European competition law and sustainable co-operation

The European Commission has previously argued that competition itself should push companies to be greener. What was needed was more enforcement, not less, and competition agencies should enforce their rules “more vigorously than ever” to support the green transition.¹

This position seemed to be in tension with a more liberal approach advocated by several national agencies, in particular that of the Dutch Authority for Consumers & Markets. A lot of attention is therefore being placed on a draft set of Commission guidelines just published on horizontal co-operation agreements. These provide an update on the Commission’s position on sustainability agreements,² alongside other forms of co-operation such as production agreements, joint marketing/purchasing arrangements, information exchange, and standardisation agreements. A public consultation on the guidelines is ongoing and there is scope for further changes. However, the draft text already provides a sense of how the Commission will assess sustainability agreements under European competition law.

Does competition law apply to sustainability agreements at all?

Some members of the competition law community – including the Dutch Authority for Consumers & Markets – had queried whether Article 101 of the Treaty on the Functioning of the European Union (which prohibits certain anticompetitive agreements and practices) should apply to agreements that sought to progress sustainability goals. This reflected a line of EU Court rulings that excluded certain measures (e.g., rules adopted by legal professional bodies) from European competition law where “the anticompetitive restrictions in question are inherent in or necessary for the pursuit of a legitimate objective.”³ However, the draft guidelines draw a clear line in the sand against that argument: “agreements that restrict competition cannot escape the prohibition of Article 101(1) for the sole reason that they are necessary for the pursuit of a sustainability objective” (paragraph 548).

They do, though, observe that sustainability agreements can only fall under Article 101 if they have an anticompetitive object or effect: “where…agreements do not affect parameters of competition, such as price, quantity, quality, choice or innovation, they are not capable of raising competition law concerns” (paragraph 551). This was already clear, but the guidelines provide several examples of agreements that will generally fall outside of the European competition law altogether for this reason:

• measures to eliminate single-use plastics in business premises, not to exceed temperature levels in buildings, or to limit the number of printed materials;
• the creation of databases containing information about sustainable suppliers, distributors, or production processes, provided there is no obligation to use such suppliers or distributors; and
• the organisation of industry-wide awareness campaigns, provided they do not amount to joint advertising of specific products.

How should the benefits of a sustainability agreement be weighed against restrictions of competition?

Where a sustainability agreement does disort competition, it may nevertheless comply with European competition law if it benefits from an exemption under Article 101(3). This requires that the agreement contribute to improving the production/distribution/technical progress, that it allows consumers a fair share of the resulting benefit, that the agreement does not impose any restrictions that are not indispensable, and that it does not eliminate competition.

The Commission has historically assessed claims in this area rigorously, and the draft guidelines make clear this will remain the case here, including to ensure rivals do not seek to greenwash illegitimate goals. Nevertheless, they make significant headway through some of the more important issues that have been raised in this respect.

First, an agreement can only benefit from the Article 101(3) exemption if its restrictions are indispensable to its benefits. It has been unclear when the Commission would accept that an agreement between rivals to take coordinated action would meet this standard where it was necessary to overcome a first mover disadvantage. The draft guidelines do note that co-operation may not be necessary where there is demand for sustainable products, or where EU or national law requires the relevant action. However, in other circumstances, they acknowledge that “a sustainability agreement may be necessary to avoid free-riding on the investments required to promote a sustainable product and to educate consumers” (paragraph 584). In other words, there may be occasions when competitors might legitimately agree to take coordinated action, even if that were to increase costs (provided the other conditions of the Article 101(3) exemption are met).

Second, there has been considerable debate over whether the benefits of an agreement that accrue to society at large can legitimately outweigh the burden of an anticompetitive distortion experienced by a narrower group of customers. In recent years, the European Commission has limited itself to the narrower set of “in-market benefits” (i.e., those experienced by the specific consumers that suffer from the anticompetitive effect) despite a broader reading arguably being supported by precedent.⁴  The draft guidelines stick to that framework, but nevertheless make some progress in bringing a range of consumer benefits within scope:

• first, and most obviously, consumers affected by the agreement may directly benefit from product improvements or price decreases that result from the agreement. For example, organic vegetables may taste better or be healthier; and replacing plastic with more durable materials may increase the lifespan of the products in question;
• second, affected consumers may benefit from their perception of the positive impact of consuming the relevant products. For example, consumers may choose a washing liquid because it is less polluting, even if it does not clean better. These choices may not improve consumers’ direct “use experience”, but the draft concedes that these indirect benefits may be taken into account where they can be meaningfully quantified (e.g., through consumer surveys); and
• third, the draft guidelines acknowledge that “collective benefits” that accrue to a larger part of society may be taken into account. For example, drivers paying more for less polluting fuel would also benefit from cleaner air, along with the rest of society. However, these benefits may only be taken into account where (1) there is a “substantial overlap” between the affected consumers (the drivers) and those that benefit (society in general), and (2) the benefits are significant enough to compensate the affected consumers.

Finally, the draft guidelines create a new “soft” safe harbour for agreements that harmonise behaviour through a set of standard practices (e.g., replacing non-sustainable products and processes with sustainable ones, harmonising packaging materials, or respecting conditions that seek to improve animal welfare) but only where they respect the following conditions:

• the procedure for developing the standard is open and transparent;
• third parties are not obliged to comply with the standard;
• participants should remain free to unilaterally adopt a higher standard;
• parties should not exchange unnecessary commercially sensitive information;
• companies that did not participate in the initial procedure have open access to the standard;
• the standard does not lead to a significant increase in price or reduction of choice; and
• a monitoring system should be in place to ensure compliance with the standard.

Failure to comply with one or more of those conditions does not create a presumption of illegality, but rather leaves the arrangement open to assessment based on standard competition law principles.

Concluding remarks

There remains considerable room for debate here, especially as regards the limitation of relevant benefits to the market affected by the restriction. There are also a host of question marks over the detail of how, and whether, companies can substantiate claims on marginal cases. 

This debate will continue but the draft guidelines do make more progress in this area than many expected. The Commission’s consultation on the draft is ongoing, with a submission deadline of 26 April. Meanwhile, the UK Competition and Markets Authority (like many of the national competition agencies within the European Union) has just published advice to the Government on ways to promote sustainability goals in the UK, which we will discuss separately in the coming days.⁵

1 Competition policy in support of the Green Deal, Executive Vice-President Vestager’s keynote speech at the 25th IBA Competition Conference of September 10, 2021, delivered by Inge Bernaerts, Director, DG Competition.

2 The guidelines make clear that sustainability covers a broader range than environmental considerations and refers to “the ability of society to consume and use the available resources today, without compromising the ability of future generations to meet their own needs.”  It therefore not only captures activities that address climate change, but also those that relate to eliminating pollution, limiting the use of natural resources, human rights, and animal welfare (paragraph 543).  This broader notion of sustainability is in line with the 2030 Agenda for Sustainable Development, adopted by UN Member States in 2015

3 Autoriteit Consument & Markt Guidelines on Sustainability Agreements of January 26, 2021, paragraph 18.  See, for example, Case C-309/99 (Wouters/Nederlands Orde van Advocaten), Case C-519/04 (Meca Medina), Case C-1/12 (OTOC), and Case C-136/12 (CNG).

4 A recent notice from the Dutch ACM provides some useful analysis in this area.

5 https://www.gov.uk/government/publications/environmental-sustainability-and-the-uk-competition-and-consumer-regimes-cma-advice-to-the-government/environmental-sustainability-and-the-uk-competition-and-consumer-regimes-cma-advice-to-the-government.