On 1 March 2022 the EU Commission published, for consultation, its draft revised rules on horizontal cooperation agreements. The rules consist of two horizontal block exemption Regulations (covering Research & Development agreements and Specialisation agreements) and Guidelines on the application of Article 101 TFEU to horizontal cooperation agreements (Horizontal Guidelines). As had been anticipated, the draft Horizontal Guidelines now include a new chapter on the assessment of sustainability agreements, setting out a framework of analysis for agreements between competitors that pursue sustainability objectives.
For some time now there have been calls for a uniform EU-wide approach to sustainability agreements as national competition authorities, in particular the Dutch competition authority, have been leading the debate and published their own guidance. The Greek competition authority has also adopted a competition law sustainability 'sandbox' and Austria has recently adopted an exemption under its competition rules for agreements that significantly contribute to a sustainable and climate neutral economy.
The Commission's guidance is currently in draft form and comments are invited by 26 April 2022. We have set out below a summary of the current draft guidance on sustainability agreements, but we expect this to be an area of particular interest under the consultation. Further changes to the guidance are almost certain before a final version is adopted.
Sustainability agreements
Sustainability agreements are defined in the draft guidance as any type of horizontal cooperation agreement that genuinely pursues one or more sustainability objectives, regardless of the form of cooperation. Where the agreement is of a type of cooperation described in any of the other chapters of the draft Horizontal Guidelines (eg R&D agreements, joint purchasing agreements, production agreements, commercialisation agreements), it will need to be assessed in line with the principles set out for that type of agreement, while also taking into account the specific sustainability objective that is being pursued.
Assessment of sustainability agreements under Article 101(1) TFEU
Sustainability agreements that do not affect the parameters of competition (eg price, quality, quantity, choice, innovation) would normally not raise any competition concerns and should therefore not be caught under Article 101 TFEU. For example, this might be the case where competitors agree on internal corporate conduct aimed at increasing the sustainability reputation of their industry, such as eliminating single-use plastics or limiting the amount of printing, or are running an industry-wide awareness campaign on the environmental footprint of consumer consumption.
Conversely, where sustainability agreements affect one or more parameters of competition they may need to be assessed under Article 101(1) TFEU. Where an agreement genuinely pursues a sustainability objective this may be taken into account in determining whether the restriction is a restriction by object or a restriction by effect. It will be up to the parties to provide facts and evidence demonstrating that the agreement does promote sustainability and is not used to disguise a by object restriction of competition.
The draft guidance focuses in particular on the analysis of sustainability standardisation agreements, which are expected to be the most frequent form of cooperation for pursuing sustainability objectives, and are to some extent different from those covered in the chapter on technological standards. They are defined in the draft guidance as agreements that specify the requirements to be met in relation to a wide range of sustainability metrics such as the environmental impacts of production. The draft guidance only covers sustainability standards developed by competitors or in which competitors participate, including quality marks or labels.
Soft safe harbour
The draft guidance provides for a "soft" safe harbour: if sustainability standardisation agreements satisfy certain criteria they fall outside the scope of Article 101(1) TFEU. These criteria include: transparency; voluntary participation; freedom to adopt higher standards; no exchange of sensitive information; non-discriminatory application; and a monitoring mechanism to ensure compliance.
However, the soft safe harbour will only apply if the sustainability standardisation agreement will not lead to a "significant increase in price" or a "significant reduction in the choice of products". Given that implementation of sustainability standards is often costly and that these costs are the very reason that competitors cooperate in the first place ("first mover disadvantage"), the safe harbour will likely be of limited scope as presently configured. Unfortunately, the draft guidance does not quantify what it views as a "significant" price increase. In hypothetical examples cited by the Commission in the draft guidance, an increase of 12% or an increase of € 40-70 for washing machines is treated as significant. If the safe harbour is adopted in its current form in the final guidance, undertakings would be well advised to conduct an in-depth analysis even where only minor price increases seem likely.
Assessment under Article 101(3) TFEU
As with any type of agreement caught under Article 101(1) TFEU, in order to benefit from an exemption under Article 101(3) TFEU a sustainability agreement will need to meet the four conditions of that provision:
Efficiency gains
The agreement needs to contribute to improving the production or distribution of goods or contribute to promoting technical or economic progress. Any efficiencies claimed will need to be substantiated and cannot simply be assumed. They will need to be objective, concrete and verifiable. If the parties claim their agreement will result in product improvement, they will need to specify the characteristics of that improvement and provide an estimate of the size of the claimed benefit.
Indispensability
The agreement should not include any restrictions that are not indispensable. The parties will need to demonstrate that the agreement, and each of the restrictions on competition it entails, are reasonably necessary in order to achieve the claimed sustainability benefits.
Where legislation already requires businesses to meet a specific sustainability goal, any restrictions in an agreement between competitors aimed achieving that goal will not qualify as indispensable, unless the aim of the cooperation agreement is to reach that goal in a more cost efficient way. The draft guidance recognises that a sustainability agreement may be necessary to avoid free-riding on investments that are necessary to achieve a sustainability goal (first mover disadvantages), or to achieve economies of scale to cover the fixed costs of setting up, operating and monitoring a sustainability standard/green label.
Pass-on to consumers
Consumers must receive a fair share of the claimed benefits. This will be the case where the benefits resulting from the agreement outweigh the harm caused by it, and the sustainability benefits must therefore relate to the consumers of the products that are covered by the agreement.
The draft guidance differentiates between three different types of consumer benefits:
Individual use value benefits
Individual use value benefits result from the use of the product and directly improve the consumer's experience with that product (eg organically grown vegetables may be tastier and healthier for consumers, outweighing the harm caused by higher prices). In addition there may be positive effects external to the consumers as a result of the agreement concerned (positive externalities).
Individual non-use value benefits
Consumers' benefits from sustainability agreements can also take the form of indirect benefits, resulting from their appreciation of the impact of sustainable consumption on others. In this case the consumers' use experience with the product is not directly improved, but they are nevertheless prepared to pay a higher price for a sustainable product in order for the wider society or future generations to benefit. In order to meet the burden of proof under Article 101(3) the parties will need to provide evidence demonstrating the actual preferences of consumers, based on a representative fraction of all consumers in the relevant market.
In particular, the parties to an agreement must not superimpose their own preferences on consumers. Instead, the parties will have to measure individual non-use value benefits by investigating the consumer's willingness to pay, eg through customer surveys. The draft guidance does not specify the standards such surveys would have to adhere to. Economists have already pointed to the fact that such surveys can be methodologically flawed, in particular much depends on the design of their questions ("framing-effect").
Collective benefits
Non-sustainable consumption can result in negative externalities on others outside the relevant market and a cooperation agreement, for example to phase out polluting technology, may be necessary to deliver sustainability benefits to a larger group of society. These benefits are defined as collective benefits and can accrue to consumers in the relevant market if they are part of the larger group of beneficiaries. For collective benefits to accrue, the market coverage of the agreement may need to be significant.
The assessment of whether the benefits of an agreement outweigh the harm of any restriction on competition should normally be done on the relevant market to which the agreement relates, but where two markets are related, efficiencies achieved on separate markets can be taken into account as long as the consumers affected by the restriction benefiting from the efficiencies is substantially the same.
In order to demonstrate collective benefits, the parties must be able to:
- describe the claimed benefits, with evidence they have occurred or are likely to occur;
- define the beneficiaries;
- demonstrate that consumers in the relevant market substantially overlap with the beneficiaries or are part of them; and
- demonstrate what part of the collective benefits occurring outside the relevant market accrue to consumers in the relevant market
The Commission recognises that there is currently little experience with quantifying collective benefits and will provide more guidance on this as and when there is further learning from specific cases.
Any or all types of benefits
The parties to a sustainability agreement are able to support their case for an Article 101(3) TFEU exemption on the basis of any or all of the three types of consumer benefits set out above. The choice may depend on the specifics of the case and on the evidence available.
No elimination of competition
Finally, the agreement must not allow the parties to eliminate competition in respect of a substantial part of the relevant products. This condition will be met even if the agreement relates to the entire industry, provided the parties to the agreement continue to compete on at least one key aspect of competition, such as price, quality, variety. The elimination of competition for a limited period of time (eg in order to introduce to the market a sustainable substitute for an existing product), will also not be an obstacle, provided there is no impact on competition in that market once the period lapses.
Involvement of public authorities
The draft guidance makes it clear that the knowledge or involvement of public authorities in a sustainability agreement does not necessarily mean that the agreement is compatible with the competition rules and that the parties cannot be liable for infringement, unless they were compelled or required by the authorities to enter into the agreement.
The draft guidance also contains a range of worked examples in order to demonstrate the application of some the key principles.
Comment
The draft guidance will be welcomed by businesses who have for some time now been calling for greater clarity on the Commission's approach to the application of its competition rules to cooperation aimed at achieving sustainability objectives.
It should also be seen in the wider context of the Commission's 'Green Deal', launched in December 2019, which sets out a number of far reaching policy and regulatory proposals aimed at building a climate neutral Europe by 2050. Competition policy is clearly not the only instrument to achieve this goal, but it is seen as a vital component to this strategy. In October 2020 Commissioner Vestager launched a call for contributions on how the competition rules and sustainability policies can work together, which was followed by a conference on Competition Policy and its Contribution to the European Green Deal. In its Competition Policy Brief of September 2021 the Commission sets out its policy approach to sustainability arguments in State aid, antitrust and merger control enforcement (see our blogposts here and here).
The current horizontal block exemption Regulations and Horizontal Guidelines expire on 31 December 2022, when the new regime, including the Commission's guidance on sustainability agreements, will enter into force.
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.
