To cooperate or not to cooperate? From the expectations of the CSDDD to the dangers of cooperation in light of EU competition law

The relationship between companies and sustainability is no longer one of separation. The European Union (‘EU’) is now particularly aware that the protection of fundamental rights and the improvement of the environment require a collaborative approach, in which businesses play a crucial role as drivers of more sustainable production and consumption patterns. This awareness is reflected in the recent adoption of the Corporate Sustainability Due Diligence Directive (‘CSDDD’ or ‘Directive’).

While it may not seem obvious, the CSDDD may confront companies with contradictory duties. On the one hand, there is the need to comply with Competition Law rules, which could be quite restrictive towards business cooperation, resulting in heavy fines. On the other hand, there are due diligence obligations, which may require such cooperation, deriving from the CSDDD. Indeed, there are several instances where the CSDDD expects companies to cooperate with their direct and indirect business partners (see Recitals 45, 53 and 66) and collaborate with other companies, either to prevent or, when prevention is not possible, to adequately mitigate, potential adverse impacts (see Article 10(2)(f) and Recitals 46, 49 and 50), or to bring actual adverse impacts to an end (see Article 11(3)(g) and Recital 54).

Furthermore, the CSDDD stipulates in Article 13 that companies must implement appropriate measures to engage effectively with stakeholders (the definition of the term is enshrined in Article 3(1)(n) and is sufficiently broad to encompass undertakings) during the due diligence process. This obligation is further elaborated in Recital 65.

Despite the relevance given to the collaboration with other companies in the context of due diligence, the Directive is not conclusive in imposing it. Indeed, a reference to compliance with Competition Law is included both in Recital 49 and in Articles 10(2)(f) and 11(3)(g). Furthermore, both provisions appear to regard collaboration between companies as a measure of last resort. According to the EU legislator, this is to be considered an appropriate measure ‘where no other measure is suitable or effective’.

Consequently, the extent to which companies subject to the CSDDD can collaborate towards complying with their due diligence obligations across the chain of activities without violating Competition Law rules remains unclear. This raises numerous questions on how to achieve compliance without triggering possible sanctions under Competition Law. And the question goes well beyond the CSDDD, given the broader expectations and the importance of corporate social responsibility and ESG factors.

It could be argued that it is now within the remit of the CSDDD, and of Member States transposing it, to determine the circumstances in which cooperation is deemed legitimate. It can also be claimed that Competition Law, through the competent authorities (either the legislature or the enforcer) must adapt its frameworks, principles and rules to the green transition and the sustainability agenda. This would help avoid a chilling effect on corporations’ initiatives.

It is true that the nexus between sustainability and the business world is also acquiring increasing relevance in the EU competition policy. To illustrate this, it is sufficient to cite the European Commission’s adoption of the new ‘Horizontal Guidelines on the applicability of Article 101 to horizontal agreements’ (‘Horizontal Guidelines’), containing a chapter fully dedicated to sustainability agreements (entered into by competing companies). This new chapter targets cooperation towards achieving a sustainability purpose, and it is designed to provide guidance on the extent to which collaboration between competitors can occur in compliance with EU Competition Law.

Such guidance is essential within a framework in which horizontal cooperation agreements that harm competition are prohibited under Article 101(1) of the Treaty on the Functioning of the European Union (‘TFEU’). Given that undertakings are to conduct a self-assessment first, to find out whether the agreement restricts competition, or, conversely, whether it meets the conditions to be considered justified in light of efficiency gains, it is paramount that legal certainty be ensured. If companies are uncertain as to whether they can collaborate or not, competition rules can become an obstacle to sustainability.

However, the ambiguity of the CSDDD is not answered by the Horizontal Guidelines, which are insufficient in scope, content and legal certainty.

To begin with, only agreements between competitors are targeted. In contrast, agreements entered into between undertakings operating at different levels of the production or distribution chain, that is to say, vertical agreements, are not covered by the Horizontal Guidelines, nor by the Guidelines on vertical restraints, which do not include a similar chapter on sustainability agreements entered into along the value chain. The CSDDD expectation on cooperation is primarily directed towards the relationship between business partners (ie between companies at different levels of the chain of activities), to which the Horizontal Guidelines do not apply.

Furthermore, even for horizontal agreements, the content of the Horizontal Guidelines is not entirely clear. It is true that the European Commission has stated that there are sustainability agreements that have no bearing on competition. Among these, there are those that aim to ensure compliance with legally binding international regulatory frameworks (but not yet, it seems, national or European Union law—perhaps because the exception of state action defence could already apply here), in relation to sustainability and human rights. The extent of this exclusion is, however, itself highly uncertain. In light of the CSDDD’s reference to the terms permitted by Competition Law and the subsidiarity perspective adopted, it could be understood from the outset that there is no binding legal framework arising from the CSDDD that imposes cooperation and allows companies to benefit from this safe harbour. It is sufficient to recall the strict interpretation given to state action defence, for which there must be an effective imposition of anticompetitive cooperation by state authorities to waive businesses' liability.

A continued reading of the Horizontal Guidelines reveals persistent uncertainty. Not because the Commission points out that restrictions of competition by object can also be found in sustainability agreements, but mainly because the analysis and self-assessment expected from companies become even more problematic at the level of the justification of a sustainability agreement that restricts competition (which will be commonplace). Firstly, efficiency gains must be objective, concrete and verifiable. This places the onus on the parties to the cooperation effort to bring evidence which, with regard to sustainability objectives in particular, may, and certainly will, not be within their reach. Secondly, the Guidelines stipulate that, in any scenario, consumers in the relevant market should be able to receive a fair share of the benefits resulting from the agreement. The (limiting) WTP (‘willingness to pay’) test then comes into play. This implies that collective benefits (ie broader societal benefits in favour of society in general) will only be taken into account if there is a substantial overlap with the interests of consumers in the relevant market and if they are sufficiently compensated for the damage suffered. Moreover, the overlap and compensation (not being merely marginal) must also be verifiable by the parties to sustainability agreements.

The dilemma remains unresolved in both the CSDDD and in Competition Law. The former is constrained by a logic of subsidiarity that leaves the assessment of the necessity of collaboration between companies to an analysis of the specific case. Competition Law, on the other hand, adopts an extremely restrictive approach to agreements between companies, allowing only those that are expressly required by law.

The absence of clear guidance regarding the expected enforcement may deter companies from taking action beyond what is strictly necessary.

As it currently stands, companies face a dilemma. Collaborating to fulfil the obligations of the CSDDD, may risk facing sanctions for infringing Competition Law, if agreements are deemed to restrain competition and thus are prohibited under Article 101(1) TFEU (despite having a sustainability rationale or broader societal benefits). In particular, a punitive rather than cooperative enforcement of Competition Law by competent authorities may result in collaboration efforts being potentially subject to fines because they are considered both restrictive of competition and not required by the CSDDD. Conversely, should companies fail to meet the expectations of the Directive with regard to cooperation with other entities, where such collaboration was deemed necessary, they risk penalties under the CSDDD. This may occur where, despite the uncertainty with regard to the compliance with Competition Law, the collaboration is subsequently deemed both allowed by Competition Law and required under the CSDDD.

Both businesses and sustainability deserve greater recognition and support. It is time for Competition Law to play its part in the pursuit of the United Nations 2030 Agenda for Sustainable Development and resolve this dilemma.

Inês F. Neves is Lecturer at the Faculty of Law, University of Porto.

Joana Fraga Nunes is Junior Lawyer at Morais Leitão.