The European Commission updates rules for cooperation between competitors
On March 1, 2022 , the European Commission published its draft revised Horizontal Block Exemption Regulations (HBERs) and Guidelines for Horizontal Cooperation Agreements (Guidelines ). The stated aim of the revision is to make it easier for companies to cooperate in economically desirable ways and contribute to the digital and green transition. The current HBERs are set to expire on December 31, 2022 and it is therefore to be expected that the final revised HBERs and Guidelines will be adopted before the end of this year.
Horizontal cooperation agreements, i.e., agreements between competitors operating at the same level of trade, can be pro-competitive. The HBERs cover research and development agreements (R&D BER) and specialization agreements (Specialization BER) and set out the conditions under which R&D and production cooperation agreements are presumed to comply with EU competition law, inter alia on the basis of market share thresholds (25% combined market share for R&D agreements; 20% for specialization agreements). In other words, the HBER s create a “safe harbor” for certain categories of agreements. The accompanying Guidelines provide guidance to companies to assess the compatibility with competition law of various forms of cooperation outside this safe harbor.
The draft new rules follow a review and evaluation process launched in September 2019. In May 2021, the Commission published a Staff Working Document setting out the results of the evaluation of the current HBERs and Guidelines (see also, the executive summary of the findings). The evaluation found that the HBERs and Guidelines met their overall objectives by facilitating economically desirable cooperation, providing legal certainty to companies and simplifying the administrative supervision by enforcers. However, the evaluation identified a number of areas where the current texts are considered to be not sufficiently clear, overly strict or otherwise difficult to interpret.
The draft revised texts now proposed by the Commission aim at addressing these issues by modernizing, streamlining and clarifying the rules.
As regards the HBERs, the following are the most important changes:
- Changes common to both the R&D and Specialization BERs: The revised texts propose simplifying the grace period which applies if market share increases above the safe harbor Specifically, market share will be calculated on the basis of the preceding calendar year or the average of the three preceding years, depending on the market (the current rules use only the preceding calendar year). The revised texts also add some new definitions and clarify existing ones. Notably, the definition of “potential competitors” is modified to remove the reference to a small but permanent increase in prices.
- Changes to the R&D BER: The revised text introduces the new concept of “competition in innovation”, which covers (1) R&D concerning entirely new products or technologies, i.e., which do not merely improve, substitute or replace existing products or technologies but rather create a separate, new market, and (2) “R&D poles”, i.e., R&D efforts oriented towards a specific objective but not yet specific in terms of product or technology. However, the draft R&D BER exempts “competition in innovation” agreements only where there are at least three competing R&D efforts in addition to and comparable with those of the parties to the R&D agreement. For R&D efforts to be considered “competing”, three conditions must be met: (i) the R&D efforts concerned must involve third parties who are independent from the parties to the R&D agreement; (ii) those third parties must already be engaged in the efforts, or be able and likely to independently engage in them; and (iii) the efforts must concern either R&D of the same or likely substitutable new products or technologies or R&D poles pursuing substantially the same aim or objective as the R&D agreement between the parties. In addition, the competing R&D efforts must be comparable in terms of size, stage and timing of the R&D project, the parties’ financial and human resources, their intellectual property, know-how or other specialized assets, and their capacity and likelihood to exploit, directly or indirectly, the possible results of their R&D efforts on the market. In practice , the fact that R&D efforts are typically confidential is likely to make it difficult for the parties to an R&D agreement to assess whether these conditions are in fact fulfilled.
- Changes to the Specialization BER: The specialization BER covers production cooperation agreements, including unilateral specialization agreements, reciprocal specialization agreements and joint production agreements. The revision slightly expands the scope of the exemption to explicitly include unilateral specialization agreements entered into by more than two parties.
As regards the Horizontal Guidelines, the most important changes can be summarized as follows:
- General: More guidance is provided regarding the determination of the “center of gravity” of horizontal cooperation agreements that involve different types of cooperation (e.g., both joint R&D and joint production of the results, or both specialization/joint production and joint commercialization of the products). According to the amended Guidelines, two factors are relevant here: first, the starting point of the cooperation, and, second, the degree of integration of the different functions which are combined. The center of gravity of a horizontal cooperation agreement involving both joint R&D and joint production will be the joint R&D if the joint production is to take place only if the joint R&D is successful. Conversely, if the joint production will take place regardless of the results of the joint R&D, the center of gravity will be the joint production. The center of gravity of a cooperation agreement involving both specialization/joint production and joint commercialization will normally be the specialization/joint production, as joint commercialization will only take place following successful cooperation in specialization/joint production.
- R&D agreements and production agreements: The revised draft Guidelines include new sections explaining the application of the HBERs, to help companies better understand the way they work and the concepts and definitions on which they are based. In addition, the chapter on production agreements now includes specific guidance on mobile infrastructure sharing agreements. For such agreements to be considered, prima facie, as being unlikely to have anticompetitive effects, the following minimum conditions must be met: (i) the operators involved must control and operate their own core network, and there must be no technical, contractual, financial or other disincentives that prevent the operators from individually and unilaterally deploying or upgrading infrastructure; (ii) the operators must maintain independent retail and wholesale operations; and (iii) they must not exchange more information than is strictly necessary for the mobile infrastructure to operate and appropriate barriers to information exchange (e.g., “Chinese walls” preventing disclosure to the parties’ commercial departments) must have been put in place. While passive infrastructure sharing is generally unlikely to restrict competition, active RAN sharing and, a fortiori, spectrum sharing agreements must be assessed more carefully.
- Joint Purchasing Agreements: The new Guidelines clarify that the chapter on joint purchasing applies to all sectors, and that joint negotiations (including those involving licensees of a standard essential patent license) are covered, as well as actual joint purchases. In addition, the distinction between joint purchasing arrangements and buyer cartels is clarified: in a buyer cartel, purchasers coordinate their behavior with regards to their individual interaction with the supplier, as opposed to negotiating collectively with the supplier. A buyer cartel may also arise when purchasers exchange commercially sensitive information about their individual purchasing intentions or negotiations with suppliers, outside any genuine joint purchasing arrangement that interacts collectively with suppliers on behalf of its members. The Guidelines set out a non-exhaustive list of factors to help undertakings assess whether the agreement to which they are party together with other purchasers, amounts to a buyer cartel. For instance, the joint purchasing agreement must make it clear to suppliers that it jointly negotiates with suppliers and binds its members to the suppliers’ terms and conditions. Moreover, the parties to the joint purchasing arrangement should define the form, scope and functioning of their cooperation in a written agreement so that the compliance of the arrangement with competition law can be verified ex post (however, the existence of a written agreement does not suffice by itself to shield the arrangement from competition law scrutiny).
- Commercialization agreements: The chapter on commercialization agreements now contains a specific section on bidding consortia. Bidding consortia are arrangements whereby two or more parties cooperate to submit a joint bid in a public or private tender. This should be distinguished from bid rigging, i.e., covert agreements between potential participants to coordinate their apparently individual participation in the tender process. Bid rigging, which is one of the most serious breaches of competition law, normally does not involve the submission of joint bids and can take various forms (e.g., agreeing on the content – and especially the price – of tenders, allocating the market based on geography, contracting authority or the subject of the tender, setting up a rotation scheme for submitting bids in successive procedures, etc.). Bidding consortia do not restrict competition if they allow the parties involved to participate in projects that they would not be able to undertake individually. In that case, the parties to the consortium are not potential competitors for implementing the project. However, a consortium agreement between parties that could have competed individually may restrict competition. Such an agreement may nevertheless be eligible for an exemption, because the parties’ joint participation allows them to submit a more competitive offer – e.g., in terms of price and quality – than they could have offered alone and those benefits outweigh the restrictive effect on competition.
- Information exchange: The chapter on information exchange between competitors now provides additional guidance on different types of information exchange, including data sharing and information exchange in the context of acquisitions. It clarifies various concepts relevant for self-assessment, such as “commercially sensitive information”, “genuinely public information”, “historic information”, etc., and it provides additional guidance on unilateral disclosure and indirect information exchange (including hub-and-spoke scenarios). Some types of information exchange are deemed “by object” restrictions of competition, i.e., they are presumed to be illegal and are unlikely to qualify for an individual exemption. The current Guidelines contain a narrow and relatively clear-cut definition of this “by object” category as regards information exchange: “information on companies’ individualized intentions concerning future conduct regarding prices or quantities”. The draft revised Guidelines contain a description that is considerably more vague : “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 new definition contains a tautology, as “commercially sensitive information” is itself defined as information that reduces uncertainty regarding competitors’ future (or recent) market conduct. Although the revised Guidelines contain a helpful (but non-exhaustive) list of what is to be considered “particularly sensitive” information, the revised definition of the “by object” category may increase legal uncertainty for undertakings conducting a self-assessment of their information exchange. Information exchange falling outside the “by object” category must be assessed for its restrictive effects on competition based on (i) the nature of the information exchanged (public/non-public, aggregated/individualized, historic/recent), (ii) the characteristics of the exchange (unilateral or not, direct or indirect, frequent or not), and (iii) the market characteristics (concentrated/fragmented, transparent, stable/volatile, etc.). Moreover, new sections in the Guidelines provide guidance on measures to control/limit how data is used, including discussion of clean teams and data pools. In cases where it is necessary to exchange sensitive information between competitors (e.g., in the context of a contemplated acquisition), it can be a solution to limit the exchange to clean teams, i.e., restricted groups of individuals not involved in the day-to-day commercial operations of an undertaking and bound by strict confidentiality protocols. Competitors can also participate in a data pool, whereby they have access only to their own information and aggregate information which does not allow them to infer company-level information of the other participants. The management of such a data pool can be entrusted to an independent third party, subject to strict confidentiality rules, who can ensure that only information necessary for the implementation of the legitimate purpose of the data pool is collected (e.g., for a benchmarking exercise in a particular industry).
- Standardization agreements: The existing chapter is split into two chapters – one on standardization agreements and one on standard terms. The chapter on standardization agreements proposes more flexibility in the effects analysis by allowing, under certain circumstances, a more limited participation in the development of a standard, and a requirement on participants for more specific disclosure of intellectual property rights (IPR) that might be essential for the implementation of the standard under development (considering that “blanket disclosures” without identifying specific IPR claims/applications should be the exception rather than the rule). The chapter also contains a statement that standard development agreements providing for ex ante disclosure of a maximum accumulated royalty rate by all IPR holders will not, in principle, restrict competition.
- New chapter on sustainability agreements: Sustainable development is one of the overarching objectives of the European Union. In line with the objectives of the European Green Deal, the draft Guidelines contain a new chapter on the assessment of horizontal agreements that pursue sustainability objectives, which devotes particular attention to sustainability standardization agreements (this is expected to be the most frequent form of cooperation in pursuing sustainability objectives). The text first stresses that competition law in itself already contributes to sustainable development, for instance, by promoting innovation and efficient allocation of resources. However, individual decisions by market participants may have negative externalities that can only be addressed by collective action. The chapter stresses the primary role of regulation and the complementary role of cooperation between undertakings to address such externalities and goes on to explain when agreements pursuing sustainability objectives may benefit from an exemption:
- Sustainability agreements will not restrict competition provided they do not affect parameters of competition such as price, quantity, quality, choice or innovation. This is, for instance, the case for agreements that merely concern the internal corporate conduct of undertakings (e.g., an agreement to eliminate all single-use plastics on business premises). If the agreement affects the parameters of competition, the fact that it genuinely pursues a sustainability objective may be taken into account in determining whether the restriction in question is a restriction “by object” (i.e., presumed illegal) or “by effect”. The Commission notes in this context that an agreement between competitors on how to translate increased costs resulting from the adoption of a sustainability standard into increased sale prices towards customers, or an agreement between the parties to adopt a sustainability standard in order to put pressure on third parties to refrain from marketing non-compliant products, restricts competition by object. The chapter also sets out criteria for the effects-based assessment of sustainability standardization agreements, outlining a “soft safe harbor” for agreements that fulfil certain conditions which aim to ensure that the agreement has no collusive or foreclosure effects. If these conditions are not met, it does not lead to a presumption of illegality, but it will be necessary to assess in detail whether the agreement has appreciable negative effects on competition. If it leads to a significant increase in price, or a reduction in output, product variety or innovation, the agreement’s eligibility for an exemption must be assessed.
- Sustainability agreements may benefit from an exemption in certain circumstances. In particular, the draft Guidelines indicate that sustainability benefits may be taken into account as efficiencies potentially outweighing the restrictive effects of an agreement. However, it is emphasized that such efficiencies must be substantiated and cannot be assumed, and should be objective and verifiable. Notably, the Commission maintains that any sustainability benefits must relate to the consumers of the product covered by the agreement, although it accepts that the concept of “consumers” encompasses all direct and indirect users of the products concerned. Sustainability benefits that are not related to the consumers in the relevant market, or that would not be significant enough to compensate for the harm done in the relevant market, cannot justify an exemption. The chapter contains detailed guidance on how to assess whether the sustainability benefits are indispensable to achieve the stated sustainability goals and if they are sufficiently related to the market’s consumers. The Commission distinguishes three types of benefits that can be taken into account in the assessment:
- Individual use value benefits, i.e., benefits that directly accrue to the product’s consumers (e.g., in the form of improved quality or a price decrease). For instance, the production of vegetables without pesticides or artificial fertilizers may result in healthier and tastier vegetables – which directly benefits the consumers of the vegetables. Alongside individual use value benefits, an agreement may also generate positive effects external to the product’s consumers (positive externalities). For instance, an agreement to reduce packaging may also reduce production and distribution costs and, ultimately, the price of the product to the consumer, while at the same time generating a positive externality in the form of reduced packaging waste and CO2
- Individual non-use value benefits, i.e., benefits that indirectly improve the consumers’ experience of the product, because the consumers value the beneficial impact of a sustainable product on others and are willing to pay extra for it. Such willingness to pay can be substantiated by customer surveys. For instance, consumers may be willing to pay a premium for furniture that is made of sustainably produced wood, not because it is of better quality or has other direct benefits for them, but because they want to stop deforestation and loss of natural habitats.
- Collective benefits, i.e., benefits that accrue to a wider group of persons or to society as a whole. However, the Commission stresses that such collective benefits can only be taken into account where there is a substantial overlap between the product’s consumers and the group receiving the benefits. For example, drivers purchasing less-polluting cars are also citizens who would benefit from cleaner air: to the extent that there is a substantial overlap between the consumers (the drivers in this example) and the beneficiaries (here, all citizens), such collective benefits are relevant to the assessment. In the absence of such overlap, the sustainability benefits cannot be taken into consideration as collective benefits. For instance, consumers who buy clothing made from sustainably produced cotton, reducing the use of chemicals and water on the land where it is produced, do not themselves benefit from these advantages. However, if the parties to the agreement can demonstrate that the consumers are willing to pay extra for these local environmental benefits, they can still count as individual non-use value benefits.
The chapter on sustainability agreements concludes by stating (or recalling) that the involvement of public authorities in such an agreement is not in itself a reason to consider the agreement compatible with competition rules. Public authority involvement does not absolve the parties from potential liability, unless they have been compelled or required by a public authority to conclude the agreement or an authority has reinforced the restrictive effect of the agreement.
Karel Bourgeois and Karl Stas, competition lawyers at Crowell & Moring LLP
For more information about our office, please consult our website www.crowell.com.
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