Balancing competition with sustainability: the pursuit of guided cooperation

Introduction

Climate change is one of the most important priorities facing the international community. The increased focus on environmental concerns has incentivized companies to pursue sustainability initiatives. In many instances, cross-industry collaboration is important for such initiatives to succeed.

While there may be competitive benefits for environmentally friendly products, the cost of developing such products means there can often be a competitive disadvantage associated with being the first mover when adopting green technologies and processes. In addition, policies that may have a positive environmental impact often require more than one company to make changes. This means collaboration by companies is often essential for sustainability goals to be achieved.

Collaboration between competitors may be prohibited under competition law. Competition law is therefore sometimes seen as an obstacle to the cooperation needed to achieve sustainability objectives and progress. The key question for businesses is therefore how to coordinate on environmental initiatives while complying with competition law. Helpfully, many competition authorities are realizing that they must ensure that competition law does not disincentivize companies from collaborating where it is clearly in support of worthy public policy objectives.

Background

Companies entering into sustainability agreements must determine themselves whether the agreement is likely to raise any competition concerns.

Article 101(1) of the Treaty on the Functioning of the European Union (TFEU) prohibits any form of agreement or collaboration between actual or potential competitors which has the object or effect of restricting competition. Under Article 101(3) TFEU, such agreements can be declared compatible provided they contribute to improving the production or distribution of goods or to promoting technical or economic progress while consumers receive a fair share of the resulting benefits without eliminating competition.

A number of sustainability agreements do not raise any competition concerns as they do not have a direct or indirect effect on competition. For example, in the DSD case, part of an agreement forming a collection and plastic recovery system was found not to infringe Article 101(1) TFEU. DSD was nominated as the exclusive contractor to collect and sort plastics in Germany at a pre-set price. While the exclusivity clause was found to infringe Article 101(1) it satisfied the Article 101(3) criteria on the basis that the agreements provided for termination within a set period of time. As the agreement gave rise to a new market – plastic waste management – and consumers would benefit from the long-term environmental considerations of the policy, the agreement was not found to restrict competition.Similarly in the CECED case, major producers of electric washing machines openly agreed to cease production of low energy efficiency categories of machine. The agreement was notified to the European Commission and found to satisfy the Article 101(3) criteria.

Self-assessment for businesses becomes much more difficult when an agreement will or may have an appreciable effect on competition. Even where an agreement could be within the scope of Article 101(1) TFEU, there are some exemptions to the competition rules. For example:

• If the combined market share of the parties to the agreement is sufficiently small to benefit from the safe harbour thresholds under the “Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements” (Horizontal Guidelines) or fall within the “Notice on agreements of minor importance which do not appreciably restrict competition under Article 101(1) of the Treaty on the Functioning of the European Union” (De Minimis Notice)
• Where the agreement falls within one of the two Commission regulations that provide a block exemption for certain types of cooperation agreements from Article 101(1) TFEU, namely for research and development agreements and specialization agreements, or
• Where the agreement generates economic benefits outweighing their negative effects and consumers receive a fair share of those benefits under Article 101(3) TFEU. An assessment of whether an agreement will meet the requirements of Article 101(3) TFEU is particularly difficult as it entails an assessment of the economic context and balancing of benefits with harms.

The European Courts have found that Article 101(1) TFEU does not apply to restrictive practices if they solely serve a legitimate – that is, a public interest – objective. In Wouters¹ , maintaining the proper practices of the legal and accountancy professions was found to be a legitimate interest. Arguably, sustainability could also be a legitimate public interest objective that would allow an agreement to fall outside Article 101(1) TFEU. There have been no recent cases where this argument has been tested in connection with environmental issues.

This means companies are often left in the dark when deciding whether to enter into a sustainability agreement as the current guidelines, legislation and case law do not provide sufficient certainty. Ultimately, this could disincentivize future beneficial projects unless the European Commission or national competition authorities provide further clarity.

New Horizontal Guidelines?

The European Commission is currently reviewing the Horizontal Guidelines and the block exemptions for research and development and specialization agreements (HBERs) which will expire in 2022.

On May 6, 2021, the European Commission published a staff working document on its evaluation of the HBERs and the Horizontal Guidelines (SWD).The SWD states that many respondents felt the current Horizontal Guidelines were insufficient for sustainability agreements. Executive Vice-President Margrethe Vestager said, “The evaluation has shown that the rules on horizontal agreements between companies and the Horizontal Guidelines are useful tools for businesses. At the same time, the evaluation has identified several areas where the rules are not sufficiently adapted to digitisation and the pursuit of sustainability goals. The Commission will now reflect on how to revise these rules in order to ensure that they remain fit for purpose.”

The SWD summarizes the findings of the evaluation study which outline some key issues with the current application of the Horizontal Guidelines to sustainability agreements:

• A definition is needed of what qualifies as a legitimate horizontal cooperation agreement pursuing a sustainability goal. This definition should not be so broad that it covers illegitimate and anticompetitive agreements that use environmental arguments as a screen, a practice known as greenwashing.
• Clarity on how the European Commission will apply competition rules to sustainable horizontal agreements, namely what will be considered acceptable under EU competition law.
• Guidance on how to weigh the benefits and efficiencies of sustainability agreements when these are often non-monetary long-term benefits.

The SWD does not specify any policy options the European Commission is currently considering or whether new guidance specifically on sustainability agreements is being considered. The Commission will shortly publish its impact assessment on possible revisions, which should provide some additional insight into the options being considered.

As well as more specific guidelines on sustainability agreements, this might include the European Commission providing comfort letters in relation to individual proposals. In response to the coronavirus disease 2019 (COVID-19) pandemic, the European Commission agreed to provide comfort letters to companies that needed to engage in coordination. This was essentially the old system for clearance of cooperation which ceased on the entry into force of Regulation 1/2003. This may be desirable in the case of sustainability agreements where so much is uncertain, and there are strong public policy arguments in favor of permitting such cooperation.

The European Commission also conducted a consultation in 2020 regarding how competition can support the Green New Deal. Europe’s Green New Deal aims to make Europe climate neutral by 2050 by transforming the European economy to protect the environment while becoming more competitive. A report will be published on that consultation process at some point in 2021.

The Green New Deal consultation aimed at collecting feedback on sustainability cooperation agreements and the extent to which “green agreements” could warrant special treatment from competition authorities. The call for contributions, which also looked at state aid guidance and “green efficiencies” in merger control cases, ran until November 20, 2020. Please refer to DLA Piper’s response to the Green New Deal contribution.

Based on the two recent consultations undertaken by the European Commission, it seems likely there will be some change to the Horizontal Guidelines to address sustainability and competition in 2022.

National initiatives

There have also been a number of national initiatives which have aimed to provide clarity to companies on when environmental collaboration is compatible with competition rules. The Dutch competition authority became the first to propose sustainability guidelines which depart from the EU’s Horizontal Guidelines. In considering where a cooperation meets the criteria for individual exemption, the Dutch NCA guidelines propose to take into account the benefits for society as a whole instead of only the user group buying the involved products. This should provide more flexibility for companies to enter into sustainability agreements. The SWD also acknowledges the Dutch proposal.

In addition, the Greek Competition Authority announced a public consultation on how competition law rules might be adapted to promote more sustainable business practices. In contrast, the French Competition Authority has made competition law infringements which also jeopardize the protection of the environment as an enforcement priority.

In light of Brexit, the UK may adopt its own approach to competition rules and horizontal coordination. On January 27, 2021, the CMA published a high-level information sheet for businesses on how competition law applies to sustainability agreements and where issues may arise. The document provides a helpful overview of the issues involved, but it does not provide detailed guidance on some of the pertinent issues, such as how to weigh environmental efficiencies. As one of the CMA’s strategic objectives is the transition to a low-carbon economy, hopefully further guidance will be published on this topic.

Conclusion

The discussion on sustainability and competition law seems to be heating up. National competition authorities and the European Commission appear to be looking to publish more detailed guidance which will give comfort to companies seeking to cooperate in order to achieve national and European-wide sustainability goals.Because the current guidance is so vague, it places the risk of self-assessment on the companies involved, which arguably is contrary to public policy objectives. The move to publish more detailed guidance is therefore very welcome.

¹ Case C-309/99 - Wouters and others, Judgment of 19 February 2002.