Co-operation beyond Covid: EU Commission review of Horizontal Co-operation Framework
In a recent article, I covered the EU Commission’s temporary framework on Competition Law and Co-operation during the Coronavirus crisis. I also mentioned in that piece that the general competition law framework for co-operation between competitors is currently under review, with the Commission conducting a consultation process (for more information about the review process click here).
The Commission has now published the individual responses that it has received, as well as a summary of feedback. At the conclusion of the consultation process, the Commission will either abolish, retain or revise the legal instruments forming part of the framework. This note reports on some of the highlights of this feedback, which will help inform its ultimate decision.
Sections 2 to 5 of my note deal with the main features of the current package of legal instruments in relation to horizontal agreements (and lawyers familiar with them may wish to skip these). Section 6 sets out the Commission’s approach to the review and consultation. Section 7 highlights some of the trends and points raised from stakeholder feedback.
2. Why does it matter?
It is imperative for businesses and their advisors to be able to assess whether any proposed form of co-operation will fall foul of competition law. If businesses infringe the law, they could face fines of up to 10% of global, group turnover as well as having void agreements and private lawsuits to deal with. On the other hand, legal uncertainty and a fear of such repercussions could lead businesses to defer or cancel plans or practices which would enhance welfare overall. It is critical for them to have certainty as to how the law applies to their projects.
As I mentioned in my previous piece, there are examples of good and bad co-operation between competitors. “Good” co-operation can produce efficiencies and new and innovative products with no anti-competitive effects. “Bad” co-operation could entail straightforward price-fixing and market sharing. Between these two extremes, there are examples of arrangements with pro- and anti-competitive effects which need to be evaluated on their particular merits and demerits.
It is for this purpose, the EU Commission put in place a framework for how EU Competition Law applies to co-operation between competitors. This is set out in an extensive set of guidelines on “horizontal co-operation” two block exemption regulations (“BERs”). “Horizontal” in this context means two businesses which operate at the same level of the market, thereby making them actual or potential competitors. These entered into force in 2011. Whilst it is an EU document, the framework has influence (in the case of the guidelines) and binding legal effect (in the case of the BERs) vis a vis national courts and national competition authorities in the EU27 and UK.
It is helpful to point out that the consultation process concluded before the on-going pandemic. The responses do not cover this issue. As I reported in my earlier article, the EU Commission has issued guidance to businesses (chiefly addressed to the life science industries) on the permissible limits of working together. Other NCAs have issued similar temporary guidance (see for example the CMA’s statement of 19 March 2020 and its guidance of 25 March 2020). In all cases, these are designed to address the immediate challenges of the pandemic.
3. Horizontal Guidelines
The Horizontal Co-operation Guidelines [i] (“HGL”) set out the Commission’s principles for understanding the application of EU Competition Law to a number of specific types of agreements. These include joint purchasing, joint commercialisation, research and development, information sharing agreements, joint buying, standardisation and certain guidance on joint bidding.
The purpose of the HGL is to assist parties and their advisors to self-assess with a view to ensuring compliance for their proposed arrangements. Advisors need to extrapolate from the HGL the relevant legal principles and apply these to structure agreements appropriately.
Where an agreement does not benefit from a block exemption, that does not necessarily mean it is unlawful. The agreement may still benefit from an “individual” exemption under Article 101(3) of the EU Treaty (“TFEU”), which lays down a four point test (a summary is available here). Whether or not the test will be met if challenged in the courts or by a regulator is a matter for consideration by the business and its advisors. The HGL operates as a tool to assist them in that task. The HGL also provides further guidance on the application of the horizontal block exemptions, now discussed in more detail.
4. Horizontal Block Exemptions
A Block Exemption Regulation (“BER”) is a legal instrument which provides certainty as to when an agreement will not fall foul of the competition rules. It creates a safe harbour for categories of agreement which are potentially pro-competitive. An agreement within the safe harbour will generally be impervious to any attack from a hostile regulator or claimant. BERs have binding legal effect.
The safe harbour will generally only be available where (i) the parties’ agreement avoids clauses which are considered to be “hardcore restrictions” within the BER and (ii) the parties’ combined share of the markets affected by the agreement fall below a specified market share threshold (expressed as a percentage) within the relevant BER.
There are two BERs under review (now discussed). Each of them is due to expire on 31 December 2022.
Research and development BER [ii]
The first BER sets out a safe harbour for R & D arrangements, which can lead to new products and services. To benefit from the safe harbour, an R&D agreement must fulfil certain conditions, such as stating that all parties to it will have full access to the final results of the R&D, including any resulting intellectual property rights and know-how.
Hardcore restrictions: the agreement must not limit output (with certain exceptions) or limit the freedom of the parties to carry out R&D in areas unrelated to the agreement (during or after the agreement).
Market share: the parties must have less than 25% share of both the market for the markets for the technology itself and the products which use it (this is explained further in the BER and in the HGL).
Specialisation and joint production BER [iii]
The second BER permits certain agreements which facilitate specialisation between competitors by, for example, agreeing that only one should produce a particular type of good while the other focus on another. It also lays down rules for when businesses may jointly produce products or services together. A condition of joint production is that the parties must market the joint goods whether through a joint production team or through a jointly appointed distributor.
Hardcore restrictions: the parties’ agreement must not have the object of price fixing vis-à-vis third parties with the exception of prices charged to direct customers (i.e. in a joint distribution set-up), limit output (subject to certain exceptions) or allocate customers or markets between them.
Market share threshold: The safe harbour will only apply if the conditions of the BER are fulfilled and the parties’ combined shares do not exceed 20% of the relevant market.
5. Stages and process of review
In accordance with the Better Regulation Principles, the EU’s review procedure is divided into two steps: (i) an evaluation phase and (ii) an impact assessment phase.
The objective of the evaluation phase is to gather evidence on the functioning of the current Horizontal Block Exemption Regulations and the accompanying Guidelines on horizontal cooperation agreements. In line with the Better Regulation Principles, this evaluation will be based on five evaluation criteria:
Relevance: whether, in light of new market developments, the two BERs and HGLs are still relevant in light of their objective.
Effectiveness: the extent to which the current framework has proven effective in identifying those horizontal co-operation agreements for which it cannot be assumed with sufficient certainty that they satisfy the conditions of Article 101(3) of the Treaty.
Efficiency: whether the framework has contributed to reducing the costs for (i) business and (ii) the competent competition authorities in ensuring compliance with the prohibition of Article 101(1) of the Treaty.
Coherence: The Commission will evaluate whether the framework continues to fit with developments in other areas of competition law.
Added value: the extent to which the framework has added value, such as leading to a consistent application of the law by courts and regulators across EU member states.
The evaluation phase is itself divided into two parts:
- A public consultation of 12 weeks was launched in Q4/2019, through a questionnaire inviting feedback on the functioning of the framework from interested stakeholders. The public consultation was launched on 6 November 2019. The deadline for stakeholders to fill in the questionnaire expired on 12 February 2020;
- A stakeholder workshop with representatives from all main stakeholder groups on areas of particular interest for the review of the two Block Exemption Regulations for horizontal co-operation agreements and the Commission Guidelines is planned for Q2/2020.
The objective of the impact assessment phase is to inform and support the decision of the Commission to determine whether it should let the Regulation lapse, prolong its duration or revise it on the basis of the evidence gathered during the evaluation phase.
6. Highlights of stakeholder feedback
On 9 April 2020, the Commission published a summary of feedback received from stakeholders . Among the 77 respondents to the questionnaire, there were 3 academic and research institutions, 30 business associations, 25 companies/business organisations, 2 non-governmental organisations, 1 public authority, 1 EU citizen, 1 trade union, and 14 others (8 of which were law firms).
- In terms of relevance, although most respondents thought the legal instruments are still relevant today, many called for them to be updated to take account of developments such as digitalisation and climate change. This is discussed further below (“more specific feedback”).
- What had been the effect of the framework on promoting competition? 35% of respondents noted an overall positive effect of the framework, while 43% perceived this contribution to be only limited.
- While respondents considered that the current framework promoted legal certainty, they also called for the Commission to introduce BERs in new areas, in order to give businesses confidence as to when they can co-operate in those areas. Most respondents felt that the HBERs offer more legal certainty than the HGLs. That is because they are binding on Courts and Regulators whereas the HGLs are not.
- 54% of respondents considered that there are other types of co-operation agreement not covered by the framework which ought to be.
- In relation to efficiency, respondents offered a mixed picture on costs. Some considered that the costs were minimal although others pointed to rising compliance costs generally as a result of stricter enforcement action. However, the point was also made that compliance costs would increase without the framework as a result of greater uncertainty. The majority considered costs were proportionate to the benefits of the framework as a whole.
- Of those answering the relevant questions, most agreed that the framework is generally coherent with other EU policies and also that the framework had added value by contributing to more uniform application of EU Competition Law.
More specific feedback:
- The most important development according to respondents (25 responses) was how competitors can work together to tackle climate change and the corresponding challenges of environmental protection and sustainability. Respondents believe that the current framework fails to recognise the resulting increase in consumer and business demand for sustainable, ethical and environmentally friendly business practices. One respondent pointed out that the Dutch Authority for Consumers & Markets (ACM) in 2005 prohibited a sustainability initiative amongst supermarkets and other stakeholders to completely replace regularly-produced broiler chicken with more sustainable alternatives in order to raise animal welfare.
- A number of stakeholders called for guidance to be adapted to digitalised markets. For example, one called for the Commission to update its guidelines on information sharing to capture the modern-day importance of data sharing. If, as widely expected, data will become the gold of the 21st century and widespread access to data is to be encouraged in order to spur innovation and growth, businesses will need to be certain of how data sharing can be undertaken without infringing competition rules. On this point, one owner of a digital retail platform argued its willingness to share information with partners had created possibilities to improve its services with customers, from speeding up re-assortment when a product is in high demand to improving logistics and delivery time. It bemoaned an opacity over which data could be shared and was frustrated by what it saw as the existing HGL focus on “old” industries such as petrol stations and tourist offices, calling for these to be replaced with examples directly relevant to the new economy.
- Digital platforms were in fact mentioned almost an issue in their own right. Many respondents mentioned them as being increasingly important to e-commerce and the gig economy. They elicit competition law problems. Retail platforms for example will operate as both sellers of their own goods and offer “marketplace” services to sellers of competing goods. This may ultimately mean that the two businesses are sharing sales data, which could have harmful as well as beneficial consequences for competition and consumers.
- For other respondents, globalisation and increased international competition (13 responses) were an important consideration. Respondents also specifically mentioned competition with companies from other jurisdictions where competition rules are less strict and that often EU companies have difficulties to compete alone, therefore they need to cooperate.
- A number of respondents considered that the Commission should offer more guidance on joint bidding arrangements (under which competitors may combine forces to tender for a particular opportunity). The guidance set out in the HGL is considerably more limited than that set out in other guidance documents on the subject issued by certain National Competition Authorities.
- The HGL provide guidance on standardisation agreements (agreements which introduce certain common standards for products or services of a certain type). Where a standard includes the IP of a third party (such as a patent) the HGL provides that intellectual property must be made available to all market participants on fair, reasonable and non-discriminatory (“FRAND”) terms and that royalties be based on the value of the patent. Apple, for example, strongly argued for this to continue and for owners of patents not to have the opportunity to set higher compensation levels just because their IP forms part of a particular standard. Another contributor disagreed, arguing that the perceived risk of “patent hold-up” was over-inflated and that it is frequently licensees who take advantage of patent owners where the latter has a legal obligation to deliver licences on FRAND terms.
- A number of respondents mentioned purchasing alliances as a concern. One for example called on the Commission to maintain its guidelines on joint purchasing as these allow for retailers to form purchasing alliances and to exercise buying power against large, often international FMCG suppliers with high margins (15-30% net margins) and high return on capital. Alliances allow these retailers to redress the balance. Other respondents however have called for the Commission to update the guidance in line with the specificities of modern purchasing alliance structures.
7. Next Steps and Comments
The next planned step in the Commission’s review journey had been to hold a stakeholder workshop in the second quarter of 2020. A similar exercise, which is designed to stimulate debate between a diverse range of stakeholders, was held in Brussels Q4 of 2019 in the context of another competition law consultation process. If the lockdown conditions do not allow for a physical meeting, it is likely (in my opinion) that the Commission will reformulate the workshop as a virtual event. The Commission will be keen to move to the impact assessment phase of the review and have the revised framework in place before the expiry of the two BERs at the end of 2022.
Continuity is not the only underlying consideration. The last iteration of the horizontal framework was published nearly ten years ago. There have been marked changes in the economy since that time. The climate change agenda and digitalisation are the most obvious examples of trends inadequately addressed by the HGL. Businesses evidently struggle at times to apply the principles of the existing framework to the modern business environment.
The responses reveal that legal uncertainty arising from the HGL is holding back projects which could otherwise release significant economic growth. In the current circumstances, that is a luxury that cannot be afforded. Once the current lockdowns are lifted and working practices are returned to something approximating normality, creating a clearer and more relevant framework for co-operation beyond COVID must be a priority for the EU Commission.
[i] Communication from the Commission — Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements, Communication from the Commission — Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements Text with EEA relevance
Communication from the Commission — Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements Text with EEA relevance
OJ C 11, 14.1.2011, p. 1–72.
[ii] Commission Regulation (EU) No 1217/2010 of 14 December 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to certain categories of research and development agreements, available here.
[iii] Commission Regulation (EU) No 1218/2010 of 14 December 2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to certain categories of specialisation agreements OJ L 335, 18.12.2010, p. 43–47, available here.