Joint sustainability initiatives in the agri-food and retail sectors are required to meet society’s demand for sustainability. But these sustainability initiatives must always be compatible with the cartel prohibition. This is where the shoe regularly pinches, which can lead to cold feet. But is that fear justified?
Since the end of 2021, the European Commission (the Commission) has offered much more room for sustainability initiatives. It has done so by adding a sustainability exemption to (the existing) CMO Regulation 1308/2013 (CMO) (Article 210a). The question is what scope this exemption offers in practice. In this blog we look into this issue on the basis of two cases of the German Competition Authority (BKa).
Sustainability exemption under Article 210a CMO
In recent years, many sustainability initiatives have failed ACM’s test against the cartel prohibition. That was the case, for instance, with shrimp fishery, but also with the Kip van Morgen. In those cases, ACM did not accept the efficiency defence (the ground for exception from the cartel prohibition referred to in Article 6(3) of the (Dutch) Competition Act/ Article 101(3) TFEU). ACM was willing to exempt an agreement only if the living standard of the consumers directly involved was not too greatly harmed by the sustainability initiative. Although ACM now appears to be cautiously changing this approach, an interesting exemption from the cartel prohibition has been added since December 2021 for sustainability initiatives in the agri-food sector. This exemption is set out in Article 210a CMO. That article provides that the cartel prohibition does not apply to agreements, decisions and concerted practices:
- of producers of agricultural products to which one or more producers and one or more operators at different levels of the production, processing and trade in the food supply chain are party; and
- that relate to the production of or trade in agricultural products and that aim to apply a sustainability standard higher than mandated by Union or national law; and
- only impose restrictions of competition that are indispensable to the attainment of that standard.
According to the text of Article 210a CMO, a sustainability initiative should contribute to specific sustainability standards regarding agricultural products (including dairy products, meat, fruit and vegetables). Annex I to the CMO Regulation contains the entire list of agricultural products to which Article 210a of the CMO applies. According to Article 210a(3) CMO, sustainability standards should contribute to one or more of the following (broadly defined) objectives:
- environmental objectives, including the reduction of food waste, pollution prevention and control, and the protection and restoration of biodiversity; or
- the production of agricultural products in ways that reduce the use of pesticides and manage risks resulting from such use, or that reduce the danger of antimicrobial resistance in agricultural production; or
- animal health and animal welfare.
Article 210a CMO makes it much easier to quickly develop domestic, international and sector-wide sustainability initiatives in the agri and retail sectors. However, an initiative must be indispensable to the attainment of a certain sustainability standard higher than mandated. If less far-reaching initiatives are possible to achieve the same sustainability objective, Article 210a CMO won’t wash. “Higher than mandated” means that a certain sustainability standard must go beyond what is mandatory under Union and national legislation. It is also notable that Article 210a CMO requires that at least one producer must be involved in an initiative.
The obvious advantage of Article 210a CMO is that it offers a generic exemption from the cartel prohibition. It is therefore no longer necessary first to present an efficiency defence in order to designate sustainability initiatives as being compatible with the cartel prohibition. This saves market parties a great deal of time and money.
Assessment in the light of Article 210a CMO: examples from Germany
In Germany, the BKa has assessed several sustainability initiatives in light of the cartel prohibition (see also this blog). The BKa's analysis of two of these initiatives – both from the milk industry – is worth addressing in the context of Article 210a CMO.
The first initiative assessed by the BKa is one of Agrardialog, an association of milk producers. Agrardialog’s initiative (“Agrardialog Milch”) served to introduce a sector-wide system of surcharges for raw milk. According to Agrardialog, the production of raw milk does not cover the costs of farmers as the producers of raw milk. The surcharges were intended to increase and stabilise the prices of raw milk across the sector in Germany.
The BKa ruled in January 2022 that Agrardialog Milch was incompatible with the cartel prohibition. According to the BKa, the system of surcharges in the Agrardialog Milch initiative is in actual fact a fixed price increase in the chain that is ultimately passed on to consumers. The “purely economic” reason for the initiative, i.e. to obtain higher payment for raw milk, does not qualify for an exemption from the cartel prohibition. The BKa noted that sustainability played an important role in its assessment, but did not play a demonstrable role in Agrardialog Milch. For instance, the system of surcharges did not contain any specific criteria to make the production of raw milk more sustainable. The BKa did report, through its chair Andreas Mundt: “Sustainability does not play a role in the financing model. However, Agrardialog can at any time present us with a sustainability concept which is not based on a price agreement to the disadvantage of consumers.” The BKa disapproved of this plan, but did open the door for a targeted adjustment of Agrardialog Milch and also for other sustainability initiatives.
The words of Andreas Mundt of the BKa did not fall on deaf ears. A second initiative of milk producers, known as the QM+ programme of the QM Milch cooperative, was submitted to the Bka for its assessment. In March 2022, the BKa did take a positive view of this QM+ programme. This initiative was specifically aimed at improving animal welfare in milk production. Milk producers that meet certain animal welfare criteria higher than mandated are granted a quality mark under the QM+ programme. The costs involved in that quality mark are raised and funded (in part) by means of an animal welfare surcharge provided for in the QM+ programme. The surcharge is paid by retailers to milk producers that are able to meet certain animal welfare criteria higher than those mandated. This way, the QM+ programme should permanently stimulate milk producers to apply these sustainability standards to their own milk production.
When does the BKa give the go-ahead to a sustainability initiative?
It is interesting to compare the two German initiatives referred to above in light of the new sustainability exemption of Article 210a CMO, because (i) both initiatives come from the same industry; (ii) both initiatives are based on a system of surcharges; and (iii) in both cases the BKa expressly stated that it had taken Article 210a CMO into account. And rightly so, since Article 210a CMO had already entered into force when the BKa assessed the two initiatives.
The underlying objectives of the initiatives proved to be highly relevant to the BKa’s assessment. The Agrardialog Milch initiative served only to cover the production costs of milk producers. According to the BKa, it therefore did not directly serve any sustainability objective (yet). The QM+ programme, on the other hand, does expressly serve a sustainability objective, namely animal welfare. That objective is referred to in Article 210a(3) CMO as one of the objectives to be eligible for this (sustainability) exemption from the cartel prohibition.
Furthermore, although both milk initiatives involve a surcharge, in the case of Agrardialog Milch it was a fixed surcharge for each participating milk producer. No fixed or generic surcharge was involved in the QM+ programme. That programme encouraged producers individually to apply animal welfare standards higher than mandated by Union or national law and individually rewarded them for meeting these standards: only if they are able to meet these higher standards do producers receive a quality mark and the accompanying surcharge. Applying sustainability standards higher than those mandated is also an express condition of Article 210a CMO. Therefore, if consumers were to pay more for milk (products) as a result of the surcharge in the QM+ programme, there is a causal relationship between the additional price paid and the “sustainability gain” facilitated by the QM+ programme.
It is remarkable that the BKa noted in its assessment of the QM+ programme that there is considerable competition between the various milk producers and labels. The BKa also stated that some of the milk producers did not participate in the QM+ programme. The BKa did not directly link these remarks to its press release. It would nevertheless appear that the BKa sets store by consumers also being able to choose milk (products) without an animal welfare surcharge after the introduction of the QM+ programme. It is then up to the consumer to make a conscious choice to pay more for milk (products) that are produced in a animal friendly (or friendlier) manner.
In the light of Article 210a CMO, the QM+ programme therefore scores on several points where Agrardialog Milch does not. In light of the requirements of Article 210a CMO referred to above, it therefore comes as no surprise that the BKa has – at least temporarily – given the go-ahead to the QM+ programme, but not to Agrardialog Milch. It is important to note that the BKa accepts that the QM+ programme may have the result of increasing the prices of the products concerned for the consumer. In other words, the fact that a sustainability initiative may lead to a higher price for consumers does not stand in the way of application of the (sustainability) exemption from the cartel prohibition of Article 210a CMO. This is an interesting development, given that sustainability initiatives, as stated above, have failed precisely on this point when actually assessed in the light of the cartel prohibition (see, for instance, the Kip van Morgen (and other examples in our earlier blogs)). In our opinion, the way in which the QM+ programme was assessed in the light of Article 210a CMO is therefore an interesting precedent for sustainability initiatives elsewhere in the European Union, including the Netherlands.
The examples from Germany point towards a clear trend. The introduction of the sustainability exemption of Article 210a CMO is having a major impact on the assessment of sustainability initiatives: the BKa is taking this new exemption from the cartel prohibition into account – as it expressly stated when it assessed the milk initiatives. This is good news for companies in the agri-food and retail sectors that wish to quickly develop domestic or international sector-wide sustainability initiatives.
We believe that ACM, like the Bka, is willing to cooperate in the assessment of a sustainability initiative in the agri-food and retail sector in light of Article 210a CMO, since ACM is increasingly assessing sustainability initiatives in light of its draft Guidelines on Sustainability Agreements (see here and here for recent examples). ACM is also actively inviting market parties to submit sustainability initiatives to ACM in the event of doubt. ACM is of course aware of the fact that Article 210a CMO not only has (direct) effect in Germany but also elsewhere in the EU and in the Netherlands.
Clear guidance from the Commission on Article 210a CMO is certainly desirable in order to give market parties the comfort they need to use this sustainability exemption independently. Such guidance will allow market parties to take into account the frameworks set by the Commission for Article 210a CMO when developing sustainability initiatives already. This offers market parties more legal certainty in advance and is of course also conducive to the faster development of (more) sustainability initiatives. The Commission's guidance – in the form of Guidelines – is not expected until the end of 2023.
For now, it helps that national competition authorities (including ACM and the BKa) are encouraging market parties to submit certain sustainability initiatives to them for their assessment. It is a promising development that the BKa has taken Article 210a CMO into account. It demonstrates that a competition authority is not necessarily a show stopper in the development of (more) sustainability initiatives.