and "qualified effects test," which justify EU jurisdiction over practices implemented or having substantial effects in the EU market.
   
   The Court stressed that the Commission must be able to request information from non-EU entities to effectively assess potential distortions in the internal market caused by foreign subsidies. Without this ability, the Commission's investigative powers would be severely limited, potentially encouraging companies to store data outside the EU to evade scrutiny.
   
   Furthermore, the Court noted that the applicants did not adequately explain why they couldn't access or provide the requested information stored on servers in China. In the Court’s words, “the applicants confine themselves to putting forward, in an extremely laconic manner, mere general assertions”. They neither demonstrated that Chinese law prevented them, as EU-based entities, from responding to the Commission's requests, nor did they explain why Chinese law was relevant to their situation.
   
   
• The Court understood from the application that “the applicable administrative penalties are generally pecuniary in nature”, which it held cannot generally “be regarded as irreparable, since it may be the subject of subsequent financial compensation”.
• As regards the violation of state secret laws, which could be subject to criminal fines and imprisonment, the export of such information would require the prior approval by competent Chinese authorities. The Court found however that the applicants failed to show that they had sought those necessary authorizations from the authorities or explored alternative methods of providing the information without violating Chinese law.
• The Court closes these observations on the international law aspects with the general observation that the decision “must be assessed in the light of EU law and not Chinese law”.
  
  
In essence, the Court found that the applicants' arguments were too general and lacked specific evidence to support their claims of unlawfulness, thus failing to meet the prima facie case requirement for interim measures.


2. The urgency requirement for interim measures was not met. According to the Court, any reputational damage had already occurred, financial harm was not proven to threaten viability, and the risk of Chinese legal consequences was not sufficiently demonstrated.
   
   
3. Finally, the Court found public interest in effective enforcement of EU law outweighed the applicants' interests. As entities operating in the EU market, they are subject to EU rules and cannot evade investigations by storing data abroad.

Practical takeaways

The decision is of a preliminary nature as it deals with an application for interim measures. In what it says, it is however a strong backing for the Commission’s enforcement powers under the FSR. In particular, the way it throws out the applicant’s arguments on the Chinese law implications demonstrates the hurdles to overcome when arguing potential foreign law infringements, if these would restrict the enforcement or effectiveness of the European law. In the Court’s views, the Commission’s electronic seizure rights do not end at the European Union’s borders.

¹Case T‑284/24 R, Order of the President of the General Court, dated 12 August 2024.