On 1 June 2023 the European Commission adopted revised Horizontal Block Exemption Regulations on Research and Development and Specialisation agreements (HBERs), accompanied by revised Horizontal Guidelines (Guidelines). The revised HBERs and Guidelines provide clarity and up-to-date guidance in assessing the compatibility of horizontal cooperation agreements within EU competition rules.
The HBERs and the Guidelines deal with purchasing agreements and joint purchasing. A joint purchasing agreement involves any arrangement under which two or more parties agree to jointly source products, whether these are components to be used by each party in the manufacture of other products or products for resale in their existing form.
The essence of joint purchasing is that a group of purchasers seek to negotiate more favorable terms and conditions than would have been obtained if they had purchased alone. These agreements are generally a windfall for sellers and consumers, as they aim to create purchasing power that can lead to lower prices or improved product quality for consumers. In some cases, however, purchasing power or combining two or more competing purchasers can raise competition concerns.
The new Guidelines endorsed by the Commission on 1st June 2023 (the Guidelines will apply once they have been published in the EU's Official Journal) do not change the competition law framework (1) but provide some clarifications and give additional guidance (2).
1. Definition of joint purchasing agreements and competition law framework
a. Reminder of competition concerns
The Commission traditionally recognizes that joint purchasing arrangements can often be pro-competitive because they allow smaller purchasers to achieve similar purchasing economies to larger competitors, which can lead to enhanced competition with lower prices and/or better-quality products for the consumer's benefit. In some cases, however, purchasing power can raise competition concerns, for example:
- if the parties have significant market power on the upstream supply market, there is a risk of abuse of purchasing power and the exclusion of downstream competitors by blocking their access to raw materials. The parties may also force suppliers to reduce the range or quality of products they produce;
- if the parties have significant market power on the downstream selling market(s), their incentives for price competition on such market(s) may be considerably reduced and there is a risk that the lower purchase prices achieved by the joint purchasing arrangement will not be passed on to consumers.
b. Unchanged competition law framework
- Safe harbor if the market shares of the parties does not exceed 15% on both the purchasing market(s) and the selling market(s)
There is no threshold above which it can be presumed that the parties to a joint purchasing agreement have sufficient market power that the agreement is likely to have restrictive effects on competition. The Guidelines only indicate that in most cases it is unlikely that competition concerns will arise if the parties have a combined market share of not more than 15 % in both the purchasing market(s) and the selling market(s).
This assumes that the agreement does not serve as a tool to engage in a seller cartel, i.e., an agreement between competitors to fix sales prices, limit output or share markets or customers in downstream selling markets. The Guidelines provide examples of when there could be a risk of competition law infringement linked to the decisions taken within the purchasing group. These are summarized below:
- Joint purchasing agreements must not result in parties exchanging commercially sensitive information, such as volumes and purchase prices. The Commission nevertheless describes the means available to purchasers to minimise the risks resulting from such information exchanges. The data can be collated by the joint purchasing arrangement (as a separate entity) which does not pass any individual information to its members;
- The parties cannot engage in concerted practices, such as excluding a competitor from the downstream selling market (which is a form of horizontal boycott and amounts to a restriction of competition by object). Nor can the parties decide not to buy from a supplier (which is a form of vertical boycott and amounts to a restriction of competition by object in certain circumstances, except where their decision is well-founded (e.g., if the products offered are unsustainable whereas the purchasers want to buy only sustainable products)). In this respect, the new Guidelines clarify the risks related to horizontal and vertical boycotts.
- If the market shares of the parties exceed 15 % on the purchasing market(s) and/or the selling market(s)
As pointed out by the Commission, market shares over 15 % do not give rise to any presumption that a joint purchasing agreement will produce restrictive effects on competition (except of course if the agreement involves hardcore restrictions – see above). However, if the market shares do exceed 15%, this should lead to a careful assessment of the potentially restrictive effects on competition.
For example, there could be a risk if the members of a purchasing group demanded that their supplier cannot supply their competitors in downstream markets, by requesting exclusive supply rights. In this case, if the market share of the parties in the supply market exceeds 15%, there is a risk of foreclosure.
There is also a risk when the 15% market share is exceeded (resulting in a high purchasing power – compared with a low countervailing seller power) that could harm suppliers' investment incentives and reduce the range or quality of supplier's products.
Any obligation on the members of a joint purchasing arrangement to purchase all or most of the products through the arrangement, thus limiting the ability of the members to independently purchase additional volumes, will also be closely scrutinized by the Commission.
In any case, restrictions of competition (other than hardcore restrictions) can be justified through the mechanism of the individual exemption (Article 101 (3) TFEU), by demonstrating essentially that the restrictions are necessary and offer economic efficiencies benefiting consumers, such as a reduction of the price or higher quality. Competition authorities generally take a rather tolerant view of such joint purchasing agreements.
2. Clarifications provided by the new Guidelines to reflect market developments and experience
a. Feedbacks from stakeholders about their experience in applying former guidelines
The stakeholders perceived the former guidelines as a useful instrument in terms of providing such legal certainty but considered that the guidance should take into account recent market developments and give more consideration to potential negative effects on upstream suppliers. In addition, they requested to increase the safe harbor for purchasing agreements by raising the market share thresholds and underlined the lack of clarity, in particular, on the distinction between legitimate cooperation among buyers through joint purchasing agreements, and illegal buyer cartels (Note by the EU - the Purchasing Power and Buyers' Cartels, 2022).
b. Clarification and additional guidance provided by the new Guidelines
The Commission has not extended the safe harbor for purchasing agreements by raising the market share thresholds but has provided the following additional clarifications and guidance:
- Clarification that the Guidance applies to all types of sectors and covers not only actual joint purchasing but also joint negotiations of purchase prices or of other terms and conditions
- Expanded guidance on the distinction between buyer cartels ("by object" restrictions) and joint purchasing agreements (generally assessed as restrictions "by effect")
In buyer cartels, undertakings coordinate their behavior by agreeing on how they will deal individually with suppliers, or by exchanging commercially sensitive information between themselves. Such behaviors aim to remove competitive uncertainty that would otherwise have existed, results in an illegal cartel and is clearly not allowed. By contrast, a joint purchasing agreement involves a common organization making it clear to a given supplier that negotiations are conducted on behalf of members that will abide by the negotiated terms and conditions or that the joint purchasing arrangement will purchase on behalf of its members.
- Expanded guidance on the circumstances in which joint purchasing agreements may cause upstream harm to suppliers and the circumstances in which it is less likely that lower purchasing prices will be passed on to consumers
A joint purchasing agreement is likely to harm competition upstream when the members have a significant degree of buying power on the purchasing market.
The exercise of joint buying power may harm upstream competition, and particularly when a given supplier does not have countervailing seller power. For example, such buying power may harm suppliers' investment incentives and force suppliers to reduce the range or quality of products that they produce. Such buying power may also be used to play off suppliers against each other by jointly limiting product variety in their shops.
When there are only few suppliers in the market, the buying power of the members of the joint purchasing arrangement may also be used to foreclose competing purchasers from the purchasing market by limiting their access to efficient suppliers.
Regarding the benefits that could be passed on to consumers, it should be noted that a significant degree of market power or high market share of the members of the joint purchase arrangement on the selling market(s) makes it less likely that low prices will be passed on to consumers and will increase the risk that the coordination of upstream purchases will also involve a coordination of downstream sales. This situation is all the more likely if the joint purchasing agreement limits the members' ability to purchase additional volumes.
- Guidance on the assessment of negotiating threats and temporary suspensions of purchase orders
The new Guidelines underline that the parties may exert their buying power by, for example, threatening to abandon negotiations or to stop purchasing unless the supplier offers better terms and conditions or lower prices. The counterparties in such negotiations may similarly threaten to stop negotiating or supplying products in their negotiations with purchasers.
Subject to applicable national laws, the new Guidelines do not consider using threats in the context of commercial negotiations (e.g. threats to abandon negotiations, threats to stop purchases) as illegal practices for a joint purchasing arrangements. Indeed, such threats are generally not constitutive of a restriction of competition by object, as they may be seen as an efficient bargaining (power) to achieve more competitive prices. However, the effects of such threats are to be assessed under Article 101(1) TFEU in light of the market position of the members implementing such threats.
- Additional explanations in the section on Article 101(3) TFEU regarding the pass-on of the benefits of joint purchasing to consumers
As abovementioned, joint purchasing agreements can traditionally lead to cost savings, lower purchase prices, lower production costs and even lead suppliers to innovate, introduce new products on the market or distribute their products to a larger number of purchasers and markets. All very positive results. However, to benefit from the exemption, the restriction of competition must be indispensable and must be passed on to consumers.
The new Guidelines specify that lower purchasing costs must be passed on to consumers through lower prices to benefit from the exemption. In this respect, joint purchasing agreements must be assessed carefully to determine whether they contain incentives to pass on price reductions to consumers, which is less likely when the members have a high degree of market power on the selling market(s) or when the members are limited in their ability to purchase additional volumes within or outside the joint purchasing agreement.
Originally published 19 July 2023
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.