Johannes Hertfelder Daniela Drixler September 19 2022 Sustainability agreements: good for the environment, bad for competition? Gleiss Lutz | Environment & Climate Change - Germany Johannes Hertfelder, Daniela Drixler Environment & Climate Change What are sustainability agreements?Existing guidance on sustainability agreements in GermanyRecent practice of Federal Cartel OfficeCommentIn recent years, calls for guidelines on the assessment of sustainability agreements under antitrust law have increased. The Federal Cartel Office has so far examined such cooperations on a case-by-case basis, without committing itself to a comprehensive catalogue of criteria. This article provides an overview of sustainability agreements from an EU perspective, and then outlines the Federal Cartel Office's current practice in this regard.What are sustainability agreements?On 1 March 2022, the Commission published a revised draft of the Guidelines on Horizontal Cooperation Agreements. The draft guidelines include an entire chapter on sustainability agreements, which the European Commission defines as agreements between competitors that pursue one or more sustainability objectives, such as:the fight against climate change;the prevention of pollution;limiting the use of natural resources;respect for the use of natural resources;respect for human rights;reducing food waste; orensuring animal welfare.The Commission sees a need to conclude sustainability agreements where the market fails due to negative externalities, such as the air pollution caused by the energy-intensive production of steel products. When such negative effects on the environment are not adequately taken into account by the economic actors or consumers who cause them, and there are no legal regulations on pricing, there is a need to conclude sustainability agreements.The Commission clarifies that sustainability agreements – like any other form of horizontal agreement between competitors – must be measured against the principle of article 101(1) of the Treaty on the Functioning of the European Union (TFEU). The Commission expressly emphasises that the pursuit of sustainability goals alone does not eliminate the existence of a restriction of competition. If the sustainability agreement restricts competition, the conditions for exemption under article 101(3) of the TFEU must be fulfilled.Existing guidance on sustainability agreements in GermanyAt the end of 2020, the Federal Cartel Office published a paper entitled "Open markets and sustainable economic activity – Public interest objectives as a challenge for antitrust practice". In it, the Federal Cartel Office described in detail the economic background of market failures in the context of environmentally harmful externalities and pointed out that, in such cases, cooperation between competitors may be necessary.In describing the antitrust challenges in connection with sustainability agreements, however, the Federal Cartel Office only referred to the requirements and limits of article 101(3) of the TFEU, without making any concrete proposals for solutions. More practical advice can be found in the Federal Cartel Office's 2021-2022 annual report, in which the Federal Cartel Office formulated the following questions to assess sustainability agreements within the framework of the cartel prohibition:How strong are the restraints on competition – for example, due to an alignment of cost components?Does this have an effect on sales prices?Is there non-discriminatory access to the cooperation?Were the sustainability criteria developed in an open manner?Is there sufficient transparency for consumers?Although these criteria have a certain guiding function, they nevertheless leave a lot of room for interpretation.The Federal Cartel Office is currently examining sustainability agreements as part of its review of its scope for action, and a decision on the admissibility of sustainability agreements has not yet been made. This has the advantage of greater flexibility, but it also creates a considerable degree of legal uncertainty. As the Federal Cartel Office's most recent case practice shows, it is often a question of value that decides whether the Federal Cartel Office will tolerate or prohibit a sustainability agreement.Recent practice of Federal Cartel OfficeIn 2022 alone, the Federal Cartel Office has already taken a stand on various sustainability initiatives, four of which are briefly described and classified below.Stabilisation of basic milk priceRepresentatives of German milk producers wanted to increase the uniform basic milk price as part of a joint base price. The milk producers justified the plan by arguing that the initiative could help finance the transformation of domestic agriculture. The Federal Cartel Office could not identify any sustainability goals in the agreement and therefore rejected the proposal on the grounds of antitrust.The Federal Cartel Office pointed out that it was possible, in principle, to conclude sustainability agreements that lead to positive effects along the supply chain. However, this is not the case where the objective of price agreements is to generate a higher level of income. The higher prices would only burden the consumer, without any apparent sustainability gains.Living wages for banana producersThe Federal Cartel Office, however, expressed no concerns in connection with a voluntary self-commitment of the food retail trade with regard to common standards for living wages in the banana sector. The aim of the initiative by food retailers and the German Society for International Cooperation is to ensure living wages along the supply chain against the backdrop of the imminent entry into force of the Supply Chain Act. The voluntary standards include the joint introduction of responsible procurement practices and the development of processes to monitor transparent wages. The sales volume of own-brand bananas whose producers receive living wages is to be gradually increased. However, there is to be no exchange on purchase prices, production quantities or margins and other costs. Finally, there is no provision for mandatory minimum prices or price surcharges.Animal welfare initiativeThis sustainability agreement has been known to the Federal Cartel Office for several years. It consists of an industry alliance between the agriculture, meat and food retail industries. The original aim of the initiative was to pay a uniform price premium to pork and poultry suppliers that fulfil certain animal welfare criteria (known as the "animal welfare fee").The Federal Cartel Office has pointed out that this practice is only possible if non-discriminatory and voluntary access is ensured for the participating companies. The agricultural enterprise must be free to choose a certifier to monitor the implementation of the measures itself. It must also be ensured that no competition-relevant information is exchanged between the companies involved at their respective market levels. The Federal Cartel Office additionally specified that the end consumer must be able to see on the product which animal welfare criteria it fulfils.The initiative is now planning to introduce the same structure for the cattle fattening sector. According to the Federal Cartel Office, the exact labelling of the products is again important. With regard to the financing model, however, the previous uniform animal welfare fee that has been paid up to now must be changed. This had only been tolerated for a transitional phase; competitive elements must be introduced from 2024. Instead of a uniform mark-up, for example, the remuneration of animal welfare costs for calves could be considered.Interbranch agreement on milkThe Federal Cartel Office's latest assessment concerned an initiative relating to animal welfare in milk production. The aim of the initiative is to introduce labels for products that meet certain animal welfare criteria. In addition, the additional costs incurred for such animal welfare measures will be financed by means of an animal welfare surcharge for producers. Participation is open to farmers' associations, the dairy industry and the food retail trade.The Federal Cartel Office has accepted the introduction of the animal welfare surcharge. It justifies this on the grounds that there are many different competing milk companies, and that there is lively competition between them. Moreover, only some of the dairies are active in the certification programme. However, the Federal Cartel Office limited the initiative to the effect that the animal welfare surcharge could initially only be applied until 2024, after which it would be necessary to evaluate the extent to which additional competitive elements could be introduced.CommentThe Federal Cartel Office's most recent case practice shows various sustainability initiatives have been accepted within the known limits of cartel law. While pure price agreements are not allowed, the voluntary commitments of the animal welfare initiative and the interbranch agreement on milk are forms of standardisation which, in principle, fulfil the known conditions for admissibility.Since the sustainability initiatives described above are individual cases and because a guiding catalogue of criteria is still lacking, it is likely to be difficult for companies to legally secure future sustainability agreements on the basis of the current case practice. This is shown, for example, by the different assessment of the Federal Cartel Office with regard to the animal welfare initiative on the one hand and the animal welfare surcharge of the interbranch agreement on milk on the other. The introduction of such a price component goes beyond the agreement of a common standard and therefore raises competition concerns. While the Federal Cartel Office did not support the price mark-up in the animal welfare initiative anymore due to the lack of pioneering nature of the project, it tolerated the animal welfare surcharge in the milk agreement on the grounds of lively competition in the milk sector. The exact demarcation of when potentially competition-restricting elements in sustainability agreements can no longer be tolerated is difficult. This applies to aspects such as surcharges or minimum purchase prices.It should be noted that certain criteria for the permissibility of sustainability criteria can be identified, such as those set out in the Federal Cartel Office's 2020-2021 annual report, Nevertheless, it is clear that the Federal Cartel Office's practice is tailored to individual cases. A more in-depth legal examination by the Federal Cartel Office of the classification of sustainability agreements under the structure of article 101 of the TFEU and sections 1 and 2 of the Competition Act has not yet taken place. This is not least due to the fact that the Federal Cartel Office has only ever expressed its concerns before proceedings are initiated. There is therefore a lack of legal certainty and legal clarity for committed companies.For further information on this topic please contact Johannes Hertfelder or Daniela Drixler at Gleiss Lutz by telephone (+49 711 8997 0) or email ([email protected] or [email protected]). The Gleiss Lutz website can be accessed at www.gleisslutz.com.