Sustainability agreements – (exemptable) restrictions of competition?
Sustainability has become a widespread topic in politics and business. There is no doubt that the development towards a more sustainable society requires the involvement of all actors – private as well as public. Recently, the role of antitrust in achieving greater sustainability has been subject to much debate In this context, the question of whether sustainability agreements are permissible under current antitrust law is of particular importance.
1. Sustainability through entrepreneurial action
The way companies do business can have a significant impact on environmental and climate protection. Furthermore, decisions – especially those of larger companies –play a decisive role with regard to achieving other sustainability goals. In the current situation, companies tend to be keen on acting sustainably themselves or on entering cooperative ventures with other companies in order to develop sustainable products or technologies, for example. Their intrinsic incentive to do business sustainably has the advantage that companies can make a joint contribution more quickly and with less bureaucracy compared to state or legislative intervention. Especially when government measures are not (or no longer) sufficient, sustainable business cooperation can be part of the solution and thus be desirable.
2. Restrictions of competition through sustainability cooperation
In this context, however, companies are increasingly confronted with the question up to what extent they may enter into agreements or pool resources in order to achieve sustainability goals. Business cooperation on sustainability aspects may, however, give rise to competition law concerns. This is because Art 101 (1) TFEU (and its Austrian counterpart Section 1 Austrian Cartel Act), basically and under certain circumstances, prohibits agreements between undertakings that lead to a restriction of competition. If competitors want to enter into sustainability cooperation, this could be restrictive of competition at first glance, especially since they would no longer work for just themselves and in competition with each other.
There is already an exemption pursuant to Art 101 (3) TFEU (Section 2 Austrian Cartel Act), which, however, is only applicable in narrowly defined cases. Four (cumulative) conditions must be met, including an increase in efficiency, a fair share for consumers, indispensability, and no elimination of competition. This could be the case, for example, if the restrictive measure leads to lower product prices. Sustainability aspects have not been considered here so far. However, this is about to change. In the future, sustainability aspects will most likely be relevant for the application of the ban on cartels or the exemption from it.
The question of the extent to which a cooperation may be entered into to achieve sustainability goals has been the subject of debate in competition law for some time. Antitrust law primarily aims at protecting competition and is linked to economic efficiency and consumer welfare. However, sustainability efforts are often driven by the common good rather than the welfare of an individual consumer. This very conflict is particularly noticeable when such agreements lead to improvements in sustainability, without directly benefiting consumers (e.g. through lower prices or quality improvements). In reality, however, prices of sustainably produced products are then often being much higher.
Although sustainability goals do not necessarily coincide with the goals of competition law, there is now a consensus that the latter should not impede the pursuit of sustainability goals. Legislative measures have now been taken at both national and European level to define the legal framework for sustainability cooperation.
3. Pioneers for sustainability agreements
The Dutch Competition Authority (ACM) already published sustainability guidelines back in July 2020 as guidance for companies in their self-assessment of sustainability agreements, as well as a proposal for the reinterpretation of existing exemptions under Dutch antitrust law.
With regard to the exemption of sustainability agreements, the ACM’s guidelines in particular significantly loosen the requirement of a fair share for consumers. It has been suggested that this criterion can be met if the harm to consumers resulting from the restriction of competition itself is outweighed by the sustainability benefits for all Dutch citizens, consumers and non-consumers. The ACM interprets the term “fair share” in a way that it does not have to be a fully compensating fair share of the resulting benefit for consumers. This approach implies a fundamental change in the interpretation of the established exemption terms.
4. Sustainability agreements in Austrian antitrust law
In Austria, the Cartel Act was amended in September 2021 to include a new sustainability exemption. Section 2 (1) Austrian Cartel Act, which, apart from that, essentially corresponds to Art 101 (3) TFEU, now reads as follows: “Consumers also have a fair share if the benefit derived from improving the production or distribution of goods or promoting technical or economic progress contributes significantly to an environmentally sustainable or carbon-neutral economy.” (Emphasis added by the authors)
The paradigm shift towards the recognition of sustainability effects on society as a whole, which can justify an exemption from the ban on cartels and do not have to benefit consumers affected by the agreement directly, is therefore remarkable. Section 2 (1) Austrian Cartel Act, however, is subject to two significant restrictions. On the one hand, the new regulation is limited purely to environmental and climate aspects and does not take other dimensions of sustainability into account. On the other hand, Austrian antitrust law exclusively applies to Austrian matters, which do not fall within the scope of EU antitrust law due to their lack of a cross-border nature.
Nevertheless, with regard to the extent to which the benefit of such an agreement must accrue to the consumers, the possibility of exempting agreements goes significantly further than is provided for in the European Commission's current draft of the revised Horizontal Guidelines (draft of the Horizontal Guidelines) for cooperation between competitors.
It should also be noted that in September 2021, the Austrian Federal Competition Authority (FCA) published guidelines on the application of Section 2 (1) Austrian Cartel Act to sustainability cooperation agreements (Sustainability Guideline 2022), as an interpretation aid, which will be continuously supplemented by new practical experience.
5. Sustainability agreements in European antitrust law
In March 2022, the European Commission published its draft of the Horizontal Guidelines, which now explicitly addresses sustainability agreements in Chapter 9. In this draft, the European Commission adheres to the well-established assessment of agreements based on Art 101 (1) TFEU. It expressly emphasizes that the pursuit of sustainability objectives alone does not eliminate the existence of an anticompetitive effect. However, the European Commission attempts to define the legal framework for sustainability agreements more concisely.
In the following, the key points of the corresponding chapter on sustainability agreements will be briefly summarized:
Definition
The draft of the Horizontal Guidelines defines “Sustainability agreements” as any kind of agreements between competitors that actually pursue one or more sustainability goals. In line with the ESG concept, the term sustainability is based on a broad understanding. Accordingly, the notion of a sustainability goal is intended to include, among others, combating climate change (e.g. by reducing greenhouse gas emissions), preventing pollution, limiting the use of natural resources, respecting human rights, fostering resilient infrastructure and innovation, reducing food waste, facilitating the transition to healthy and nutritious food, or ensuring animal welfare.
Non-objectionable sustainability agreements
As examples for sustainability agreements that do not fall under the ban on cartels, the European Commission mentions agreements that regulate internal corporate behavior (e.g. a ban on single-use plastic in business premises or a reduction of room temperature) and agreements on the establishment of a database containing information on suppliers with sustainable supply chains or production processes.
Sustainability standards
The European Commission also deals in detail with the assessment of so called “sustainability standardization agreements”. Such “sustainability standards” define, for instance, requirements that producers, (retail) traders or service providers in a supply chain must comply with. By doing so, competitors can, for example, phase out unsustainable products or processes or harmonize packaging materials to reduce waste or facilitate recycling.
However, as there is a risk of restricting competition in this context, the European Commission provides for a so-called “soft safe harbor” rule, according to which Art 101 (1) TFEU is not applicable if certain (cumulative) conditions are met: In addition to transparency, no exchange of sensitive business information and voluntary participation in the sustainability standard, the European Commission requires in its draft of the Horizontal Guidelines, among other things, that the sustainability standard does not lead to a significant price increase or a significant restriction of the variety of products available on the market.
Possibility of exemptions
If those conditions are not met, it is still possible that the above-mentioned exemption under Art 101 (3) TFEU applies. In this regard the European Commission points out that the chapter on sustainability agreements in the draft of the Horizontal Guidelines should not be viewed as a standalone, but rather that sustainability may also be relevant, for example, in purchasing or research & development (R&D) cooperation, to which separate chapters in the Horizontal Guidelines, and, regarding R&D agreements, block exemption regulations (BER) are dedicated. For instance, an agreement to develop a sustainable production technology would first be evaluated under the BER for R&D. However, the fact that the agreement aims at achieving sustainability goals should be additionally taken into account in the assessment.
Given a scenario that a sustainability agreement has an anticompetitive effect and does not fall under any of the existing BER, the European Commission with its draft of the Horizontal Guidelines is making the requirements for an exemption more flexible.
For instance, the draft of the Horizontal Guidelines now explicitly specifies that an agreement contributes to improving the production or distribution of goods or to promoting technical or economic progress (and thus fulfills one of the conditions for exemption pursuant to Art 101 (3) TFEU) if it aims to use more environmentally friendly production or distribution technologies or more resilient supply chains.
In this context, the requirement for a fair share for consumers is particularly interesting. According to the draft of the Horizontal Guidelines, it is no longer mandatory that a specific direct benefit for consumers, which in turn compensates for an agreement’s anticompetitive effect, is demonstrated. Instead, the European Commission now distinguishes between three types of benefits for consumers: individual direct benefits, individual indirect benefits and collective benefits. Accordingly, with regard to collective benefits, it should already be sufficient that there is a collective benefit for society. Nevertheless, this is subject to the restriction that there must be a sufficient overlap between the beneficiary collective and the consumers affected by the anticompetitive effects. Consequently, the recognition of collective benefits is an important step, but – in contrast to the legal situation in Austria and the Netherlands – it still cannot be considered independently or detached from the individual consumers and the respective affected markets.
6. Conclusion and outlook
Sustainability agreements not only make for interesting theoretical discussions but are now playing an increasingly important role in practice. Business cooperation can indisputably make a decisive contribution to achieving a more sustainable society. Assuming that sustainability is important for consumer behavior and purchasing decisions, companies themselves ultimately have a strong interest in meeting sustainability requirements for economic reasons.
In principle, antitrust law does not prohibit sustainability agreements between competitors. Under certain conditions, they are not even addressed/covered by the ban on cartels. However, one must bear in mind that companies could engage in so-called “green-washing”, i.e. attempt to circumvent antitrust bans under the guise of sustainability. In this context, the competition authorities will therefore have the difficult yet essential task of differentiating precisely in case of sustainability agreements.
The Austrian legislator’s progressive approach regarding the sustainability exemption in Section 2 (1) Austrian Cartel Act sends a strong signal for the promotion of sustainability by substantiating and expanding the exemptions from the ban on cartels. Based on this, the inclusion of sustainability agreements in the European Commission's draft of the Horizontal Guidelines and the ACM’s even more progressive stance. However, what all the above-mentioned initiatives have in common is that they are based on a fundamental conflict of objectives between competition and sustainability as well as on the recognition of overriding public welfare goals, including in antitrust law.
In any case, companies are faced with the challenge of evaluating the permissibility of sustainability agreements themselves. This is particularly important if such agreements affect competition parameters and are therefore (potentially) anticompetitive. Although the draft of the Horizontal Guidelines – on a European level – contains helpful information for companies on how they can structure sustainability agreements in compliance with antitrust law, there is still a considerable need for interpretation under the current legal framework. Of course, it will also be important to see to what extent the final version of the Horizontal Guidelines contains modifications compared to the current draft.
However, it is undisputed that antitrust law will play a significant role in promoting sustainable goals in the future. This is also an opportunity for companies to have greater possibilities for cooperation with the help of the sustainability exemption.