CADE issues decision regarding agreements between competitors and sustainability metrics
On June 21 of this year, the Board of the Administrative Council for Economic Defense (“CADE”) approved a joint venture involving important agricultural commodities players, whose objective is to develop and operate a B2B software platform for tracking and standardizing sustainability metrics across food and agricultural supply chains.
This approval decision is an initial indication from the Brazilian authority regarding the growing intersection between the competition law and the promotion of sustainability. The discussions raised in this decision show a glimpse of the Boards’ position regarding the risks commonly associated with the standardization of sustainability parameters among competitors and which measures should be adopted for tackling such risks.
In this case, the final position is still rather generic, applicable to any form of collaboration among competitors and lacking more specific guidelines on the interaction between these two variables. However, this is CADE’s initial step towards more advanced discussions internationally, with valuable indications on the measures necessary to structure collaborations among competitors in accordance with Brazilian competition law.
In addition, regarding the safeguards adopted and required by CADE to mitigate risks on the sharing of competitively sensitive information, it is not possible to say that the decision is innovative: the authority’s position adheres to the precedents that were also approved under the premise (and condition) that there would be sufficient firewalls and transactional and governance safeguards to preserve the independence between the activities of competing shareholders/players and the company object of collaboration.
Our Competition and Antitrust team carried out a detailed analysis (i) of the platform proposed by the notified joint venture and (ii) of the Board’s decision, identifying the main critical points of the subject and offering some recommendations for future cases (Case n. 08700.009905/2022-83).
1. About the platform
1.1 The transaction involved the formation of a joint venture aimed at developing and operating a B2B software platform to create sustainability metrics generated based on the anonymous and aggregated standardization of data¹ from different suppliers of agricultural and food products to allow the measurement of the environmental impact of commercial activities.
1.2 The central objective of the platform is to provide users with a consistent way of visualizing data based on existing methodologies currently used in the market without developing new methodologies or standards. Therefore, the aim is to increase efficiencies related to the measurement of sustainability data, making access to information more dynamic and consolidated, considering the growing demand, at national and international levels, from authorities regarding the presentation of sustainability information, including product traceability.
2. Conclusions and initial recommendations
2.1 The decision is the first to address the interaction between competition law and the promotion of sustainability more explicitly, although it did not offer exhaustive guidance². The approval of the joint venture was based, to a large extent, on the fact that the platform would not create rules or sustainability standards for the food and agricultural supply chains but would only consolidate and make available the metrics data and methodologies already widely adopted.
2.2 Thus, market agents should still wait for more explicit signaling from CADE on the criteria and parameters that may authorize greater levels of collaboration and restrictions on competition due to the promotion of sustainable objectives. which is a central aspect – and perhaps the most delicate one – on the intersection between competition law and sustainability. Nevertheless, it is possible to apprehend essential recommendations from the authority on the precautions companies must adopt to mitigate the competitive risks associated with initiatives between competitors.
2.3 More specifically, CADE understands that it is up to companies to:
2.3.1 show the existence of (i) assurances aimed at preserving the autonomy and independence of the management of the data-sharing platform and (ii) mechanisms for controlling, monitoring, and handling the flow of sensitive information within the scope of decision-making bodies and shareholders, to mitigate concerns related to the coordinated exercise of market power and the sharing of competitively sensitive information among competitors;
2.3.2 make public data available on the platform, preferably, and adopt precautions, such as aggregation and anonymization, for the treatment of data with some degree of competitive sensitivity;
2.3.3 incorporate technical solutions to maintain adequate levels of data confidentiality and security, such as data encryption and the segregation of hardware and information technology infrastructure;
2.3.4 formalize antitrust commitments that clearly and expressly establish principles, governance structure, systems, and supervision by a specific, qualified, and independent professional, as well as other measures to ensure that interactions within the scope of the platform comply with competition law;
2.3.5 show that the platform can be accessed by third parties, presenting the criteria and conditions for participation that ensure non-discrimination and equal access; and
2.3.6 demonstrate effective commitment to the implementation of these assurances, submitting internal and binding documents between the parties with the presentation of the objectives of the association between competitors.
3. Analysis of the transaction by the CADE Board
3.1 The General Superintendence – the body responsible for initiating cases and the fact-gathering phase – approved the formation of the joint venture without restrictions. Nonetheless, the case was submitted to the Board evaluation due to the proposal made by Commissioner Victor Fernandes³.
3.2 The case was then assigned to Commissioner Sérgio Ravagnani. When assessing the case, the Reporting Commissioner recognized that it has become a growing requirement to provide sustainability information in production chains, including product traceability. However, the Reporting Commissioner noted that the commitment to sustainable objectives does not constitute an antitrust exemption, and there are concerns about the misuse of the agenda to legitimize misleading environmental practices (greenwashing) intended to cover up anticompetitive conduct.
3.3 The Reporting Commissioner highlighted that two specific points deserved an in-depth analysis: (i) the possibility of creating or imposing sustainability standards that result in exclusionary or discriminatory effects on competition, and (ii) the access to sensitive information of competitors, suppliers, or customers by joint venture shareholders, as owners of the platform.
3.3.1 The exclusionary or discriminatory effects would be associated with the fact that the joint venture shareholders are large global commodity trading companies and could impose sustainability standards on suppliers, causing the exclusion of suppliers or the alteration of commercial conditions for their own benefit.
3.3.2 Access to the information on the platform would allow the joint venture shareholders to know relevant competitive variables of their competitors, considering that the data made available relate to commercial relationships and are not publicly available. Access to such information, therefore, could confer undue competitive advantages and generate coordination risks among suppliers, softening competition in the market.
3.4 To analyze such risks, the Reporting Commissioner relied on the guidelines established by the European Commission and the UK competition authority, which indicate certain conditions that must be met to mitigate competition concerns related to sustainability agreements between competitors. These conditions would generally involve:
(i) transparency in the development of sustainability metrics and standards and openness to participation by all interested parties in the development and selection of the standard;
(ii) no direct or indirect obligation to comply with the standard;
(iii) freedom for companies adhering the standard to adopt stricter standards/norms for themselves;
(iv) no exchange of competitively sensitive information that is not objectively necessary and proportionate for the development, adoption, or modification of the standard/norm;
(v) effective and non-discriminatory access to the result of the standardization process, including effective and non-discriminatory access to the requirements and conditions for using the agreed label, logo, or brand and the possibility for companies that have not participated in the process of creating the standard/standard to adopt them at a later stage; and
(vi) observance of at least one of the following criteria: (a) absence of significant price increase or significant reduction in the quality of the products involved as a result of the standard/norm adopted; or (b) joint market share of companies participating in the sustainability agreement of less than 20% in any relevant market affected by the standard.
3.5 Based on these criteria, the Reporting Commissioner observed that the “standardization” aimed at by the platform would consist solely of providing a friendly digital solution to make available comparable and consistent sustainability data to facilitate measurement and comparison over time by each user. This will result in a set of metrics and methodologies disclosed on the platform, presented according to customer requests, which are guided by current legislation and by the very requirements of end consumers. Thus, “standardization” would be necessary for organizing and presenting information to platform users.
3.6 Therefore, the platform’s activity would not be to create standards or norms for conforming practices and procedures in the sector but only to consolidate, organize and present the sustainability information received by the platform, following the metrics and methodologies already widely adopted. New metrics and methodologies for measuring sustainability parameters will not be created by the joint venture, being defined externallly to the platform, in discussions outside its control, with third-sector organizations, specialists, academics, industries, etc.
3.7 In addition, the Reporting Commissioner noted that (i) the platform would not have the function of providing accreditation or certification of companies, nor data verification mechanisms or generation of sustainability label for suppliers, customers, or any user; and that (ii) the platform will be accessible to any participant in the supply chain, under commercially reasonable conditions without any discrimination, preference, obligation of exclusivity or privilege, and the condition of shareholder would not result in any commercial advantage for the joint venture shareholders compared to other users.
3.8 For these reasons, the Reporting Commissioner ruled out the possibility of exclusionary risks, market foreclosure, or discrimination against competitors through the imposition of sustainability standards since:
3.8.1 such standards will not be created by the platform, which will only organize and present the data according to the metrics and methodologies already widely used in the sector;
3.8.2 any new metrics and methodologies for measuring sustainability parameters will not be created by the platform, being defined in externally, with third-sector organizations, specialists, academics, industries, etc.;
3.8.3 the platform will not provide certifications or labels that could generate differentiation and possible discrimination between suppliers; and
3.8.4 access will be guaranteed to any participants in the supply chain, under commercially reasonable and equal conditions, without excluding other market participants from joining the platform.
3.9 Regarding the risk of accessing and exchanging competitively sensitive information, the Reporting Commissioner found that all data on the platform will be presented in an aggregated and anonymized manner, being visible only to the owners involved in the private contracts that gave rise to the data provided to the platform. Additionally, the platform will not function as a marketplace either, making it impossible to identify and communicate with other users, form new businesses, and commercial agreements between platform users. Thus, there would be no risk that the information could be accessed and used anticompetitively. The joint venture shareholders clarified the technical solutions developed to preserve adequate levels of data confidentiality that will be received by the platform, which also served to convince the Reporting Commissioner as to the non-existence of such risks.
3.10 Even though the indicated safeguards were already provided in the Antitrust Protocol adopted for the implementation of the platform, the Reporting Commissioner suggested some additional adjustments to the Antitrust Protocol and the Shareholders’ Agreement presented by the parties. In summary, the considerations focused on:
3.10.1 the implementation of a specialized team to monitor compliance with competitive commitments;
3.10.2 the existence of a Chief Compliance Officer with autonomy to exercise her duties and conduct periodic audits;
3.10.3 the creation of a whistleblowing channel;
3.10.4 implementation of governance mechanisms and practices expected by the staff to ensure the commitments assumed;
3.10.5 quarantine policy for executives or professionals who are eventually hired by any of the shareholders;
3.10.6 details of professional relatinships that may be considered incompatible with the platform’s managerial independence from shareholders; and
3.10.7 implementation of internal procedures assuring that there will be no exchange of competitively sensitive information between members of the Board of Directors and shareholders.
3.11 Thus, understanding that the risks associated with the joint venture would be tackled by the safeguards presented and the platform’s very design and purpose, the Reporting Commissioner decided to approve the transaction without restrictions.
3.12 The Board unanimously followed the opinion of the Reporting Commissioner. Below we present a summary of the main points adduced by the Commissioners of the Board in their opinions:
Commissioner Luiz Hoffmann concluded that it would be essential to adopt a well-structured Antitrust Protocol and clear governance mechanisms, but that its mere existence, without a practical and effective application of the commitments, would not be sufficient to ensure competitive compliance. Thus, the actual commitment and the demonstration of the implementation of the Protocol would be necessary to authorize the approval of the joint venture, under penalty of review of the operation, pursuant 91 of Law No. 12,529/2011.
Commissioner Gustavo Augusto drew distinctions between the present case and the case recently judged by the Board and approved with restrictions related to the Catena-X initiative, indicating that there would be no horizontal sharing of information between competitors, that the business plan provides for the scope and application of the data collected, with direct verification of compliance with antitrust rules. The Commissioner also noted the relevance of data as an economic input, which could raise risks of market power exercise in the acquisition and centralization of data on the platform.
Commissioner Victor Fernandes discussed the repercussion of the topic in European jurisdictions, with the publication of guidelines and the review of guides on horizontal agreements to provide the business community with more predictable guidance on the legality of sustainability initiatives. The Commissioner indicated that sustainable businesses potentially harmful to competition should be analyzed with caution without departing from the strict application of the Competition Law. He also pointed out that there are sustainability that are, in fact, pro-competitive, but when this does not occur, it is necessary to ensure the proper functioning and application of antitrust laws.
President Alexandre Cordeiro highlighted his concern with expanding the authority’s competence, which should only be strictly focused on the protection and promotion of competition and consumer welfare. For the Presidente, the case did not involve “weighing competition and sustainability,” but consisted only in a transaction free from any risks to the consumer welfare, which is why he followed the decision for approval without restrictions.
¹ In summary, companies will provide this platform with traceability, environmental, and social data generated through their commercial contracts to external agents unrelated to the platform, who will aggregate this data and create metrics that reflect sustainability indicators. The data provided include information about the place of production, agricultural practices used, water consumption, chemicals and energy, deforestation reports, carbon emissions, forced labor, human rights, and child protection. Therefore, the platform does not generate new data; it only compiles anonymized data already available to simplify the management, presentation, and reporting of information.
² The decision did not deal with a crucial and very sensitive aspect of this interaction: the possibility of approving agreements between competitors that (i) aim at creating standards and norms to promote sustainability and (ii) eventually cause restrictions on competition.
³ For Commissioner |Fernandes, it was necessary to carry out a more in-depth examination of the competition analysis criteria applicable to agreements between competitors whose object is the development of sustainability metrics, analyzing the extent to which the safeguards adopted by the joint venture, such, for example, antitrust protocols and internal governance mechanisms would effectively mitigate the competition concerns related to the case.
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