On 1 June 2023 the European Commission adopted its revised guidelines on horizontal cooperation agreements (Guidelines) together with its revised horizontal block exemption Regulations on R&D and Specialisation Agreements. For an overview of the revised Guidelines see our blog post here. The Guidelines contain a new chapter on the assessment of sustainability agreements, with a framework of analysis for agreements between competitors that jointly pursue sustainability objectives and we have set out below a summary of the key features of the new sustainability chapter.
In addition to this sustainability-specific guidance the Commission is also encouraging parties to sustainability agreements to approach it for informal guidance under its Informal Guidance Notice, where their agreement gives rise to novel or unresolved issues. This is in line with the UK’s Competition and Market Authorities (CMA) approach in its draft guidance on sustainability agreements (see our blog post here), which will operate an open-door policy giving businesses the opportunity to seek informal guidance on their proposed initiatives. The CMA indicates that fines will not be imposed for agreements discussed with the CMA and where the CMA does not raise any competition concerns or where any concerns raised by the CMA have been addressed, but the Commission’s Guidelines do not refer to a similar immunity from fines. The Dutch competition authority is also prepared to provide guidance on sustainability agreements, without giving formal approvals in principle, and has already received such requests from 25 companies. Non-confidential summaries of these individual assessments will be published in order to provide guidance for similar initiatives.
The inclusion of the chapter on sustainability agreements comes amid a growing focus on sustainability issues both at EU and national levels. In 2019, the EU introduced the Green Deal as a means to help it meet the United Nations’ Sustainable Development Goals. Under the Green Deal, the EU has committed to reducing net greenhouse gas emissions by 55% by 2030 compared to 1990 levels, and by making Europe carbon neutral by 2050. National competition authorities likewise began taking steps to encourage sustainable development, with the Netherlands publishing draft guidance on sustainability agreements, and Greece adopting a competition law sustainability ‘sandbox’, among others. In recognition of the growing calls for an EU-wide approach, the European Commission has now included guidance on sustainability agreements in the new Guidelines.
Definition of sustainability agreements
The Guidelines define sustainability agreements as “any horizontal cooperation agreement that pursues a sustainability objective, irrespective of the form of cooperation”.
The Commission has taken a broad approach to sustainability, that goes beyond climate change and environmental concerns but encompasses a wide variety of objectives identified by the UN Sustainable Development Goals. These include (but are not restricted to) limiting the use of natural resources, upholding human rights, ensuring a living income, fostering resilient infrastructure and innovation, reducing food waste, facilitating a shift to healthy and nutritious food, and ensuring animal welfare. This is in contrast with the CMA’s approach in the UK, where agreements that pursue broader societal objectives, such as improving working conditions, do not qualify as sustainability agreements.
Agreements that fall outside the scope of Article 101 TFEU
Sustainability agreements that do not negatively affect the parameters of competition, such as price, quantity, quality, choice or innovation would not normally raise any competition concerns and should therefore not be caught under Article 101 TFEU. The Guidelines provide a non-exhaustive list of such agreements, which include:
- Agreements aimed exclusively at ensuring compliance with sufficiently precise requirements or prohibitions in legally binding international treaties, agreements or conventions.
- Agreements that do not concern the economic activity of competitors but their internal corporate conduct, such as an agreement to increase the industry’s reputation for acting responsibly by eliminating single-use plastics from their business premises in order to improve the industry’s environmental reputation.
- Agreements on the creation of databases containing general information on suppliers with (un)sustainable value chains, production processes or inputs, or distributors with (un)sustainable marketing practices, provided the parties are not required to purchase from those suppliers or sell to those distributors.
- Agreements relating to the organisation of industry-wide awareness campaigns, or campaigns to inform customers of the environmental impact of their consumption, provided they do not amount to joint advertising of specific products.
Assessment of sustainability agreements under Article 101(1) TFEU
Where sustainability agreements negatively affect one or more parameters of competition, they must be assessed under Article 101(1) TFEU. The Guidelines indicate that, unless a sustainability agreement is used in order to disguise cartel activity, such agreements will typically not be treated as by object restrictions but instead their effects on competition will have to be assessed.
The Guidelines set out a number of factors that should be taken into account when assessing the effects on competition of sustainability agreements. These include:
- The level of market power of the parties to the agreement.
- The degree to which the agreement limits the parties’ independence in making decisions in relation to the main parameters of competition.
- The market coverage of the agreements.
- The extent to which commercially sensitive information is exchanged in the context of the agreement.
- Whether the agreement results in an appreciable increase in price or an appreciable reduction in output, variety, quality or innovation.
Sustainability agreements that restrict competition within the meaning of Article 101(1) TFEU, either by object or by effect, can still benefit from the Article 101(3) TFEU exception provided they meet the four conditions of that provision. The Guidelines set out how these conditions apply in the context of sustainability agreements.
In addition, there is a ‘soft safe harbour’ for sustainability standardisation agreements that meet certain conditions.
Soft safe harbour for certain sustainability standardisation agreements
The ‘soft safe harbour’ applies to sustainability standardisation agreements, which are described as agreements used to specify requirements that producers, processors, distributors, retailers or service providers in a supply chain have to meet in relation to a wide range of sustainability metrics. Examples include agreements to phase out, withdraw or replace non-sustainable products, to harmonise packaging materials to encourage recycling, to purchase only production inputs which have been produced sustainably, or to improve animal welfare.
In order to benefit from the ‘soft safe harbour’, the agreement will have to meet the following six cumulative conditions:
- The procedure for developing the sustainability standard must be transparent, and all interested competitors must be able to participate in the process leading to the selection of the standard.
- The standard must not impose on undertakings that do not wish to participate any direct or indirect obligation to comply.
- While binding requirements can be imposed on participants in order to ensure compliance with the standard, participants must remain free to apply higher sustainability standards.
- The parties should not exchange commercially sensitive information that is not objectively necessary and proportionate for the development, implementation, adoption or modification of the standard.
- Effective and non-discriminatory access to the outcome of the standard-setting process must be ensured.
- The sustainability standard must satisfy at least one of the following conditions:
- The standard must not lead to a significant increase in price or a significant reduction in the quality of the products concerned and/or
- The combined market share of the participating undertakings must not exceed 20% of any relevant market affected by the sustainability standard.
The Guidelines also clarify that a sustainability standardisation agreement is more likely to achieve sustainability objectives if it provides for a monitoring system to ensure that undertakings adopting the standard comply with its requirements.
Failure to comply with one or more of the soft safe harbour conditions does not automatically create a presumption that the standardisation agreement restricts competition in breach of Article 101(1) TFEU, but for such agreements it will be necessary to carry out an individual assessment under Articles 101(1) and 101(3) TFEU.
Assessment under Article 101(3) TFEU
As for 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 must contribute to improving the production or distribution of goods or contribute to promoting technical or economic progress. Examples of efficiencies that can result from sustainability agreements include the use of less polluting production or distribution technologies, improved conditions of production and distribution or better quality products. The efficiencies cannot simply be assumed but must be capable of being substantiated and need to be objective, concrete and verifiable.
The Commission refers here to its Recommendation 2021/2279 on the use of the Environmental Footprint methods to measure and communicate the life cycle of environmental performance of products and organisations. This Recommendation contains practical guidance on the assessment of the lifetime footprint of a range of products and on the methodologies and data points to be applied in these assessments.
Indispensability
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, a restriction in an agreement between competitors aimed at achieving that goal will not qualify as indispensable, unless not all aspects of market failure are addressed by regulation and there is residual scope for cooperation or where the aim of the cooperation agreement is to reach that goal in a more cost efficient way.
Pass-on of benefits to consumers
Under this requirement consumers must receive a fair share of the benefits which the parties claim result from the agreement. In the context of sustainability agreements, such benefits may accrue to a wider group than just the consumers of the relevant products or services subject to the agreement. However, in the Guidelines the Commission has defined consumers for this purpose as all direct and indirect customers of the products covered by the agreement. Wider, so called out-of-market benefits will therefore typically not be taken into account. The Commission claims that it is prevented by the case law of the CJEU from taking a different approach.
The Guidelines differentiate between three different types of consumer benefits:
Individual use value benefits
These are benefits that result from the use of the product and directly improve the consumers’ 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), which are distinct from the individual use value benefits and will be assessed as collective benefits (see below).
Individual non-use value benefits
Consumer 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. The Guidelines indicate this can be done through consumer surveys, which should provide appropriate context to mitigate the risk of consumers under- or over- estimating their true preferences. The parties to the agreement should also avoid projecting their own preferences onto consumers.
Collective benefits
These are benefits which occur irrespective of the consumers’ individual appreciation of the product and accrue to a wider section of society than just consumers in the relevant market. They will be taken into account when assessing pass-on of the relevant benefits to consumers, provided the parties to the agreement are able to:
- Define clearly the claimed benefits and provide evidence that they have already occurred or are likely to occur.
- Define clearly the beneficiaries.
- Demonstrate that the consumers in the relevant market substantially overlap with the beneficiaries or form part of them.
- Demonstrate that the share of the collective benefits that accrues to the consumers in the relevant market outweighs the harm suffered by those consumers as a result of the restriction.
Parties to sustainability agreements can rely on any or all of the above three types of consumer benefits in order to justify their agreements under Article 101(3) TFEU.
The Commission also accepts that the benefits from the sustainability cooperation do not need to materialise immediately in order to benefit from the exemption. However, the greater the time lag, the greater the efficiencies will have to be in order to compensate also for the loss to consumers during the period no benefits were passed on.
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 parameter of competition, such as price, quality or 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 the development of competition after that period lapses.
Comment
The Commission’s guidance on sustainability agreements set out in the Guidelines has been widely welcomed, in particular as there have been calls for some time now for a uniform EU-wide approach to sustainability agreements. National competition authorities have been leading the debate and have published their own guidance which has resulted in diverging approaches.
A key point of divergence is around the extent to which a fair share of the benefits of the agreement must go to the consumers of the products or services that are subject of the agreement (consumers in the market) when applying the Article 101(3) exemption criteria or national equivalents. The Dutch competition authority, which has been leading the debate and was one of the first to adopt draft sustainability guidelines, allows sustainability benefits to society as a whole to be taken into account. This is in contrast with the Commission’s approach which, even for collective benefits, still requires there to be a substantial overlap between consumers in the relevant market and the beneficiaries. The Dutch authority has indicated that it will now bring its draft guidelines in line the Commission’s approach, as most initiatives in the Netherlands affect trade between Member States in the EU. However, to the extent that it feels strongly about this point it could decide to use an appropriate case in the future to refer the issue to the CJEU by way of preliminary ruling.
The UK’s CMA, which as a result of Brexit is able to diverge from the EU approach, has taken a hybrid approach. Whereas it proposes to adopt the same approach as the Commission on the requirement for the benefits to go to the consumers in the market in question, for climate change agreements it will take a more permissive approach, taking into account the benefit of the agreement to all UK consumers when offsetting the harm to competition. The CMA considers this approach is justified by the exceptional nature of the harm caused by climate change and reflects the degree of public concern around it as well as the binding national and international commitments entered into by the UK government.
For further information, please contact:
Kyriakos Fountoukakos, Herbert Smith Freehills
kyriakos.fountoukakos@hsf.com
