In February, the Competition and Markets Authority (“CMA”) published its long-awaited draft guidance on the application of UK antitrust law to sustainability agreements (the “Guidance”). The Guidance aims to provide greater legal certainty around the circumstances in which legitimate industry collaboration to address environmental sustainability issues, including climate change, can take place.
The Guidance is based around the concept of ‘environmental sustainability agreements’ (“ESAs”), defined as ‘agreements or concerted practices between competitors and potential competitors which are 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’.
Within ESAs, the Guidance also identifies a sub-set of ‘climate change agreements’, namely those that contribute towards the UK’s binding climate change targets under domestic or international law. The Guidance considers the application of UK competition law to ESAs, in particular the prohibition on anti-competitive agreements under Chapter I of the Competition Act 1998 (the “Chapter I Prohibition”).
Which ESAs could infringe the Chapter I Prohibition?
The Guidance sets out types of ESAs which are unlikely to infringe the Chapter I Prohibition e.g. agreements which allow the parties to achieve something jointly which they could not do individually; or agreements that establish industry-wide efforts or standards to tackle climate change. We would expect that very many ESAs will generally fall outside the Chapter I Prohibition because they don’t relate to the way companies compete with each other (or don’t have an appreciable adverse effect on competition).
In contrast, ESAs with the 'object’ of restricting competition or which could have an appreciably adverse effect on competition (which we would generally expect to be the smaller proportion) could risk infringing the Chapter I Prohibition unless they can benefit from an exemption from this prohibition. Such agreements could include, for example, agreements that set the price at which products meeting an agreed environmental standard are sold.
Exemptions for ESAs that might otherwise restrict competition
In order for an ESA that has the object of restricting competition or may give rise to restrictive effects on competition to be exempt from the Chapter I Prohibition, it must fulfil four cumulative conditions:
- the ESA must contribute to certain benefits, namely improving production or distribution or contribute to promoting technical or economic progress;
- the ESA and any restrictions of competition within the ESA must be indispensable to the achievement of those benefits;
- consumers must receive a fair share of the benefits; and
- the ESA must not eliminate competition in respect of a substantial part of the products concerned.
The Guidance is helpful in setting out the CMA’s thinking about two features of this cumulative test in particular, namely the scope of relevant ‘benefits’ and the definition of ‘consumers’. In both cases, the CMA has adopted a broader definition – potentially therefore increasing the scope for ESAs to be considered exempt from the Chapter I Prohibition.
The Guidance notes that, in the context of environmental sustainability, it is not uncommon for benefits to be non-monetary in nature and / or to materialise in the longer-term future. The CMA will therefore consider both non-monetary and future benefits as relevant to its assessment of ESAs (alongside current and / or monetary benefits). Helpfully, the Guidance suggests a number of economic methodologies that can assist in the quantification of such benefits.
In general, when assessing whether consumers receive a fair share of the benefits of an ESA, the relevant ‘consumers’ for these purposes are the consumers of the products or services to which the agreement relates (e.g., the consumers within the relevant market). The cost to these consumers flowing from the agreement must generally be offset by the benefits they receive. In certain circumstances where there are two related markets, benefits achieved on separate markets can be taken into account, provided that the consumers affected by the restriction and receiving the benefit are substantially the same or substantially overlap.
But climate change agreements benefit from a more expansive approach to the definition of consumers. Specifically, the Guidance would allow the totality of the benefits accruing to all UK consumers arising from the agreement to be taken into account, rather than only those accruing to ‘in-market’ consumers (or those in a related market). The CMA has reiterated that the exceptional nature of the threat of climate change, and the related policy decisions of successive UK governments, justifies this exceptional approach. The CEO of the CMA has also cited the UK’s decision to leave the European Union as an opportunity to “go further than we have before in providing reassurance and clarity on our approach.”
Informal guidance and fining restrictions
The CMA encourages businesses considering entering into an ESA to approach the CMA for informal guidance, for example to seek clarity or comfort on how the guidance will be applied in specific circumstances or for recommendations on how the parties to a potential agreement could amend their proposal to (for example) bring it within the exemption criteria. The Guidance also explains that the CMA will not:
- take enforcement action against ESAs that clearly correspond to the examples in the finalised guidance (and are consistent with the principles contained within it); or
- issue fines against parties to an ESA that was discussed with the CMA in advance and where any competition concerns (if any) were addressed by the parties (so long as they did not withhold any relevant information from the CMA during its assessment that would have made a material difference to the analysis).
The CMA is consulting on the Guidance; the consultation closes at 5pm on 11 April 2023.