Analysis: “The new sustainability chapter in the draft revised Horizontal Guidelines of the European Commission” by Martin Gassler

On 1 March 2022, the European Commission (‘Commission’) published its draft revised Horizontal Guidelines, together with the two draft revised Horizontal Block Exemption Regulations (the draft revised Research & Development Block Exemption Regulation and the draft revised Specialisation Block Exemption Regulation), and invited interested stakeholders to comment during the public consultation until 26 April 2022 (see press release). These draft documents were accompanied by an explanatory note which aims to give an overview over the proposed changes. New revised horizontal rules and guidelines will enter into force on 1 January 2023 (as the current Horizontal Block Exemption Regulations will expire on 31 December 2022).

During the evaluation stakeholder criticised that the current horizontal rules and guidelines do not reflect the economic and societal changes in the last ten years, particularly with regard to the green transition of the economic (which was also pushed by the Green Deal announcement of the Commission in December 2019). The green importance is also shown by the fact that the Commission has commissioned an external study that focuses solely on the question on how to incorporate sustainability objectives in the effects-analysis of horizontal agreements.

Against this background, the Commission has decided to add a new chapter in the draft Horizontal Guidelines for assessing sustainability agreement (i.e. agreements between competitors that pursue one or more sustainability objectives). The new chapter not just provides guidance for agreements with environmental objectives (as the old 2001 Horizontal Guidelines in chapter 7 did), but for a wide variety of sustainability objectives (the draft Horizontal Guidelines mention e.g. respecting human rights, fostering resilient infrastructure or ensuring animal welfare).

The new sustainability chapter explains in great detail the different analytical routes available for sustainability agreements:

• Sustainability agreements may not be caught by Art 101(1) TFEU if they do not affect parameters of competition (such as price, quantity, quality, choice or innovation). For instance, if the agreement merely creates a database containing information about suppliers that have sustainable value chains, without requiring the parties to the agreement to also purchase from those suppliers, such agreement would fall outside the scope of Art 101 TFEU.
• If sustainability agreements do affect parameters of competition, they fall within the scope of Art 101(1) TFEU. The draft Horizontal Guidelines explain that if the sustainability agreement corresponds to one of the types of cooperation agreements addressed in the other chapters of the draft Horizontal Guidelines, the agreement should be assessed according to the principles in these chapters. For instance, an agreement to only purchase from suppliers observing certain sustainability requirements, should be assessed according to the principles in the chapter on purchasing agreements (chapter 4).
• Otherwise, the sustainability agreements should be assessed according to the principles set out in the sustainability chapter (chapter 9). The draft Horizontal Guidelines provide, in particular, guidance for ‘the most typical’ sustainability agreement, which are (according to the Commission) sustainability standardisation agreements. These are agreements that specify the sustainability requirements that producers, traders, manufacturers, retailers or service providers in a supply chain have to meet and are different from ‘normal’ standardisation agreements (the draft Horizontal Guidelines identify in paras 564-567 four main differences). If such sustainability standardisation agreement does ‘genuinely’ pursue sustainability objective (i.e. no greenwashing which constitute a restriction by object as e.g. in the Consumer Detergents cartel) the draft Horizontal Guidelines provide for a soft safe harbour under which sustainability standardisation agreements are unlikely to produce appreciable negative effects on competition if certain cumulative conditions are met: (1) the procedure for developing the sustainability standard is transparent and open, (2) the participation is voluntary, (3) the participating undertakings should be free to exceed the sustainability standard, (4) the information exchange is limited to what is strictly necessary for the sustainability standard, (5) the access to the outcome of the sustainability standard is non-discriminatory, (6) the sustainability standard should not lead to a significant increase in price or a significant reduction in the choice of products (otherwise the agreement needs to be assessed under Art 101(3) TFEU – see below) and (7) there should be a monitoring system in place to ensure that the participating undertakings comply with the sustainability standard. Importantly, the soft safe harbour does not list any market share or market coverage thresholds. The draft Horizontal Guidelines even recognise that, in some instances, significant economies of scale may be only achieved if a significant part of the market adopts the standard. The market coverage of the products incorporating the sustainability standard only becomes relevant outside the soft safe harbour (i.e. if one of the seven conditions is not fulfilled).
• If the sustainability agreement does not constitute a sustainability standardisation agreement or falls outside the soft safe harbour for sustainability standardisation agreement (in particular if sustainability standard leads to a significant increase in price or a significant reduction in the choice of products) the sustainability agreement may be still individually exempted if the four cumulative conditions of Art 101(3) TFEU are satisfied. The draft Horizontal Guidelines provide great detail on each of these conditions in the sustainability context. Unsurprisingly, the Commission qualifies sustainability objectives as the types of ‘efficiencies’ (sometimes also referred to in the draft Horizontal Guidelines – and probably more appropriate – as ‘benefits’) required by Art 101(3) TFEU (first condition). The agreement and its restrictions also need to be reasonably necessary for the sustainability benefit (third condition). Furthermore, the agreement must also not eliminate competition in respect of a substantial part of the products in question (fourth condition), which the Commission sees even then satisfied if the agreement covers the entire industry, as long as the parties to the agreement continue to compete vigorously on at least one important aspect of competition (e.g. if the agreement eliminates competition only on product variety, but not on price). Last but not least, consumers need to receive a ‘fair share’ of the claimed sustainability benefits. The Commission essentially requires full compensation of the consumers on the relevant markets (as already indicated by the Commission in the Competition Policy Brief in September 2021 and as stated in the Art 101(3) TFEU Guidelines). It is the Commission’s strict interpretation of that condition that will most likely cause backlash by stakeholders during the public consultation. The Dutch Competition Authority for instance takes the view in a Legal Memo on this condition that after analysing the relevant case law of the EU Courts full compensation is not required, and thus directly opposed the legal interpretation of the Commission on this condition (see also paras 45 et seq of the Dutch Draft Guidelines on Sustainability Agreements). It has to be seen whether the Commission’s strict interpretation will be also included in the final version of the Horizontal Guidelines.

Overall, the new sustainability chapter in the draft Horizontal Guidelines is a welcomed and much needed step towards more legal certainty when assessing sustainability agreements. It provides extensive guidance for the different analytical routes available for assessing sustainability agreements. Particularly, the soft safe harbour for sustainability standardisation agreements will be much appreciated. However, the strict interpretation of the ‘fair share’ condition under Art 101(3) TFEU will certainly cause much debate and leaves the question whether such strict interpretation actually finds support in the case law of EU Courts (let alone the question of whether such interpretation is actually desirable from a policy perspective as this may essentially undermines the ‘polluter pays’ principle). But what is certainly clear is that competition law (or at least the interpretation of competition law) is getting greener.

Martin Gassler is an aspiring competition lawyer based in Vienna (Wolf Theiss). He is also a case reporter for Oxford Competition Law and regularly publishes about recent developments in EU and Austrian competition law. He has also recently recorded a podcast on sustainability and competition law together with Simon Holmes and Viktoria Robertson