Antitrust damages actions and dominant firms
While damages claims are often thought of in the context of harm caused by cartels, there is an increasing trend of damages claims against dominant companies.
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Global | Publication | January 2021
Ensuring that global economic development is sustainable in light of climate change and other challenges is key to the European Union’s (the EU’s) Green Deal. Green Deal objectives drive much of the EU’s legislative agenda for President Von der Leyen’s term. In parallel with this legislative program, the European Commission (the Commission) and other antitrust authorities are increasingly focused on sustainability issues and how they relate to competition law enforcement.
The competition law community is conflicted on the relationship between sustainability and antitrust objectives. Some commentators seem to view the relationship as adversarial, with competition law potentially standing in the way of cooperation among competitors that could help achieve sustainability goals. Others see the two as largely separate, viewing sustainability as a public interest outside the scope of traditional antitrust policy. A third group takes a more “technocratic” approach, focusing on the application of sustainability considerations to traditional antitrust concepts like innovation competition and efficiencies.
The Commission aims to play a leading role in these discussions. In late 2020, the Commission conducted a targeted consultation on competition policy supporting the European Green Deal (the EU Consultation) and is considering sustainability issues in its consultation on revisions to the Commission’s antitrust assessment of vertical agreements (the VBER Consultation). The Commission will follow up with a conference on antitrust and sustainability in February 2021.
However, the Commission has seemingly not decided how warmly to embrace sustainability objectives in the antitrust context. The Commission notes that traditional EU antitrust rules contribute to the Green Deal objectives by sanctioning behavior such as restrictions in the development or roll-out of clean technologies or foreclosing access to essential infrastructure for renewable energy sources. But the Commission also observes that, “Competition policy is not in the lead when it comes to fighting climate change and protecting the environment. There are better, much more effective ways, such as regulation and taxation. Competition policy, however, can complement regulation and the question is how it could do that most effectively.”
Other European authorities are also increasingly active in this debate. In a December 2020 OECD roundtable on sustainability and competition, Germany, Greece, Lithuania, and the Netherlands submitted comments, as well as Australia & New Zealand, industry and consumer groups. Earlier in 2020, the Dutch Competition Authority (the ACM) consulted on draft guidelines (the ACM Guidelines) on the assessment of sustainability agreements. The ACM Guidelines arguably represent the most concrete and authoritative “technocratic” analysis of how sustainability benefits can be incorporated into the antitrust assessment of cooperative agreements. The Hellenic Competition Commission (the HCC) and the Bundeskartellamt also published working papers on sustainability and antitrust in 2020.
Sustainability concerns arise in a variety of competition law contexts, including EU State aid law, the assessment of cooperative agreements and unilateral conduct by companies with dominant market positions, as well as merger review.
Perhaps not surprisingly, the EU Consultation focused first on State aid control, which is an exclusive Commission competence under EU law. Under the Treaty on the Functioning of the European Union (TFEU), State aid by EU Member States in favor of a company or group of companies is subject to review to ensure that the aid does not distort competition.
The EU Consultation notes that many public investments for environmental projects have been approved under EU State aid rules and that these are already being updated to help public authorities contribute to the transition to a green economy. The Commission asked for additional input on changes needed in the State aid rulebook, such as lowering the levels of State aid, or approving fewer State aid measures for activities with a negative environmental impact, or building mitigating measures into aid approvals for such projects.
Alternatively, the Commission asked whether the EU should allow more State aid to support environmental objectives, for example by allowing aid on easier terms for environmentally beneficial projects than for comparable projects which do not bring the same benefits (“green bonus”). If so, how should this green bonus, and environmental benefits more generally, be defined?
The Commission is engaged in a wide-ranging review of its current guidance on the assessment of proposed State aid. While the EU Consultation is quite open-ended, we can expect future State aid guidelines to address the role of sustainability benefits and disadvantages in the review and approval of proposed aids.
Antitrust rules in the EU and elsewhere prohibit anti-competitive agreements, but many sustainability agreements, even among competitors, would not be considered anti-competitive in the first place. The Commission noted, for example, that standards agreements going beyond the legal minimum can be beneficial provided that the companies put in place safeguards to ensure that standards are applied in a transparent and non-discriminatory manner accessible to all interested companies, and not allow for exchange of commercially sensitive information. Examples from the ACM Consultation include (i) non-binding agreements where individual undertakings determine their own contributions and the way in which they wish to realize them; (ii) codes of conduct promoting environmentally or climate-conscious practices, provided the participation criteria are transparent, access is granted on the basis of reasonable and non-discriminatory criteria, and it is possible to have alternative standards or certification labels of equal standing and to sell products that fall outside of such codes; (iii) agreements aimed at removing less sustainable products from the market, provided these do not appreciably affect price and/or product diversity; and (iv) agreements whose sole purpose is to help respect local law, provided they are not unnecessarily restrictive and do not involve sharing of competitively sensitive information.
Even where an agreement may be considered restrictive of competition, an otherwise anti-competitive agreement may qualify for exemption if it generates efficiencies that outweigh the potential anti-competitive effects. In the EU, anti-competitive agreements are prohibited by Article 101(1) TFEU but may qualify for an exemption based on the criteria in Article 101(3) TFEU. The EU Consultation asked for examples of desirable cooperation that could not be implemented due to EU antitrust risks and why cooperation rather than competition between firms would lead to greener outcomes. The VBER Consultation also asks for input on the role of sustainability objectives in the assessment of agreements between suppliers and resellers, though these issues are likely to be more relevant to the forthcoming consultation on the Commission’s assessment of horizontal agreements among competitors.
The ACM Guidelines discuss these issue in much greater detail. The ACM Guidelines rephrased the Article 101(3) TFEU criteria as follows: (i) the agreements offer efficiency gains, including sustainability benefits; (ii) the users of the products in question are allowed a fair share of those benefits; (iii) the restriction of competition is necessary for reaping the benefits, and does not go beyond what is necessary; and (iv) competition is not eliminated in respect of a substantial part of the products in question. In applying these criteria, the ACM indicated that it will only take account of “objective” sustainability benefits, meaning benefits that are substantiated as being useful not only to consumers, but also to society (or parts thereof) in a broader sense.
Examples include the reduction of negative externalities, reducing operational costs, increasing innovation, improving quality or encouraging greater diversity of products. The ACM Guidelines show a strong preference for quantifying sustainability benefits, but note that a qualitative assessment may be sufficient where the undertakings involved have a combined market share of no more than 30 per cent and the harm to competition is obviously smaller than the benefits of the agreement.
In a quantitative analysis, benefits are measured using so-called “environmental prices,” or “shadow prices,” which indicate the harm of, among other things, pollution and greenhouse gas emissions. Cost-benefit guidelines applicable to governmental agencies can be used as the starting point to determine how environmental prices should be determined. An environmental price set with an eye to realizing a concrete policy objective is called a shadow price based on prevention costs. For “other” sustainability agreements, a value can be assigned to improvements, for instance by revealing consumers’ willingness to pay for a certain product or product feature, such as an improvement in terms of human, animal or environmental friendliness.
In determining whether users are allowed a fair share of the benefits, the ACM takes a broad approach. Future users can be taken into account as well as current users (taking account of an agreement’s duration), and indirect users taken into account as well as direct users. The ACM deviates from the Commission’s standard approach where the agreement aims to prevent or limit obvious environmental damage and the agreement helps comply with an international or national standard to prevent environmental damage to which the government is bound.
The ACM distinguishes between environmental-damage agreements (which aim to improve production processes that cause harm to humans, the environment, and nature) and other sustainability agreements, such as agreements setting requirements for labor conditions or animal welfare. In the case of environmental-damage agreements, the ACM would take account of benefits for others than merely the users. For example, if undertakings in a certain sector jointly decide to use carbon-neutral energy only, greenhouse gas emissions will decrease as a result, benefiting both customers of the producers and society at large. In these situations, users may not need to be fully compensated for the harm caused by an agreement, because their demand for the products essentially created the problem for which society needs to find solutions. In that context, however, the agreement must contribute to a policy objective in a binding international or national standard. Moreover, the contribution must be efficient, so that users, as a rule, reap the benefits in the same way as the rest of society.
With regard to other sustainability agreements, the ACM follows the basic principle that users must be fully compensated by the benefits of the sustainability agreements for the harm that they suffer from a restriction of competition. For example, if a sustainability agreement leads to a quality improvement in production, but also leads to a price increase, the users (as a group) will have to attach sufficient value to those quality improvements to offset the price increase.
With respect to the necessity criterion, the parties to a sustainability agreement should be able to make a plausible case that no other, less anticompetitive alternative is available for realizing the same objective, or if the parties would only be able to realize the objective to a demonstrably less efficient degree, for example because of a lack of expertise or scale, so that the sustainability objective can be reached sooner or more effectively. In some sectors, for example, market participants may agree on quality standards with regard to sustainability aspects of products and services that would be less anticompetitive than an agreement to stop producing or selling certain products and services. Similarly, the determination of whether a sustainability agreement eliminates competition in respect of a substantial part of the products in question depends on the market shares attributable to companies participating in the agreement, as well as the influence of the sustainability agreement on key competition parameters, such as price.
Companies considering entering into a sustainability agreement are encouraged to “self-assess” the legality of their agreement based on the ACM’s guidelines, requesting advice from the ACM if necessary. The ACM commits not to impose fines where an agreement has been made public, and the ACM’s guidelines have been followed in good faith as much as possible, even if the agreement later turns out to violate Dutch competition law.
As mentioned, the ACM Guidelines are the most complete and authoritative attempt so far to incorporate sustainability considerations into the antitrust framework for assessing cooperative agreements. The Commission consultations are much less specific, but in the coming years the Commission will revise its current block exemptions and related guidelines for the assessment of horizontal (among competitors) and vertical (between suppliers and resellers) cooperation agreements. Given the widespread focus on sustainability issues, it seems likely that the revised guidance will address these issues in much greater detail.
In addition to prohibiting anti-competitive agreements, antitrust laws commonly impose heightened obligations on or in relation to companies with a high degree of market power. In the EU, Article 102 TFEU prohibits companies holding a “dominant position” in a relevant market from “abusing” that power. Sustainability issues have received less attention in the abuse-of-dominance context than in the anti-competitive agreement context. The EU, ACM, Bundeskartellamt and OECD papers don’t separately address this area. However, some of the same issues, in particular as regards efficiencies, arise in the anti-competitive agreement and abuse-of-dominance contexts.
EU law recognizes that the realization of efficiencies may be raised as a defense in abuse-of-dominance cases. EU Commission guidance recognizes that consumer safety and health can amount to objective justifications for not finding an abuse, although “proof of whether conduct of this kind is objectively necessary must take into account that it is normally the task of public authorities to set and enforce public health and safety standards.” As examples of potentially justifiable conduct, the HCC paper lists the setting of a higher price to cover environmental and broader sustainability costs or to reinvest in environmental protection and attainment of sustainability aims without this being found excessive, charging different customers different prices for products based on the impact on sustainability objectives, bundle environmentally friendlier product options, or refuse to provide inputs to an undertaking that does not satisfy certain sustainability standards.
The HCC paper also considers whether practices of a dominant firm considered as unfair from an environmental, social or moral perspective could also be considered abusive for antitrust purposes. The HCC argues that such practices may constitute abuses under Article 102(a) TFEU, which prohibits “unfair purchase or selling prices or other unfair trading conditions.” A broad definition of unfair prices or unfair trading conditions could cover non-sustainable practices such as excessively low prices paid by retailers or other intermediaries to farmers for their production, putting in jeopardy the strategy of sustainability from farm to fork.
The HCC paper raises interesting issues, not only on the possibility for dominant firms to use sustainability arguments as a shield to defend conduct that might otherwise qualify as abusive, but also the possibility for authorities to use sustainability considerations as a sword, defining environmentally harmful practices as a new category of abuse. Whether, and if so when, these proposals will be reflected in changes to EU (or other) antitrust enforcement remains to be seen. The EU’s guidance on Article 102 TFEU is generally less developed than its guidance in the Article 101 TFEU and merger review contexts, so it seems unlikely that we will get more specific guidance on sustainability issues in this context in the near future.
In the merger review context, antitrust authorities must determine whether a particular merger is likely to have a negative effect on competition; in the language of the EU Merger Regulation, “significantly impede effective competition.” Antitrust authorities consider a wide range of factors, most obviously the merger’s likely impact on prices, but also on other competitive factors such as product quality and innovation. Even a merger otherwise considered anti-competitive can be approved if it generates efficiencies that outweigh the competitive harms.
Some jurisdictions, such as South Africa, also allow antitrust authorities to take account of public interest factors in the merger review context. Others, like France and Germany, have separate procedures to override merger review findings on public interest grounds. The Bundeskartellamt working paper discusses the possibility of including sustainability considerations in the merger review process, but such a change would require an amendment to the EU Merger Regulation and is unlikely for the foreseeable future. In past transactions, the Commission has ruled out challenging transactions on public interest grounds.
However, the EU Consultation notes the elimination of pressure between firms to innovate on sustainability where consumer preferences for environmentally friendly and sustainable products are an important competitive factor would be a relevant factor in EU merger review. The Commission asked for input on situations when a merger between firms could be harmful to consumers by reducing their choice of environmentally friendly products and/or technologies and ways merger enforcement could better contribute to Green Deal objectives.
The Bundeskartellamt paper also noted that sustainability is increasingly considered as an important competitive advantage, which can be considered in the merger review context like any other non-price competitive factor. The Bundeskartellamt noted further that vertical integration could give dominant firms the ability to impose harmful practices on other industry players, which could amount to a new sustainability-related theory of harm.
Surprisingly, the EU Consultation does not address the question of how sustainability benefits can be included in the assessment of efficiency benefits that may counterbalance competitive harms and lead to approval of otherwise anti-competitive mergers. Revisions to the Commission’s guidance on assessment of sustainability benefits in the Article 101 TFEU context could likely be transposed into the merger review context. The Commission is not currently planning to review its horizontal and non-horizontal merger guidelines, but updating the assessment of sustainability benefits (and efficiencies more generally) would be helpful.
Promoting sustainability is a top policy priority for the European Commission, but the Commission is still exploring the role of competition policy in this context. The Commission views regulatory and tax tools as more effective in promoting sustainability goals than antitrust enforcement. Understandably, if somewhat defensively, the Commission argues that traditional antitrust enforcement already promotes sustainability goals by keeping markets open and competitive, thereby encouraging innovation. The Commission may fear that bringing sustainability goals explicitly into the antitrust framework, potentially allowing cooperation among competitors that would otherwise be prohibited, would open the door to “green washing.”
Other European authorities, notably the Dutch ACM, have gone further in developing the analytical framework for incorporating sustainability benefits in its antitrust analysis. The ACM focuses on practical, technical questions such as which environmental benefits can be taken into account for this purpose, and how to measure them. The ACM does not (yet) address sustainability issues in other contexts, such as sustainability as a sword or shield in the abuse-of-dominance or merger context, and has been criticized for not taking a more ambitious approach.
Indeed, the German and Greek authorities pose broader policy questions in relation to sustainability. Their efforts are so far more academic than the ACM’s, however, and in view of the cautious approach of the Commission (and others) it is doubtful that these proposals will result in major enforcement changes in the near future.
In the near term, the Commission can be expected to pay enhanced attention to the role of sustainability on a case-by-case basis when applying traditional antitrust concepts such as innovation competition. In the medium term, the Commission may expand its discussion of sustainability benefits in its revised horizontal and vertical cooperation guidance. In the longer term, the Commission may prove more ambitious. In particular, the Commission’s guidance on efficiencies in the abuse-of-dominance and merger review context is underdeveloped. Reforms in these areas to modernize and harmonize EU antitrust policy in line with ongoing work on efficiencies in cooperative agreements would be welcome.
While damages claims are often thought of in the context of harm caused by cartels, there is an increasing trend of damages claims against dominant companies.
Much debate continues around whether increased damages risk is causing a decline in leniency applications.
© Norton Rose Fulbright LLP 2023