Holy Cow: Antitrust supports Animal Welfare?

Co-authored by Kaya Ricken

One might not see the connection between antitrust and animal welfare at first sight. Truth is that these topics have been closely linked for quite some time now. This became (again) obvious this week, when the German Animal Welfare Initiative (“Initiative Tierwohl”) reacted to the concerns of the German Federal Cartel Office (FCO) and cancelled its current compulsory premium payable to participating farmers (“Tierwohlentgelt”). Covering this topic, we of course cannot get around also taking a look at the European Commission’s new Horizontal Guidelines.

Hold your horses: The link between animal welfare and antitrust

Sustainability, and with it animal welfare, is one of the most hotly debated topics of our time. In order to make an impact in this area on a considerable scale, it might be necessary that even very large companies act together. However, whenever companies act in concert, antitrust has a role to play. It is therefore not surprising that the Animal Welfare Initiative has worked closely with the German FCO from the very beginning.

The Animal Welfare Initiative: What is it?

The Animal Welfare Initiative is an industry alliance of farmers, the meat industry and food retailers. The overall goal of the initiative is to support and reward farmers for improving husbandry conditions in the area of poultry, beef and pork production. This goal is mainly financed by the four largest food retailers in Germany: EDEKA, REWE, Aldi and the Schwarz-Group (Lidl, Kaufland). Currently, the funding works through the payment of a compulsory premium which is paid to participating farmers per kilogram of meat sold (Animal Welfare Surcharge).

The Animal Welfare Initiative on a tight leash

Now to the nerdy part: The current framework agreement between the parties involved in the initiative is – spoken in antitrust terms – a horizontal but also a vertical agreement along the supply chain. A coordinated binding price mark-up through a horizontal agreement usually constitutes a hardcore restriction under antitrust law and as a result an infringement of German (and European) antitrust rules.

So, the question arises why this initiative should be exempted from the cartel prohibition. And this takes us to the lively debate of the relationship between antitrust and sustainability. But let’s focus on the case at hand: In Germany, there is no clear guidance on “sustainability agreements” and under which circumstances they can benefit from an antitrust exemption. But compared to other regulators, there is relatively rich case law from the FCO.

The regulator had concerns regarding the Animal Welfare Initiative from the very beginning. But inter alia since the initiative was a pioneer in its field and sustainability and animal welfare are sexy topics, it initially let the initiative go through with its plan. However, the FCO closely monitored the initiative and made clear from the start that in the long run the financing model would have to be designed more competitively.

Glimmer of hope: The European legislator

The European legislator might have made things easier for the initiative. It responded to the “trend” of sustainability agreements in 2021 with the adoption of Art. 210a of Regulation (EU) 1308/2013. This provision exempts agreements in the agriculture sector from antitrust if these agreements are indispensable to achieving sustainability standards higher than EU or national mandatory standards. The exact interpretation of the indispensability criterion will certainly provide room for discussion in the future. The European Commission intends to issue guidelines by the end of 2023, in which the conditions for the application of the new exemption rule will be explained in more detail.  

However, the German FCO has already signalled that it would doubt the indispensability of the Animal Welfare Surcharge, arguing that the initiative was well established on the market, had a high level of adoption, and that there were competing labels without binding price elements. Taking this into account, the initiative decided to discontinue its current funding model by 2024. Instead, a non-binding recommendation for financing the additional costs associated with the animal welfare criteria is to be introduced.

Is it all about justification?

As it was the case for the Animal Welfare Initiative (at least to a certain extent) many sustainability and/or animal welfare initiatives come at a price. Measures to protect the environment or to increase animal welfare often cost money and someone needs to pay for it. Ultimately, this will often be the consumer.

However, agreements on a certain fee or passing on costs thus regularly fall within the scope of antitrust rules and will require an individual justification. This is also somehow acknowledged in the new Horizontal Guidelines, which the European Commission adopted only yesterday. A large part of the chapter on sustainability revolves around justification of such initiatives. Without going into details, these are our initial key takeaways:

• Potential restrictions of competition are generally only justifiable if consumers get a fair share of the benefits. Before analysing the fair share of consumers, the Commission will analyse whether a restriction is indispensable, “because the analysis of consumer fair share should not include the effects of any restrictions that do not meet the indispensability condition”. In the Guidelines, the Commission illustrates some ways in which sustainability agreements can be indispensable, even where they might not appear to meet the criterion at first glance.

• The Commission acknowledges that, while there are clear-cut cases on both ends, a detailed assessment of the fair share of consumers cannot be avoided in some cases.

• Sustainability agreements might be most difficult to assess where they only lead to so-called collective benefits. These are benefits where the sustainability impact “accrues not necessarily to the consuming individual but to a larger group”. The Commission will take such collective benefits into account in case the parties to the agreement can (a) describe clearly the claimed benefits and provide evidence that they have already occurred or are likely to occur; (b) define clearly the beneficiaries; (c) demonstrate that the consumers in the relevant market substantially overlap with the beneficiaries or form part of them; and (d) demonstrate that the share of the collective benefits that accrues to the consumers in the relevant market, possibly together with other benefits accruing to those consumers, outweighs the harm suffered by those consumers as a result of the restriction.

Sustainability initiatives, including those on animal welfare, will remain difficult to assess. Thus, the parties involved should seek antitrust guidance from the very beginning. In this respect, the Animal Welfare Initiative might be a good example.

Co-author Kaya Ricken studied law in Münster and Glasgow (and currently works at ROCAN as a research assistant).

Photo (for this post) by Rubén Bagüés on unsplash