On 8 July 2021, the European Commission (Commission) held that Daimler, BMW and the Volkswagen group (Volkswagen, Audi and Porsche) breached EU competition law and imposed a total fine of around EUR 875.2 million–of which around EUR 502.4 million on the Volkswagen group and around EUR 373.8 million on BMW. Daimler received full immunity as it revealed the existence of the cartel to the Commission and thus escaped a fine of around EUR 727 million. Most interestingly, the Commission did not fine the companies for “classic” cartel practices, such as price fixing, market sharing and/or customer allocation but, for the first time in its decision practice, for (secretly) agreeing on restrictions of technical development—specifically for colluding to limit the development and rollout of car emission control systems that could reduce harmful nitrogen oxide gases of diesel cars.
Even though the decision (and thus the details of the Commission’s considerations) have not yet been published, this case is obviously interesting since (1) the Commission, for the first time, imposed a fine for collusion solely relating to the restriction of technical development and (2) granted a 20% reduction of the fines due to the fact that this is the first decision based solely on a restriction of technical development”. In addition the case may have sweeping consequences (3) for many companies engaging in industry collaboration on innovative technologies and (4) how innovation and sustainability issues may have an impact on competitive assessment and competition law compliance in the future.
Facts and background of the cartel
In 2007, European law introduced minimum standards for nitrogen oxide (NOx) emissions for cars which were to be implemented over time. A method to meet these EU regulatory requirements is via selective catalytic reduction (SCR) systems which eliminate harmful emissions from diesel passenger cars through the injection of urea (also called “AdBlue”) into the exhaust gas stream.
Daimler, BMW and the Volkswagen group (Porsche and Audi included) held regular technical meetings, internally referred to as “circles of five”, to jointly develop SCR-systems for diesel passenger cars meeting the EU regulatory requirements. That cooperation allowed them to develop a technology to reduce the NOx emissions of new diesel passenger cars and to bring that technology swiftly to the market.
While Daimler, BMW, Volkswagen, Audi and Porsche possessed the technology to reduce harmful emissions (even) beyond what was legally required under EU emission standards, they colluded during their meetings, and for over a period of five years, to avoid to compete on using this technology’s full potential. In other words, the cartelists essentially agreed not to compete on offering technology to consumers that was cleaner than required by law and not to exploit the full potential of the technology.
More specifically, Daimler, BMW and the Volkswagen group reached an agreement on AdBlue tank sizes and ranges and had a joint understanding on the average estimated AdBlue-consumption. They also exchanged commercially sensitive information on these elements.
While it appears that the Commission did not find the cooperation of the car makers to achieve the legal EU standards as such illegal and in particular not agreements on the standardization of the AdBlue filler neck, discussions on quality standards for AdBlue or the joint development of a software platform for AdBlue, it found that the fine line between legal and illegal cooperation was crossed—and this is the basis for the fine—when the car manufacturers agreed that none of them will take the (available) technology to the point of achieving a reduction in harmful NOx emissions beyond the legal requirements (“over-fulfilment”) and when the companies restricted competition with regard to AdBlue-refill ranges and comfort.
While BMW appears to have defended itself by saying that it had not implemented the agreements, in the Commission’s view the carmakers’ discussions already constituted an infringement. Cartel authorities can indeed impose fines for by object infringements such as the illegal exchange of information or the agreement, even if the companies involved in the discussion do not implement them. In the past, cartel authorities have made ample use of these powers and safeguards against compliance risks from illegal information exchange, in particular, should be a core element of each compliance program and cooperation agreement between competitors (graphic).
New legal territory due to a new theory of harm?
The novelty and significance of the Commission’s decision stems from the fact that for the first time the Commission has concluded that essentially collusion on technical development constitutes a cartel, as was illustrated by a statement issued by the Commission’s Executive Vice President Margrethe Vestager:
In contrast to price agreements and market sharing, agreements on technology (and related product features) would be unlikely to have been caught by EU competition laws in the past. Cooperation in the field of research and development can be very advantageous for competing companies as it enables companies to pool their know-how and resources in order to jointly develop necessary innovations that each of them would not be able to develop on their own. Accordingly, in many industries—but in particular the automotive sector—cooperating on research and development and product development is a vital element of technical and economic progress and can generally be pro-competitive and permitted under EU competition law. However, Commissioner Vestager stressed that this case “is about how legitimate technical cooperation went wrong” since the carmakers jointly developed a technology but decided not to compete on exploiting it to its full potential.
While it is also an objective of competition law to ensure that companies invest in innovations and are exposed to the pressure of competitors, according to the Commission the above mentioned collusion of the five car manufacturers on technical development eliminated uncertainty about the market behaviour of their competitors (which is the litmus test for illegal cartel conduct) and thus constituted an infringement of the cartel prohibition by object in the form of a limitation of technical development. Less well-known than typical cartel infringements such as price fixing or market or customer allocation, this type of infringement is actually explicitly referred to in Article 101(1)(b) of the Treaty for the Functioning of the European Union (“TFEU”) and Article 53(1)(b) of the European Economic Area (EEA)-Agreement which explicitly prohibit agreements that “limit or control production, markets, technical development, or investment”.
On this basis, the Commission now for the first time has relied its fining decision solely on the restriction of technical development as a theory of harm given that due to the cartelists’ behavior consumers were not offered what would have been possible in the absence of the collusion – namely cars with better emission control systems (i.e. “greener” cars). In this context one may, however, raise the question whether such “greener” cars would have been available at the same price and, if not, the consumer would have bought them and how this may have an impact on the theory of harm in the present case where the collusion on non-competition on over-fulfilment was in the Commission’s view the core allegation. However, the (potential of) over-fulfilment of legal EU standards due to better technology would not have helped a lot—at least not for the achievement of sustainability goals (as will be discussed later)—if consumers would not buy those cars due to (potentially) higher prices.
At the same time the Commission has recognized the novelty of the case. The Commission granted an additional fine reduction of 20% to all companies given that this is the first cartel prohibition decision based solely on a restriction of technical development and not on price fixing, market sharing or customer allocation.
Protection of innovation and sustainability increasingly important
The focus of the Commission on innovation is not an entirely new development. Already previously—primarily in the area of merger control—the Commission had recognized that innovation is a key parameter of competition in many industries.
In a number of merger control cases, such as Dow/DuPont (Case M.7932, 2017) and Bayer/Monsanto (Case M.8084, 2018), the Commission assessed innovation concerns, often covering two types of effect, i.e. elimination of potential competition from pipeline products and wider innovation effects. The referenced Dow/DuPont and Bayer/Monsanto cases involved in particular the wider innovation concerns:
- In Dow/DuPont, the Commission found that the merged entity would have lower incentives and a lower ability to innovate than Dow and DuPont separately, and that the deal would remove incentives to develop new pesticides to bring to market. The concerns arose not in relation to particular pipeline products, but in relation to the general overlap of the parties’ R&D activities in respect of pesticides, where the companies were two of just five globally integrated R&D players. To remedy its concerns, the Commission required the divestment of much of DuPont’s global pesticide R&D organization.
- In Bayer/Monsanto, the Commission also applied a similar approach, and found that the transaction would have ‘significantly reduced competition in a number of markets and ‘significantly reduced innovation’. As part of the remedy package, Bayer committed to divest three important lines of its global R&D organization.
The fining decision at stake illustrates that the Commission considers innovation to be relevant in the broader realm of competition law and that any type of restriction may amount to a cartel. This is even more the case since, for the Commission, competition and innovation are essential for the EU to meet its ambitious Green Deal Objectives. Indeed, Executive Vice-President of the Commission Margrethe Vestager, stated: “Competition and innovation on managing car pollution are essential for Europe to meet our ambitious Green Deal objectives. And this decision shows that we will not hesitate to take action against all forms of cartel conduct putting in jeopardy this goal.”
It appears that the main reason for the Commission to choose this case to set an example of how restricting innovation competition constitutes a cartel, is the Commission’s willingness to use competition law enforcement to contribute to the realization of the “European Green Deal” to tackle the challenges of environmental protection. In the Commission’s view, aspects of sustainability are product features that can be relevant to customers and without the carmakers’ collusion, the consumers would have had the choice of a car that has better emission control than the cars offered as a result of the agreements. It can thus be expected that, in the future, innovation competition for more environmentally friendly technologies and environment-related agreements in general will come under much closer scrutiny of the Commission in cartel cases. Since Commissioner Vestager already indicated that a guidance letter sent to the parties will become publicly available together with the decision, there is hope that such letter can provide some guidance for other companies who want to enter into technological development cooperations.
It remains to be seen how “intensively” the Commission intends to enforce sustainability objectives in the competition law context in the future. In May 2021 the Commission published the findings of its evaluation of the horizontal block exemption regulation and related guidelines which will expire on 31 December 2022 and thereafter be replaced by new rules.
Since respondents also identified issues regarding conditions for research and development cooperation, the case at stake could serve as a starting point for the differentiation of legal and illegal horizontal cooperations, particularly in the field of technological developments considering sustainability issues. The Commission announced that the new horizontal block exemption regulation and its guidelines shall aim at promoting effective protection of competition and increasing legal certainty for companies with regard to different types of horizontal cooperation agreements, including agreements pursuing sustainability goals (See the Commission’s inception impact assessment of 7 June 2021; here)
Legal vs. illegal cooperation: what is the dividing line?
The Commission has emphasized that EU competition law does not stand in the way of pro-competitive cooperation between competitors on R&D and product development. Such cooperation can bring efficiency gains, for example in the form of a faster development and marketing of improved products because of the combined skills and assets. In the context of this case, the Commission provided guidance to the companies on aspects of their technical cooperation which raise no competition concerns.
For the Commission the dividing line is clear: companies must not coordinate their behavior to limit the full potential of any type of technology. Companies must not restrict their competition on performing better than what is required by law and they should continue to compete for the benefit of the consumers. Agreeing not to do so is therefore anti-competitive and illegal.
The guidance letter sent to the parties in the case at stake, which shall become publicly available with the decision shortly, will hopefully provide more guidance for companies who want to enter into technological development cooperations.
Conclusions and outlook
The case shows that technical cooperation can create significant compliance risks. This is even more the case at this stage where it is not (yet) clear to what extent competition authorities may and will increasingly take innovation competition into consideration in cartel and antitrust proceedings—in particular innovation for the benefit of sustainability irrespective of effects on prices, market allocations and other aspects which have so far been more on the radar of competition authorities to date.
In any case, even though the restriction of technical development has been ever explicitly prohibited by Article 101 lit. b TFEU, the “prosecution” of companies for agreeing to withhold technical innovations is breaking new legal ground or at least a new antitrust enforcement practice with potentially broad implications for the automotive sector but also beyond. While so many questions are still open given that key guidance documents have not yet been published or are under revision, the dividing line—against the background of the Commission’s decision—is that cooperation is possible, but companies may not limit the full potential of technology.
Finally; following the logic of cartel proceedings in terms of decisions on fines, the question arises, if the cartelists are likely to face follow-on cartel damages claims. While a large number of cartel damage claims are pending across Europe relating to the various cartels in the past (in particular concerning the truck cartel), it is questionable whether follow-on damage claims could be brought here. If one were to assume that in absence of the cartel, the consumer would have had the opportunity to buy “greener” cars (potentially at the same price or a higher price), it is doubtful—unlike in typical price cartel cases—who actually suffers financial damages by the restriction of innovation competition (as opposed to price competition), what the damage would be in the present case and how it could be quantified. Even more than in other cases, it will be crucial to involve specialized competition economists from the very beginning, in order to examine if a claim has realistic and good prospects, and management of potential cartel victims could be required to consider entering into competition litigation under the business judgement rule.