The Intersection Between ESG Efforts and Antitrust Law

A team of Vinson & Elkins attorneys recently summarized the intersection of ESG and antitrust law for a presentation at the American Bar Association’s 2022 Antitrust Spring Meeting, producing a 14-page paper, available through this link. Readers who need more detail should review the full paper, but below is a shorter explanation of the key takeaways for companies working to implement ESG initiatives.

Single-firm ESG Efforts — No Significant Antitrust Risk

Antitrust law applies less scrutiny to “unilateral” conduct (a single firm, acting on its own) than to “horizontal” conduct (collaborations between competitors) and other agreements. Unilateral conduct is unlikely to violate antitrust law unless the firm engaging in the conduct possesses a significant degree of market power. While there is no formal minimum for determining what level of market power counts as significant, courts in the United States only rarely find a single firm to possess market power if it has less than 50% of a properly defined market. For most firms, their small size alone should give them comfort that unilateral ESG actions will not raise antitrust concerns.

If market power is established, single-firm conduct antitrust analysis then examines market impact. The analysis usually proceeds to apply particular tests for particular types of conduct, and only one of these, “refusals to deal,” has significant relevance to ESG topics. Here, a key question is whether the refusal is conditional or unconditional. In both the United States and EU, liability for an unconditional refusal to deal is quite rare; in fact, the U.S. Supreme Court has suggested that such a refusal is almost automatically lawful. This is important in the ESG context because ESG policies often lead to unilateral, unconditional refusals to deal: a company may, for example, decide not to retain any vendor that fails to meet certain pollution-abatement standards. Such an action would be very unlikely to face antitrust problems.

In contrast to unconditional refusals, a conditional refusal may face antitrust attack if it involves an anticompetitive condition — e.g., “do not trade with my rivals, or I will not trade with you.” But most conditional refusals still would not be considered dangerous to competition in the absence of market power. A conditional refusal by a firm with a 5% market share, for example, likely would not impact the broader market enough to allow a plaintiff to state a viable antitrust claim.

“Collaborative” ESG Efforts  — Risk versus “Reasonableness”

Collaborative conduct — meaning, agreements and similar multi-firm efforts — is traditionally the greatest focus of antitrust law. But not all collaborations are equally suspect; to the contrary, most collaborations are competition-enhancing or at least competitively benign. Aside from “per se” (automatically) illegal conduct such as price fixing, most collaborative conduct is subject to a balancing test that examines market power, market impact, and business justifications. In the United States, the primary test is called the “rule of reason”; in the EU, the “effects balancing test” is the primary mode of analysis. This area of the law can be complex — again, readers should review the longer V&E paper for more details — but the V&E analysis divides ESG conduct into three buckets that should help clarify the analysis for ESG situations. These three buckets are: safe harbors; collaborations unlikely to cause concern; and collaborations likely to draw scrutiny.

Safe Harbors

There are two safe harbors that are likely to apply most commonly to ESG collaborations and conduct.

• The U.S. 20% Safety Zone: The United States Antitrust Guidelines for Collaborations Among Competitors, published by the Federal Trade Commission and Department of Justice Antitrust Division, establish an “antitrust safety zone” within which “the Agencies do not challenge a competitor collaboration when the market shares of the collaboration and its participants collectively account for no more than [20] percent of each relevant market in which competition may be affected.”¹ A 20 percent market share cap may not be enough to protect truly industry-wide ESG collaborations but it is large enough to protect most bilateral or small multilateral collaborations.
• The EU 30% Vertical Safe Harbor: The European Commission’s Guidelines on Vertical Restraints establish a safe harbor for vertical agreements (meaning, for example, manufacturer-reseller agreements) “if neither the market share of the supplier nor that of the buyer exceeds the 30 % market share threshold,” so long as the agreements do not contain certain unusual blacklisted or excluded restrictions.²

Note that the U.S. safe harbor applies to all agreements, whereas the EU safe harbor applies only to vertical agreements. Also note that market shares above the safe harbor levels do not mean conduct is illegal; they only mean that the conduct is ineligible for the automatic protection of the safe harbor.

Collaborations Unlikely to Raise Antitrust Concern

Many ESG practices, by their nature, are not likely to receive significant antitrust scrutiny. These include:

• Industry-wide Best Practices – Best practices discussions may include which ESG principles are most effective or which efforts have been most difficult to implement. These topics do not raise antitrust concerns, provided that the parties do not share “competitively sensitive information” (see “Information Sharing” below).
• Optional, Non-Exclusive Codes of Conduct – Collective pledges or codes of conduct among multiple companies are useful to promote a wide range of ESG goals. To ensure that a code of conduct does not raise antitrust concerns, members of the collaborative effort should confirm that (i) participation is voluntary and non-binding, (ii) each participant has the ability determine its own path to compliance, (iii) membership does not involve intrusive rival-to-rival auditing of compliance, (iv) participants do not share competitively sensitive information, and (v) the question of enforcement and penalties is left to government officials.
• Certification Standards – A common method to formalize ESG-focused codes of conduct is to award compliant companies with a seal of approval indicating that a company is, for example, “ESG Compliant.” To minimize antitrust concerns here, certifications should not be exclusive (a company should be permitted to pursue multiple competing certifications), and certified firms should make sure not to deny certification unjustifiably to a competitor.
• Petitioning the Government – Companies sometimes advance their ESG efforts by collectively lobbying the government to change a law. In the United States, such efforts are immunized from antitrust attack by the Constitution’s First Amendment (and Supreme Court antitrust cases, citing the First Amendment), so long as any anticompetitive effects flow from the resulting actions of the government, not from the direct conduct of the private parties. The EU has a similar policy based in non-constitutional law.

Collaborations Likely to Draw Increased Scrutiny

Four types of conduct are particularly likely to draw antitrust scrutiny, even if companies attempt them in the context of ESG discussions. The first two should be avoided. The second two should be done only with the advice of knowledgeable counsel.

• Hardcore Cartel Conduct – So-called “hardcore” cartel conduct includes price fixing, bid rigging, and customer or territory allocation. This type of conduct is viewed as the archetypal antitrust violation. ESG efforts must not be used as cover or sham for hardcore cartel conduct.
• Group Boycotts or Concerted Refusals to Deal – While unilateral refusals to deal involve only a minor antitrust risk, the risk of antitrust enforcement rises when multiple competitors reach an agreement not to do business with another firm. The same goes for group boycotts that arise in the context of trade association or standard-setting organization membership. In either case, a collective decision not to interface with certain competitors, even if it is for a failure to adhere to ESG principles, is potentially subject to antitrust liability.
• Joint Purchasing Arrangements – Joint purchasing agreements might be utilized by a group of competitors that agree to purchase goods only from certain ESG-compliant suppliers. Although such agreements are generally seen as procompetitive because they allow smaller companies to lower costs by achieving economies of scale, companies should be mindful that these agreements may draw increased antitrust scrutiny if they result in monopsony power — that is, the ability of the purchasing group to force suppliers to lower their prices below competitive levels. Consider whether such an arrangement would benefit from the market share safe harbors mentioned above. If not (or even if so), consult antitrust counsel to ensure that such an agreement can be justified.
• Information Sharing – Although open discussion of ESG efforts among competitors often is helpful to further collective ESG goals, collaborators should be very careful about whether or how to share “competitively sensitive information” because doing so may facilitate collusion or harm competition. Competitively sensitive information is any information of Competitor A that is not public or well-known, which, if learned by Competitor B, would allow it to predict Competitor A’s pricing or output strategies or influence the competitive decisions of either party. Competitors should be especially careful when deciding whether to share company-specific pricing, cost, margin, or volume information. Antitrust counsel can help design an information protocol that protects the participants from undue antitrust scrutiny.

For additional information about ESG issues and antitrust, please feel free to write to the authors or your usual Vinson & Elkins contacts.

¹U.S. Fed. Trade Comm’n & U.S. Dep’t of Justice, Antitrust Guidelines for Collaborations Among Competitors § 4.2 (Apr. 2000), https://www.ftc.gov/sites/default/files/documents/public_events/joint-venture-hearings-antitrust-guidelines-collaboration-among-competitors/ftcdojguidelines-2.pdf. “The safety zone, however, does not apply to agreements that are per se illegal, or that would be challenged without a detailed market analysis, or to competitor collaborations to which a merger analysis is applied.” Id.

²Guidelines on Vertical Restraints, 2022 O.J. (C 248) 5.