The European Commission published new guidelines on the competition law assessment of sustainability agreements in the agricultural sector

On December 7, 2023, the European Commission (Commission) published the "Commission guidelines on the exclusion from Article 101 of the Treaty on the Functioning of the European Union for sustainabil-ity agreements of agricultural producers pursuant to Article 210a of Regulation (EU) No 1308/2013" (Guidelines), which entered into force on December 8, 2023.

Article 210a of Regulation (EU) No. 1308/2013 on a common organization of the markets in agricultural products (CMO) and the guidelines relate to the structuring of agreements to meet higher sustainability standards in agriculture in compliance with competition law. For the first time, the guidelines provide important points of reference for the question of the conditions under which agricultural producers can cooperate with competitors or other market players on upstream or downstream markets (in compliance with competition law) in order to meet higher sustainability standards.

1. Background

In principle, competition law regulations are fully applicable to the agricultural sector. Nevertheless, there are specific exceptions to the ban on cartels in the agricultural sector, which are regulated at European level in the CMO (cf. Art. 152 et seqq. and Art. 209 et seqq. CMO) and at national level in Section 28 ARC and in the Agricultural Organizations and Supply Chains Act. In simple terms, associations of agricultural producers or recognized producer organizations or associations of recognized producer organizations are already permitted to bundle steps such as the production, storing, packaging etc. of agricultural products and also to jointly market any such products (including the agreement of joint selling prices; cf. Art. 152 (1a) CMO) without falling under the ban on cartels. In terms of legal policy, these sectoral exemptions are intended to take into account the special nature of agricultural production conditions and compensate for the reduced ability of agricultural producers to adapt to market developments.

Art. 210a CMO, which was newly introduced by the European Parliament and the Council of the European Union in 2021 in connection with the reform of the Common Agricultural Policy (CAP) for the years 2023 to 2027, now creates a further exemption. Article 210a CMO intends to exempt agreements from the ban on cartels that exceed a legally prescribed sustainability standard under European or national law and only contain restrictions on competition that are essential for achieving the sustainability standard. The focus is therefore no longer on the production of agricultural products as such, but on the production with the creation or improvement of existing sustainability standards. In contrast to Art. 152 et seqq. and Art. 209 et seqq. CMO, the sectoral exemption is not limited to the producer level, but also includes upstream and downstream market levels.

2. Personal and material scope of application of Art. 210a CMO

Art. 210a CMO applies in terms of personal scope if at least one agricultural producer is involved in the agreement in question:

• On a horizontal level, Art. 210a CMO covers agreements between several producers;
• At the vertical level, Art. 210a CMO covers agreements between agricultural producers and other economic operators at various stages of the agricultural and food supply chain (e.g. seed supply, processing, trade, distribution).

Agreements within an industry association in which market players from different levels of the agricultural and food sector are members may also be covered by Art. 210a CMO if the effective participation of agricultural producers in the agreement is ensured.

In substantive terms, the agreement must relate to the production of or trade in agricultural products listed in Annex I of the TFEU (e.g. living animals, meat, milk, vegetables, fruit, etc.) and essentially aim to improve existing sustainability standards and, if necessary, create new ones (see below). However, if the agreement also includes goods that are not listed in Annex I of the TFEU, the corresponding part of the agreement is not covered by the exemption of Art. 210a CMO.

While agreements between producers are already exempt from the ban on cartels under the conditions of Art. 152 et seqq. and Art. 209 et seqq. CMO, Art. 210a CMO now creates a framework for agreements between agricultural actors at different market levels – at least when it comes to improving existing/creating new sustainability standards.

3. Pursuit of sustainability goals through an agreement on the application of sustainability standards

In order to be covered by Art. 210a CMO, the respective agreement must aim to apply a sustainability standard that contributes to one or more of the following sustainability objectives. According to Art. 210a para. 3 lit. a - c CMO, these are the following objectives:

1. Environmental objectives, environmental objectives, including climate change mitigation and adaptation, the sustainable use and protection of landscapes, water and soil, the transition to a circular economy, including the reduction of food waste, pollution prevention and control, and the protection and restoration of biodiversity and ecosystems;

2. the production of agricultural products in ways that reduce the use of pesticides and manage risks resulting from such use, or that reduce the danger of antimicrobial resistance in agricultural production; and

3. Animal health and animal welfare.

The guidelines clarify that the list in Art. 210a (3) lit. a CMO (environmental objectives) is not exhaustive and that other types and variants of objectives for the exemption under Art. 210a (1) CMO are also conceivable (e.g. the reduction of air or plastic pollution, the conservation or improvement of water quality, etc.). In contrast, the objectives in Art. 210a (3) lit. b and c CMO are listed exhaustively. If the agreement includes several sustainability objectives, some of which do not fall under Art. 210a (3) lit. a-c CMO, these are excluded from the exemption. Sustainability agreements can naturally also pursue other economic (e.g. appropriate remuneration for producers) or social (e.g. improvement of working conditions) objectives. In this respect, the guidelines make it clear that these objectives are also not covered by the exemption of Art. 210a CMO.  

It is important for Art. 210a CMO that the agreement stipulates the binding and indispensable application/fulfilment of the sustainability standard that contributes to the sustainability objectives. However, the standard itself does not have to be developed by the parties; rather, existing national or European standards can be used if the agreement aims to "exceed" this standard. These sustainability standards must - if they are quantifiable - lead to concrete and measurable results (e.g. the agreement to reduce the use of pesticides by 10%), otherwise at least to visible and describable results (e.g. description of concrete plant varieties that are planted in order to strengthen biodiversity). However, if an equivalent or more ambitious sustainability standard is introduced at a later date at national or Union level, the agreement is no longer subject to Art. 210a CMO.

4. Indispensability as a limitation of the broad scope of application

The criterion of indispensability serves as a corrective to the broad scope of application of Art. 210a CMO (cf. Art. 210a (1) CMO). The agreement must therefore be indispensable in order to meet the sustainability standard. The guidelines explicitly refer to the case law on the assessment of indispensability pursuant to Art. 101 para. 3 TFEU, which serves as the starting point for the assessment of the exemption. Whether an agreement is indispensable is determined on the basis of a two-stage test.

4.1   Step 1: The indispensability of the sustainability agreement

As a first step, the sustainability agreement itself must be reasonably deemed to be indispensable for achieving the desired sustainability standard. In this context, both the individual provisions of the agreement and the sustainability agreement as such must be examined as a whole - by the parties to the agreement (self-assessment) - in accordance with the standards of the guidelines.

At its core, the assessment revolves around the question of whether the restriction of competition is indispensable under the actual framework conditions when applying the sustainability agreement. This is not the case if the parties involved could achieve the objective through individual action. They must therefore be able to explain why they are working together and what prevents them from achieving the standard on their own. The following applies as a rule of thumb:

" The easier it is to make the improvement of the sustainability standard that operators aim to attain, when compared to what is already mandated by Union or national law, the less likely it is that operators would need to cooperate or that the chosen restrictions would need to be of a more serious nature or intensity."

The guidelines spend around 20 paragraphs on this assessment alone and provide detailed guidance on the question of the indispensability of the sustainability agreement as such.

4.2   Step 2: The indispensability of the restrictions of competition

In a second step, the restrictions on competition resulting from the agreement must be examined and the question asked as to whether this is essential for achieving the sustainability standard. The various options for action must be weighed up and the option that restricts competition the least must be selected. In particular, the type, severity and duration of the restriction of competition must be taken into account.

For example, it might be essential for poultry producers to make a provision for the payment of a surcharge to compensate for the specific additional price of organic feed compared to conventional feed. An agreement to set a retail price for consumers, on the other hand, could only be indispensable if compliance with the standard leads to additional costs in the entire production process due to additional factors such as more space in cages, longer exercise periods or better veterinary care. As the fixing of sales prices naturally constitutes a particularly serious restriction of competition, such an agreement should only be considered as a last resort and must be carefully examined on a case-by-case basis. In contrast to Art. 101 (3) TFEU, an examination under Art. 210a CMO does not require an analysis of the market coverage of the parties involved in order to assess the question of indispensability.

As the ban on cartels is essentially intended to prevent the restriction of competition, the question of how this is assessed in the context of a sustainability agreement in accordance with Art. 210a CMO is of greatest importance. Consequently, the guidelines also devote around 20 paragraphs to the assessment of this point and provide corresponding points of reference for the assessment by the parties to such an agreement.

4.3   Possibility of an opinion by the Commission

In principle, an exemption under Art. 210a CMO does not require an official decision; if the sustainability agreement meets the requirements of Art. 210a CMO, it is automatically exempt from the ban on cartels.

As the assessment by the parties involved - despite corresponding guidelines - can still be subject to uncertainties, Art. 210a (6) CMO offers the possibility for the parties to a sustainability agreement to submit an application to the Commission regarding the compatibility of this agreement with Art. 210a CMO. Upon receipt of the application, the Commission must issue an opinion on the compatibility of the sustainability agreement with Art. 210a CMO within four months.

Such an opinion is not binding. However, it should provide the parties involved with a sufficient basis for assessment in order to implement the intended agreement in compliance with competition law or, if necessary, to tighten up parts of the agreement or refrain from certain parts.

5. Official action possible through ex-post intervention

Art. 210a (7) CMO contains a protective mechanism such that national competition authorities (e.g. the German Federal Cartel Office or the Commission) are authorized to demand the amendment or termination of sustainability agreements. For this purpose, the sustainability agreement in question must jeopardize the achievement of the five objectives of the CAP under Art. 39 (1) TFEU or exclude competition. However, the guidelines themselves assume that the threshold for assuming a threat to agricultural policy objectives is likely to be high, as otherwise the meaning and purpose of Art. 210a CMO would be null and void.

6. Outlook

The further orientation of European law towards greater sustainability as part of the "Green Deal" is also continuing in agriculture. The Commission had already taken a first step with the revision of the Horizontal Guidelines, which for the first time include a chapter on sustainability agreements between competitors (without limiting the business areas or industrial sectors). Art. 210a CMO not only continues this approach - limited to the area of agriculture - but also extends the possibility of sustainability agreements between different market levels in compliance with competition law. The guidelines that have now been published provide the parties to such agreements with helpful information on the question of whether a sustainability agreement involving agricultural producers is exempt from the ban on cartels. As the scope of application includes the entire chain from production to food retail, Art. 210a CMO in fact creates considerable scope for the necessary transformation towards sustainable and climate-neutral agriculture involving all market players.