Client Alert: Sustainability Corporation Among Competitors and Competition Rules – Do We Have Clear Guidance from the European Commission?

The European Commission is currently running a public consultation on the draft Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements (“draft Horizontal Guidelines”) and the draft revised horizontal block exemption regulations until 26 April 2022. The long-awaited draft Horizontal Guidelines have introduced a new chapter (Chapter 9) on sustainability agreements. Against the background of various green initiatives by the EU, including its ambitious Green Deal and Chemicals Strategy for Sustainability (see our analysis here), the industry has been advocating for further guidance on collaboration among competitors to meet different sustainability goals. Any guidance is further welcomed as it is proposed by the draft Directive on Corporate Sustainability Due Diligence that undertakings should collaborate to increase their ability to bring the adverse environmental or human rights impacts to an end (see our analysis here). We explore here below the proposed approach by the Commission on the sustainability agreements - horizontal cooperation agreements that genuinely pursue one or more sustainability objectives. The draft Horizontal Guidelines and the proposed approach may be further revised based on the input from different stakeholders gathered during the public consultation.

Can Sustainability Agreements Raise Competition Concerns?

Sustainability agreements will raise competition concerns if they entail serious restrictions on competition, in particular when agreements affect one or more parameters of competition such as price, quantity, quality, choice or innovation. However, they could still be justified under Article 101(3) of the TFEU (see below). Furthermore, the sustainability objective of an agreement among competitors is not a de facto exemption from Article 101(1) TFEU. The draft Horizontal Guidelines highlight that competition concerns will not be raised where, for example:

• Agreements do not concern the economic activity of competitors but their internal corporate conduct (for example, agreements not to use single-use plastics on their business premises).
• Agreements to create databases on suppliers that have sustainable value chains or use sustainable products, or distributors selling products in a sustainable manner, or similar (as long as competitors are not required to use those suppliers or distributors).
• Agreements relating to industry-wide awareness campaigns or campaigns raising customers’ awareness of the environmental footprint (as long as such campaigns do not amount to joint advertising of a particular product).

The Commission identifies that agreements that set sustainability standards will be the most common cooperation among competitors in the sustainability arena. In respect of such agreements, a “soft safe harbour” setting conditions when it is unlikely that competition concerns will be raised has been established. The following cumulative conditions will have to be met:

• The procedure for developing the sustainability standard is transparent and all interested competitors can participate in the process leading to the selection of the standard.
• The sustainability standard does not impose on undertakings that do not wish to participate in the standard an obligation - either directly or indirectly – to comply with it.
• Participating undertakings remain free to adopt for themselves a higher sustainability standard than the one agreed with the other parties to the agreement.
• The parties to the sustainability standard do not exchange commercially sensitive information that is not necessary for the development, adoption or modification of the standard as such.
• Effective and non-discriminatory access to the outcome of the standardisation procedure is ensured, including effective and non-discriminatory access to the requirements and the conditions for obtaining the agreed label or for the adoption of the standard at a later stage by undertakings that have not participated in the standard development process.
• The sustainability standard does not lead to a significant increase in price or to a significant reduction in the choice of products available on the market.
• There is a mechanism or a monitoring system in place to ensure that undertakings that adopt the sustainability standard comply with its’ requirements.

Sustainability agreements that are based on cooperation among competitors that will also fall within the scope of other chapters of the draft Horizontal Guidelines will be assessed based on the principles in those other chapters. For example, agreements on jointly developing greener technology will be covered by the principles of R&D agreements (Chapter 2), agreements to share infrastructure will be covered by the principles of production agreements (Chapter 3) and agreements on joint purchasing to reduce environmental footprint will be covered by the principles on purchasing agreements (Chapter 4).

Can Sustainability Agreements be Exempted under Article 101(3) TFEU?

Where an agreement has a restrictive ‘object’ or produces appreciably restrictive effects within the meaning of Article 101(1) TFEU, the agreement will be illegal (i.e. unenforceable) under Article 101(2) TFEU unless the contracting parties can demonstrate that it falls within a potentially applicable block exemption or can be explicitly justified on efficiency grounds under Article 101(3) TFEU. The four cumulative conditions for exemptions under Article 101(3) TFEU are:

• The agreement in question results in incremental economic benefits (for example, improves the production or distribution of goods, or contributes to promoting technical or economic progress). Sustainability agreements can introduce efficiencies such as the use of cleaner production or distribution technologies, less pollution, improved conditions of production and distribution, better quality products, reduce the time necessary to introduce sustainable products on the market, etc.
• The consumers receive a fair share of these economic benefits. In other words, this is passed on to the customers. We discuss below sustainability benefits that could be taken into account to outweigh competition concerns in sustainability agreements.
• The agreement and all restrictions of competition resulting from the agreement are necessary to accomplish the identified/claimed economic (sustainability) benefits (and there are no other economically practicable and less restrictive means of achieving those benefits). For example, the Commission has proposed that where legislation imposes an obligation on individual undertakings to meet certain sustainability goals, cooperation among affected undertakings may not be justified as the legislator intended that undertakings individually achieve the goal. However, cooperation may be justified where it would address the free-rider or the first mover disadvantages.
• The agreement does not eliminate competition for a substantial proportion of the goods or services in question. In other words, the parties to the agreement must be able to compete vigorously on at least one important aspect of the competition (for example, quality, variety or price).

What Consumer Benefits Could Potentially Outweigh Competition Concerns in Sustainability Agreements?

The Commission draws a distinction between three main types of consumer benefits that could be taken into account when assessing whether the consumers receive a fair share of the claimed benefits:

• Individual use-value benefits that derive from the consumption or the use of the products covered by the agreement that directly improve consumers’ experience. These usually are qualitative efficiencies such as improved product quality or product variety and price decrease. Individual use-value befits could also be accompanied by positive externalities like pollution reduction.
• Individual non-use value benefits result from the consumers’ appreciation of the impact of sustainable consumption on others. These are indirect benefits for which the consumers are willing to pay a higher price even when the consumers’ user experience with the product is not directly improved. Examples include consumers choosing to wash up liquid that contaminates water to a lesser extent (and not because it washes better) or purchasing furniture manufactured with wood that has been grown and harvested in a sustainable manner (and not because it is better quality). The draft Horizontal Guidelines note that individual non-use value benefits (customer willingness to pay a higher price) could be demonstrated through customer surveys.
• Collective benefits address negative externalities and bring about sustainability benefits to a larger group of society irrespective of the consumers’ individual appreciation of the product. In order for collective benefits to be taken into account it will be necessary to show that:
  • Claimed benefits are clearly defined and have already occurred or are likely to occur.
  • Beneficiaries are clearly defined.
  • The consumers in the relevant market substantially overlap with the beneficiaries or are part of them.
  • Part of the collective benefits occurring or likely to occur outside the relevant market can substantially accrue to the consumers of the product in the relevant market.

Concluding Remarks

While specific guidance has been provided for sustainability standards, further guidance could be provided for other types of sustainability cooperation. It is also clear that assessment will be always fact-specific and will require not only legal but also economic analysis in order to establish whether a particular cooperation agreement will raise competition law concerns. Each particular industry should assess whether the draft Horizontal Guidelines provide enough legal certainty for undertakings to assess whether their cooperation agreements with sustainability objectives would raise competition law scrutiny. For example, the question remains whether the Commission should provide individual guidance on sustainability agreements. The undertakings should take the opportunity to provide their comments during the public consultation.