Specialisation and R&D: how can businesses collaborate without breaching competition law?

Current economic pressure impacting businesses and their supply chains, combined with more pressing demands for better ESG and innovation, are driving businesses to collaborate more closely. This includes pressure on businesses to collaborate with their competitors.

For competition authorities, collaboration between competitors has been (and remains) an area of sensitivity. The key concern being that collaboration may risk reducing the intensity of competition, leading to poorer outcomes for consumers or, in more serious cases, it may simply result in collusion that is clearly anti-competitive. A critical issue therefore is how to distinguish between legitimate forms of collaboration, undertaken responsibly, and illegitimate forms of collaboration that constitute market collusion or could otherwise be construed as anti-competitive.

Earlier this year, the UK adopted two pieces of legislation designed to provide greater certainty for businesses in the UK in two specific areas: specialisation agreements (such as agreements in respect of production / manufacturing) and R&D:

• The Competition Act 1998 (Specialisation Agreements Block Exemption) Order 2022 (“SABEO”) (here); and
• The Competition Act 1998 (Research and Development Agreements Block Exemption) Order 2022 (here) (“R&D BEO”)     

Framework for assessment of horizontal agreements

The SABEO and the R&D BEO contain a framework for companies and their advisers to use when assessing if two specific types of agreements breach competition law:

• Specialisation agreements: under which the parties agree (either unilaterally or reciprocally) to stop producing a particular product and purchase it from the other party, or they agree to have a product manufactured only jointly; and
• R&D agreements: under which the parties cooperate in the R&D of new products or technologies and sometimes also in the exploitation and commercialisation of the results.    

The SABEO and the R&D BEO contain detailed definitions of the types of the agreements that are covered and specify the market share thresholds that the parties must not exceed, as well so-called “hardcore” restrictions that they may not have in their agreements for them to be exempted.

These new set of rules were designed to carry over two EU block exemptions that had applied pre-Brexit and had been retained EU law up until the point they expired at the end of December 2022.  Those two EU block exemptions had to be read as part of broader set of guidelines on the application of EU competition law to horizontal agreements.  In a further mirroring of the post-Brexit legal landscape, the UK Competition and Markets Authority (“CMA”) has consulted on a set of UK guidelines for the assessment horizontal agreements (agreements between businesses that can be considered actual or potential competitors). The new UK horizontal guidelines are expected to be published later this year (here) and we will provide a further update once those guidelines have been finalised. Furthermore, the CMA has just completed a consultation on draft guidance on agreements between competitors or potential competitors in relation to environmental sustainability agreements, with the aim of further supporting legitimate ESG initiatives (here).

Transitional periods for ensuring compliance

The SABEO applies from 1 January 2023 to specialisation agreements entered into following that date. There is a two-year transition period provided to allow time for existing specialisation agreements (entered into before 1 January 2023) to comply by 31 December 2024.  

The R&D BEO also applies from 1 January 2023 in respect of R&D agreements entered into following that date, but only to the extent the parties cannot be considered to be competing in innovation (see below). There are two separate transitional periods provided for:

• for agreements entered into before 1 January 2023, there is a transitional period until 31 December 2024; and
• new requirements designed to protect competition in innovation apply only in relation to R&D agreements entered into on or after 1 January 2024.    

Key changes from the previous EU block exemptions

SABEO:

• Definition of specialisation agreements: The definition of specialisation agreements has been expanded to include not just agreements between undertakings that are already active on the same product market but also those who wish to enter a particular product market by way of the agreement. This addition will give companies more comfort that the agreements they intend to enter into may benefit from the exemption (if the other conditions of the SABEO are fulfilled).
• Unilateral specialisation agreements: the SABEO now covers unilateral specialisation agreements between more than two parties. The previous EU block exemption only applied to unilateral specialisation agreements that were entered into by two parties.
• Market share thresholds: the combined market shares of the parties to the specialisation agreement must not exceed 20% (the relevant market shares having to be calculated at the time at which the agreement is entered into). Under the SABEO, the agreement will only cease to benefit from the exemption after two consecutive years following the year in which the 20% threshold was first exceeded.
• Market share calculations: the parties’ market shares are to be calculated on the basis of data or information relating to the calendar year preceding that in which the calculation is being made. The SABEO now includes the provision that where the calendar year is not representative of a party’s position in the relevant market, then it should be calculated as an average of the party’s market shares for the three calendar years preceding that in which the calculation is being made.
• CMA intervention: under new provisions, parties are required to supply to the CMA information that it requests about an agreement that the parties claim is block exempt. If the CMA considers that this obligation has not been met, then it may cancel the applicability of the SABEO to the relevant agreement. The CMA can further cancel the benefit of the SABEO upon written notice to the parties.

R&D BEO

The R&D BEO contains similar new provisions to the SABEO with regard to the calculation of market shares, responses to CMA requests about agreements that parties believe are block-exempt and the potential cancellation of the benefit of the BEO in individual cases.

However, the R&D BEO also contains some far more extensive changes relating to competition in innovation.  

The principal difference is that the R&D BEO has retained the 25% combined market share threshold, which must not be exceeded for parties to be able to benefit from the BEO. However, it has broadened the scope of the threshold contained in the EU block exemption, introducing a new separate test for R&D agreements that are entered into between companies that are competing in innovation. The aim of this addition is similar to the extension of the SABEO to cover agreements between potential competitors: to foster innovation to the benefit of consumers.

Theoretically, this addition may increase the likelihood of businesses being incentivised to collaborate on future-facing R&D activities, as they have a new degree of comfort that their efforts will be compatible with competition law (if the other conditions of the R&D DEO are fulfilled). However, the difficulties and uncertainties associated with accurately estimating combined market shares, remain. In fact, while beneficial in theory, the new innovation provisions in the R&D BEO may make it more difficult for businesses and lead to an increased level of uncertainty in practice.

In order to benefit from the protection that the R&D BEO offers, parties will have to demonstrate that, at the time of entering into the agreement, there are:

• three or more competing R&D efforts comparable with those of the parties to the R&D agreement, or
• three or more third parties that are able independently to engage in R&D effort, which concerns:
  • R&D of a new product or technology which is the same as, or likely to be substitutable for, a new product or technology that would be covered by the agreement, or
  • an R&D cluster pursuing an aim or objective which is the same, or substantially the same, as an aim or objective that would be covered by the agreement.

Considering that the aim of the R&D BEO is to give comfort to companies that they will not be breaching competition law, it seems slightly odd to expect the companies to prove intricate details about the R&D activities of competitors with whom they are not intending to collaborate. The other obvious point is that it may be challenging for the parties to satisfy themselves on this condition without seeking to access to highly sensitive competitor information.

Comment

The UK Government needed to put the SABEO and R&D BEO in place as a result of the EU block exemptions expiring at the end of last year. While neither is arguably essential as part of the legal framework for UK competition law, they cover two areas where there is increasing focus and they therefore play an important role in giving businesses the confidence to invest in this type of initiative.  

The two EU block exemptions that they replace were, however, already complex and difficult to apply in practice. There is a risk that some of the additional features of the R&D BEO, for example in relation to “innovation”, may further complicate the issue.  

There is also the point that businesses do not want to have to assess their agreements to achieve the protection of different block exemptions in the UK and the EU; the risks of divergence being part of the business reality of Brexit.  Interestingly, the two EU block exemptions were due to expire on 31 December 2022 but have now been extended until June 2023 in order to give the European Commission more time to evaluate stakeholders’ views and also to complete their review of the EU guidelines on horizontal agreements.  Unless there are clear policy reasons for a difference in approach, it would surely have been better for business if the UK had continued applying the EU provisions (at least in substance) until the EU had concluded its review both of the guidelines on horizontal agreements and the two block exemptions, and then had decided whether it should adopt a similar (aligned) approach, again both on the more general guidelines on horizontal agreements and on specialisation and R&D agreements specifically?

Article co-authored by Clare O'Toole, Trainee Solicitor at CMS.