The positive impact of last month’s announcement that the European Commission will provide agricultural firms with clarifications on how they can cooperate to promote sustainability without falling foul of antitrust rules was unfortunately diluted by the fact that this won’t happen until the end of 2022.
At a time when collaboration in food sector supply chains has been essential to unblock bottlenecks and serve consumers in a global emergency (and facilitated by many antitrust agencies including the Commission), that 2022 target seems woefully unambitious.
This blogpost tries to restore some positivity – setting out ideas on what companies (in any sector) can do to ensure that antitrust concerns do not obstruct legitimate sustainability projects with competitors.
Why competition laws might apply to sustainability initiatives between competitors
As sustainability becomes a Board-level issue, many companies are looking to ensure that their supply chains are environmentally and ethically accountable, from sourcing and production, through distribution and packaging, to disposal. The motivation for companies to engage in sustainability activities may come from the internal business, consumer, government, and shareholders—or all of them.
A lot of the time, companies can pursue these goals on their own. For example, in markets where there is fierce competition to sell differentiated products to well-informed consumers, companies may be able to compete in terms of the sustainability of their offering. Sustainability becomes a parameter of competition.
But a company cannot always ‘move the needle’ on their own. A joint initiative may be needed to achieve change on a scale which would be impossible for a company to achieve on its own. Combined efforts across an industry also avoid the ‘first mover disadvantage’ which can arise if a company could not switch to, say, more environmentally-friendly (but more costly) products or processes without losing market share. Even the most efficient and ethical company may know that it will lose customers to competitors who are not meeting the higher standard.
It is the prospect of competitors working together that can raise issues under global competition/antitrust laws. These rules catch agreements between competitors which may affect prices, customers, output, quality etc. The net is cast wide because the law is usually focused on where an arrangement is likely to have an effect, rather than simply where the parties are located. So an agreement between competitors to pay a minimum price to African farmers or to eliminate certain products in Asia from the supply chain may fall within the scope of antitrust laws of countries in those regions but also in the countries where the products are subsequently sold.
Of course, not every agreement between competitors is going to create an issue under antitrust rules. For example, loose commitments to contribute to the attainment of a sector-wide environmental target or agreements which relate to a product or process which is only marginal for influencing the buyers' purchase decision should not raise antitrust concerns.
But, in truth, some sustainability projects are going to increase costs and, even in a competitive environment, these might be passed down the supply chain meaning that consumers pay more for the more sustainable products. It is important to understand that laudable, social objectives (and even Government knowledge/encouragement) will not in themselves insulate companies from the application of antitrust laws. Getting it wrong has major consequences. In serious cases, companies can be fined and sued, receive terrible PR (where they might be accused of ‘greenwash’) and also need to devote significant time and resources to defending themselves.
It is well known that antitrust law (or the perception of it) can get in the way of legitimate projects focussed on more sustainable outcomes and that this can be a frustration. So this blogpost considers when the issues might arise and how to deal with them so as to avoid undue antitrust scrutiny, focussing on:
- Standards and benchmarking which are common ways for companies to drive more sustainable/ethical outcomes
- The very real risk that, over time, discussions can stray from legitimate topics into illegal territory, such as prices and how to ensure market stability
- How to mitigate the risks when a sustainability initiative might have widespread price effects
Standard setting and information exchange
An industry ‘standard’ can cover any and every part of the supply chain. Standards might cover how workers are paid, which inputs can be used, manufacturing methods and can even play a role in making recycling more efficient.
There are clear benefits to standards and many will not raise antitrust issues. However, companies need to make sure that standards are not developed in a way which disadvantages or excludes (i.e. boycotts) others. The standard setting procedures and the governance provisions should therefore be studied very carefully. In broad terms, antitrust risks can be reduced by adopting a voluntary standard which companies are free to exceed. Participation in the standard-setting process should be as unrestricted as possible and the rules governing membership and voting rights and should be objective and applied impartially.
A related risk comes from the fact that companies engaged in sustainability initiatives often need to share information. For example, in the standard-setting context, an industry group is likely to want to calculate the volumes that have been produced/sold under a new ‘ecolabel’. Companies may also want to work together to pass on best practices to help smaller firms in difficult economic or environmental circumstances higher up the supply chain.
Antitrust agencies recognize the potential efficiencies of information exchange. Efforts by industry members to share best practices are unlikely to raise antitrust concerns. When it comes to volumes, provided there is a legitimate reason for sharing information (e.g., to show that extra volumes being produced on a more sustainable basis) there is bound to be a way to achieve this. For example, a third party might be used to aggregate the volume figures supplied. Provided a sufficient number of firms are involved so that no one contributor is able to reverse engineer information about its competitors, there is no antitrust worry.
Scope-creep and straying into illegal territory
It goes without saying that cartels masquerading as sustainability initiatives will be dealt with very harshly by antitrust agencies. But these cases are rare. Instead, a more commonly seen pitfall is that employees get carried away. They might start off focusing on legitimate areas and topics but then – perhaps desensitized by the long term nature of the project and the frequent competitor contacts – start to discuss things which are unrelated to the sustainability initiative. There have, for example, been cases where discussions about a legitimate initiative turned to price discussions as competitors tried to make sure that none of them would use the environmental initiative to gain a competitive advantage over the others. Discussions on how to pass on the costs of new standards etc. could be treated as serious antitrust violations. These kinds of violations are reminder of the need to implement clear compliance safeguards even when a project is initially uncontroversial.
In-between cases – that tricky category…
A challenge for companies and their advisers lies in deciding how to approach projects which sit somewhere on the continuum between the extremes above: projects which are not ‘cartels in disguise’ and yet which might increase costs even though the companies clearly seek positive societal benefits and not just extra revenue.
These are the hardest category since companies and their advisers will often need to weigh up the pros and cons and, unless they are able to obtain some kind of reassurance or guidance from relevant antitrust agencies, run the risk that agency may ultimately take a different view (or that another agency might intervene following a complaint).
The challenge is made harder because qualitative benefits are harder to quantify or may be more uncertain, for example, because they will only arise in the longer term (even for the next generation of consumers). Regrettably, companies might conclude that short term antitrust scrutiny is more certain than generating environmental and commercial benefits.
There are no easy answers for this category of projects and the legal assessment will always be fact and jurisdiction-specific but the following tips should help to mitigate the risk:
- Make sure that those responsible for corporate sustainability initiatives (such as Sustainability Managers/Directors) are linked up with in-house antitrust counsel so that there are no surprises down the line. Training may be needed to remind committed employees that good intentions (or even Government knowledge/involvement) may not insulate the company from antitrust risks
- Focus on why an arrangement has to be carried out by competitors working together: what is it about the project (in terms of risk and cost) which means that it could not be achieved in some less restrictive manner? Why is the competitor cooperation indispensable in other words? Have other options been considered and rejected for principled reasons?
- Make sure that there is as much room for competition as possible – e.g. if there is some kind of standard or commitment to an industry target, then try to keep as much latitude as possible for companies to decide independently how they will meet that standard or target
- Try to identify and hopefully quantify the benefits of the initiative as well as who will benefit and when
- Ensure that each initiative has a compliance programme which will cover information exchange safeguards and, if necessary, the use of a third party to avoid the sharing of competitively sensitive information. Training will be needed too. Keep a close eye on the project to avoid ‘scope creep’ which can lead to unforeseen risks and discussions.
- Consider the pros and cons of approaching a Government body and/or antitrust agency about a contemplated project. That is unlikely to provide cast -iron guarantees worldwide but may be a good option where major investments are contemplated.
Don’t let antitrust get in the way unnecessarily
So to conclude… sustainability initiatives involving competitors can certainly raise antitrust issues. But the good news is that there are steps which can be taken to ensure that antitrust laws do not stand in the way of legitimate goals. That point seems particularly important when companies are seeking to partner in the wider public interest.
Agricultural firms are set to receive clarifications from the European Commission on how they can cooperate to promote sustainability without falling foul of antitrust rules, according to the EU’s “Farm to Fork” strategy published today. The clarification of the rules “with regard to sustainability in collective actions” is planned for the third quarter of 2022, the commission’s communication document says.