The European Commission has published an interim policy brief ('the Brief') on how it plans to adapt its competition law rules and enforcement approach to ensure it is playing its part in achieving the EU’s ambition to be carbon neutral by 2050.
This follows the Commission’s consultation last year in relation to competition policy and the Green Deal and continued stakeholder engagement. The proposals are still subject to further consultation, including with national competition authorities. However, the Brief indicates the types of reform and enforcement approach we can expect in the merger control, antitrust and state aid space in the coming months and years.
Most notably, the Commission views the green transition as another reason to strengthen, rather than soften, its enforcement approach, with Executive Vice-President Margrethe Vestager emphasising that the Commission will need to enforce competition rules 'more vigorously than ever' in her speech at the IBA Competition Conference announcing the proposed reforms.
However, alongside this strict approach to enforcement, the Commission is also listening to calls for additional guidance from businesses on how they can collaborate on sustainability initiatives without breaching competition law and when sustainability may be taken into account in merger reviews. In response the Commission has outlined:
- how it intends to provide guidance on permissible horizontal co-operation arrangements; and
- when consumer preferences for sustainable products, environmental benefits or 'green innovation' may impact merger reviews.
Finally, the Brief also covers various sustainability-related updates in the state aid space. Please keep an eye out for separate blog posts from us covering those developments.
Antitrust: recognition that further guidance on sustainability agreements is required
The Commission has heard the call for greater clarity on the application of antitrust rules to sustainability agreements. This was something we, among others, raised in our own response to the Commission’s initial consultation as many businesses have recognised that, in order to meet ambitious environmental targets, competitor collaboration is sometimes necessary when objectives cannot be met alone. In order to encourage and not deter such collaboration, businesses require more detailed and sustainability-specific guidance to enable them effectively to self-assess whether an agreement may be prohibited by Article 101(1) of the Treaty on the Functioning of the European Union (TFEU) and, if so, whether it is likely to satisfy the strict criteria for exemption under Article 101(3) as a result of its associated sustainability benefits.
Notably, the Commission’s proposals follow various initiatives by national authorities across Europe, with the Dutch competition authority (ACM) taking a leading role with its first draft guidelines published in July 2020 (see our blog post) and the Austrian legislator recently going further by explicitly including sustainability benefits as criteria for exemption (watch this space for our upcoming blog on this).
However, with its firm commitment to the European Green Deal, the Commission is clearly stepping-up its own policy reforms and helping drive an EU-wide approach to the role competition policy should play in supporting the transition to a net zero economy. This should be welcomed as different views – both within and outside Europe – can still hamper legitimate sustainability collaborations given the severe penalties involved for breaching competition laws.
To help ensure antitrust enforcement 'remains anchored to the consumer welfare standard' while allowing sustainability benefits for society to be taken account, the Commission has given some helpful initial indications in the Brief of how it will provide more clarity for businesses in order to aid self-assessment. This includes providing concrete examples of the types of agreement which are likely to fall outside of Article 101(1) completely, as well as guidance on when and how the Article 101(3) TFEU exemption applies in a sustainability context. Of particular note are the Commission’s statements that:
- sustainability benefits can be assessed as qualitative efficiencies under Article 101(3) – so benefits such as longevity of a product or consumer experience may be taken into account in addition to quantifiable benefits such as cost savings;
- sustainability benefits do not necessarily need to take the form of a direct or immediately noticeable product quality improvement or cost saving provided consumers appreciate (and are ready to pay for) the benefits;
- in line with traditional principles of consumer welfare, direct consumers should be fully compensated for any harm arising from a restriction of competition and those benefits should arise in the relevant market. However, benefits achieved in separate markets may be taken into account provided the group of consumers affected by the restriction and the group of benefiting consumers are substantially the same. Here, the Commission appears to be taking a more cautious approach than the Dutch draft guidelines and the new Austrian law which may allow environmental agreements that benefit society as a whole, even if direct consumers are not fully compensated; and
- when considering the requirement to show that an agreement is indispensable to achieving the benefits, there may be instances where companies need to get together in order to override a first mover disadvantage.
While these initial indications are promising and suggest that the Commission’s guidance may allow for sustainability benefits to be taken into account in more cases, these principles remain undeveloped and are still subject to further consultation, including with the competition authorities of member states. It is therefore still unclear how they will operate in practice, and detailed practice guidance elucidating these principles still needs to be developed.
In this respect, we are in the process of responding to the Commission’s ongoing consultation on its plans to revise its existing guidance on horizontal agreements. We propose to highlight those areas of the guidance where further detail and clarity is needed in respect of sustainability.
This is an important opportunity to influence the Commission’s development of its guidance, and interested businesses and stakeholders should respond to the consultation with their views. If you are considering responding to the consultation, please feel free to contact a member of the Freshfields antitrust, competition and trade team for assistance.
Merger control: adapting the competitive assessment and increasing scrutiny of 'killer' green acquisitions
The Commission recognises that it does not have a mandate under the current legal framework to intervene in mergers solely because they are likely to harm the environment. However, the Commission does indicate that it will increasingly seek to incorporate sustainability considerations into its competitive assessments. Examples of issues which are likely to become more prominent include:
- consumer preferences for sustainable products - for example, when the Commission is defining the relevant market or identifying competitive constraints on the parties;
- the use of 'innovation theories of harm' - to protect innovation efforts on environmentally friendly technologies or capabilities where a merger might reduce incentives to innovate or threaten on-going R&D; and
- efficiencies which benefit consumers of the relevant products or services - although (in line with its approach on antitrust) the Commission indicates that any environmental benefits achieved on separate markets are less likely to be taken into account if the parties are unable to show that direct consumers are fully compensated for any price rise, reduction in choice or other harm.
Most significantly in the merger space, the Commission appears to give the green light to national authorities using its updated approach to Article 22 referrals for acquisitions of 'green innovators'. This mechanism – which the Commission considers allows it to review deals falling below EU or national thresholds – is already being used more frequently in the technology and life sciences sectors with material implications for deal timing and outcome.
Companies involved in acquisitions of businesses active in 'green innovation' should therefore factor in the risk of a Commission review early in deal planning in order to ensure their regulatory strategies, deal documents and timing take proper account of a possible referral, extended review and (as we are seeing in some cases) litigation.
This Brief gives a strong steer on the Commission’s intended approach to sustainability in the context of competition law. Clearly, sustainability is, and will remain, a hot topic for the Commission in the coming years with its current focus being strengthening enforcement and updating its guidance in this context.
The approach described in the Brief is more conservative than the one proposed by some national authorities and legislators, in particular the Dutch and Austrians. However, the Commission’s policy is very much still a work in progress, and we will therefore continue to follow and contribute to the discussions and monitor the Commission’s approach as it continues to develop its policy in this space.