OPINION OF ADVOCATE GENERAL

SIR GORDON SLYNN

delivered on 8 July 1986

My Lords,

By 1984 milk production in the Community had increased and was increasing at a rate which gave cause for great concern. Accordingly the Council adopted Regulation No 856/84 of 31 March 1984 (Official Journal 1984, L 90, p. 10) which imposed a levy, additional to the co-responsibility levy, on quantities of milk delivered beyond a guarantee threshold in five consecutive years beginning on 1 April 1984. The Regulation (by adding a new Article 5(c) to Regulation No 804/68 (Official Journal 1968, L 148, p. 13), the basic regulation on the common organization of the market in milk and milk products), gave Member States an option to adopt one of two formulas. The first (‘Formula A’) imposed a levy payable by milk producers on the quantities of milk delivered to a purchaser which exceeded a reference quantity to be determined for the relevant 12-month period. The second (‘Formula B’) required purchasers to pay a levy on quantities of milk delivered to them by a producer which for the same period exceeded a reference quantity to be determined, the purchaser being required to pass on the burden in the price paid to those producers who had increased their deliveries, in proportion to their contribution to the purchaser's reference quantity being exceeded. It was left to the Council to lay down general rules for the application of that Article and in particular for the determination of the reference quantities and the amount of the levies.

Those rules were set out in Regulation No 857/84 of 31 March 1984 (Official Journal 1984, L 90, p. 13). By Article 2 of Regulation No 857/84:

‘1. The reference quantity referred to in Article 5c (1) of Regulation No 804/68 shall be equal to the quantity of milk or milk equivalent delivered by the producer during the 1981 calendar year (formula A) or to the quantity of milk or milk equvalent purchased by a purchaser during the 1981 calendar year (formula B), plus 1%.

2. However, Member States may provide that on their territory the reference quantity referred to in paragraph 1 shall be equal to the quantity of milk or milk equivalent delivered or purchased during the 1982 calendar year or the 1983 calendar year, weighted by a percentage established so as not to exceed the guaranteed quantity defined in Article 5c of Regulation No (EEC) 804/68. This percentage may be varied on the basis of the level of deliveries of certain categories of persons liable for the levy, of the trend of deliveries in certain regions between 1981 and 1983 or of the trend in deliveries of certain categories of persons liable during this same period, under conditions to be determined according to procedures provided for in Article 30 of Regulation No (EEC) 804/68.

3. The percentages referred to in paragraphs 1 and 2 can be adapted by the Member States to ensure the application of Articles 3 and 4.’

Articles 3 and 4 deal with special situations requiring adjustments to quantities attributable to certain categories of producer, notably in the cases of producers implementing approved development plans, whether before or after the entry into force of the new levy, certain investments carried out without a development plan, young farmers and producers whose production in the reference year was seriously affected by disaster, accident or disease. They also allow the Member States to pay compensation to producers who undertake to discontinue production definitively.

Article 5 provided:

‘For the purpose of applying Articles 3 and 4, additional reference quantities may be granted only within the guaranteed quantity limit referred to in Article 5c of Regulation No (EEC) 804/68. These additional quantities shall be drawn from a reserve constituted by the Member State within the abovementioned guaranteed quantity’.

By Article 7, if an undertaking is sold it is provided that all or part of the corresponding reference quantity is to be transferred to the purchaser; and ‘Under formula B, where a purchaser replaces, wholly or in part, one or more purchasers, his annual reference quantity shall be established’ in the way defined.

By Article 8(1):

‘Except as provided for in Article 7(1):

1. Where formula B is applied, Member States may take the necessary steps making it possible for the purchasers of milk and milk products to manage the reference quantities allocated to them including the allocation and reallocation of the quantities mentioned in Article 10 ... ’

Article 10 applies when a Member State opts for Formula B. It requires purchasers to recover the levy through the price paid to producers by reference to the amount by which they have exceeded ‘a quarterly quantity corresponding to that taken for the purposes of establishing the purchasers' reference quantity’.

The Commission subsequently adopted Regulation No 1371/84 (Official Journal 1984, L 132, p. 11) laying down detailed rules for the application of the supplementary levy scheme.

The Grand Duchy of Luxembourg sought to implement these Regulations, inter alia, by the Grand-Ducal Regulation of 3 October 1984 concerning the application, in the Grand Duchy of Luxembourg, of the arrangements for the supplementary levy on milk (‘Règlement grand-ducal du 3 octobre 1984 concernant l'application, au grandduché de Luxembourg, du régime du prélèvement supplementaire sur le lait’: Mémorial,8 octobre 1984, p. 1486).

It opted for Formula B (levy on purchaser) (Article 1), and provided for the calculation of the reference quantity from the quantity of milk bought by the purchaser in 1981, increased by 2% for the first 12 months of the application of the supplementary levy and by 1% for each further 12 months of its application. The quantities thus calculated are subject to a coefficient to take account of the trend of deliveries of milk in the Grand Duchy between 1981 and 1983 (Article 2). The purchaser is required in his turn to apply a similar system to the reference quantities which he allows to each of his suppliers (Article 3). A national reserve is provided for pursuant to Article 5 of Regulation No 857/84 (Article 4). If a producer stops supplying one dairy (purchaser) and begins to supply another, the corresponding reference quantity is taken away from the first purchaser and given to the new one; and where a supplier ceases all deliveries, the corresponding reference quantity is to be attributed to the reserve of the last purchaser to whom the supplier delivered milk for a period of at least two consecutive years (Article 7).

Two actions were brought before the Luxembourg Conseil d'État against the Secretary of State for Agriculture and Viticulture to contest orders laying down reference quantities for milk made pursuant to the Grand-Ducal Regulation. The first action was brought by three dairies (Marthe Kipgen née Klensch, trading as Laiterie Ekabe, Procola and Corelux) and the second by a farming company (Société civile d'Exploitation agricole de Niederterhaff, Bertrange). All the applicants submitted that the Grand-Ducal Regulation created discrimination between the various producers and purchasers of milk in the Grand Duchy and that in adopting it the Luxembourg Government misused its powers by attempting to favour the Luxlait dairy to the detriment of other purchasers.

Apart from the three applicants in the first case it seems that the only other dairy which pasteurizes and processes milk in the Grand Duchy is Luxlait which although not State-owned is connected with the Centrale Paysanne, a semiofficial body to which a large proportion of small-scale farmers are affiliated. Most of the producers who sell their milk to Luxlait are members of the Centrale paysanne. Central Marketing Sari, the marketing arm of Centrale paysanne, distributes and sells Luxlait's products. However, many farmers who have undertaken improvements on their farms, it is said, are turning to the applicants because they can get a better price than from Luxlait. Other farmers who formerly supplied Luxlait ceased production. Accordingly it is common ground that since 1981, quantities supplied to Luxlait have declined whereas deliveries to the dairy applicants have increased. On the other hand, farmers who, like the producer in the second case, have, with due authorization even if not under a development plan, invested substantial sums in milk production since 1981, received a reference quantity which is only a fraction of what they need in order to amortize their investments. The result of the Grand-Ducal Regulation, it is said, is that smaller producers associated with Luxlait benefit; larger producers who supply the plaintiffs suffer.

Moreover, the rules, under which quantities attributable to producers who stop production remain within the last purchaser's reference quantity, work in Luxlait's favour since it thereby acquires spare capacity which it can pass on to its suppliers, enabling them to increase output. The plaintiffs in the first case, whose suppliers are not likely to cease production but, on the contrary, would like to increase it (as is the case with Niederterhaff, the plaintiff in Case 202/85), have no such spare capacity to assist them.

The Conseil d'État appears to have accepted that the results of the Grand-Ducal Regulation were less favourable to the plaintiffs than to Luxlait but it found that there was no evidence that, in particular by choosing 1981 as the reference year, the Luxembourg Government intended to place Luxlait in an advantageous position. Moreover, even though some inequalities inevitably arose from the system of controls adopted, the Government realized that there had been variations in the trends in deliveries to the various purchasers between 1981 and 1983, and for that reason it weighted the quantities laid down to make allowance for these variations. The percentages adopted had the effect of slightly reducing the quantities allocated to Luxlait and increasing those allocated to other purchasers.

The Conseil d'État decided to refer a number of questions to the Court arising out of these proceedings. The questions are common to the case brought by the dairies (Case 201/85) and by the farming company (Case 202/85) and the cases have been joined.

The questions are these:

‘(1) Does Article 40(3) of the Treaty of Rome, which provides that the common organization of agricultural markets is to exclude any discrimination between producers within the Community, prohibit a Member State from choosing as the reference year for the determination of the reference auantity referred to in Article 5 c (1) of Regulation No (EEC) 804/68, pursuant to Article 2 of Council Regulation No (EEC) 857/84, the year referred to in Article 2(1) of Regulation No 857/84, if that choice in fact has the effect of according an advantage to a purchaser, and hence to milk producers making deliveries to that purchaser, to the detriment of other producers and purchasers supplied by them?

(2) Where a Member State has chosen 1981 as the reference year, does Article 2(1) and (2) of Council Regulation No 857/84 permit the reference quantity referred to in Article 2(1) to be weighted by a percentage which varies on the basis of the level of deliveries to certain categories of those subject to the levy despite the fact that Article 2(2) expressly provides for that possibility only where the Member State has chosen the 1982 or 1983 calendar year as the reference year?

(3) Does the general scheme of Council Regulation No 857/84, and in particular Articles 2(2), 4(2) and 8(1) thereof, permit a Member State which has opted for formula B to add the individual reference quantity of a producer who has discontinued deliveries as a result of ceasing trading to the reserve of the purchaser to whom that producer made deliveries of milk, instead of adding that quantity to the national reserve?

(4) Does Council Regulation No 857/84, and more particularly Article 4(2) thereof, permit a Member State to add to the reserve of the last purchaser the individual reference quantity of a supplier who has discontinued production, even where additional quantitites drawn from the national reserve have been added thereto?

(5) If question 4 is answered in the affirmative, does Council Regulation No 857/84 permit that reference quantity to be added to the reserve of the last purchaser to whom the former supplier has delivered milk for a continuous period of at least two years?’

It is convenient to take the last four questions, which go to the detailed implementation of the scheme by Luxembourg, before considering the general issue of principle raised in the first question.

Article 2 of Regulation No 857/84 provides that 1981 is to be taken as the reference year, subject to the discretion given to a Member State to decide to take 1982 or 1983 when the figures must be weighted ‘so as not to exceed the guaranteed quantity defined in Article 5c of Regulation No EEC 804/68’. There is no such provision in relation to 1981; indeed such a provision is not to be expected since the aim broadly was to get back to the 1981 quantities plus 1% (or 2% in the first year of the scheme) so that, subject to exceptions, subsequent developments are to be ignored. If 1982 or 1983 are chosen as the reference year the figures have to be adjusted to take account of subsequent events. The Member States had a discretion between the two courses; they had no discretion to run the two together under the terms of the Regulation. Nor, in my view, did they have any inherent discretion, if they chose 1981, to modify the actual figures to achieve what they thought was a fairer or better result. Accordingly the answer to the second question is that there was no power for a Member State to take 1981 and then to weight the reference quantity by a percentage which varied on the basis of the level of deliveries to certain categories of those subject to the levy. That position is unaffected by the fact, as the Court was told, that amendments to the Regulation are contemplated which would enable the 1981 figures to be adjusted.

The third question, as I understand it, relates to the fixing of the reference quantities by Member States on the coming into force of the scheme. It arises because the Luxembourg scheme, under which Formula B, where the levy is to be payable on the quantities delivered to a purchaser, was adopted, provided for the transfer of a discontinuing producer's reference quantity to his purchaser's reserve. The applicants say that this favours Luxlait which can redistribute that producer's reference quantity to other producers. That quantity, it is said, should be transferred to the national reserve and be distributed equitably amongst the various dairy purchasers.

The Council Regulations do not mention ‘a purchaser's reserve’. However it seems to me, as the Commission contends, that if Formula B and the reference year 1981 are chosen the position is clear. The purchaser's reference quantities are fixed on the basis of the milk or milk equivalent delivered to him in 1981 plus 1% (or 2% in the first year of the operation of the scheme). There is no provision that a reduction must be made representing the tonnage formerly delivered by any supplier who has voluntarily ceased or reduced production. Nor is there any provision in the Regulations that a figure representing such tonnage should be transferred to the national reserve in respect of any supplier who voluntarily ceases production. The national reserve includes amounts retained from the overall reference quantity referred to in Article 2 for the purposes of applying Article 3 of the Regulation No 857/84, or allocated to the national reserve on a transfer under Article 7. In relation to a cessation of activity rather than a sale or transfer, it is only if, under Article 4 (1) (a) of Regulation No 857/84, a producer is compensated for undertaking to discontinue milk production definitively that the reference quantity freed goes into the national reserve. Question 3 must thus be answered in the affirmative.

The fourth question, as I read it, is intended to refer not to the introduction of the scheme but to its application to the reference quantities of producers who discontinue production during the life of the scheme. The applicants say that these too have to be transferred to the national reserve especially as part of that producer's reference quantity may itself have been allocated from the national reserve. Again, in my view, it is clear that there is no provision to this effect. The relevant reference quantity under Formula B is that of the purchaser; it is not affected by the fact that one supplier ceases production voluntarily. It is irrelevant for this purpose that part of the producer's reference quantity came from the national reserve. That no reduction has to be made merely because part of a purchaser's quantity came from the national reserve seems to me to be borne out by the fact that Article 6 of Commission Regulation No 1371/84 (Official Journal 1984, L 132, p. 11) expressly provides that a purchaser's reference quantity is to be adjusted to take account of additional quantities assigned to producers under Articles 3 and 4 of Regulation No 857/84, i.e. from the national reserve. Question 4, like question 3, must in my view be answered in the affirmative.

As to the fifth question, it is contended by the Luxembourg Government that, in order to prevent trafficking in reference quantities, it was provided that the reference quantity of a supplier who had ceased production should be attributed to the purchaser who had last been supplied by that supplier for two years, rather than to the final purchaser if he had not been supplied by that supplier for two years. Otherwise it is said that one purchaser might persuade a producer, who sold to another purchaser and who was contemplating ceasing production, to transfer to the former purchaser, so that the latter would obtain the benefit of the quantity supplied which on cessation could be allocated to other suppliers.

It is said that there is nothing in the Regulation to prevent this safeguard being adopted by a Member State.

In my opinion, there is nothing in the Regulation which permits such a condition to be imposed. If a supplier ceases production the purchaser's reference quantity is not reduced; there can be no justification for giving the quantity delivered by the supplier going out of business to a'hother and earlier purchaser. Article 6 (1) (d) of Regulation No 1371/84 applying Article 7 (1) of Regulation No 857/84 makes it plain that, when a producer transfers from one purchaser to another, the first purchaser's reference quantity is reduced and the second purchaser's increased with immediate effect, subject to any amount being attributed to the national reserve. There is no requirement that the producer shall be the supplier of a particular purchaser for any length of time in order to include the quantities delivered in his reference quantity. I agree with the Commission that the fifth question must be answered in the negative.

I return to the first question which appears to proceed on the basis that a Member State had taken 1981 and complied with the relevant provisions of the Regulations. For the reasons given I do not consider that that is the position here. On that view, the first question as framed does not arise on the facts of the case. It is, however, a question which it is necessary for me to consider in general terms.

It is clearly the duty of the Council and the Commission when making a regulation within the framework of a common organization of the market to comply with Article 40 (3) of the EEC Treaty and to exclude any discrimination between producers or consumers within the Community. If in a particular case it were contended that the choices given must lead to discrimination, the proper course would be to challenge the validity of the regulation. It is not, however, suggested in this case that the Council Regulations do not comply with Article 40 (3) or that the choices given must lead to discrimination; no question is posed as to the validity of the Regulations themselves.

Once a common organization of the market has been established it is the duty of Member States not to take any measures which might undermine or create exceptions to it. In applying the instant Regulations, it is thus clear that Member States must not jeopardize the objectives or operation of the common organization of the market. In that context Mr Advocate General Reischl in Case 52/76 Benedetti v Munari [1977] ECR 163 at p. 187 took the view that ‘it cannot be doubted ... that Article 40 binds not only the Community legislature but applies also to the Member States in so far as with their intervention agencies they undertake functions within the terms of the common organization of the market’.

I do not myself share the view that ‘it cannot be doubted’ that Article 40 (3) by its terms deals with the application by Member States of rules laid down by the Community in respect of a common organization of the market. In Case 51/74 Van der Hulst [1975] ECR 79 the Court apparently did not regard it as obvious that Article 40 (3) applied to national regulations implementing a Community scheme. It was said at paragraph 35 that national regulations conflict with the prohibitions embodied, inter alia, in Article 40 (3) ‘if only by analogy’ in circumstances where exports are subject to higher charges than those placed on the national market or where charges were intended to place national products at an advantage.

In my view, Article 40 (3) properly interpreted is directed to the making of the rules by the Community institutions for the establishment of such a common organization of the market and not to steps taken by Member States to implement those rules.

There exists, however, a general rule of Community law, of which Article 40 (3) is an expression in a particular context, that in the administration of such a common organization of the market Member States must act fairly, observing the principles of proportionality and nondiscrimination.

How those rules are applied must depend on the context of the regulations and be seen alongside the obligation of Member States not to jeopardize the objectives or operation of the common organization of the market. In the present case it is plain that the Community institutions took the view that milk production must be curtailed or at least not allowed to rise beyond certain limits. Some farmers who wished to increase production would therefore be restricted; others might have to cut back production. They cannot complain of that in itself. Various provisions authorizing, e.g. extra quantities to be allocated and the transfer of reference quantities on sale of a business, seek to ensure that the scheme works effectively and fairly.

Moreover, since the actual scheme set up, giving a choice of years and methods, is not said to be unlawful, Member States had a discretion as to which year to take so long as they carried out precisely the option which they chose. There can be no obligation a priori to take the year which gives the higher figure to particular groups of producers or purchasers.

However, even though controls had to be imposed, that discretion must, in my view, be exercised fairly, the Member State taking a broad view and striking a balance between competing claims. The result may still be that some purchasers or suppliers suffer a greater reduction than others but if the discretion is exercised fairly and on an overall basis then there can be no complaint that what is done is unlawful. On the other hand, it is plain that flexibility is introduced to enable account to be taken of different conditions in the various Member States since farming is not organized on a uniform basis. The size of farms, the degree of modernization, the organization of distribution, varies from Member State to Member State. These factors may have to be taken into account. It is also relevant to consider the extent to which farmers have been encouraged or allowed by the State to invest or increase production during the years 1981 to 1983.

It seems to me to be implicit in the reference that the Conseil d'État did not think that it was conclusive against discrimination or unfairness that the State did not intend to discriminate in favour of one purchaser or group of purchasers or suppliers. I am of that view also. It is, and was for the Member State in making its choice, a relevant consideration as to whether on a broad view the effect of its choice would produce unfair disadvantages for one group as compared with another, or be disproportionate. The issues in the cases fall to be decided by the national court on that basis. It does not seem to me to be for this Court to decide or to assess those issues in detail.

I accordingly propose that the questions should be answered on the following lines:

(1) Article 40 (3) of the EEC Treaty cannot be relied upon by individuals in proceedings before a national court to challenge a national system which properly implements Community legislation governing a common organization of an agricultural market: there is, however, an obligation on a Member State in the proper implementation of such a scheme to take into account all relevant factors and, on an overall view, not to act unfairly between different and competing groups of suppliers and purchasers.

(2) Article 2 of Regulation No 857/84 does not entitle a Member State which chooses 1981 as the reference year to weight the reference quantity referred to therein by a percentage reflecting delivery levels to certain of the persons subject to the levy.

(3) Regulation No 857/84 contains no provision enabling Member States which have opted for formula B under Article 5 (c) (1) of Regulation No 804/68 to deduct from the reference quantity of a purchaser any amount consequent upon the ceasing by a producer to supply any amount to that purchaser, whether before the coming into operation of the scheme provided for in, inter alia, Regulations Nos 856/84 and 857/84 or during the validity of that scheme. In particular the aforesaid Regulations contain no possibility for the Member States to transfer any such amount to the national reserve, and such amounts must remain within the reference quantity of the purchaser to whom they were last supplied, irrespective of the duration of such supply.

The costs of the parties to the main action fall to be dealt with by the national court; the Commission's costs are not recoverable.