Cooperation, sustainability and competition law

What is the scope for cooperation between competitors in promoting sustainability and combatting climate change? 

General prohibition

Companies in the same sector often consider cooperating with one another. However, there is a risk that where competitors collaborate this can lead to a reduction of competition between them. This is a problem as agreements that prevent, restrict or distort competition are prohibited by competition law.

Infringements of competition law can lead to fines of up to 10% of turnover, agreements being void and unenforceable, actions for damages by third parties and Director disqualifications as well as negative reputational consequences.

In addition, cartels, the most serious competition infringements, can be criminal and can lead to fines or imprisonment.

Exemption

Competition authorities accept that cooperation between competitors can overall provide economic benefits which benefit consumers. Such agreements can be exempt from the general competition law prohibition against anti-competitive agreements.

The Competition and Markets Authority (“CMA”) has recently published two draft Guidelines setting out how agreements between actual and potential competitors should be assessed in a range of different circumstances. The key element of these relates to when agreements qualify for exemption.

Agreements must meet the following criteria for exemption:

• contributing to improving production or distribution or promoting technical or economic progress;
• not containing any restrictions which are not indispensable to the achievement of these benefits;
• consumers of the relevant products or services must receive a fair share of the benefits; and
• the agreement must not eliminate competition in respect of a substantial part of the products concerned.

The main draft Guidance covers Horizontal agreements in general, dealing with the standard range of agreements between competitors, including: R&D agreements, specialisation agreements, commercialisation agreements, etc.

However, due to the recognised importance of sustainability and combatting climate change and the fact that achieving these may well require greater cooperation between competitors the CMA has produced specific draft Guidance for agreements that go to achieving these objectives.

This draft Guidance relates specifically to:

• Environmental sustainability agreements: agreements aimed at preventing, reducing or mitigating the adverse impact that economic activities have on environmental sustainability or assessing the impact of their activities on environmental sustainability; and
• Climate change agreements: a subset of environmental sustainability agreements that contribute to the UK’s binding climate change targets under domestic or international law.

There are two key points to highlight about the draft Guidance:

• contrary to the CMA’s general practice, it will be willing to provide informal guidance to parties entering into environmental sustainability agreements which will provide the parties with a degree of comfort around enforcement and fines; and
• while sustainability agreements in general do not qualify for any special treatment, for climate change agreements, benefits to consumers are not limited to benefits to customers of the products or services in question. This significantly broadens out a key aspect of the exemption criteria which makes the criteria easier to achieve.

Conclusion

The CMA recognises that Guidance is necessary because businesses can be unnecessarily or mistakenly deterred from lawfully cooperating or collaborating to promote environmental sustainability out of fear of breaching competition rules. It also recognises that industry collaboration is likely to be necessary to meet the UK’s binding international commitments and legislative obligations to achieve a net zero economy, and to play an essential part in delivering the UK’s net zero ambitions.

However, the CMA is also very suspicious of ‘greenwashing’. For example, following on from its introduction of the Green Claims Code, the CMA is currently carrying out an investigation into how products and services claiming to be ‘eco-friendly’ are being marketed, and whether consumers could be being misled.

Therefore, companies looking to collaborate in ways that might reduce competition will need to carefully consider the likely effect on competition of any coordination and the beneficial economic benefits and consumer benefits. The stronger this analysis prior to implementation, the stronger the arguments those involved will have that they should benefit from exemption and not be subject to sanctions. Companies should therefore seek legal (and potentially economic and environmental) advice before entering into such agreements, to help manage the risks of non-compliance with competition law.

We advise companies on all aspects of competition law including cooperating and collaborating with competitors on environmental sustainability in a legally compliant manner. If you would like to discuss competition law or any of the issues raised in this article, please contact Noel Beale, Partner, on noel.beale@michelmores.com.