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Cartels for the good cause?

05 July 2021 | Germany
Legal Briefings – By Dr. Marcel Nuys and Dr. Florian Huerkamp

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Sustainability is the big topic in business. It would be a good thing if everyone pulled together but from a competition law perspective that's not so easy. Marcel Nuys and Florian Huerkamp discuss the current state of sustainability.

In 1970 Nobel Prize winner Milton Friedman wrote a famous article for the New York Times and noted: "The social responsibility of business is to increase its profits." A good 50 years later, Friedman's dictum no longer seems to apply. Hardly a day goes by without a major company committing itself to environmental or social goals. Deutsche Börse now maintains an index that takes into account environmental, social and corporate governance criteria. ESG (Environmental, Social, Governance) and CSR (Corporate Social Responsibility) are on everyone's lips when it comes to investments and are considered the "new normal".

Most areas of law accompany this swing silently and efficiently. Antitrust law, however, faces much greater difficulties as it is necessary to reconcile competition policy objectives and sustainability. This is not always easy, for example, a company wants to build a new production plant and decommission the older "dirty plant" to combat climate change, but because of the considerable investment costs the company has to raise its prices. It fears competitive disadvantages compared with competitors who do not take the step; economists speak of a "first-mover disadvantage". In order to avoid these disadvantages, the company consults with its two main competitors, who also agree to modernize their factories in the interests of environmental protection.

From a sustainability point of view, this cooperation seems to be welcome. Nevertheless, Olivier Guersent, Director General for Competition at the EU Commission, among others, pointed out at the end of March that such cooperation could constitute a prohibited cartel.

Sustainability in the focus of the antitrust authorities

It is, therefore, not surprising that the antitrust authorities are increasingly recognizing sustainability as a core issue where action is needed: The German Federal Cartel Office has published a detailed background paper and the EU Commission held a conference on "Competition Policy and the Green Deal," attended by Vice Presidents Frans Timmermans and Margrethe Vestager. The Dutch Competition Authority has published guidelines to enable an assessment of sustainability initiatives and the Greek competition authority has posted a discussion paper online.

Has this defused the conflict? Not at all! So far, there is a lack of clear and legally binding guidelines that show companies how to reconcile sustainability and competition law.

The paper published in October 2020 by the German Federal Cartel Office's working group on antitrust law, "Open Markets and Sustainable Business - Public Interest Goals as a Challenge for Antitrust Practice," does not offer solutions, but rather traces conflicts. It points out that in practice to date, antitrust law has taken environmental protection concerns into account within the framework of its regulatory scope of action. Nevertheless, the authority admits that it has "primarily provided individual guidance" to companies. The cases decided so far - if they have been published at all - cannot therefore be generalized.

Do co-operations lead to "greenwashing" of cartels?

While some may find the underlying conflict between competition and sustainability difficult to understand, economists try to defend the basic pillars of antitrust law: empirically, they say, it can be shown that the incentives for companies to invest in green technologies are always higher under competition than under cooperation.

This  assumes that consumers are willing to pay more for environmentally friendly services and products. In contrast, co-operation between competitors involves the risk that companies agree on a minimum of "green" investments and a maximum of price increases.

The Federal Cartel Office also points out that it is almost impossible to quantify with certainty the general welfare improvements that could result from co-operation. But then an essential part is missing in the assessment of whether a restriction of competition can still be justified.

State before private?

Overall, this brings to light a more fundamental conflict: should private companies – either with the blessing of the competition regulators or without them being allowed to intervene – achieve improvements for society as a whole through co-operative ventures? Or should the (democratically legitimised) legislator set the framework for action – e.g. by banning particularly environmentally harmful practices or artificially increasing the price of fossil fuels through emissions trading – in such a way that sustainability concerns are sufficiently taken into account?

Milton Friedman would probably opt for the latter and repeat his plea for companies to focus on increasing profits. Critics, on the other hand, may point out that waiting for uniform national legislation, to create a level playing field, is illusory in light of global challenges, such as climate change. In this perspective, only the "global players" have the opportunity to enforce higher standards, e.g. in environmental protection, through mutual agreements. Rising prices are to be accepted as the flip side of improved environmental protection.

Competition regulators are working on new rules

The debate is gaining momentum. Company representatives have urged that - regardless of the specific positioning - it is essential for companies to obtain legal certainty about the scope for sustainability co-operation under antitrust law.

The EU Commission will soon present a proposal for new guidelines that will also take this wish into account. In addition, antitrust regulators in all countries have indicated that they are prepared to enter into a dialog with companies willing to co-operate at an early stage, in order to examine the admissibility of projects under antitrust law. Companies should take this outstretched hand.

In Germany, companies are already benefiting from a recent revision of competition law: the Federal Cartel Office must issue a statement within six months on whether or not co-operation between companies is permissible.

The authors: Dr. Marcel Nuys is a partner and Dr. Florian Huerkamp is counsel in the Düsseldorf office of Herbert Smith Freehills. The two regularly advise companies on antitrust and competition law.

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