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So far we have looked at choice-of-law in a federal system, and at Europe and the US as federalistic states. Another defining feature of the US and Europe is that they strive to establish an internal market. Before we turn to the choice-of-law implications of the internal market, we should clarify the concept of the internal market as such. The concept of the internal market aims at establishing a unified economic sphere equivalent to that of a single state. In the words of Chief Justice Marshall, "[i]n all commercial regulations, we[120] are one and the same people."121 The internal market is established through positive and negative integration.122
Positive integration encompasses the creation of federal laws and institutions dealing with aspects of economic activity, such as external economic relations and competition policy. State intervention in these fields is usually, but not always, preempted, at least once the federal government has made use of its powers. In terms of federalism, positive integration is simply the centralization of certain legislative powers at the federal level. A hybrid results when the federal government does not preemptively regulate a certain area, but limits itself to formulate guidelines for the states (harmonization).123
Negative integration, on the other hand, is more complex. Negative integration means limitations on what the states can do. The Dormant Commerce Clause and the Freedoms limit the legislative freedom of the states in areas in which the states, in principle, retain their legislative powers. No state may erect artificial barriers to intra-union commerce such as tariffs and quantitative restrictions.124 More generally speaking, discrimination against out-of-state commerce is forbidden.
But neither US nor EU law stop at non-discrimination. Both the Freedoms and the Dormant Commerce Clause require that a state not impose burdens on interstate commerce that are not necessary for the protection of a legitimate interest (hereinafter referred to as the burden-test). This is known in Europe as the Dassonville / Cassis de Dijon doctrine, and in the US as the Pike test.
In its Dassonville decision, the ECJ held that "[a]ll trading rules enacted by Member States which are capable of hindering directly or indirectly, actually or potentially, intra-Community trade are to be considered as measures having an effect equivalent to quantitative restrictions."125 Such rules thus potentially violate Art. 28 EC - the free movement of goods. However, the Cassis de Dijon decision clarified that "[o]bstacles to movement within the Community resulting from disparities between the national laws relating to the marketing of the products in question must be accepted in so far as those provisions may be recognized as being necessary in order to satisfy mandatory requirements,"126 i.e., "requirements [that] serve a purpose which is in the general interest and such as to take precedence over the requirements of the free movement of goods, which constitutes one of the fundamental rules of the Community."127 The ECJ then gradually extended this jurisprudence to the other Freedoms.128
The US Supreme Court has for some time been applying an almost identical test, formulated in the Pike decision as follows: "Where the statute regulates evenhandedly to effectuate a legitimate local public interest, and its effects on interstate commerce are only incidental, it will be upheld unless the burden imposed on such commerce is clearly excessive in relation to the putative local benefits."129
To treat the ECJ's and the US Supreme Court's tests as one for the purposes of this paper is not to say that there are no differences between them. The case laws of the two Courts may diverge on particular issues. Different arguments may be made under the Freedoms and the Dormant Commerce Clause, respectively, as to what the underlying philosophy of the two provisions is or should be.130 The practical operation of the two tests, and the question of their precise scope, seem sufficiently similar, though, to abstract from these fine differences without detriment for the analysis in this paper. Rather, it is important to attend for a moment to the common problems surrounding the scope of the tests.
Read literally, the Dassonville / Cassis de Dijon and Pike formulas would bring any measure with even only incidental effects (hindrances) on interstate commerce under Freedoms / Dormant Commerce Clause scrutiny. This would mean that the courts would have to control if such a measure is necessary to protect legitimate interests of the acting state. In order to ascertain whether the measure is necessary, the courts would have to analyze the precise effects of the measure and alternative measures. Finally, under the Pike formula ("excessive"), the Courts would have to determine the respective magnitudes of both the burden on interstate commerce and the benefits resulting from the measure, and weigh them against one another under some sort of criterion. The last step is not explicit in the ECJ formulas, but it blends into the "necessity" test as applied by the ECJ131, perhaps an inevitable result.132 Taken to its extreme, the analysis would have to be an overall efficiency analysis of the measure at issue, weighing its commerce-impeding consequences against its commerce-enabling, and more generally against all its beneficial consequences. Several proposals have been made to restrict this extremely wide understanding. Some of these proposals shall be sketched here.
The ECJ usually refers to products "lawfully produced and marketed in one of the Member States" when applying the burden-test.133 This seems to be a condition of the burden-test. Why would the ECJ use this condition? If the burden-test determines the legality of a measure of one member-state, why should it matter how another Member State treats the question at issue ? One answer might be, of course, that it does not matter. The wording of the ECJ's decisions might be redundant, or it might indicate that legality in another Member State is a warning sign that the measure might not be justified by legitimate interests.134 If legality in another Member State does matter, the reason might be that limiting the burden-test to situations where there is a difference in the legislation of two states is a way of assuring that the Freedoms protect, and the ECJ surveils, only interstate commerce, not commerce as such. After all, if a certain product or practice is not legal in any of the Member States, this prohibition might be a burden on commerce, but it is a burden on commerce in general, not specific to the interstate situation.135
The Keck jurisprudence of the ECJ may be seen as a new attempt to limit the workings of the Freedoms136 in that way. In Keck, the ECJ explicitly reconsidered its prior case law. "In view of the increasing tendency of traders to invoke Article [28 EC] as a means of challenging any rules whose effect it to limit their commercial freedom even where such rules are not aimed at products from other Member States, the Court consider[ed] it necessary to re-examine and clarify its case-law on this matter."137 The ECJ reaffirmed that "requirements to be met by [imported] goods (such as those relating to designation, form, size, weight, composition, presentation, labeling, packaging) constitute measures of equivalent effect prohibited by Article [28]."138 But the ECJ stated that "[b]y contrast, contrary to what has been decided, the application to products from other Member States of national provisions restricting or prohibiting certain selling arrangements is not such as to hinder directly or indirectly, actually or potentially, trade between Member States within the meaning of the Dassonville judgment, so long as those provisions apply to all relevant traders operating within the national territory and so long as they affect in the same manner, in law and in fact, the marketing of domestic products and those from other Member States."139
The interpretation of Keck and its progeny is highly controversial.140 The most plausible reading of Keck seems to limit judicial control under the Freedoms to discriminatory measures and product specifications (which can be interpreted as a quantitative restriction at level zero !), and a retreat from the judicial control of mere hindrances.141 Such a distinction has intuitive appeal, although it is not clear if the distinction between mere hindrances on the one hand and product specifications on the other withstands a more rigorous policy analysis - some hindrances might be much more disruptive of interstate commerce than some product specifications.142
Going even further, a close observer of the US Supreme Court has put forward the proposition that the phrasing of the decisions notwithstanding, the burden-test is after all only an instrument to deal with hidden discriminations. The argument holds that since the Court has (albeit solvable) difficulties to observe the precise motives behind a measure143, striking down measures lacking a sufficient justification is in the view of the Justices the only way of getting at measures which, despite their appearance, could really only have had the purpose of keeping out out-of-state commerce. The proposal is to go back to a pure non-discrimination standard.144
Referring to the aforementioned idea that the Freedoms and the Dormant Commerce Clause are supposed to protect interstate commerce, not commerce as such, many authors, at least in Europe, seem to want to restrict the application of the burden-test to measures which at least in fact impose a heavier burden on interstate commerce (than on purely internal commerce).145
Numerous other restrictions of the scope of Dormant Commerce Clause and Freedoms scrutiny have been proposed. Behind the concrete proposals stand different views of, or implications for, the structure of the federal system and the internal market, and the relationship between courts and legislatures. If the Freedoms and the Dormant Commerce Clause only opposed artificial trade barriers like tariffs in particular, and discrimination in general, they would leave non-discriminatory economic policy decisions of the states untouched. The literal reading of the Dassonville / Cassis de Dijon and Pike formulas described above, on the other hand, would deeply engage the (federal) courts in the policy decisions of the states in virtually all legislative matters - a road that the ECJ seemed to be headed to go down, until Keck put on the brake.
Demanding a valid reason for a freedom-limiting rule is of course common place. Thinking that after all, even a literal reading of the Dassonville / Cassis de Dijon and Pike formulas does not demand more than that, one might find the literal reading unproblematic.146 But such reasoning would overlook the complexities of the burden-test as it results from a literal reading of Dassonville / Cassis de Dijon and Pike as outlined above. Even if courts could objectively determine the precise effects of a measure, the proportionality test would involve a value judgment of the court - if only the criterion according to which the weighing should be done.147 Moreover, determining which "legitimate interests", or "valid reasons", are to be taken into account in the first place involves a value judgment as well. In addition, the idea that the courts can objectively determine the precise effects of a measure is, of course, misleading. Nobody can. Just establishing the likely effect of the measure will therefore require educated guesses. In fact, if evaluating different policy options were such an easy and objective task, we could dispense with much of our philosophical and political debate and institutions.
Courts do not seem to be well equipped to carry out the analysis just described. It is dubious if they have the mandate to engage in the necessary value judgments, and they lack the technical expertise and resources to ascertain the effects of the measures they scrutinize. The latter is probably even more true for ascertaining the precise economic effects of a measure than for non-economic effects. This critique of the burden-test has gained publicity through the forceful and persistent attacks of Justice Scalia against the US Supreme Court's Dormant Commerce Clause jurisprudence. According to Scalia, the inquiry demanded by the burden-test "is ill suited to the judicial function and should be undertaken rarely if at all." Scalia pointedly formulated his critique in, among others, the aforementioned CTS decision. The economic merits of the anti-takeover act at issue seemed to Scalia "a highly debatable question, but it is extraordinary to think that the constitutionality of the Act should depend on the answer."148
It seems inevitable that courts to some extent engage in value judgments, and make educated guesses.149 When a court is called upon to decide whether a restriction on freedom of speech is justified to protect some other interest of primary importance against an imminent danger, the court has to make educated guesses on the likely outcomes if the measure is adopted or not adopted, and a value judgment as to how the different dangers and restrictions should be weighed against one another. But the burden-test is special in the breadth of its application (almost any measure can "indirectly" and "potentially" affect trade), and in the scope of the analysis required (in the extreme view, it would be an overall efficiency analysis of the measure). Most constitutions do not provide for such a general judicial control of any legislative measure. Where they do, such as Art. 2 of the German Fundamental Law ("Grundgesetz"), courts act with strong judicial restraint, i.e., the courts largely defer to the legislator.
To the extent that a court does engage in the analysis required by the burden-test, the required value judgments and educated guesses will by the force of things be the value judgments and guesses of the court, or the court's reading of value judgments and guesses into the Constitution or the EC Treaty, respectively. So if the burden-test is taken seriously, the court can implement its version of a free-market economy, personal or implied from other constitutional provisions.
This is not only a problem of the relationship between courts and the legislature in general. The object of burden-test scrutiny are exclusively or overwhelmingly state laws, and the scrutinizing court is, at least in the last instance, the US Supreme Court or the ECJ, a federal court. The extent of burden-test scrutiny is therefore also, and perhaps mainly, a problem of the relationship between the states and the union - a federalism problem.150
Technically, of course, the burden-test concerns only interstate commerce in two respects. First, only measures having a potential hindrance effect on interstate commerce would be scrutinized by the federal courts. But, again, almost any measure can "indirectly" and "potentially" hinder commerce. The history of Congress's legislative powers under the Commerce Clause is a lesson on how far this criterion can be pushed, and how difficult it is to draw a line.151 Second, the federal courts would scrutinize, and perhaps invalidate, a measure only in so far as it applies to interstate commerce. But realistically, most liberalization by the Court for interstate commerce resulting in reverse discrimination will put such economic pressure on the state concerned that the difference between interstate and internal regulation is not likely to persist for long.
The question is if such federal interference with the (economic) policies of the states in the absence of positive integration is desirable, or desired by the Constitution and the EC. Such federal interference would by definition have to be left to the courts. This question goes to the basic conception of the internal market and its relationship with the federal system.
If one were to take seriously the proposition that in an internal market, "market participants have to find the same rules everywhere, or remaining differences must be without influence upon their business decisions"152, there would hardly be room for any legislative diversity, i.e., for federalism, at all.153 The mere fact that one will have to deal with a foreign law when engaging in business in another state will influence one's business decision, a point we will come back to later. On a substantive level, most laws have at least a marginal influence on business decisions.
A more debatable question is if the Freedoms (and less plausibly the Dormant Commerce Clause), and more broadly speaking the EC (and the US Constitution), have a substantive economic content, i.e., if they require the states to adopt a certain brand of free-market economy, a requirement which would be enforced by the courts.154 This substantive content, whatever it may be, would inform the judges in their value-judgments and educated guesses that a strict burden-test requires. The question is fundamental for the relationship between the union and the states. If the answer were yes, the legislative powers of the states would be severely limited. Depending on the stringency of such substantive requirements, the states would be more or less reduced to filling in the details of a grand plan set on the federal level, even in the absence of concrete measures of positive integration. My personal inclination is that constitutional substantive requirements for the economic policies of the states are neither wise, nor mandated by the EC or the US Constitution. In fact, the authors of the EC Treaty and especially of the US Constitutions would probably be very surprised by a substantive reading of, or into, the Freedoms and the Commerce Clause, respectively, that goes beyond a general vote for a market economy. A beneficial functioning of the internal market would seem to be sufficiently served by a non-discrimination requirement encompassing hidden discrimination.155 For the purposes of this paper, we can assume arguendo a broad conception of the burden-test, and remind us of other, narrower views where this makes a difference.
Since most of choice-of-law is concerned with what the civil law systems call private law, it is worth attending for a minute to a special problem in applying the burden-test to private law. Roughly speaking, private law is the part of the law which applies as between individuals, for example general contract and tort law, property law, and so on. Ernst Steindorff has argued that private law cannot be treated like its complementary sibling, public law, for the purposes of the burden-test. According to Steindorff, private law fulfills a distinct function as, what he calls, legal infrastructure. Private law rules are what enables private commercial interaction beyond a primitive level in the first place, and so they cannot be easily treated as obstructing such commercial interaction. At the very least, private law rules should be treated with the utmost judicial restraint.156
To a lawyer from a common law jurisdiction, the very idea of distinguishing private and public law may seem bizarre. However, some of Steindorff's argument can be found in the aforementioned U.S. Supreme Court's CTS decision. The Court of Appeals had invalidated the state law on the grounds that it hindered tender offers. The Supreme Court overturned, attributing primary importance to the fact that "state regulation of corporate governance is regulation of entities whose very existence and attributes are a product of state law."157 The equity market, allegedly hindered by anti-takeover statutes, "depends at its core upon the fact that a corporation ... is organized under, and governed by, the law of a single jurisdiction."158 The Supreme Court explicitly said that a state corporate governance statute may reduce the number of successful tender offers, since "[t]he very commodity that is traded in the securities market is one whose characteristics are defined by state law. Similarly, the very commodity that is traded in the 'market for corporate control' - the corporation - is one that owes its existence and attributes to state law."159 The ECJ reasoned almost identically in its Daily Mail decision of 1988.160
True, the ECJ has not even mentioned this point in its Centros decision of 1999161 which, in the eyes of many observers, overturned Daily Mail. And as a general matter, neither the ECJ nor the U.S. Supreme Court seem to distinguish between private and public law in their Freedoms/Dormant Commerce Clause decisions.162 But as a conceptual matter, the point is certainly worth exploring, if just to say why it has not resonated in more recent and general jurisprudence of both courts, and rightly so.
The reason why the distinction between civil and public law has not found more attention in Dormant Commerce Clause/Freedoms scrutiny, and in policy-making contexts in general, seems to be that civil and public law seem to be functionally equivalent. True, without legally enforceable contracts, commerce would have remained at a much less developed stage. But legally enforceable contracts need civil procedure law and law enforcement institutions presumably much more than contract law. Civil procedure, and law enforcement in any event, is public law, though. Going away from a purely conceptual towards a more pragmatic view, it is clear that most public law also fulfills an infrastructure function. In addition to all law enforcement mechanisms, one might think of publicly enforced antitrust rules, supervisory agencies like the S.E.C., and other institutions which enable, rather than impede, beneficial and ever more active and complex market exchanges. In general, a functioning legal system including such classic public law fields as criminal law is a necessary infrastructure for commerce. Russia has learned this lesson rather painfully over the last decade.
The burden-test as discussed above does not ignore such infrastructure functions. But they do not exclude scrutiny under the Dormant Commerce Clause/Freedoms. Instead, they are taken into account as legitimate interests on the justification side, once a burden on interstate commerce has been found. As we have seen, such an analysis can of course be extremely difficult, and on average this is maybe more so in areas of private law than in areas of public law. But there seems to be no special reason why the burden-test should be restricted in relation to private law. Hence we will engage in our analysis of choice-of-law rules in the internal market without further attending to the distinction of private law and public law.
120 Read: Americans or Europeans, respectively.
121 Cohen v. Virginia, 19 U.S. (6 Wheat.) 245, 413 (1821).
122 The expressions seem to have been invented by Jan Tinbergen, International Economic Integration 76 (2nd ed. 1965). See generally on the following, as it applies to the US and the EU, Tribe, supra note 94, ch. 6, and P.J.G. Kapteyn & P. VerLoren van Themaat, Introduction to the Law of the European Communities ch. III.1-3 (3rd ed. 1998), respectively.
123 Cf. recently Michael Dougan, Minimum Harmonization and the Internal Market, 37 Common Mkt. L. Rev. 853 (2000), with numerous further references. Harmonization creates interesting problems for choice-of-law, cf. supra note 111 and accompanying text. For lack of space, I have to abstain from discussing these problems here.
124 See for Europe the Articles containing the Freedoms, supra note 1, and for the US, U.S. Const. art. I, § 10, cl. 2 of the Constitution.
125 Case 8/74, Procureur du Roi v Benoît and Gustave Dassonville, (1974) E.C.R. 837, recital 5.
126 Case 120/78, Rewe-Zentral AG v Bundesmonopolverwaltung für Branntwein, (1979) E.C.R. 649, recital 8.
127 Id., recital 14.
128 The convergence may not have been perfect, but for our purposes we can just assume a uniform test for all Freedoms. On the convergence of the Freedoms see generally, e.g., Peter Behrens, Die Konvergenz der wirtschaftlichen Freiheiten im Europäischen Gemeinschaftsrecht, EuR 1992, 145; accord. Kapteyn & VerLoren Van Themaat, supra note 122, 577-588.
129 Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970).
130 Cf. Roth and Kommers & Waelbroeck, supra note 8.
131 See Stefan Leible, note 21 on Art. 28 EC, in Das Recht der Europäischen Union, Kommentar (Eberhard Grabitz & Meinhard Hilf eds., loose-leaf, 2000).
132 A point frequently made by my honored teacher Prof. Joseph H.H. Weiler.
133 Case 120/78, Rewe-Zentral AG v Bundesmonopolverwaltung für Branntwein, (1979) E.C.R. 649, recital 14, and in the subsequent jurisprudence; see generally Peter Oliver, Free Movement of Goods in the European Community, 6.79-6.86 (3rd ed. 1996)
134 See, e.g., von Wilmowsky, supra note 4, 55-56.
135 This mechanics of the test, although not the policy justification, is proposed by Peter Oliver, 6.96-6.97.
136 Properly speaking, Keck concerned only the free movement of goods. But for the conceptual questions I am after, I hope I will be forgiven to disregard this complication.
137 Joint Cases C-267 and 268/91,Criminal Proceedings against Keck & Mithouard, [1993] ECR-I-6097, recital 14.
138 Id., recital 15.
139 Id., recital 16 (internal quotation omitted).
140 For an overview of the discussion and the stakes, see Stephen Weatherill & Paul Beaumont, EU Law, 612-619 (3rd ed. 1999); Kapteyn & VerLoren van Themaat, supra note 122, 631-637; Leible, supra note 131, note 27-30 on Art. 28.
141 E.g., Joseph H.H. Weiler, The Constitution of the Common Market Place: Text and Content in the Evolution of the Free Movement of Goods, in The Evolution of EU Law 349 (Paul Craig & Grainne de Burca eds. 1998).
142 Cf., e.g., Hans-Peter Schwintowski, Freier Warenverkehr im Europäischen Binnenmarkt, RabelsZ 64 (2000) 38, 47-50, with further references.
143 In the context of the aforementioned CTS decision in particular, cf. Donald C. Langevoort, Comment: The Supreme Court and the Politics of Corporate Takeovers: A Comment on CTS Corp. v. Dynamics Corp. of America, 101 Harv. L. Rev. 96, 104-110 (1987).
144 Donald H. Regan, The Supreme Court and State Protectionism: Making Sense of the Dormant Commerce Clause, 84 Mich. L. Rev. 1091.
145 Especially those advocating a stronger impact on choice-of-law, e.g., Basedow, supra note 3, 7-10; Drasch, supra note 3, 25-, 100-; Stefan Grundmann, Europäisches Schuldvertragsrecht pt. 1 note 60 (1999); Eva-Maria Kieninger, Mobiliarsicherheiten im Europäischen Binnenmarkt 134-147 (1996); cf. Kozyris, supra note 12, 506-507 (facilitate interstate commerce).
146 My friend Lothar Ehring, Esq., always makes this point when I tell him how startled I am by the broad reading of the Freedoms by many scholars and courts. The following text is my reply.
147 See Weiler, supra note 141, 367-368.
148 481 U.S. 69, 95 (Scalia, J., dissenting in part).
149 For this reason, Scalia's general ideas on judging seem overblown to me.
150 Two further remarks:
- The problem might be compounded by the fact that negative integration, about which we are talking now, seems to be doctrinally linked to positive integration in the sense that any measures found to constitute a burden on interstate commerce under the burden-test is thereby automatically subject to federal harmonization or uniformization, see Weiler, supra note 141, 362-364, 371-372.
- There might also be special cognitive problem. If one assumes that legislative powers are decentralized at least partially for the reason that local legislators are better able to determine the relevant facts and evaluate the options, control by a federal court seems to be even more problematic than by a state court.
151 Cf. Tribe, supra note 94, § 5-5 and 5-6.
152 Armin v. Bogdandy, note 38 and 40 on Art. 2 EC, and note 10 on Art. 14 EC, in Das Recht der Europäischen Union, Kommentar, supra note 131 (my translation; emphasis in original).
153 This seems indeed to be what some authors desire, and understand, the Internal Market to be, see, e.g., Schwintowski, supra note 142. v. Bogdandy, id., does not seem to mean what his quotation in the preceding footnote would imply, see id., note 43 on Art. 2 EC.
154 Denying such a content, e.g., v. Bogdandy, supra note 152, note 64 on Art. 2 EC, with further references; cf. Kapteyn & VerLoren van Themaat, supra note 122, 129-132 (noting that under the EC Treaty, general economic policy must conform to the market model).
155 Cf. Weiler, supra note 141, 361.
156 Ernst Steindorff, EG-Vertrag und Privatrecht (1996), especially p. 78, 223-224, 228, 232-, 267-; also Hans Jürgen Sonnenberger, Europarecht und Internationales Privatrecht, Zeitschrift fuer Vergleichende Rechtswissenschaft [ZVglRWiss] 95 (1996) 3, 23-24 (possibility to conclude contract through an agent is a favor granted by the state, so that its details cannot be considered a burden). Cf. also Jürgen Prölss & Christian Armbrüster, Europäisierung des deutschen Privatversicherungsrechts (Teil II), Deutsche Zeitschrift fuer Wirtschaftsrecht [DZWir] 1993, 449, 456-457.
157 481 U.S. 69, 89.
158 Id., at 90.
159 Id., at 93-94.
160 Case 81/87, The Queen v. Treasury and Commissioners of Inland Revenue, ex parte Daily Mail and General Trust PLC, (1988) E.C.R. 5483.
161 Case C-212/97, Centros Ltd v. Erhvervs-og Selskabsstyrelsen, (1999) E.C.R. I-1459.
162 For the ECJ, see, e.g., Cases C-339/89, Alsthom Atlantique v. Sulzer, (1991) E.C.R. I-107; C-93/92, CMC Motorradcenter v. Pelin Baskiciogullari, (1993) E.C.R. I-5009; C-315/92, Verband sozialer Wettbewerb v. Clinique Laboratoires et al., (1994) E.C.R. I-317. See from the literature, e.g., Drasch, supra note 3, 209-, 246-247; Oliver Remien, Grenzen der gerichtlichen Privatrechtsangleichung mittels der Grundfreiheiten des EG-Vertrages, Juristenzeitung [JZ] 1994, 349, 352-353; Wulf-Henning Roth, Das Allgemeininteresse im europäischen Internationalen Versicherungsvertragsrecht, Versicherungsrecht [VersR] 1993, 129, 133-134. Cf. also von Wilmowsky, supra note 4, 32-35 (private law does have an enabling function, but that it fulfills this role is guaranteed by certain human rights, such that not fulfilling that role can be a violation of the Freedoms).