ESG and Company Cooperation Agreements: The European Commission to Give Guidance on Potential Antitrust Issues
On 3 October 2022, the European Commission (the EC) published a revised Informal Guidance Notice that loosens the conditions under which companies can seek informal guidance from the EC on their cooperation agreements and initiatives and obtain guidance letters.
The revised approach is particularly focused on ESG collaboration and the rollout of new technologies. Collaboration in those areas has the potential to yield significant benefits for consumers that would be lost if companies refrain from entering into efficient and lawful co-operation agreements in fear of falling afoul of antitrust rules. The EC hopes to avoid that by lowering the bar for when informal guidance can be provided. Through publication of key elements or summaries of such letters, the approach may also help give the broader market more insights into the EC’s approach to these collaborations.
Under Article 101 of the Treaty on the Functioning of the European Union (TFEU), companies are prohibited from entering into anti-competitive agreements (including concerted practices) that have as their object or effect to restrict competition. These could be agreements to fix prices, divide customers or territories, decrease production, or limit innovation. Companies may run afoul of these rules simply by exchanging sensitive business information, if by doing so they reveal their future strategy and thereby remove the uncertainty that otherwise would exist between them. Indeed, that uncertainty is an important driver of the rivalry that is essential to effective competition. Conduct that infringes Article 101(1) TFEU exposes companies to a risk of heavy fines of up to 10% of their annual turnover.
Certain arrangements that entail a restriction of competition may be necessary in pursuit of effective collaboration. Where that’s the case, and a fair share of the efficiencies obtained are passed on to consumers, the conduct can potentially be exempted under Article 101(3) TFEU.
However, a careful assessment is required to verify that the conditions under Article 101(3) TFEU are met. It is not the case that all agreements that entail a restriction of competition, but are engaged in to pursue sustainability objectives, can escape the prohibition of Article 101(1) TFEU. For an exemption to be available, the parties would need to:
- Substantiate efficiencies achieved through the agreement, which could be broad and varied such as cleaner production or distribution technologies, less pollution, improved conditions of production and distribution, more resilient infrastructure or supply chains, better quality products, etc. As discussed below, they may however have to be specific to the market affected.
- Establish that any restrictions imposed are indispensable to the attainment of those benefits. That includes analysis of whether the agreement as such, and each of the restrictions of competition it entails, are reasonably necessary for the claimed sustainability benefits to materialise and that there are no other economically practicable and less restrictive means of achieving them. This analysis is complex, and must take account of standards already imposed through regulation. The EC has stated that it “is mindful that there may be instances where companies need to get together in order to override a first mover disadvantage and nudge consumers towards using more expensive sustainable products” but it also acknowledges that this may not be enough. If the products were considered so valuable by consumers, companies would have pursued their production independently.
- Show that a fair share of the benefits will be passed on to consumers. Here, the intricate question arises of the extent to which consideration of environmental benefits to society as a whole should count in the assessment. Our current understanding is that the EC is reluctant to take such broad benefits (fully) into account and will look to make sure the benefits are accruing specifically to customers in the market impacted by any restriction of competition which the collaboration entails.
- Show that the agreement does not allow the parties to eliminate competition in relation to substantial elements to the relevant product(s). That would be the case, for example, where there is a sufficient number and credible actual and/or potential competitors which are realistically expected to continue exerting competitive constraints on the parties.
Impact of the revisions to the Informal Guidance Notice
The general rule is that companies must carry out the assessment described above on their own, a system known as “self-assessment”. That system was introduced in 2004 and replaced an earlier system of notifications to the EC to apply for an exemption or confirmation that a given agreement or other collaborative effort did not raise antitrust law concerns. When that change occurred, the EC also adopted the previous Notice on Informal Guidance, the purpose of which was to specify the circumstances in which the EC would consider issuing informal guidance to individual businesses in cases where they were genuinely uncertain about the application of antitrust rules.
To avoid the previous notification system being reintroduced “through the back door”, the Informal Guidance Notice adopted criteria narrowly interpreting the circumstances in which the EC could provide informal guidance. In fact, with the exception of two guidance letters issued during the pandemic, the EC has never made use of the mechanism.
The EC argues that the very strict approach no longer is justified as the self-assessment system now is tried and tested and well-understood. The EC also acknowledges that there now is more need for guidance in areas of uncertainty.
Under the revised version of the Informal Guidance Notice, it is much more likely that the EC will agree to review an agreement and provide a green light or point out areas that require modification. Guidance may be provided if the agreement or initiative meets the following two cumulative conditions:
- It concerns novel or unresolved questions for which there is no sufficient clarity in the existing legislation and jurisprudence, nor sufficient publicly-available general guidance at the EU level. The inclusion of the word “sufficient” significantly broadens the scope of reviewable initiatives under the informal guidance mechanism.
- There is an interest to provide guidance because clarifying publicly the question on the applicability of the antitrust rules would bring legal certainty.
Those are very helpful clarifications. However, the real question will be the extent to which the EC is willing to provide guidance that is not overly conservative. Indeed, the two guidance letters issued during the pandemic appeared to largely restate the law in a rather conservative manner, and therefore served mainly as a signal that cooperation to address the problems created by the pandemic was encouraged, but they may have done little to solve genuine legal uncertainties for the companies involved. In this respect, the approach of the national antitrust authorities of some of the EU Member States, such as the Dutch ACM, set a good example that one can only hope the EC will follow. Indeed, only by showing which types of permitted collaboration genuinely further ESG objectives will these guidance letters truly ensure that significant benefits for consumers are not lost for fear of falling afoul of antitrust law.
Guidance letters have no binding force on Member States’ authorities and courts. They also cannot prejudge the assessment of the European Court of Justice, or even preclude the EC from examining the same agreement at a later stage.
Still, for the parties and third parties who follow the EC’s guidance letter in good faith, the benefit is that they will not be exposed to fines, in principle.
The informal guidance tool is only available for agreements that are already in place or are at a sufficiently advanced stage of planning (i.e., hypothetical questions are not eligible for guidance).
Companies should back up their request with detailed information and documentation about the initiative they want to test. They must still do their homework by demonstrating the uncertainty that warrants informal guidance and also by showing why, in their view, the collaboration does not infringe the antitrust rules.
There are no strict deadlines for the EC to issue a decision. The EC has stated that it will use its best efforts to respond within a reasonable time, but response time will depend on the circumstances and complexities of each case.
Key elements or summaries of the guidance letters typically are published, thus, allowing other companies to also benefit from insights into regulators’ approach to specific issues.
© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.