On 1 March, the European Commission (EC) issued draft replacement texts for its core documents on agreements between competitors – the Horizontal Guidelines, R&D and Specialisation block exemptions – for consultation. The consultation runs to 26 April.
The draft Horizontal Guidelines (Draft Guidelines) include significant changes in important areas including information exchange, sustainability initiatives, joint purchasing, joint bidding, and the treatment of joint ventures. Sadly, many of the changes appear not to be for the better (or not to go far enough). We highlight three areas of concern – information exchange, sustainability and joint purchasing – below, together with a potentially positive development in relation to joint ventures.
The changes to the block exemptions are more minor, and particularly in the case of the R&D block exemption represent a wasted opportunity to fix a problem document. We will consider the implications for R&D cooperation separately. This piece focuses on the Draft Guidelines.
Most if not all competitor collaborations give rise to some risk that commercial information will be exchanged between the parties. The legality of such exchanges is therefore a core concern. Unfortunately, the Draft Guidelines create additional uncertainty in an already difficult area. It does so in two ways.
First, the existing Horizontal Guidelines (Existing Guidelines) identify a relatively narrow set of circumstances in which information exchange will constitute an automatic, by object, infringement of competition rules. They identify the focus of concern as information relating to “future conduct regarding prices or quantities”.
This narrow language has been removed from the Draft Guidelines and replaced (at para 448) with language that, on its face, is very much wider:
“An information exchange will be considered a restriction by object when the information is commercially sensitive and the exchange is capable of removing uncertainty between participants as regards the timing, extent and details of the modifications to be adopted by the undertakings concerned in their conduct on the market”.
This language is potentially so broad that it is not obvious what commercially sensitive information competitors could exchange without risking an object infringement. As a result, many competitor interactions risk being tainted by automatic illegality due to information exchange risk.
The second key change increases this risk. The Existing Guidelines state (at para 56) that, where information is exchanged as part of a wider cooperation, the legality of the exchange must be assessed in the context of the overall arrangement. The clear implication is that the exchange of information will generally be lawful where it a necessary part of a wider pro-competitive collaboration. The Draft Guidelines remove this language and the comfort it provided. Instead, they state only that an exchange is “more likely to meet” the criteria for exemption if the information exchanged is limited to “what is necessary to enable the cooperation” (para 409). The implication is that, even where the exchange is necessary in the context of a wider cooperation, a separate assessment under the Art 101(3) exemption criteria is required.
Each individually problematic, the two changes are worse together, since as every competition lawyer knows, it is almost impossible to make a robust exemption argument in relation to an object infringement. In practice, therefore, the new draft threatens to condemn many if not most competitor collaborations to legal uncertainty.
The key issue for sustainability is how to apply the ‘fair share’ aspect of the exemption criteria under the Art 101(3). In a new section on sustainability agreements, the EC fudges the issue in a way that seems destined only to store up trouble.
The central problem in relation to sustainability is market failure resulting from negative externalities. For example, the fact that the driver of a petrol vehicle causes pollution that causes harm to others for which he does not have to pay. A solution that corrects this market failure will benefit society as a whole, but will also increase the driver’s costs.
If the solution involves some restriction of competition, an exemption under Art 101(3) will be required. Such exemption is available only if “consumers” receive a “fair share” of the benefits. If the term consumers is understood to mean all end consumers (i.e., all individuals) no problem arises. However, in the Draft Guidelines, the EC takes the (somewhat tortured) position that the term “consumers” means direct customers (specifically “consumers in the relevant market”, see para 600 et seq.). It follows that, where the driver is the direct consumer, any solution that increases his or her costs (i.e., one that corrects the market failure) cannot in principle qualify for exemption.
To solve this self-created problem, the EC proposes a fudge. If there is a “substantial overlap” between direct customers and the group that benefits from the solution, then the fair share requirement may be satisfied. At para 604, the draft Guidelines explain how this might operate on the basis of two hypothetical examples:
“For example, drivers purchasing less polluting fuel are also citizens who would benefit from cleaner air, if less polluting fuel is used. To the extent that a substantial overlap of consumers (the drivers in this example) and the beneficiaries (citizens) can be established, the sustainability benefits from cleaner air are in principle relevant for the assessment and can be taken into account if they are significant enough to compensate consumers in the relevant market for the harm suffered. Conversely, consumers may buy clothing made of sustainable cotton that reduces chemicals and water use on the land where it is cultivated. Such environmental benefits could in principle be taken into account as collective benefits. However, there is likely no substantial overlap between the consumers of the clothing and the beneficiaries of these environmental benefits that occur only in the area where the cotton is grown”.
On its face, this might seem a reasonable outcome. But consider two similar, but slightly different, scenarios. First, a less polluting but more expensive fuel for commercial trucks. Most consumers are not drivers of commercial trucks, does that mean that exemption is (or should be) precluded? Second, sustainable ornamental house plants grown in Slovenia exclusively for high end consumers in Germany. Are the environmental benefits to EU citizens in Slovenia irrelevant under Art 101(3)? The correct answer is surely that were a collaboration demonstrably benefits consumers as a whole (or at least consumers in the EEA) exemption should be available.
From a competition policy perspective, joint purchasing is an unusual form of competitor collaboration. The primary concern of a purchaser is to reduce the prices it pays and therefore to reduce its cost base. As a result, the expected first order effect of joint purchasing is to lower prices to downstream consumers. It is only where the collaborating parties have significant market power on the purchasing market (or where the collaboration extends beyond purchasing activities) that consumer harm through reduced output or innovation will occur, and only where the parties also have market power on the downstream selling market that lower prices may not be passed on to consumers.
These economic facts suggest that joint purchasing should be treated as an automatic, by object, infringement only where the parties have significant market power – or at least there is some threat of coordination in relation to downstream sale prices. The Existing Guidelines address this by indicating that joint purchasing is likely to constitute an object infringement where it “does not truly concern joint purchasing, but serves as a tool … [for] price fixing, output limitation or market allocation” (para 205).
The Draft Guidelines abandon this targeted approach, instead labelling as a “buying cartel” any arrangement that involves “coordination of purchase prices or parts thereof” or influences “purchaser’s individual negotiations” unless it also involves collective negotiation and conclusion of an agreement (para 316). In other words, a distinction is made between, on the one hand, potentially lawful arrangements that “truly concern joint purchasing” and, on the other, ‘naked’ coordination in relation to purchasing that is automatically unlawful.
Unfortunately, this distinction both economically unjustified and likely to call into question the legality of well-established and pro-competitive behaviour. For example, the exchange of cost data for benchmarking purposes. If such an exchange might affect the way that parties negotiate purchase prices (its purpose) this would appear to fall within the definition of a buying cartel (which expressly covers information exchanges, see para 318). By adopting an over-broad test for illegality that is divorced from any economic rationale, the EC risks having a substantial chilling effect on pro-competitive activity.
Finally, the draft Guidelines do offer the hope of real progress on an area of ongoing difficulty: how to assess agreements between joint ventures (JVs) and their parent companies. The current case law suggests that, on the one hand, JV parents are obliged to treat JVs as independent third parties when entering into agreements with them while, on the other and simultaneously, being liable to fines for their JV’s infringements on the basis that they form part of a single economic unit with their parent.
Paragraph 13 of the Draft Guidelines seeks to resolve this tension in favour of treating parent companies and their JVs as a single undertaking for almost all purposes, stating:
“parent companies and their joint venture form a single economic unit and, therefore, a single undertaking … in so far as it is demonstrated that the parent companies of a joint venture exercise decisive influence”.
Where this applies, the EC states that it will only seek to apply Art 101 to agreements between a parent and a JV to the extent they fall outside the JV’s existing product and geographic scope.
If it survives to the final document, this change would represent a substantial improvement over the current situation.
If implemented in their current form, the Draft Guidelines will represent a significant shake up of the EU rules in relation to competitor collaborations, and one that is likely to lead to significant uncertainty in relation to both new and existing projects. With luck, the issues outlined above will turn out to have been teething problems in an early draft that are fixed before the final document is adopted. But given that Draft Guidelines have emerged after a review process that was launched in July 2019, that would be an optimistic view. More likely then that businesses will increasingly need access to robust and well-informed legal advice in cases where cooperating with competitors is necessary.