Competition law and sustainability: Dutch authority makes headway with draft guidelines

From 9 July to 1 October 2020 the Netherlands Authority for Consumers and Markets (ACM) conducted a public consultation on its draft guidelines on applying EU competition rules to agreements promoting sustainability (Draft Guidelines). Against a wide background of political initiatives and binding duties to address sustainability, the ACM is the first competition authority to propose guidelines that depart from the European Commission (Commission) 2004 guidance limiting an exemption to efficiencies benefiting consumers (Article 101(3) TFEU Guidelines). The Hellenic Competition Commission has followed with an extensive staff discussion paper, while sustainability is also part of the Commission’s review of two block exemption regulations. The Draft Guidelines thus set out a path that other authorities may take regarding sustainability.

It is not the first time that sustainability throws the ACM into the limelight: in the 2015 Chicken of Tomorrow case, the ACM decided not to exempt an agreement aiming to improve animal welfare because it estimated consumers were not willing to shoulder the price increase. Emboldened by its follow-up study that animal welfare had improved in the wake of its decision, the ACM has transposed this ‘willingness-to-pay test’ to the Draft Guidelines. However, it also proposes an exception to this test for ‘environmental damage agreements’: by calculating ‘environmental prices’ that incorporate externalities like pollution or carbon emissions, the ACM would be able to analyse whether the cost of those agreements to consumers is offset by benefits for society.

The ACM should be lauded for formalising the importance of sustainability for its enforcement even if, as this post will discuss, some legal choices are off-key. The Draft Guidelines are not a token effort: the ACM offers to provide help in individual cases and will not impose fines in cases of good faith of compliance. The ACM’s caution against ‘greenwashing’ – the risk of cartels disguising as sustainability agreements – is also understandable. It is nevertheless worth questioning if cost-benefit frameworks like willingness-to-pay and environmental prices are the most appropriate tools available. EU law does not limit sustainability to such a narrow economic mandate, from the Charter of Fundamental Rights to the Treaties.

The ACM’s full legal competence thus deserves to be developed in the future guidelines. Sustainability can fall under Article 101(3) TFEU, as the Draft Guidelines advance, and as always undertakings must be required to substantiate benefits to consumers when they want to deviate from the competitive process. However, this framework becomes inadequate or superfluous outside the benefits to consumers mentioned in the Treaty. Precisely because of this, the Court of Justice of the EU (Court) has devised a public policy justification in Wouters. The omission of this case law from Draft Guidelines is hard to square with its intention to explore ‘Opportunities within competition law’ for sustainability initiatives.

Restriction of competition

The first opportunity explored by the Draft Guidelines is whether sustainability agreements may escape the qualification of restriction of competition under Article 101(1) TFEU. This is arguably more important in practice than obtaining an exemption under Article 101(3) TFEU: many sustainability initiatives are not even proposed or negotiated because contacts between competitors risk triggering the apparatus for sanctioning cartels. The Draft Guidelines are perhaps too aware of this, since they refer to Article 101(1) TFEU in general as ‘the cartel prohibition’. This is not correct since the prohibition is of restrictions by object or effect and cartels are only a kind of restriction by object. If sustainability agreements fell under a cartel prohibition, as the Draft Guidelines assert, the guidelines would become moot because cartels cannot be exempted under Article 101(3) TFEU (as they in principle fail the requirement of not eliminating significant competition).

Sustainability agreements are not cartels but can still be considered a restriction by object or effect. A cartel is a collusive arrangement aiming to undermine competition, often secret, which experience shows to harm consumers; sustainability agreements have a different objective and legal and economic context. That objective can also prove to be restrictive by object if it shows an anti-competitive purpose, but only if sustainability is a mere facade – greenwashing – could it qualify as a cartel (and not as a true sustainability agreement). Nevertheless, the Draft Guidelines attempt to draw a difference at sustainability concerning ‘less important competitive parameters’. This is neither true nor desirable: the main contribution of competition law is to foster intense competition on sustainability. Only when this is impractical should the non-application of competition rules in the Draft Guidelines be considered.

A restriction may be avoided, as the Draft Guidelines rightly note, when sustainability agreements improve quality, choice, and innovation. The Draft Guidelines identify categories of agreement which in principle lead to these improvements (non-binding sustainability targets, open standards, quality upgrades, resource-access or market creation, and foreign law compliance). Those categories are indeed unlikely to constitute a restriction by object but they cannot set aside a restriction by effect, which always depends on the factual situation and in particular the market power of the parties. For example, even non-binding and open standards may become de facto exclusionary if they represent a large segment of the market.

The Draft Guidelines could therefore discuss the circumstances in which sustainability agreements do not generate anti-competitive effects. The only standard provided is ‘not appreciable affect[ing]’ competition, which points towards the De Minimis Notice and its market shares of up to 10%. This low threshold is however for arrangements that, unlike sustainability agreements, do not generate positive effects. The Draft Guidelines set a market share of below of 30% for dispensing the quantification of benefits in order to facilitate the exemption of smaller sustainability initiatives under Article 101(3) TFEU, but market shares do not affect in any way whether consumers benefit nor make this calculation harder or easier. This 30% market share could instead be taken as an indication of no anti-competitive effects for sustainability agreements (as it is employed in block exemption regulations).

The Draft Guidelines could furthermore contemplate the ‘ancillary restraints’ doctrine, that is to say, allowing restrictions which make a pro-competitive agreement possible and are proportional. The Draft Guidelines state that an agreement ‘cannot exclude other market participants and products’, but exclusion may be necessary for certain agreements – the Draft Guidelines themselves provide a fictional example when compliance with foreign regulations excludes acquisitions outside a ‘green list’. Other important ancillary restraints are exchanges of information. Despite the Draft Guidelines’ concerns about disclosures of ‘sensible information’, sustainability agreements often require discussing production methods and product characteristics. They would therefore greatly benefit from an express reference in the guidelines to restrictions which are ancillary to the pursuit of their objectives.

Article 101(3) TFEU

Most of the Draft Guidelines are dedicated to the application of Article 101(3) TFEU, and are set out to contrast with the Article 101(3) TFEU Guidelines. The Commission guidelines were part of the ‘modernisation’ of enforcement which gave a leading role to economic analysis and adopted a consumer welfare goal (not coincidentally, what the Chicago School had achieved for US antitrust law). Until then Article 101(3) TFEU had been interpreted to cover a large range of interests, from consumer gains to social and environmental protection, but the Article 101(3) TFEU Guidelines narrowed it to efficiencies demonstrably benefiting consumers. The Draft Guidelines make an important mark by adopting a wide notion of sustainability, namely by including any initiative addressing the ‘negative impact of economic activities on people (including their working conditions), animals, the environment, or nature’.

According to the Draft Guidelines, the crux of Article 101(3) TFEU is the requirement of allowing a fair share of the benefit to consumers (which are referred to as ‘users’ in order to catch indirect and final consumers). The Draft Guidelines thus require quantifying the benefits of sustainability except when they are obvious or the agreement covers less than 30% of the market. This demand effectively backtracks on a wide notion of sustainability since, contrary to what is stated, a qualitative assessment of sustainability ceases to be enough (outside the two mentioned exceptions). However, the Draft Guidelines must require quantification because they use willingness-to-pay as the measure of benefits to consumers. This is basically the same as the Article 101(3) TFEU Guidelines.

The most relevant change in the Draft Guidelines is to also consider benefits to society, and not only to consumers, in relation to environmental damage agreements. Those agreements are defined as (i) addressing an ‘obvious environmental damage’, and (ii) helping to ‘comply with an international or national standard to prevent environmental damage to which the government is bound’. Despite this tight definition, the Draft Guidelines give environmental damage agreements a central place and relegate all remaining sustainability initiatives – including non-obvious or non-binding environmental benefits, labour conditions, and animal welfare – to ‘other sustainability agreements’.

There is an apparent enthusiasm in the Draft Guidelines for calculating environmental prices that incorporate environmental damage (or ‘shadow prices’ that include the costs of preventing the damage). This would allow a price increase to be ‘efficient’ if it is lower than the value of environmental benefits. Contrary to the rule in the Article 101(3) TFEU Guidelines that consumers must ‘at least’ be compensated for the restriction of competition, which the Draft Guidelines follow for other sustainability agreements, the ACM considers that consumers do not have to be fully compensated in environmental damage agreements. For the ACM, consumers already sufficiently benefit from those agreements as members of society.

The two fictional examples provided in the Draft Guidelines are illustrative. The first is an agreement on carbon reductions helping the Netherlands achieve its legal obligations. Environmental prices show that the benefits of this agreement are overall higher than the price increase. Consumers will only be partially compensated since they support the whole of the increase but, as 30% of the population, receive about a third of the benefits. The second example emulates the Chicken of Tomorrow case but for pigs, whereby an agreement improves their (unquantifiable) welfare. Consumers are also partially compensated because they value animal welfare as an improvement of quality but not enough to cover the price increase. The first agreement is considered to allow users a fair share of the benefit, the second not.

Harm or benefit

After rightly accepting a wide notion of sustainability, the opportunities for compliance set out in the Draft Guidelines feel underwhelming. The notions of restrictions by object or effects (including ancillary restraints) are not fully explored, and the majority of sustainability agreements are led into a willingness-to-pay dead-end. If there is demand for sustainability a competitive market will usually supply it. The exceptions where cooperation is objectively necessary to satisfy that demand (by setting up infrastructure or developing a new market) are unlikely restrictive to start with or fall under existing individual and block exemptions for efficient cooperation. The agreements that are left are those where consumers are unwilling to pay for sustainability. As the Chicken of Tomorrow case demonstrated, there is no need for sustainability guidelines if they follow the logic of benefits to consumers of the Commission guidance.

Environmental damage agreements are supposed to liberate sustainability from this constraint, but one cannot escape the impression that they were defined with economics in mind first and the law second. Just because environmental economics suggest they are efficient does not mean that competition law will accept them. Many practices that economists usually find efficient (price discrimination, non-recoupable predation, refusals to licence, excessive pricing, barriers to parallel trade) are considered anti-competitive. The Draft Guidelines make their task even harder by setting themselves against consumer welfare, the reason why economics can claim some identification with competition law to begin with.

As such, the Draft Guidelines are too cavalier about their interpretation of what may constitute ‘allowing consumers a fair share of the resulting benefits’ – a requirement which is written into the Treaties. The Article 101(3) TFEU Guidelines are not authentic interpretation, but they are mischaracterised as setting the standard at compensation: the idea is that consumers will normally benefit from the efficiencies, not even out. Watering this down even further to ‘partial compensation’ is rhetorical, since the most abusive monopolistic price still partially compensates consumers with the utility of the purchased good. The relevant question is whether consumers are ultimately harmed or benefited. The Draft Guidelines ask that consumers support the burden of controlling environmental damage, not that they should benefit from it.

No matter how fair it is to force consumers to internalise the harms they impose on society, this is unlikely to fall under a provision of the Treaties which expressly secures consumer interests. The Draft Guidelines make no effort to support their interpretation in the case law. However, even in judgments before modernisation there is no hint that consumers are to be worse off – on the contrary, if competition was to be weakened for other interests then consumers should not be on the losing side. Consumer benefit was understood differently back then, but in the single instance post-modernisation where the Court effectively interpreted Article 101(3) TFEU the benefits were still clearly directed towards consumers (increased credit availability and reduced indebtedness in Asnef-Equifax).

Although not as apparent, there is a greater problem for the legal coherence of Article 101(3) TFEU. A fair share to consumers is a single legal concept: it cannot demand full compensation in some cases and partial compensation in others. The definition of environmental damage agreements points towards the obligation incumbent on the Dutch state to address climate change, but national obligations cannot affect the interpretation of a concept of EU law. In contrast, the multiple obligations under the Treaties to address sustainability – which do not differentiate environmental damage from other sustainability – are ignored. Member State interests may of course justify a departure from EU rules, as examined next. The only reason given as a matter of Article 101(3) TFEU for the differentiated treatment of environmental damage agreements, however, is the ability to calculate environmental prices as a guarantee of their efficiency. This may appease cynics that see every initiative as potential greenwashing, but knowing the price of sustainability is not the same as valuing it.

A missed opportunity

In contrast to lack of recent Article 101(3) TFEU cases, the Court has considered public policy directly under Article 101(1) TFEU in what is now a long line of cases since Wouters. This case law adopts an internal market-style justification of open-ended ‘legitimate objectives’ subject to a proportionality test. Similarly to how this allowed environmental justifications in internal market law, it has long been argued that sustainability could fall under Wouters. The advantage over Article 101(3) TFEU would be to escape the logic of consumer benefit, as Wouters itself demonstrates: the prohibition by the Dutch Bar association of innovative legal services hurt consumers, but preserving the role of the legal profession in the judicial system was considered more important for society.

The ACM was criticised after the Chicken of Tomorrow case for not resorting to Wouters. As referred at the outset, it has now responded with a study that animal welfare has improved after its decision. There is a sense of vindication but the study also highlights the deficiencies of the ACM’s decision. The decision’s main finding was that consumers were unwilling to pay for the improvements in chicken welfare, but it turns out that consumers pay even more for even higher standards. To the ACM this is a triumph of letting competition run its course. However, as the study admits, there is no indication that the same result would not have been achieved had the agreement been exempted. All that it would require – as the Draft Guidelines state for the market-wide agreements – would be for Chicken of Tomorrow not to restrict competition further on key competitive parameters, welfare in this case.

The wrong lessons seem to have been drawn from Chicken of Tomorrow. It is true that the agreement proved unnecessary to improve animal welfare, but this only confirms that competition in sustainability will achieve better results than coordination. The issue is that the decision failed to identify willingness-to-pay for these improvements one way or the other. This is a false positive of consumer harm that, as is well understood, disincentives legal behaviour – a worrying sign for sustainability. A study of Chicken of Tomorrow should have therefore focused on the process generating this error rather than the market outcome. It would find that the Article 101(3) Guidelines are notoriously hard to satisfy, the Commission not having issued a single exemption applying these guidelines. A willingness-to-pay test does not favour public policy, since changes to background conditions and consumer preferences do not immediate or perceivably translate into price improvements. To put it more simply: a willingness-to-pay test is biased towards the status quo, which is the opposite of sustainability.

In light of this, it is surprising that the Draft Guidelines chose to rely on Article 101(3) TFEU and not Wouters. This case law is not even considered, which is again of doubtful compatibility with EU law. Regardless, from a practical point of view, Wouters presents a solution to the problems identified so far: the bias of willingness-to-pay, its inadequacy for sustainability agreements, and the legality of environmental damage agreements. Befitting its public policy nature, Wouters is not intended to block legitimate objectives but to ensure they are proportional, i.e. adequate and not going beyond what is necessary. This has always included protection against disguised restrictions, which would prevent greenwashing in relation to sustainability.

The future guidelines could therefore provide a decisive contribution to interpreting Wouters. This is without prejudice to assessing willingness-to-pay under Article 101(3) TFEU for agreements intending to satisfy consumer demand, as long as all other sustainability agreements are checked against Wouters – including qualitative benefits and addressing environmental damage. If this had been done for Chicken of Tomorrow, proportionality would have preserved competition for higher welfare standards while achieving the current minimum conditions earlier. As for environmental damage agreements, proportionality is open to all objective evidence including environmental prices. These prices could prove instrumental in determining if sustainability is adequately pursued and for ensuring consumers are not unnecessarily harmed. Nonetheless, considering the unfamiliarity with this method and the risk of false positives of harm by miscalculation of environmental benefits, a proportionality judgment is more appropriate than a strict cost-benefit analysis.

Conclusion

In summary, the Draft Guidelines would benefit from the following adjustments:

1.      Instead of using a market share below 30% market for dispensing the quantification of consumer benefits, using this threshold to indicate the absence of a restriction by effect.

2.      Expressly allowing contact and exchanges of information ancillary to sustainability agreements, and not ruling out ancillary exclusion.

3.      Confirming that sustainability agreements outside Article 101(3) TFEU, namely qualitative improvements and addressing environmental damage, can still be   justified when pursuing a legitimate objective.

4.      Providing guidance on the proportionality test of legitimate objectives, notably:

• • Preserving competition on sustainability parameters;
  • Excluding cartels disguised as sustainability initiatives;
  • Whether imposing a cost on consumers may be adequate and not go beyond what is necessary to achieve sustainability benefits.