Setting A Standard for Sustainability Guidance? Seven Things Worth Knowing About the Final EU Antitrust Guidelines (Plus Soundtrack…)
The Commission has followed a Long and Winding carbon-free Road since only a few years ago when it seemed to favour the Status Quo and promoted a robust competitive process as the best way to guarantee sustainable outcomes for consumers.
The final chapter on Sustainability Agreements in the EU Horizontal Guidelines clearly shows a Commission that is rightly determined to play its role in addressing climate change by making it clear when competition law will not unduly stand in the way of laudable green competitor collaboration. Here are seven things that stand out:
All Together Now
The Commission is here to help. The Guidelines recognise that cooperation agreements may be necessary to “cure” residual market failure when it is not solved by public policy and regulation (para 519). In addition, ‘sustainability’ under the Guidelines includes social objectives (e.g. labour and human rights), not just environmental initiatives.
That wider scope sets it apart from other agency guidance and makes sense for companies whose ESG initiatives comprise numerous elements of E, S and G, e.g. cutting out bad inputs from the supply chain; incentivising different farming techniques to boost biodiversity and guaranteeing a living wage. The goals are often connected: projects that pursue social or economic objectives can make it easier to achieve green objectives, and the impact of climate change can disproportionately affect those in disadvantaged areas.
Don’t Worry, Be Happy
The Commission is at pains to describe joint initiatives that will be no cause for concern. In the end, it’s not a very generous list but it is good to see explicit acknowledgement that databases put together on the (un)sustainability of supply chain partners (whether supplier or reseller) will be OK provided there is no identification of whose supplier/reseller it is and no obligation to buy/not buy (530). The Commission is hardly going out on a legal limb here, but it is useful to see the Guidance acknowledge that these sorts of databases can be an efficient way to help with some quite overwhelming due diligence obligations coming down the line. Companies trying to gather this information on their own will be making life unnecessarily harder for themselves.
In a late addition, the Guidance now reassures companies that agreeing with competitors to respect binding international treaties etc. (which would affect EU imports) but which may be underenforced at a national level will not offend the EU competition rules (para 528). Agreeing to play by the rules should never have been a problem but this now gives a clear signal to multinationals who want to do the right thing for all sorts of reasons. Firms can be assured of a level playing field (free from ‘illicit’ competition) and make these sorts of commitments with greater confidence.
We Can Work It Out
An effects analysis will (more) often be appropriate. The spectre of a ‘by object’ characterisation has all too often prevented laudable projects from getting off the ground. Of course, sustainability goals offer no free pass and the Commission rightly signals that cartels masquerading as green cooperation will be dealt with harshly. That would include agreements to pass on increased costs from sustainability standards to customers, to fix the prices of the more sustainable output, or to limit technological development to the minimum sustainability standard required by law.
But there is far more guidance on the effects analysis. This apparent ‘broadening’ of the ‘effects’ box for sustainability agreements is a positive thing. See in particular, the acid test in para 528 (I paraphrase): does the sustainability objective (once you look at its provisions, objectives and economic/legal context) cast reasonable doubt on the notion that it involves a sufficient degree of harm to competition? That is a test that advisers can work with to give reassurance that many projects can be explored in more detail without undue fear of competition law, albeit with the right safeguards in place.
Illustrative of this approach is the guidance that (i) agreements between competitors to jointly purchase as an input only products with a limited environmental impact or (ii) to buy exclusively from suppliers that respect certain sustainability standards (which are to be assessed under the guidance relating to Joint Purchasing agreements (not cartels). The Commission is essentially signalling that these sorts of agreements are not akin to collective boycotts, which would deserve harsher treatment.
Gimme Shelter
The Commission has defined a genuinely useful “soft safe harbour” for sustainability standards that meet certain criteria. This is a fertile area for guidance because standards can be developed and applied at any level of the supply chain – from input sourcing, manufacturing, distribution and even end-of-life /recycling.
Most eye-catching is that a standard can still benefit from the safe harbour even where the standard is binding on the firms as a minimum (para 549, 3rd indent). This is a step change for firms wanting to pursue sustainability goals through standards but worried about first-mover disadvantages (as they invest in compliance with the standard). No one expects anyone to sue a competitor for buying outside a label etc. but an instant advantage of this guidance is the signal and reassurance that, in the right circumstances, competitors can actually agree to respect a standard without fear that this alone will be framed as anticompetitive coordination.
Critically, the safe harbour also includes a safety valve according to which the sustainability standard must not lead to a “significant” increase in price/reduction in quality. That seems a sensible and yet fairly generous upper price threshold for a safe harbour (deliberately higher than ‘material’ or ‘appreciable’?). A footnote explains that what is “significant” depends on the product/market – and further guidance is found in para 551 and Example 3 (see below).
Borderline
It was always frustrating that the Guidance was silent on when sustainability efforts would only result in a non-appreciable effect on competition. The Guidance now confirms that a price increase resulting from a standard (if such an increase arises at all) may be insignificant where “the product covered by the sustainability standard represents only a small input cost for the product” (para 551).
Example 3 illustrates this in relation to an initiative where clothing brands commit only to buying from producers that respect minimum wage levels. While the initiative appears to inflate the wages of workers, it would not do this to a degree that is problematic when you trace that impact through to the final product. That’s because the wage component of production costs was only 30%, meaning that a 20% increase only meant an ex-factory increase of 6% which is a drop in the ocean when you take into account the 200-300% mark-up added on by the final seller. That is a methodology that firms can work with (without having to exchange granular confidential information) – though it is admittedly more useful for differentiated products with a large value-add element.
Good Vibrations
Three categories of benefits are explicitly identified as being relevant to the competitive analysis:
- Individual use benefits – where the cooperation directly improves the consumer’s experience with the product (I value this because it’s better);
- Individual non-use benefits – where the consumer’s experience is unchanged, but the consumer derives value from knowing that another group is benefiting (I value this because it’s better for others); and
- Collective benefits where, irrespective of the consumer’s view, there is some objective benefit for a class of people of which the consumer is part (Whatever I think, the cooperation is good for a group which includes me).
Any or all of these consumer benefits can be relied upon to justify an agreement. The Commission also now recognises that in some cases, there may be a lag before benefits materialise. This won’t prevent firms from relying on those benefits though the greater the time lag, the greater the benefits need to be (para 591).
Overall, it is very useful to have these three headings of benefits. The notion of ‘collective benefits’ has great potential. In principle, it allows wider benefits to society to be brought into the calculus which should allow projects to address negative externalities more easily. But, despite criticism and legal argumentation, the Commission has not moved on its narrow interpretation of the law that appears to require full (not just ‘fair’) compensation for the consumers harmed by the restrictive arrangements. In other words, benefits to consumers in other markets are not included in this assessment
That aversion to taking into account benefits accruing outside the relevant market amounts to a ‘polluter must benefit’ type test. The Commission therefore appears to be at odds with the competition authorities of the Netherlands and the UK which are trying to get beyond this by favouring an approach that aims to consider, in certain cases, benefits for wider society as a whole, rather than only the consumers of the products in the relevant market.
It’s also worth flagging that the Commission has widened the text about when cooperation is indispensable for claimed benefits. The Guidance now explains that the presence of regulation won’t necessarily be a bar to sustainability cooperation – including because it allows the parties to reach the goal “more quickly” (para 565).
The Guidance also explains that consumer willingness to pay, while important, does not necessarily mean that a sustainability agreement is not indispensable. That’s because even though consumers may be willing to pay, a restrictive agreement may still be necessary, e.g. to overcome first-mover disadvantage or to achieve cost-reducing economies of scale (footnote 403). That provides an important reconciliation of two notions (paying consumers/indispensability) which might seem to be at odds on occasion.
Hello
The Commission has now confirmed explicitly that it has an open door and invites firms to rely on its Informal Guidance Notice procedures to provide clarity on “novel or unresolved questions on individual sustainability agreements”. This is a good gesture and would be more valuable if the Commission were able to coordinate with other agencies who might be approached about the same conduct (and may, even within Europe, be minded to take a different approach). As helpful as these Guidance are, Europe is only one albeit important part of the Jigsaw Puzzle and many sustainability projects will be targeted at events, firms and processes in other countries.
Whereas the Commission used to favour the status quo, pointing out that regulation and a robust competitive process were reliable ways to guarantee sustainable outcomes for consumers, the Guidelines now explicitly recognise that cooperation agreements may be “necessary” to fill the gap when residual market failures are not solved by public policy and regulation (para 519).
‘Sustainability’ under the Guidelines also includes social objectives (e.g. labour and human rights), not just environmental initiatives. This makes sense for companies from whom that was a distinction without a difference and who see the goals as connected: projects that pursue social or economic objectives can make it easier to achieve green objectives, and the impact of climate change can disproportionately affect those in disadvantaged areas (para 546).
Benefits that are relevant to the competitive analysis, including qualitative and ‘out of market’ benefits in certain circumstances.
Three categories of benefits are relevant under the draft Guidelines for offsetting potential harm from competitor cooperation pursuing sustainability goals:
- Individual use benefits – where the cooperation directly improves the consumer’s experience with the product (I value this because it’s better);
- Individual non-use benefits – where the consumer’s experience is unchanged, but the consumer derives value from knowing that another group is benefiting (I value this because it’s better for others);
- Collective benefits where irrespective of the consumer’s view, there is some objective benefit for a class of people of which the consumer is part (Whatever I think, the cooperation is good for a group which includes me).
The third (and arguably the second) category opens (or at least unlocks) the door to ‘out of market benefits’. This was a contentious issue in the public consultation. Commentators invited the Commission to take a more ‘worldly’ view of competitor cooperation agreements (and the benefits they create) given that not all negative externalities can be cured through the voluntary, individual actions of consumers.
Limiting principles mean that the Commission is not opening the floodgates to unverifiable claims. A nexus is still needed between the benefits and those consumers suffering harm from the restrictive agreement. For example, if companies claim that consumers attach value to the fact that the product benefits others, this will need to be demonstrated, e.g. using surveys that show that consumers will pay more for that reason (para 597).
When collective benefits are alleged to arise outside of the relevant market, the consumers in the relevant market need to substantially overlap with or be part of the beneficiaries outside that market. The collective benefits also need to be “significant enough” to compensate consumers in the relevant market for the harm suffered (para 603). Helpfully, while consumers need to receive a fair share of benefits, the draft Guidelines only require that the overall effect on those consumers is at least “neutral”. So the Commission appears to be departing from the more restrictive notion of “fully compensated” (which remains in the 101.3 exemption guidelines, unfortunately).
The notion of collective benefits could mean a real step change in addressing environmental negative externalities. Cleaner areas and lower emissions could be accounted for and be part of the equation. But important questions remain unanswered – and probably intentionally. Precisely what will count as “collective benefits” and how will they be measured? Will firms rely on global benefits or just EU benefits or just the share of benefits enjoyed by EU consumers? The answers to these questions may determine whether the collective benefits are indeed significant enough to offset harm in the relevant market.
Yet the notion of collective benefits literally has its limits. Local/regional benefits, or societal aims, seem unlikely to qualify under the draft Guidelines as ‘collective benefits’ given the absence of overlap between those consumers paying and those consumers benefitting. Instead, societal gains can only count as individual non-use benefits where consumer willingness to pay is proven. This means that, although environmental and social aims are both included in the notion of sustainability, they qualify for different treatment. Societal benefits are arguably subject to an extra hurdle of willingness to pay, which will sharply focus the need for well-designed consumer surveys in relation to a “representative fraction” of all consumers in the relevant market (para 600).
#2. A ‘soft safe harbour’ for sustainability standards that appears to be capable of covering binding standards
The Commission also wants to reassure firms that certain sustainability cooperation will fall outside the competition rules in the first place (perhaps to avoid the complexities of exemption arguments). The new soft safe harbour for sustainability standards is a prime example and sits in a section that is now tailored to the realities of sustainability initiatives and no longer concerned with technical interoperability etc (para 572).
The safe harbour contains some familiar requirements (transparency, consultation, accessibility). But two particular innovations stand out. First, it seems that a standard can still benefit from the safe harbour even where it is binding on the firms (i.e., they can agree not to manufacture or buy outside of a label, subject to other conditions) (para 572, 2nd indent). The idea that binding sustainability standards covering a large part of the market can still in principle benefit from the safe harbour needs to be clarified in the next draft. But this certainly makes sense and would mean a step change for firms wanting to pursue sustainability goals through standards but worried about first-mover disadvantage. It does not seem likely that one company would sue a competitor for buying outside a label etc. (though there could be other repercussions – e.g. ejection from a group). But an instant advantage is the signal and reassurance that, in the right circumstances, competitors can actually agree to respect a standard without fear that this alone will be framed as anticompetitive coordination.
Critically, the safe harbour also includes a safety valve according to which the sustainability standard cannot lead to a “significant” increase in price/reduction in choice. That seems a sensible and yet fairly generous upper threshold for a safe harbour (higher than ‘material’ or ‘appreciable’). In a nod to recent enforcement cases, the parties must also remain free to adopt for themselves a higher sustainability standard than the one agreed with the other parties to the agreement (e.g. they may decide to use more sustainable ingredients in their final product than the standard may require).
#3. A fair-minded approach to deciding when sustainability cooperation is anticompetitive by object –exemplified by the reassurance that an agreement to buy only from sustainable suppliers is not a joint boycott of non-sustainable suppliers
The Guidelines remain tough on cartels masquerading as sustainability initiatives but also promise that, if an agreement genuinely pursues a sustainability objective, this is relevant when determining whether or not the restriction is anticompetitive by object (para 559).
This is reflected in the way the draft Guidelines treat joint purchasing agreements where competitors agree to purchase only from suppliers with a limited environmental footprint. Rather than characterise these agreements as “collective boycotts” the Commission explains that, in view of its content, objectives and legal and economic context, the agreement will not be seen as having the object to exclude suppliers producing unsustainable products from the market (para 333). Instead, a collective boycott is described as a very different arrangement where a group of purchasers aims at excluding an actual or potential competitor from the same level of the selling market (para 334).
Joint purchasing agreements like this could be very effective for competitors wanting to bring about change. The Guidelines helpfully remove the spectre of a ‘by object’ characterisation that can stop laudable projects from even getting off the ground.
Just warming up?
The draft chapter clearly reflects a huge amount of careful thought, debate and, no doubt, negotiation and compromise. It is already quite an achievement, and commentators will be watching carefully to see how it is received by other antitrust agencies around the world – particularly in countries where sustainability initiatives are often directed but which have been largely silent on the application of local antitrust laws. In addition, there are some areas for extra guidance and assurance:
- The need for an expanded section on the types of cooperation that fall outside Article 101.1 – including agreements to comply with national laws or international treaties (environmental/human rights) or cooperation that does not relate to an important parameter of competition.
- Case studies which explore more nuanced, borderline issues including societal aims such as living wage /human rights commitments which, depending on the facts, might be outside Article 101.1 or have a non-appreciable impact due to, say, low commonality of costs or negligible impact on end-consumer prices.
- Guidance on how to measure collective benefits (defined globally) and how to counterbalance those benefits against competitive harm.
- Confirmation that binding standards can benefit in principle for the soft safe harbour.
- A more generous approach to the state compulsion defence. Government policies in this field are and should be fast-moving and so will require flexible policy instruments and not just legislative compulsion. Where corporate action conforms to clear and precise government policy, there should at least be a defence in the sense that no resulting coordination is considered a ‘by object’ infringement.
