With that in mind The Competition and Markets Authority ('CMA') published new Green Agreements Guidance outlining how they will approach competition law issues where agreements between businesses have the purpose of environmental sustainability or to take action on climate change. This article summarises the guidance and our key takeaways from the new guidance.
Chapter 1 Competition Act 1998 broadly prohibits agreements from preventing, restricting or distorting competition in the UK – whether they do so by object (they have the purpose of doing so) or by effect (they do not necessarily have such purpose, but do impact competition). One well-known example of a breach is price fixing, where purchase or selling prices are fixed by separate businesses. This prohibition leaves business concerned about how and when they can collaborate with competitors, and what can and what cannot be said. Across the EU this has been an area of considerable confusion and stifling potential collaborations throughout the circular economy, including the famous chicken of tomorrow example in the Netherlands.
The CMA's Green Agreements Guidance, published on 12 October, makes clear that the CMA do not want this Chapter 1 prohibition to "impede legitimate collaboration between businesses that is necessary for the promotion or protection of environmental sustainability". This recognises that in the fight for a more sustainable economy and world, collaboration is key, but that UK businesses may be put off collaboration if there is a risk that they will breach competition law.
ESG, sustainability claims, enforcement
Our first key takeaway is that if an agreement covers broader societal objectives (improving working conditions, the 'S' in ESG, instead of the 'E'), it is outside the guidance scope.
Our second key takeaway, as flagged by the CMA, is that you still need to consider non-competition law compliance when collaborating on sustainability. If, for example, multiple manufacturers develop between them a label indicating a product meets certain standards, these manufacturers would still need to ensure the labels are not misleading or 'greenwashing' even if there is no Chapter 1 breach.
Our last key takeaway is enforcement. The CMA say they do not expect to take action where agreements align with the guidance principles, so it should be considered if you are entering an agreement which has both sustainable purpose and the potential to be anti-competitive.
Why is collaboration important?
The CMA want to help businesses take action on climate change and environmental sustainability "without undue fear of breaching competition law". The guidance recognises that businesses might be put off sustainable innovation by a 'first-mover disadvantage'. If it is more costly to purchase sustainable materials, why would a business put only itself at a price disadvantage by doing so?
The CMA also recognise that collaborating on sustainability can mean collecting individual resources together to more easily or quickly improve sustainable outcomes, and duplication can be reduced.
The guidance overall recognises that if businesses want to work together for a sustainable purpose (and not with a purpose of distorting market competition), competition law should not be a barrier.
What does the guidance cover?
The guidance covers:
- Environmental sustainability agreements: "agreements between competitors which are aimed at preventing, reducing or mitigating the adverse impact that economic activities have on the environment or assist with the transition towards environmental sustainability". An example given is an agreement between fashion manufacturers to stop using certain fabrics that contribute to microplastic pollution in water.
- Climate change agreements: "sub-set of environmental sustainability agreements… covers agreements which contribute to combating climate change. Such agreements will typically reduce the negative externalities arising from greenhouse gases, such as carbon dioxide and methane, emitted from the production, distribution or consumption of goods and services". An example is an agreement between delivery companies to switch to electric vehicles.
When collaborating with others you should first consider if a proposed agreement (which does not have to be written down) is likely to be one of the above.
Though the guidance does not give business a free pass to make agreements which distort competition as long as there is a sustainable or climate change element, it does provide guidelines on the approach the CMA is likely to take.
Unlikely to infringe, could infringe, or could be exempt from Chapter 1 prohibition
The guidance covers three broad situations. First is agreements unlikely to infringe the Chapter 1 prohibition. These fall outside the prohibition anyway either because they don't relate to the way businesses compete or may compete, or don't have an appreciable adverse effect on competition. Examples given are where the parties have a small combined market share (as long as the agreement does not have the object of distorting competition), or because the agreement does not impact the main competition parameters such as price, quantity, quality, choice or innovation.
Second the CMA consider agreements which could infringe the Chapter 1 prohibition because they have the object or effect of restricting competition (unless they are ancillary restraints or benefit from an exemption).
- Object: The CMA warn caution should be taken where agreements involve price fixing, market or customer allocation, limitations of output or of quality / innovation, as this likely has the object of restricting competition. There could be no breach if the object is an ancillary restraint to the main agreement, but you should always consider if such restraint is necessary and proportionate.
- Effect: Even if your agreement does not restrict competition by object, you should consider if it has appreciable negative effect on competition. The guidance lists factors to be considered such as market power, the ability of others to participate, and the impact on price.
Lastly, the CMA considers agreements which could be exempt. These agreements fall within the prohibition but are exempt as the benefits outweigh competitive harm. The four conditions for exemption are:
- Condition 1: agreement must contribute to certain benefits, namely improving production or distribution or contribute to promoting technical or economic progress. An example given is the reduction of greenhouse gas emissions, but it is noted that the benefit and harm considered is that felt by UK consumers;
- Condition 2: the agreement and any restrictions of competition within the agreement must be indispensable to the achievement of those benefits;
- Condition 3: consumers must receive a fair share of the benefits, and the benefits must be substantial and demonstrable; and
- Condition 4: the agreement must not eliminate competition in respect of a substantial part of the products concerned.
In the same way that you cannot advertise a claim to consumers without substantiating it, you must substantiate that a benefit is felt.
Assessing the benefits in climate change agreements
In assessing condition 3 the general principle is that the assessment of harm and benefit should be for the same set of consumers, but a broader approach is taken for climate change agreements due to the exceptional nature of the harms posed by climate change.
If you have any questions or would like to discuss sustainability and how your business can stay ahead of the regulation, please get in touch with Dominic.Watkins@dwf.law or Kirsty.Poots@dwf.law
