Cyprus: Competition And Regulatory: New Horizontal Block Exemption Regulations And Guidelines Come Into Force

1. Introduction

On 1 July 2023 the new Research & Development Block Exemption Regulation ("R&D BER") and the new Specialisation Block Exemption Regulation ("Specialisation BER") (together the "HBERs") came into force replacing the older versions which have applied since 2010. These new regulations will remain in force for 12 years.

The HBERs together with the new Horizontal Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union ("TFEU") to horizontal co-operation agreements ("Horizontal Guidelines") provide a more clear, coherent and simplified set of rules that promote competition, while introducing developments in relation to innovation, digitisation and sustainability.

Therefore, if you are a company that cooperates with competitors within the EU, these new updates on horizontal cooperation agreements are vital for complying with EU competition law.

2. General notes

Horizontal cooperation agreements are agreements between competing undertakings.

Article 101 of the TFEU aims to ensure that undertakings do not use horizontal cooperation agreements to prevent, restrict or distort competition in the internal market to the ultimate detriment of consumers.

The HBERs exempt certain Research & Development ("R&D") and specialisation agreements from the prohibition laid down in the Article 101 (1) of the TFEU because they are presumed to fulfil the conditions of Article 101(3) of the TFEU exemption, thereby HBERs create a safe harbor for those categories of agreements.

R&D agreements are agreements which have as their object the research and development of products, technologies or processes up to the stage of industrial application and the exploitation of the results, including provisions regarding intellectual property rights.

Specialisation agreements are agreements that have as their object, specialisation, including agreements necessary for achieving such specialisation. Such agreements may relate to the manufacture of goods and/or the preparation of services.

For each company who intends to enter into a R&D or a specialisation agreement, the first step is to consider whether such agreement can benefit from the R&D BER or the Specialisation BER, respectively.

3. The updated version of R&D BER and of Chapter 2 of the Horizontal Guidelines

3.1 The new R&D BER addresses issues which were making the cooperation between companies in R&D more complicated under the former regime.

For example, the new R&D BER and Chapter 2 of the Horizontal Guidelines have been modified to make clearer that parties to an R&D agreement, that do not compete on markets for existing products or technologies, may nonetheless be competitors in innovation, thus alleviating the previous concern that innovation competition was not sufficiently protected by the R&D BER in cases where it was not possible to apply the R&D BER's market share threshold.

Additionally, the new R&D BER introduces articles which provide the Commission and the National Authorities the power to withdraw the benefit of exemption established by the said regulation in individual cases, pursuant to Article 29 of Regulation (EC) No 1/2003, where, inter alia, the R&D agreement restrict innovation competition in a particular field.

Further to the above, in order to make it easier for companies to cooperate in R&D, to provide adequate legal certainty and to simplify administrative supervision, pursuant to article 6 of the new R&D BER, it is provided that where the results of R&D agreements are jointly exploited the exemption shall continue to apply for 7 years from the date on which the products or technologies are first put on the market and if after the expiry of the 7 year period, the parties' combined market share rises above the 25% threshold, the exemption shall continue to apply for a period of 2 consecutive calendar years.

Additionally, article 7 of the new R&D BER provides the option to calculate the market shares based on an average of the 3 preceding calendar years if data for the preceding calendar year is not representative.

Transitional Period

The new R&D BER provides for a transitional period of two years (from 1 July 2023 to 30 June 2025), during which the prohibition laid down in Article 101(1) of the TFEU does not apply to R&D agreements that are already in force on 30 June 2023 and do not satisfy the conditions for exemption set out in the R&D BER but satisfy the conditions for exemption provided for in Regulation (EU) No 1217/2010 (older version).

3.2 Regarding the Horizontal Guidelines, a new section explaining how to apply the R&D BER is introduced.

4. The updated version of Specialisation BER and of Chapter 3 of the Horizontal Guidelines

4.1 Having regards the uncertainty contained in the old version of Specialisation BER regarding its scope, the new Specialisation BER makes things clearer by broadening the definition of "unilateral specialisation agreements" to cover agreements that include more than two parties, a change particularly beneficial for small and medium sized enterprises ("SMEs") since cooperation of more than one party may be required for an effective specialisation.

Similar to R&D BER, in order to make it easier for companies to cooperate in Specialisation BER, to provide adequate legal certainty and to simplify administrative supervision, the new Specialisation BER simplifies the grace period that applies if the parties' market shares increase above the threshold for exemption so as when the market shares increases above the 20%, the exemption shall continue to apply for a period of 2 consecutive calendar years.

Likewise, the new article 4 of the Specialisation BER provides that the market shares of the parties shall be calculated based on an average of the 3 preceding calendar years if data for the preceding calendar year is not representative.

Regarding specialisation agreements concerning intermediary products the new Specialisation BER clarifies how the market share threshold applies for the exemption to be applicable, namely (a) the parties' combined market share not exceeding 20% on the relevant market(s) to which the specialisation products belong; and (b) the parties' combined market share not exceeding 20% on the relevant market(s) to which the downstream products belong.

Again, like the new R&D BER, the new Specialisation BER introduces articles which provide the Commission and the National Authorities the power to withdraw the benefit of exemption established by the said regulation in individual cases, pursuant to Article 29 of Regulation (EC) No 1/2003.

Transitional Period

It should be noted that the updated Specialisation BER provides for a transitional period of two years (from 1 July 2023 to 30 June 2025), during which the prohibition laid down in Article 101(1) of the TFEU does not apply to specialisation agreements that are already in force on 30 June 2023, and do not satisfy the conditions for exemption provided for in the Specialisation BER; but satisfy the conditions for exemption provided for in Commission Regulation (EU) No 1218/2010 (older version).

4.2 In relation to the Chapter 3 of the Horizontal Guidelines, it is now clear that the guidance covers all types of horizontal subcontracting agreements, not just those that aim to expand production.

Further, the Horizontal Guidelines contain a new section explaining how to apply the Specialisation BER and a new section on a specific type of production agreement namely the mobile telecommunications network sharing agreements ("NSAs").

4.2.1 NSAs

NSAs are agreements under which mobile telecommunications network operators share the use of parts of their network infrastructure, operating costs and the cost of subsequent upgrades and maintenance. This new section in Horizontal Guidelines covers agreements relating to the joint deployment of infrastructure by mobile telecommunications network operators but not agreements relating to the provision of mobile telecommunications wholesale access products.

The Commission considers that, in principle, NSAs, including spectrum sharing, do not restrict competition by object within the meaning of Article 101(1) of the TFEU, unless they serve as a tool to engage in a cartel, while NSAs can, however, give rise to restrictive effects on competition, inter alia, by limiting infrastructure competition that would take place absent the agreement, this leading to limit competition in the supply of mobile telecommunications services. It is provided that NSAs always require an individual assessment under Article 101 of the TFEU and indicative factors are provided in order to assess each case depending on its facts.

5. Sustainability agreements – Chapter 9 of the Horizontal Guidelines

5.1.1 Recognizing that sustainable development is a core principle of the Treaty on the European Union and a priority for the EU policies, the European Commission has committed to implement the United Nations' sustainable development goals. Towards this commitment, a new chapter on sustainability agreements has been introduced aiming for competition law to contributes to sustainable development by ensuring effective competition which spurs innovation, increases the quality of choice of products, ensures an efficient allocation of resources, reduces the costs of production, and thereby contributes to consumer welfare. Further, for novel or unresolved questions on individual sustainability agreements, the European Commission provides informal guidance through its Informal Guidance Notice.

Pursuant to the new Chapter 9 of the Horizontal Guidelines, sustainable development refers to the ability of society to consume and use the resources available today without compromising the ability of future generations to meet their own needs. It encompasses activities that support economic, environmental and social (including labour and human rights) development. The notion of sustainability objectives therefore includes, but is not limited to, addressing climate change (for instance, through the reduction of greenhouse gas emissions), reducing pollution, limiting the use of natural resources, upholding human rights, ensuring a living income, fostering resilient infrastructure and innovation, reducing food waste, facilitating a shift to healthy and nutritious food, ensuring animal welfare, etc.

According to the Horizontal Guidelines, a sustainability agreement refers to any horizontal cooperation agreement that pursues a sustainability objective, irrespective of the form of cooperation.

Sustainability agreements will only raise competition concerns under Article 101 of the TFEU if they entail restrictions of competition by object or they lead to appreciable actual or likely negative effects on competition. Agreements that restrict competition cannot escape the prohibition laid down in Article 101(1) of the TFEU simply by referring to a sustainability objective.

Where sustainability agreements restrict competition within the meaning of Article 101(1), they may still be compatible with Article 101 of the TFEU if they fulfil the four conditions of the exemption provided by Article 101(3)of the TFEU.

On the notion that sustainability agreements do not differ from other types of horizontal cooperation agreements, the Horizontal Guidance provide guidance on how to handle a possible agreement with multiple objectives thus when an agreement corresponds to one of the other types of horizontal cooperation agreement and also such agreement pursues a sustainability objective, the specific guidance of the relevant Chapter should be followed along with the guidance provided in Chapter 9, whereas in case of inconsistency, the most favorable guidance may be followed.

Further, the Horizontal Guidance provides an illustrative example of agreements that generally will fall outside the scope of Article 101 of the TFEU such as:–

However, where sustainability agreements affect competition negatively, they have to be assessed under Article 101 (1) of the TFEU. To such end, the effects of such agreement on competition will have to be assessed and the following factors should in particular be taken into account: – the market power of the parties participating in the agreement; the degree to which the agreement limits the decision-making independence of the parties in relation to the main parameters of competition; the market coverage of the agreement; the extent to which commercially sensitive information is exchanged in the context of the agreement; and whether the agreement results in an appreciable increase in price or an appreciable reduction in output, variety, quality or innovation.

Nonetheless, sustainability agreements that restrict competition within the meaning of Article 101(1) of the TFEU, either by object or by effect, can still benefit from the exemption provided by Article 101(3) of the TFEU if the parties are able to demonstrate that the four cumulative conditions of that provision are fulfilled.

5.1.2 Sustainability Standardisation Agreements

A new sub-category of sustainability agreements is provided for in the Horizontal Guidance namely the sustainability standardisation agreements which are agreements between competitors who may agree to adopt and comply with certain sustainability standards such as to agree to replace non-sustainable products or to agree to purchase only production inputs that have been manufactured in a sustainable manner. Such sustainability standardisation agreements have specific features. Besides the positive effects that sustainability standardisation agreements have inter alia the contribution to sustainable development, they may also enclose restrictions to competition by object.

In order to safeguard a soft safe harbour for sustainability standardisation agreements and not to lead to restriction of competition, six cumulative conditions need to be met: –

Failure to comply with one or more of the above conditions of the soft safe harbour does not create a presumption that the sustainability standardisation agreement restricts competition within the meaning of Article 101(1) of the TFEU but then an individual assessment of the agreement under Article 101 of the TFEU must be followed.

In such case, for a sustainability agreement to benefit from the exemption provided by Article 101(3) of the TFEU the parties to the agreement need to establish that the 4 cumulative conditions are satisfied i.e.: –

6. Other significant updates on the Horizontal Guidelines

In addition to the above updates on Chapters 2 and 3 and the new Chapter 9, the rest of the Horizontal Guidelines have been revised as well, namely the Introductory Chapter, the Joint Purchasing Agreements- Chapter 4, the Commercialisation Agreement- Chapter 5, the Information exchange- Chapter 6, the Standardisation Agreements and Standard Terms- Chapters 7 and 8 providing a more detail guidance on each type of agreement and clarifying numerous issues that previously were matters of controversies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.