News

New guidance on sustainability agreements between competitors

April 01, 2022

On 1 March 2022, the European Commission published draft revised guidelines on co-operation between competitors, together with draft revised block exemption regulations for specialisation agreements and R&D agreements. Unlike the current guidelines, which expire on 31 December 2022, the new guidelines include a chapter on the assessment of so-called sustainability agreements.

The term sustainability agreement refers to agreements between actual or potential competitors that pursue one or more sustainability objectives, regardless of their form, e.g. joint R&D, joint purchasing or sustainability standardisation. The term sustainability objectives is not limited to climate objectives. It also includes broader sustainability objectives such as human rights, healthy food and animal welfare.

Sustainability agreements between competitors can be an effective way of driving development towards a more sustainable society. In some situations, sustainability benefits can only be achieved, or achieved more cost-effectively, if competing companies work together. A sustainability agreement may be necessary to avoid free-riding on the investments required to promote a sustainable product, that is overcoming “first mover disadvantages”. Sustainability agreements can thus give rise to significant benefits both for individual consumers and for society in general. In recent years, companies' work with sustainability issues has also become an important competitive parameter.

Co-operation between competitors can however also give rise to consumer harm, e.g. in the form of higher prices or a reduced product range. This could be the case even if the parties' intention is not to restrict competition. Agreements that violate the prohibition against anti-competitive agreements set forth in Chapter 2, Section 1 of the Swedish Competition Act/Article 101 TFEU may lead to significant fines. Even in cases where the agreement pursues sustainability objectives or other objectives it is important to conduct a thorough competition law review of the agreement.

The lack of case-law and guidelines on how sustainability agreements between competitors should be assessed, together with the risk of significant fines in the event of incorrect assessments, may have had a restraining effect on companies' propensity to enter into this type of agreement. It is thus welcome that the Commission is now developing guidelines describing the principles governing the assessment. The Commission's guidelines are also applicable in the assessment of the Swedish competition rules and will make it easier for companies to assess the competition law risks. The Commission has also stated that it may offer companies individual guidance through so-called comfort letters and has thereby signalled that it realizes the importance of this type of co-operation.

Draft guidelines on sustainability agreements

The Commission's draft new guidelines on co-operation between competing companies contain a completely new chapter on sustainability agreements. The most important take-aways are summarized below.

Agreements not caught by the prohibition

Agreements that do not affect any parameters of competition are not caught by the prohibition. An example mentioned in the guidelines is an agreement creating a database of suppliers that have sustainable value chains, without requiring the parties to purchase from those suppliers.

Assessment of sustainability agreements that may be caught by the prohibition

Sustainability agreements that affect any competitive parameter such as price, quality or sales volume, may be caught by the prohibition against anti-competitive agreements. For such agreements, it must be assessed whether the agreement may objectively be deemed to have the object or effect to restrict competition. Depending on the nature of the co-operation, guidance may be found in the other chapters of the Commission's guidelines, e.g. the chapters on joint R&D or joint purchasing, in addition to the guidance provided in the new chapter on sustainability agreements.

Soft safe harbour for sustainability standardisation agreements

According to the Commission, the most common form of sustainability agreements are sustainability standardisation agreements, i.e. agreements that specify the requirements that manufacturers or retailers in a supply chain must meet in relation to different sustainability metrics. Such agreements can often have positive effects on competition, but they can also give rise to competition harm in the form of, e.g. increased possibilities to co-ordinate prices or exclude alternative standards.

The Commission considers that sustainability standardisation agreements are unlikely to be caught by the prohibition against anti-competitive agreements if the following cumulative criteria are met:

  1. 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.
  2. There is no (direct or indirect) obligation for the participating undertakings to comply with the standard.
  3. The participating undertakings are free to adopt for themselves a higher sustainability standard.
  4. The parties to the sustainability standard do not exchange commercially sensitive information that is not necessary for the development, the adoption or the modification of the standard.
  5. The co-operation ensures effective and non-discriminatory access to the outcome of the standardisation, including the requirements 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.
  6. The sustainability standard does not lead to a significant increase in price or significant reduction in the choice of products available on the market.
  7. There is a mechanism in place to ensure that undertakings that adopt the sustainability standard actually comply with the requirements of the standard.

The fact that an agreement fails to meet these condition, e.g. because it gives rise to a significant price increase for the products in question, is not sufficient per se to conclude that the agreement violates the prohibition against anti-competitive agreements. However, this means that a careful assessment of the agreement must be made. Important factors for the assessment can be, e.g. the market coverage of the agreement, i.e. the existence of competition from other labels/standards and/or products outside the labels/standards, and what restrictions the agreement imposes on the parties' activities outside the standard.

Conditions for exemption

A sustainability agreement that is covered by the prohibition against anti-competitive agreements can be exempted if:

  1. it gives rise to (objective, concrete and verifiable) efficiency gains;
  2. it does not impose other restrictions on the undertakings than those that are necessary to attain these efficiency gains;
  3. consumers receive a fair share of the efficiency gains; and
  4. the agreement does not allow the parties the possibility to eliminate competition in respect of a substantial part of the products in question.

Of the conditions set out above, the third is likely be the most difficult to apply in practice. Although the draft contains comprehensive guidance on what is required for consumers to receive a fair share of the efficiency gains, weighing different sustainability benefits against the disadvantages in the form of, e.g. higher price or reduced supply resulting from the agreement will continue to be difficult. The guidelines describe three different types of individual and collective sustainability benefits that may be taken into consideration.

  1. Individual use value benefits, i.e. direct benefits in the individual customers’ user experience (e.g. better taste).
  2. Individual non-use value benefits, i.e. indirect benefits to the individual customer that are not related to their user experience but rather their perception of higher quality resulting from their appreciation of the positive (external) impact their sustainable consumption has on others.
  3. Collective benefits for a larger group of individuals, e.g. in the form of less pollution.

As a starting point, the benefits must be sufficient to offset the harm caused by the agreement in the relevant market. Benefits on related markets may be considered, but only if the group of customers affected by the restrictions and benefitting from the efficiency gains are essentially the same. This limits the possibility to take collective benefits into consideration, as such benefits often arise in other markets than those to which the agreement relates. As an example, the Commission states that there is likely to be no substantial overlap between the group of individuals that would benefit environmentally by sustainable grown cotton (inhabitants in the country in which the cotton is grown) and the consumers that buy the sustainable cotton clothing (customers in other countries), and that sustainable grown cotton is thus not likely to give rise to collective benefits to customers on the relevant market concerned by the agreement. To the extent that customers are willing to pay more if their clothing is made of sustainably grown cotton, the local environmental benefits can however be taken into account as individual non-value benefits for the consumers of the clothing (see (ii) above)).

Next steps

The Commissions draft new guidelines and the draft block exemptions for specialisation agreements and R&D agreements have been published for public consultation. Undertakings and others are invited to submit comments up to and including 26 April 2022. Following the expiry of the consultation period, the Commission will complete the guidelines and block exemptions which will enter into force on 1 January 2023.

 

If you have any questions regarding the above, you are welcome to contact:

Johan Karlsson 
Partner
johan.karlsson@vinge.se

Marcus Glader
Partner
Marcus.glader@vinge.se

Trine Osen Bergqvist
Expert
Trine.osenbergqvist@vinge.se

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