Businesses are increasingly backing the EU's green ambition, with competitors ready to join forces in pursuit of sustainability goals. To provide legal certainty, the Commission devotes a chapter to the competition law assessment of sustainability agreements in its new draft horizontal guidelines (see our more general article on those guidelines here). The Commission sets boundaries within which pro-sustainability cooperation may be achieved. Although concrete sustainability gains may qualify as benefits that outweigh competitive restraints, the Commission's assessment remains narrowly anchored in the consumer welfare standard. The "out of market" sustainability benefits of an anti-competitive agreement (namely, those that accrue to wider society), will only be taken into account if the affected customer group is also a direct beneficiary. In contrast, the Dutch Authority for Consumers and Markets (ACM) has shown more willingness to look beyond the relevant market and the immediate consumer.
On 1 March 2022, the Commission unveiled new draft revised rules on cooperation agreements between competitors (horizontal agreements) and launched a public consultation inviting stakeholder comments. These draft horizontal rules encompass two revised block exemption regulations and revised guidelines. Specifically, the draft guidelines explain how companies must self-assess compliance with the prohibition on anti-competitive agreements, and how the conditions for exemption from that prohibition may be fulfilled. In relevant part, the draft guidelines address various types of agreements. What stands out is a dedicated chapter on sustainability agreements, including examples of agreements that are unlikely to raise competition concerns. The EC has launched another public consultation in parallel, on sustainability agreements in the agri-food sector. With these steps, the Commission is responding to the demand by European companies for greater clarity on permissible pro-sustainability cooperation.
Assessing sustainability agreements
By sustainability agreements, the guidelines refer to any type of horizontal cooperation agreement that pursues one or more sustainability objectives, regardless of the type of cooperation. The draft sustainability guidance defines "sustainability objective" in broad terms: addressing climate change (or limiting resource use) and, among other things, respecting human rights or ensuring animal welfare. The draft guidance clarifies that agreements pursuing sustainability objectives are not distinct types of cooperation agreements. Moreover, if a sustainability agreement concerns a particular type of cooperation as defined in other parts of the draft horizontal guidelines, then its assessment will be governed by the relevant chapter (such as on research & development, joint production, joint purchasing, etc.), while taking into account the sustainability objective pursued.
Even so, anti-competitive agreements cannot escape competition law scrutiny because they pursue a sustainability objective. However, the Commission displays some flexibility by stating that, when determining if a restriction to competition is by object or by effect, account may be taken of any sustainability objective being pursued. By object restrictions that are otherwise prohibited (such as setting prices or limiting output) may now be treated as by effect restrictions provided that the genuine goal of the agreement is a sustainability objective. If evidence clearly shows that an agreement genuinely pursues sustainability objectives and is not used to disguise a by object restriction, its effect on competition will need to be assessed. For that purpose, the Commission has further published an expert report on incorporating sustainability into an effects-based analysis. This report answers questions like: (i) how to measure sustainability benefits; and (ii) how to offset those benefits against the harm to competition deriving from the same agreement. Where the sustainability benefits outweigh the competitive harm, the agreement can be exempted.
In its draft guidelines, the Commission lists three categories of agreements that do not fall foul of the prohibition on anti-competitive agreements:
- sustainability agreements which do not raise competition concerns;
- sustainability standardisation agreements benefiting from a new soft safe harbour; and
- sustainability agreements with benefits to consumers that offset restrictions of competition.
Sustainability agreements that do not affect competition parameters
The draft sustainability guidance restates basic competition law: agreements that do not affect key parameters of competition (price, quantity, quality, choice or innovation) are not capable of raising competition concerns. A short, non-exhaustive list of examples is also provided. Competitors may enter into agreements relating to internal corporate conduct to phase out single-use plastics in their place of business. Agreements may also merely create a database of suppliers having sustainable value chains or of distributors selling sustainably, as long as there is no requirement to purchase from or sell to only those in the database. Similarly, customer- or industry-level awareness campaigns which do not result in the joint advertising of particular products are unlikely to raise competition concerns.
Sustainability standardisation agreements
Sustainability standardisation agreements designate requirements that supply chain participants (producers, traders, manufacturers, retailers or service providers) may have to fulfil in connection with a variety of sustainability metrics; for example, environmental impacts of production. Agreements setting sustainability standards, also called sustainability systems, may be developed by competitors. These may cover quality marks or green labels, and parties to the agreement may use a particular logo or brand name as long as they meet the sustainability conditions. The Commission expects sustainability standardisation agreements to be the most common type of cooperation for pursuing sustainability objectives. The draft sustainability guidance pays marked attention to their assessment. Such agreements/systems are prohibited if they are used to hide by object restrictions, such as price-fixing or to pass on increased costs as higher prices to customers. Where this is not the case, the draft guidance sets a soft safe harbour which, if applicable, implies that the particular sustainability standardisation agreement is also unlikely to produce appreciable anti-competitive effects.
Soft safe harbour
The safe harbour is available if seven cumulative requirements are met. These relate to: transparency; non-compulsion; the possibility of adopting higher standards; no exchange of commercially sensitive information; non-discriminatory access; no significant price increase, or lessening of product choice; and monitoring systems. As competitors enter into standardisation agreements to avoid the "first-mover disadvantage" resulting from the higher costs of sustainability standards, it is unclear why the draft guidance does not indicate what a significant increase in price might be. As the draft currently stands, businesses must carefully assess if implementing the sustainability standard will be costly, resulting in higher prices. The non-fulfilment of these criteria will not, however, lead to the presumption that the agreement is anti-competitive. Instead, an assessment of possible anti-competitive effects will have to be undertaken. Even if anti-competitive effects - like associated higher prices - are shown, the benefits of the agreement will still be checked to determine if the sustainability benefit can offset the restrictions of competition.
Exemption: sustainability benefits outweigh competitive harm
If sustainability agreements restrict competition, they might be eligible for an exemption if they:
- offer properly substantiated, objective, concrete and verifiable efficiencies;
- a fair share of the benefits resulting from the efficiencies is passed on to the consumer;
- all restrictions are reasonably necessary for benefits to materialise (indispensability); and
- some degree of competition remains, even if on a single parameter of competition.
Pass-on to consumers
For exempting sustainability agreements with benefits that offset restrictions of competition, the key question is: if in addition to efficiencies for affected customers in the relevant market, should out-of-market efficiencies be considered? The draft guidance allows out-of-market efficiencies to be taken into account, but only to a limited degree. It classifies benefits as: 1) individual use value benefits; 2) individual non-use value benefits; and 3) collective benefits.
Individual benefits and efficiencies within the relevant market
Individual use value benefits directly enhance consumers' experience of the product in question. These benefits may, for example, be improved product quality in the form of tastier and healthier vegetables grown with organic fertilisers or they may be benefits in the form of lower prices due to cost efficiencies.
Conversely, individual non-use value benefits are indirect benefits stemming from the consumers' appreciation of the impact of their sustainable consumption on the environment. These relate to the voluntary and altruistic choices of consumers. For instance, consumers may prefer a certain car not because it drives better than another, but because it pollutes less. Meat from farms where animal welfare standards are high might not taste better, but it may reflect an important element of consumer animal-welfare choice. These indirect non-use benefits may be measured by customer studies showing that customers are ready to pay more for these benefits. In any event, parties to an agreement must provide cogent evidence proving the actual preferences of the consumers. Similar to direct individual use benefits, indirect non-use benefits would also accrue to immediately affected consumers within the relevant market.
Collective benefits and out-of-market efficiencies
According to the draft sustainability guidance, the balancing of anticompetitive effects with efficiency-related benefits to consumers is typically done within the relevant market to which the agreement relates. Where two markets are related, efficiencies achieved on separate markets can be considered if the consumers affected by the restriction and those benefiting from the efficiency gains are substantially the same. If a consumer uses less polluting fuels, this will benefit all citizens including the consumer who is also a citizen. In such cases with substantial overlap between affected consumers and end beneficiaries, it is okay to factor in these efficiencies, provided the following conditions are met:
- collective benefits of efficiencies are defined with evidence that they have occurred or will occur;
- beneficiaries are identified;
- substantial overlap between consumers in the market and the beneficiaries is proved; and
- the extent to which benefits outside the market accrue to consumers within the market is shown.
By way of illustration, the draft guidance points out that if consumers buy clothing made from cotton grown sustainably (no chemicals, optimal water use) in another part of the world, it is unlikely that these collective benefits would accrue to the consumers in the relevant market. In our opinion, this is flawed reasoning. If another part of the world benefits from low emissions, the global environment will benefit. The affected consumer will therefore live in a better world and thus benefits as well. A scientific appreciation of the interdependence of the world's ecosystems will lead to the conclusion that in cases of collective benefits, there is mostly a substantial overlap between affected consumers and end beneficiaries. The draft guidance does provide an alternative solution: if it can be demonstrated that consumers are willing to pay more for clothing made of sustainably grown cotton, then local environmental benefits can be viewed as individual non-value benefits accruing to the affected consumers within the relevant market. This may help in some instances, but businesses are likely to argue that consumer preferences are extremely varied and that, therefore, willingness to pay should not be the only way to permit joint initiatives to improve work conditions for those higher up in the supply chain; for example, in developing countries.
Sustainability agreements in the agri-food sector
EU competition law applies to the production of and trade in agricultural products only to the extent determined through specific EU legislation. The EU has accordingly adopted a new derogation from competition rules for agricultural products. Since December 2021, this derogation is contained in the CMO Regulation 1308/2013 that is part of the EU common agricultural policy (CAP). The CAP has been modernised and aligned with other EU policies, including on sustainability. With a view to issuing guidelines for the application of the new derogation, the Commission is presently consulting on sustainability agreements in agriculture. The deadline for these guidelines is 8 December 2023. These sustainability guidelines will further the Commission's farm to fork strategy that aims, among other things, to clarify the scope of competition rules for collective actions in the agriculture sector. The new derogation for vertical and horizontal initiatives for sustainability in the agri-food sector covers producers and participants along the entire value chain (processors, wholesalers distributors, etc). However, one of the parties to the agreement must be a producer. The derogation allows agreements leading to higher prices or lower quantities, if they are indispensable to achieving sustainability standards higher than EU or national mandatory standards.
Surcharges in the agri-food supply chain
The German Bundeskartellamt applied this exemption in a recent investigation. Milk producers wanted to agree on a raw milk surcharge to obtain a higher price than their costs. The Bundeskartellamt concluded that this was a price-fixing agreement. It could not be exempted under this new derogation because it did not aim at a higher sustainability standard than as stipulated by EU or national law. In contrast, the Bundeskartellamt did not agree with the concerns surrounding a voluntary commitment to setting common standards for living wages in the banana sector, because there were no compulsory surcharges at any point in the supply chain. But it's not always clear-cut: the German competition authority found itself somewhere in between these two poles in a case concerning an animal welfare initiative. The pork and poultry supply chain agreed on a premium to be paid by slaughterhouses (and financed by the four largest retailers) to reward livestock owners for improving the animal welfare standard. Because of the pioneering nature of this initiative, the Bundeskartellamt allowed the fixed surcharge only for a transitional period, but is now indicating that instead of a compulsory payment, the initiative should shift to a non-mandatory system of, for example, only a recommended premium to allow for more competition.
Parallel member state and UK enforcement
In January 2021, the ACM released draft revised guidance explaining its new approach to assessing sustainability agreements (see our previous article). In contrast to the Commission, the ACM has shown much more willingness to take into account out-of-market efficiencies. At that time, the ACM did not publish a final version of its guidelines, as it preferred a pan-European harmonised competition policy on sustainability agreements, and could not take a position contrary to EU law. In the interim, the ACM reviewed sustainability initiatives under its own draft guidelines and recently approved two agreements in the energy sector. The first agreement is about the joint purchase of electricity from a wind farm by companies and institutions. The second initiative concerned an agreement of grid operators on the use of a uniform CO2 settlement price in purchasing and investment decisions.
Greece meanwhile has created a sustainability sandbox that provides for the issue of "no-enforcement action" letters for business proposals aimed at sustainable development. Elsewhere, Austria has significantly amended its domestic competition law to provide that consumers are deemed to enjoy benefits of anti-competitive agreements, if the benefits contribute substantially to an ecologically sustainable or climate-neutral economy. Unlike the Commission's draft sustainability guidelines, the Austrian exemption is more aligned with the ACM guidelines. According to the Austrian authority, environmental benefits do not always need to accrue to consumers on the relevant market and it is sufficient if there is a benefit for broader society.
Outside the EU, the UK's Competition and Markets Authority (CMA), published its environmental sustainability advice to government and outlined plans for a sustainability taskforce. In a nutshell, the CMA believes that there is little evidence suggesting that domestic competition law prevents sustainable cooperation, though it acknowledges the requirement for more clarity. The CMA has as such committed to providing formal guidance to companies, including clarifying how there is flexibility under the current rules to take environmental benefits into account when considering exemptions for agreements that restrict competition.
The current horizontal guidelines expire on 31 December 2022. From 1 January 2023, new horizontal guidelines, including the draft guidance on sustainability agreements, will enter into force. Depending on the outcome of the public consultation on the draft guidelines, the Commission will adopt a final text. Undoubtedly, much will be up for debate in the coming months, especially the issue of out-of-market efficiencies on which the ACM and Austrian legislature have shown that a different - and more global sustainable - stance is possible.