Getting Ready For A Group Discount - The European Commission's Updated Guidance On Joint Purchasing Arrangements

The European Commission recently revised its Guidelines on Horizontal Cooperation Agreements. This alert is the fourth and last in a series of alerts in which we provide practical guidance, in light of these revised Guidelines, on how to make antitrust-related assessments for various types of agreements between competitors.

Previously, we looked at sustainability agreements, joint venture agreements and information exchanges. In this alert, we take a closer look at the new guidance on the competitive assessment of joint purchasing arrangements.

What joint purchasing activities are covered by the Horizontal Guidelines?

Joint purchasing arrangements exist in a variety of industries. They allow companies to pool their various purchasing activities in order to negotiate better terms and conditions with suppliers of products or services. Joint purchasing arrangements can be implemented in different ways, such as by a separate company owned (and controlled) by its members, through a cooperative or a contractual arrangement, or perhaps through looser forms of cooperation, e.g., where a representative negotiates or concludes purchases on behalf of several companies.

According to the Horizontal Guidelines, joint purchasing can range from the pooling of actual purchases to the joint negotiation of components of purchase prices or other terms and conditions. It can sometimes cover additional activities, such as warehousing, quality control or joint transport. Depending on the sector, purchasers may then go on to consume the jointly purchased products, resell them or use them as inputs for their own activities.

Joint purchasing arrangements are generally intended to create a degree of buyer power vis-à-vis suppliers – power that the individual members of the joint purchasing arrangement would not have if they acted independently. This can help companies, especially smaller ones, to remain competitive in the downstream selling market. While these agreements can lead to lower prices, higher quality and greater product variety for consumers, they must be carefully structured to avoid anti-competitive pitfalls that could lead to a collusive outcome that could reduce variety, output, quality and innovation or foreclose the market.

Beware the buyer cartel!

As compared to the previous Horizontal Guidelines, the Commission's revised version makes a clearer distinction between legitimate joint purchasing arrangements and buyer cartels. Joint purchasing arrangements are generally not considered to be "restrictive of competition by object" if they involve genuine joint negotiations with suppliers. An arrangement that is restrictive of competition by object is one that is by its very nature harmful to competition, and is therefore presumed to be illegal. In contrast, buyer cartels, which are characterized by coordinated purchasing behavior without actual joint negotiations, do restrict competition by object and are therefore prohibited under competition law.

Buyer cartels may involve the fixing of purchase prices, market allocation or the exchange of commercially sensitive information between cartel members without actually engaging in genuine joint negotiations with a supplier. The exchange of commercially sensitive information concerns, in particular, the exchange between purchasers of the purchase prices they will pay (maximum prices, minimum discounts and other aspects of pricing), or other terms and conditions, sources of supply, volumes and quantities, quality or other parameters of competition (such as timing, delivery and innovation).

The revised Horizontal Guidelines set out two conditions which, if fulfilled, make it less likely that a joint purchasing arrangement constitutes a buyer cartel:

• Transparency to suppliers: The joint purchasing arrangement makes it clear to suppliers that it jointly negotiates and binds its members on the terms and conditions of their individual purchases or purchases made jointly on their behalf.
• Written agreement: The parties to the joint purchasing arrangement have defined the form of their cooperation, as well as its scope and operation, in a written agreement.

It should also be borne in mind that a joint purchasing arrangement may amount to a seller cartel if it is used as a tool to fix sales prices, limit output or share markets or customers in the downstream selling market; or to a horizontal boycott if the arrangement is aimed at excluding actual or potential competitors from the downstream selling market.

Not a buyer cartel, but still problematic?

A safe harbor for companies with limited market shares

Even if a joint purchasing arrangement does not constitute a buyer cartel, it may still restrict competition. However, joint purchasing arrangements are less likely to raise competition concerns if the parties do not have significant market power on either the upstream purchasing market or the downstream selling market. The Horizontal Guidelines provide market share thresholds below which market power is unlikely to exist, thus offering a "soft safe harbor" to the parties. This is the case if the parties to the joint purchasing arrangement have a combined market share not exceeding 15% on the relevant purchasing market and a combined market share not exceeding 15% on the relevant selling market.

What if safe harbor is not, or no longer, available

If a joint purchasing arrangement does not qualify for safe harbor, a more detailed assessment of the actual or potential harmful effects on the relevant upstream purchasing market and on the relevant downstream selling market is required.

According to the revised Horizontal Guidelines, the following factors are particularly relevant in assessing the anti-competitive effects of a joint purchasing arrangement:

• The market power of the parties participating in the arrangement, taking into account competitive parameters such as market concentration, profit margins, the closeness of competition, the nature of the products subject to the arrangement, the purchasers' degree of buyer power and the suppliers' degree of countervailing seller power.

With respect to the degree of buyer power, the revised Horizontal Guidelines place increased emphasis on the impact of the exercise of buyer power on suppliers, which may ultimately also have harmful effects on consumers. In particular, where purchasers collectively account for a large share of the relevant purchases, the exercise of buyer power, e.g., by threatening to walk away from negotiations unless the supplier offers lower prices, may lead to a reduction of profits, and therefore discourage those suppliers who do not have a significant degree of countervailing seller power from investing or innovating, and may force them to reduce the range or quality of their products.

• The risk that the purchasing arrangement may lead to collusion between the purchasers on the downstream selling market, taking into account the extent to which the characteristics of the downstream selling market are conducive to collusion, the degree of market power of the purchasers on that market and the degree of commonality of costs.

Even if a joint purchasing arrangement is restrictive of competition (e.g., because its members have a certain degree of market or buyer power), it may nevertheless be considered acceptable if its positive effects outweigh its restrictive effects. Four cumulative conditions must be met:

a. Efficiency gains: The arrangement must contribute to improving the production or distribution of goods or to promoting technical or economic progress. Joint purchasing arrangements may give rise to significant efficiencies, such as cost reductions or qualitative efficiencies in the form of the introduction of new or improved products by suppliers. Such efficiencies must be substantiated and be objective, concrete and verifiable.

b. Indispensability: The restrictive agreement may only impose restrictions of competition that are indispensable to the attainment of the benefits generated by the agreement. In other words, the agreement as a whole, and each of its competitive restrictions, must be reasonably necessary to achieve the benefits, i.e., there must be no other economically feasible and less restrictive means of achieving those benefits.

c. Pass-on to consumers: Consumers must receive a fair share of the claimed benefits of the agreement. In the case of purchasing arrangements, efficiencies such as cost reductions and quality improvements must be passed on to consumers to an extent that outweighs any restrictive effects on competition caused by the joint purchasing arrangement. For instance, in the case of lower purchasing costs, the pass-on may take the form of lower prices in the selling market.

d. No elimination of competition: The agreement must not allow the parties to eliminate competition in respect of a substantial part of the products concerned, either on the relevant purchasing market or on the relevant selling market.

Rules regarding ancillary restrictions and the sharing of information

If a joint purchasing arrangement is found not to be anti-competitive, any ancillary restrictive measures will generally also be acceptable, provided that they are objectively necessary and proportionate to ensure the proper functioning of the joint purchasing arrangement. For example, an arrangement may prevent members from participating in competing joint purchasing arrangements where this could jeopardize the proper functioning of the cooperation. It may also, in certain circumstances, provide for limited coordinated volume restrictions by the members of the arrangement if negotiations with suppliers reach an impasse. Similarly, the exchange of commercially sensitive information that the participants may wish and need to share with each other to ensure effective and successful negotiations must not exceed what is objectively necessary and proportionate for such negotiations.

Key points to be aware of when setting up a joint purchasing arrangement

Companies wishing to engage in joint purchasing activities with one or more competitors should ensure that:

• Legitimate purpose: The arrangement has a legitimate purpose, i.e., to engage in genuine joint negotiations with suppliers and to counterbalance their seller power.
• Written agreement: There is a written agreement in place that clearly sets out the form, scope and operation of the arrangement. It is helpful if the agreement includes specific language concerning the arrangement's legitimate purpose.
• Transparency: Suppliers are made aware of the existence and operation of the arrangement by the parties to the arrangement. This may also be helpful in addressing supplier concerns and reducing the risk of supplier complaints to competition authorities.
• Ongoing monitoring: A careful self-assessment of the arrangement is required, taking into account, among other things, the market position of the parties to the arrangement as well as the structure and characteristics of the relevant purchasing and selling markets. As these conditions may change over time, it is important to periodically reassess whether the conditions permitting the joint purchasing arrangement continue to exist.
• Proof of pass-on of efficiencies: The parties have the ability to show how efficiencies are being passed on (directly or indirectly) to consumers.
• Only objectively necessary restrictions and information exchange: A legitimate joint purchasing arrangement may include certain restrictions, provided that they are objectively necessary and proportionate to ensure the proper functioning of the arrangement. Similarly, members may exchange commercially sensitive information to the extent that such information is objectively necessary and proportionate for successful negotiations. Any restrictions or information exchanges that are not strictly necessary must be avoided.
• Compliance measures: Since a joint purchasing arrangement naturally involves close cooperation between different competitors on a number of commercially sensitive issues, it is essential to have robust compliance measures in place. For example, there should be clear, segregated structures and responsibilities, and detailed policies on how commercially sensitive information should be collected, stored and shared. Ensuring that these compliance measures are implemented consistently and on an ongoing basis is just as important as having the right measures in place at the start of the cooperation.

We would like to thank Ruben Debuf, Intern, for his contribution to this alert.