Sustainability agreements, competition law and the cartel prohibition: how to proceed?

Last week, we wrote in this blog that the Ministry of Economic Affairs was preparing a legislative proposal to introduce a sustainability cartel register. This register would be comparable to the cartel register that applied until the Dutch Competition Act (Mededingingswet) entered into force. The legislative proposal would be introduced on 1 April 2018 so as to push companies to run greener businesses. The message was received with great interest and it was obvious to many readers that this was an April fool’s joke. For the avoidance of doubt: there will be no sustainability cartel register.   

Still, the ‘news item’ touched upon a hot topic, as there are and have been several regulatory initiatives in this area. The Competition and Sustainability Policy 2016 (Beleidsregel mededinging en duurzaamheid 2016) (the “Policy”), for example, aims to provide a point of reference for exceptions to the cartel prohibition that apply to sustainability initiatives. In addition, there is work in progress on the Legislative proposal general applicability sustainability initiatives (Wetsvoorstel algemene gelding duurzaamheidsinitiatieven) which aims to offer companies more possibilities to realise sustainability initiatives more quickly. An online consultation for this legislative proposal is expected to be held this spring. According to the current timetable, the legislative proposal will be submitted to the Council of State for advice later this year.

With this development, the government wants to respond to consumers’ and producers’ demand for more sustainable business. In the past few years, plans to this end often stranded after the Authority Consumer and Market (Autoriteit Consument & Markt, “ACM”) issued a negative opinion. ACM’s negative assessment of plans in 2013 to close coal-fired power stations and in 2015 to make chicken meat more sustainable (the “Chicken of Tomorrow”) led to considerable discussion. ACM took the view that with these plans, the benefits of the proposed cooperation did not outweigh their adverse effects on competition. For that reason, ACM considered these plans to be irreconcilable with the cartel prohibition (Article 6(1) Dutch Competition Act). Even though ACM provides points of reference to assist in the assessment as to whether sustainability agreements can be reconciled with the cartel prohibition, ACM recently emphasised that sustainability agreements must not be detrimental to competition and to the consumer. In sum, companies will have to make do until the Legislative proposal general applicability sustainability initiatives enters into force. For this reason, this blog offers eight practical tips for making sustainability agreements work.

1: Determine whether the behaviour is anti-competitive

The cartel prohibition prevents companies from making anti-competitive arrangements. For that reason, it is efficient to first determine whether the arrangement in question is contrary to the cartel prohibition. If that is not the case, there is no need for a competition law analysis. This could apply, for example, to a situation where competitors jointly lobby for a legislative proposal to make sustainable production more (fiscally) attractive. This is permitted by definition. Arrangements that are invariably considered as anti-competitive should of course be subjected to a competition law analysis. This applies, for example, to arrangements that limit production or production capacity. Then there is always the grey area. If competitors agree to use a common sustainability quality mark, this may still negatively affect competition. In that case, a competition law analysis in advance would be advisable as well.

2: Quantify the benefits

Sustainability initiatives that fall under the scope of the cartel prohibition may be exempted from it if they meet the requirements stipulated in Article 6(3) Dutch Competition Act. This is also known as the efficiency defence. In the context of the efficiency defence, an analysis of four elements is made. The cooperation must result in (i) benefits (ii) which allow consumers a fair share of the benefits, where (iii) the restrictions are necessary and (iv) there is no elimination of an essential part of the remaining competition.

In view of the foregoing, it is important to clearly define the nature of the intended benefits. The European Commission (the “Commission”) has so far not allowed much scope for taking purely non-economic benefits into consideration (see also the Commission’s Guidelines). This is strikingly illustrated by the CECED case. In that matter, the Commission consented to an anti-competitive arrangement, whereby certain energy-inefficient washing machines could no longer be sold (see also our previous blog). Although the Commission took the collective environmental benefits into account, it expressed these benefits in terms of reduced waste costs. In the matter of the so called The Chicken of Tomorrow, it seemed that ACM wanted to offer more scope for taking non-economic benefits into consideration. The parties involved wanted to collectively agree to remove non-sustainable chicken meat from their product ranges. In connection with this, ACM assessed whether animal welfare, environmental concerns and public health benefited the consumer. ACM investigated whether consumers were willing to pay more, to a certain extent, for sustainable chicken meat. ACM found that this was not sufficiently the case. These examples show that it is advisable to express the intended benefits in economic terms as much as possible and to substantiate them quantitatively as well as qualitatively.   

3: Determine whether benefits will be passed on to the consumer

This condition can have a broad scope. First of all, the Policy allows for a focus on the long term. Secondly, the benefits do not always have to directly fall to the consumers on the market to which the anti-competitive arrangements pertain. In CECED, the Commission took account of the fact that the arrangement to stop supplying very energy-inefficient washing machines would lead to a lower energy consumption in the long term. In this example, the benefits (lower energy costs) were achieved in a different market than the one to which the anti-competitive arrangements pertained (the offer on the washing machine market was restricted).

4: Identify the necessity

It follows from the Policy that a ‘first mover disadvantage’ can provide the required necessity. This concerns the fact that whenever an undertaking takes independent action that benefits sustainability, that undertaking may for example lose part of its market share due to a rise in production costs, or it may see a drop in its profits. All this may undo any incentive to implement sustainability initiatives. For this reason, a first mover disadvantage may be considered a legitimate reason for cooperating with competitors for the sake of sustainability initiatives.

5: Assess the extent of the remaining competition

The Policy emphasises that this condition may be met if competition remains possible on the basis of parameters other than those relating to sustainability such as price, service or other quality aspects. It is also interesting to note that when all market parties are involved in an initiative, this does not necessarily mean that the remaining competition is eliminated completely.

6: Create or increase political support

Public and political support may help the competition authorities see the advantage of a sustainability initiative. ACM board member, Henk Don, noted in 2011 that if a specific public interest is invoked in the assessment of whether a cooperation between competitors can be reconciled with the cartel prohibition, this public interest should have an adequate legal or political basis. Don also referred to the ministerial support given to piglet castration under anaesthesia. It was partly for this reason that in 2008, ACM consented to arrangements that were aimed at preventing specific supermarkets from selling meat from pigs that had been castrated without anaesthesia. ACM also announced in late 2016 that it will not take measures against sustainability agreements that enjoy wide public support provided that all parties involved (including the government) are positive.  

7: Determine if and when competition authorities are contacted

It is advisable to carefully consider, in advance, whether competition authorities should be contacted. If a competition authority is asked to give an opinion on a sustainability initiative, it may give a sceptical response. Alternatively, prior consent from the competition authorities provides comfort that a sustainability initiative can actually be implemented. ACM does not grant exemptions in advance to sustainability initiatives taken by companies. In principle, ACM only assesses whether existing arrangements violate the cartel prohibition. There are a few exceptions to this basic principle. The companies involved may, for example, request an informal opinion from ACM. In addition, ACM is generally willing to communicate informally about plans for cooperation, especially when the interests or the public interest are considerable.     

8: Perform a self-assessment

In principle, parties should themselves consider whether a sustainability initiative can be reconciled with the cartel prohibition and whether an efficiency defence applies. For this reason, it is common practice to conduct a self-assessment beforehand. If the authorities or (foreign) competitors question the cooperation, the self-assessment can be used to demonstrate why the cooperation is permissible. In an interactive decision tree on sustainability, ACM explains which steps should be taken when performing a self-assessment. In its decision tree, ACM notes: “If you don’t know what to do, please consult a lawyer specialised in competition law.” If you have any questions or if you need assistance, please contact us. 

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