On the first of March 2022, the Commission published, for consultation with stakeholders, a revised draft block exemption regulations on research and development and specialisation agreements (collectively referred to as “BERs”), and the accompanying Guidelines on horizontal cooperation agreements (“Horizontal Guidelines”). Once its final version is published in the Official Journal of the European Union, it is expected to enter into force on 1 January 2023. This brief article will try to explain and summarize further the categories of pro-sustainability agreements between competitors that meet the conditions set out in the Horizontal Guidelines.
Collaboration agreements have traditionally distinguished between those relating to research and development, production, joint purchasing, marketing and standardisation, to name the main ones. Any of these stipulations may involve a sustainability pact, and it is therefore important to be especially cautious, since this factor, in itself, cannot serve as a license to hide restrictive agreements. One of the main novelties of these drafts is the inclusion of a chapter on agreements pursuing sustainability objectives, defined by the Commission as “[A]ny type of horizontal cooperation agreement that genuinely pursues one or more sustainability objectives, irrespective of the form of cooperation“.
Sustainable development refers to society’s ability to consume and use currently available resources without compromising the ability of future generations to meet their own needs. In essence, it encompasses activity that promotes economic, environmental and social development (including labour and human rights).
The term “sustainability agreement” generally refers to any kind of horizontal cooperative arrangement between competitors that actually pursues one or more sustainability objectives, regardless of the form of cooperation, and that seeks to minimise the negative externalities that would be generated in an alternative scenario (with individual production and consumption decisions; rather than collective initiative in favour of sustainability).
Under both the current and future regulatory framework, agreements between competitors that fulfil the conditions set out in the block exemption Regulations on joint R & D and specialisation aiming at, for example, a reduction in their respective carbon footprint, are ensured to be compatible with the competition rules. Otherwise, they may still be compatible, if the companies prove that their agreements aim at achieving sustainability objectives, and generate sufficient benefits for consumers, will outweigh their restrictive effects on competition. What was before regarded as collusive behaviour could now be seen as permitted exchange of information for the greater sustainability in the market. For example, in the shipping industry where CO2 emissions are quite high, the sharing of know-hows to reduce emissions, benefits not only the consumer but the globe in its entirety, would be seen as permitted behaviour as the results are greater than any infraction committed. However, sustainability standardisation agreements such as the example above, need to comply with principles of transparency and freedom of access comply with competition rules. They are compatible as long as they do not exclude third parties outside the project and protocols are established to limit exchanges of sensitive information. Participants should remain free to adopt higher sustainability standards individually.
To achieve these objectives, competitors within a sector may enter into standardisation agreements. The draft Guidelines cite some examples of agreements falling into this category, such as sectoral initiatives aimed at: (i) phasing out, withdrawing or replacing unsustainable products and processes with sustainable ones; (ii) harmonising packaging materials to facilitate recycling or packaging sizes to reduce waste; (iii) purchasing production inputs only if the purchased products are produced in a sustainable way; or (iv) agreeing on certain conditions that improve animal welfare. These “sustainability standardisation agreements” or “sustainability standards” may result in the establishment of a label, logo or eco-mark for products that meet the agreed minimum requirements. It is acceptable that the joint sustainability standard triggers a price increase (without price agreements between the companies), but this should not be significant. In addition, it must be verified that companies comply with the requirements of the agreed sustainability standard.
The draft Guidelines include several examples of compatible agreements on this ground. First those agreements which do not relate to the market activity of the companies, but to their internal conduct. A simple example of these agreements would be one between competitors on the basis of which, in their respective offices, the temperature will not exceed X degrees in winter. Another type would be sustainability agreements on the creation of a database containing information (i) on suppliers with sustainable value chains, using sustainable production processes and providing sustainable inputs, or (ii) on distributors selling products in a sustainable way and lastly, agreements between competitors regarding the organisation of awareness-raising campaigns on the environmental footprint of the consumption of their products.
Secondly, sustainability standardisation agreements that meet the conditions, laid down as a “soft safe harbour” in the draft Guidelines, are also compatible. The procedure for developing the sustainability standard must be transparent and all interested competitors should be involved in the selection process. It should be non-binding vis-à-vis third parties outside the initiative, participating companies should remain free to adopt individually a higher sustainability standard than that agreed with their competitors. They must avoid exchanges of confidential business information that is not necessary for the development, adoption or modification of the standard while ensuring effective and non-discriminatory access to the outcome of the standardisation procedure, operators who have not participated in the definition of the standard should then be able to join the initiative. Additionally, the standard should not lead to a significant increase in prices, nor to a significant reduction in the variety of products available on the market. In the examples section, the draft Guidelines state that, for example, a price increase of 12% will already be considered significant.
Thirdly, sustainability agreements with restrictive effects on competition that generate sufficient efficiencies and benefits for consumers to outweigh their restrictive effects are also compatible (according to the four conditions of Article 101(3) of the Treaty on the Functioning of the European Union, “TFEU”).
The agreements mentioned above will be permitted as long as certain conditions are met. The first condition is that the sustainability agreement must deliver objective efficiencies, broadly understood as encompassing not only reductions in production and distribution costs, but also increases in product variety and quality, improvements in production or distribution processes and increased innovation. The draft Guidelines allow for a wide range of sustainability benefits from the use of specific ingredients, technologies and production processes to be considered as efficiency gains, such as the use of cleaner production or distribution technologies, reduced pollution, increased resilience of infrastructures or supply chains, etc.
The second condition is that the agreement only includes those restrictions of competition that are indispensable to ensure the success of the sustainability agreement. An agreement will be “indispensable” to achieve a given sustainability objective when there are no other economically viable and less restrictive means of achieving the sustainability benefits. In this context, where there is sufficient demand for sustainable products, cooperation between competitors may be unnecessary. However, the draft Guidelines recognises that even in such cases, agreements between competitors may be necessary and indispensable to achieve the sustainability objective in a more efficient way or to overcome market failures.
The third condition requires that direct or indirect users of the products covered by the agreement receive a fair share of the intended benefits.
Finally, the fourth condition is that the agreement must not enable the undertakings to eliminate competition in respect of a substantial part of the products in question.
Undoubtedly, this draft Guidelines, if finally approved, can open the door in the future to endless opportunities for collaboration and agreements between competitors to achieve the goal so desired by the whole society of improving the sustainability of production processes, transport and waste, notably improving environmental protection.
Angel Valdés Burgui
Partner – Head of Competition of Competition Law Department
Lupicinio International Law Firm