In Short
The Development: The European Commission ("EC") has published highly anticipated draft guidelines ("Draft Guidelines") detailing a new antitrust exemption for agreements in the agriculture and food supply chain that target certain European Union ("EU") sustainability objectives.
The Background: The EC's Farm-to-Fork and Biodiversity strategies are key initiatives in the European Green Deal, which the EC claims will make Europe a fairer and more prosperous society with a modern, resource-efficient, and competitive economy. The Farm-to-Fork strategy aims to develop a "sustainable food system" that includes sustainable food production, processing, and trade. The Biodiversity strategy aims at reversing the loss of biological diversity.
Looking Ahead: To support those Green Deal priorities, the EC intends the new antitrust exemption and the Draft Guidelines to facilitate certain sustainability agreements in the agri-food industry that might otherwise violate the EU antitrust laws. Businesses in the agri-food sector should evaluate whether the Exemption creates new opportunities for industry collaboration. However, where the exemption creates reward, there also is antitrust risk in navigating the EC's new rules outlined in this Commentary.
EU antitrust law prohibits conduct that restricts competition, such as price fixing, bid rigging, and information sharing or certain other agreements between competitors or companies in the vertical supply chain that have a net anticompetitive effect on competition. In 2021, the European Parliament and Council of the EU adopted an antitrust exemption in Article 210a of Regulation 1308/2013 ("Exemption") for certain "sustainability agreements" in the agri-food supply chain. The Exemption allows such an agreement—even if it harms competition—as long as the agreement targets a sustainability outcome that is "higher" than mandatory standards under EU and/or national laws and provided that any competition restriction is "indispensable" in achieving the sustainability outcome.
The Draft Guidelines explain the scope of the Exemption, clarify which sustainability objectives qualify, define standards for meeting the Exemption, and describe when the EC or national Competition Authorities ("NCAs") are likely to intervene.
The Draft Guidelines come as the EC is revising its horizontal guidelines, which provide antitrust exemptions for certain competitor collaborations. The draft horizontal guidelines also include a new exemption for sustainability agreements. While the sustainability Exemption in the Draft Guidelines is limited to certain environmental objectives detailed below, the proposed exemption in the draft horizontal guidelines is broader, "encompass[ing] activities that support economic, environmental and social (including labour and human rights) development." The Draft Guidelines, however, are comparatively more detailed about key definitions (e.g., what constitutes an "agreement") and the EC's analysis. The Draft Guidelines therefore may have a broader significance, filling the gaps in the draft horizontal guidelines.
Scope of the Exemption
For an agreement to qualify for the Exemption, an agricultural producer must be a party to the agreement. The Exemption therefore covers both horizontal agreements between agricultural producers or agreements between an agricultural producer and another business. Therefore, as long as an agricultural producer is a party to an agreement, the Exemption may apply to vertical agreements that include distributors, wholesalers, retailers, or any other business in the agri-food supply chain.
The scope of the Exemption is limited to agreements and behavior relating to agricultural products identified in Annex I of the Treaty on the Functioning of the European Union ("TFEU"). Annex I is a list of dozens of agricultural and food products, including, but not limited to, live animals, meat, fish, dairy, tree, vegetables, fruits, nuts, cereals, coffee, spices, milled products, oils and oil seeds, fats, sugars, alcohol, and unmanufactured tobacco. The Exemption covers only the portion of an agreement related to Annex I products.
Eligible Sustainability Objectives
To obtain the benefit of the Exemption, an agreement must contribute to one or more of the following EU sustainability objectives:
- Climate change mitigation and adaptation;
- Sustainable use and protection of landscapes, water, and soil;
- Transition to a "circular economy," including the reduction of food waste and prevention and control of pollution;
- Protection and restoration of biodiversity;
- Reduction in pesticide use;
- Managing risks of pesticide use;
- Reduction in the danger of antimicrobial resistance in agricultural production; and
- Animal health and animal welfare.
Guidance Regarding the Exemption Standard
To qualify for the Exemption, an agreement must meet certain sustainability thresholds and be "indispensable" to achieving the sustainability objective. A sustainability agreement must identify a preexisting EU or EU Member State standard, describe measurable quantitative and/or qualitative criteria that go beyond that mandatory standard, and should lead to "tangible and measurable" or "observable and describable" results, if the results cannot be easily measured numerically. For example, if France requires that farmers reduce pesticide use by 30% for a particular cereal crop, agricultural producers could agree to reduce pesticides by 60%.
Under the Draft Guidelines, the Exemption applies only if: (i) each provision of an agreement is reasonably necessary to obtain; and (ii) any competition restrictions are "indispensable" to the desired sustainability outcome.
Although "indispensable" already has a definition under other EU competition laws, the Draft Guidelines introduce a new two-step indispensability test for the Exemption:
- In a first step, the parties must show that the agreement is "specific" and reasonably necessary to achieving the sustainability standard.
- In a second step, the parties must show that the restriction of competition is necessary to attain the sustainability standard in question, which will require a review of the nature and the identity of the restriction.
By comparison, under existing EU competition law, Article 101(3) TFEU, there is an exemption for otherwise unlawful anticompetitive agreements if such an agreement improves the production or distribution of goods or promotes technical or economic progress as long as consumer receive a fair share of the resulting benefits. The Article 101(3) exemption, however, requires that the "restriction" be indispensable to obtain the benefit and not eliminate competition with respect to a "substantial part of the products in question."
The indispensability requirement in the Exemption differs from Article 101(3) in two critical respects:
- Unlike Article 101(3), the Exemption does not require that consumers receive a fair share of the benefits resulting from the sustainability agreement.
- The Exemption does not have a market coverage limitation like Article 101(3), except that the EC can consider that factor in its after-implementation reviews, detailed in the next section.
EC and NCA Review and Intervention
Application of the Exemption is not likely to be clear in every case, and there can be significant consequences if the EC disagrees with the parties' self-assessment. Agricultural producers and producer associations may request an opinion from the EC about whether the Exemption applies to their agreement, and in some cases, that may be a suitable approach. To request an opinion, parties must file with the EC, and the EC will issue information requests similar to its merger filing pre-notification process. Once the parties have submitted all the information that EC has requested, it will issue the opinion within four months.
While EC opinions are not legally binding and are subject to changes in facts, EC case law, and/or EC policies, a positive opinion should provide the parties with substantial protection. Only in exceptional cases is the EC likely to deviate from a prior opinion, and NCAs, European courts, and national courts will afford EC opinions some deference in forming their own views. With few exceptions, the EC does not offer advisory opinions in other areas of competition law.
The Draft Guidelines also state that the EC and the NCAs can unwind or require amendments to a sustainability agreement even if an agreement falls within the scope of the Exemption or the EC has issued a supportive opinion. The Draft Guidelines state that the EC is more likely to intervene if necessary to prevent "serious" harm to competition (for instance, by restricting consumer access to alternative products) or if the agreement endangers the five objectives of the Common Agricultural Policy (increasing agricultural productivity, securing a fair standard of living for the agricultural community, the stability of agricultural markets, the availability of supplies, and reasonable prices of agri-food products for consumers).
Parties to a sustainability agreement should consider the risk of any such EC modifications, whether the economics of the agreement could survive EC modifications, and the effect of severability clauses.
Next Steps: Public Consultation
The EC has launched a public consultation, inviting public comment on the Draft Guidelines until April 24, 2023. The EC will hold a public workshop in June 2023 and plans to issue the final guidelines by December 2023.
Four Key Takeaways
- The Draft Guidelines detail how the EC will evaluate private agreements in the agri-food supply chain that attempt to further the EC's sustainability objectives but that also risk at least some reduction in competition. Although the Draft Guidelines provide a framework to evaluate sustainability agreements, the EC or NCAs can still block or modify those agreements if they harm competition or endanger the five objectives of the EU's Common Agricultural Policy.
- Companies in the agri-food business should evaluate whether the Exemption provides new opportunities to cooperate with competitors, suppliers, and distribution partners to meet their business objectives. However, businesses will need to check those collaborations against the EC's complex new rules.
- Businesses that take advantage of the Exemption will need to establish guardrails and monitor compliance to ensure that legitimate cooperation does not spill over into improper competitor coordination or other prohibited topics.
- Global agri-food businesses will not have the luxury of considering the EC's Exemption in isolation. While other countries may share some of the EU's policy goals, there is no indication they plan to adopt a similar antitrust exemption.
