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Environmental and sustainability practices in the beauty industry: The CMA's approach

Posted on 12 February 2021

The Competition and Markets Authority (CMA), the UK's competition and consumer regulator, has recently launched two initiatives that could have an impact on companies within the beauty industry and their ability to market products as 'green' or 'sustainable'.

The CMA's investigation into greenwashing

In November 2020, the CMA announced an investigation into descriptions and labels used to promote products and services claiming to be 'eco-friendly', amid concerns that they could mislead consumers.

In particular, the CMA's investigation is focusing on:

  • How claims about the environmental impact of products and services are made.
  • Whether such claims are supported by evidence.
  • Whether such claims influence behaviour when purchasing goods and services.
  • Whether consumers are misled by an absence of information about the environmental impact of products and services.

The CMA plans to look across a wide range of sectors, although it has said that it is likely to focus on the sectors of particular concern to consumers, such as textiles and fashion, and fast-moving consumer goods (including beauty and cosmetics).

At this stage, the CMA has not reached a view as to whether or not consumer protection law has been broken. However, if it finds evidence that businesses are misleading consumers, the CMA has warned that it will take appropriate action.

Following its investigation, the CMA ultimately intends to publish guidance for businesses looking to make environmental claims. It may also provide advice to government depending on its findings.

In addition to its investigation, the CMA is also working alongside its Dutch counterpart as part of a project with the International Consumer Protection Enforcement Network (ICEPEN). From 9 to 20 November 2020, the CMA conducted a 'sweep' of randomly selected websites with ICEPEN members, aiming to identify the types of misleading green claims being made around the world. The results of this investigation have not yet been made public.

Environmental sustainability agreements and competition law

On 27 January 2021, the CMA released its guidance on "Environmental sustainability agreements and competition law" (the Guidance).

This guidance addresses cooperation agreements between businesses (including industry-wide initiatives and decisions of trade associations) intended to promote the achievement of sustainability goals, such as tackling climate change. This is because such agreements have the potential to breach Chapter 1 of the Competition Act 1998 (the Chapter 1 Prohibition). Chapter 1 prohibits agreements, decisions, and concerted practices between or among undertakings or associations of undertakings which have as their object or effect the restriction, distortion, or prevention of competition within the UK and which affect trade within the UK. Infringement of the Chapter 1 Prohibition is a serious matter, and can result in fines of up to 10% of worldwide turnover for each party to the agreement.

In the case of the beauty and cosmetics industry, businesses may be at risk of infringing the Chapter 1 Prohibition when, for example, they decide to combine expertise to make their products more energy efficient, or agree to use packaging material that meets certain standards in order to facilitate package recycling and reduce waste. Certain standard setting agreements, such as agreements by which businesses (often through trade associations or standardisation organisations) set standards on the environmental performance of products, production processes, or the resources used in production, also risk breaching the Chapter 1 Prohibition.

To address this issue, the CMA's Guidance states that businesses must use 'fair standard setting processes' in order to avoid breaching the Chapter 1 Prohibition. Accordingly, when setting up a new standard, businesses, trade associations and/or standardisation organisations should follow these steps to comply with competition law:

  • allow stakeholders to inform themselves effectively of upcoming, ongoing, and finalised standardisation work in good time at each stage of the development standard – for example, through the publication of regular updates in dedicated journals;
  • guarantee that all competitors in the markets affected by the standard can participate in the standard-setting process and join the agreement;
  • ensure access to the standard is on fair, reasonable, and non-discriminatory terms for all businesses which comply with it;
  • if the standard-setting involves intellectual property rights (IPR), participants must disclose in good faith their IPR that might be essential to the implementation of the standard. They must also offer to licence their essential IPR to all third parties on fair, reasonable, and non-discriminatory terms. This should be provided for in an IPR policy from the standard-setting organisation;
  • ensure that the members of a standard setting organisation remain free to develop alternative standards (including higher standards) or products that do not comply with the agreed standard.

When setting standards, businesses, trade associations and standardisation organisations should not:

  • exchange or disclose commercially sensitive information that goes beyond what is necessary for setting the standard;
  • impose obligations (either directly or indirectly) to comply with the standard, label or code of conduct on businesses that do not wish to participate;
  • make it difficult for businesses to develop alternative standards (including higher standards) or products that do not comply with the agreed standard;
  • use quality norms to prevent a technology or a competitor from entering the market. (Examples of this include setting a standard and putting pressure on third parties to prevent them from marketing products which do not comply with that standard, or colluding to exclude a new technology from an already existing standard).

In addition, the CMA has emphasised that businesses must avoid the most serious restrictions of competition. There are certain forms of collusion between companies that by their nature are most likely to prevent, restrict or distort competition. These are known as 'by object' agreements. For example, sustainability or standard setting agreements must never be used as a cover for a cartel or an arrangement by which the parties are exchanging competitively sensitive information.

Existing Protections

There are also a number of existing 'block exemptions' which may apply under UK law in order to protect sustainability agreements which otherwise might be considered to breach the Chapter 1 Prohibition (as long the infringement is not considered a 'by object' infringement, as above). These include:

  • Research and development agreements block exemption (expires on 31.12.2022)
  • Specialisation agreements block exemption (expires on 31.12.2022)
  • Technology transfer agreements block exemption (expires on 30.04.2026)
  • Vertical agreements and concerted practices block exemption.

Each of these block exemptions contain certain conditions that can apply to exempt agreements from an infringement of competition law.

Furthermore, in the case of any cooperation agreement that does not contain a 'by object' infringement, the CMA is likely also to consider whether that agreement benefits from an individual exemption. This can be the case where:

  • the agreement generates efficiencies;
  • these efficiencies cannot be achieved with other economically practicable and less restrictive means;
  • these efficiencies benefit consumers; and
  • the agreement will not lead to the elimination of competition in the market.

This is a particularly complex area, and both the CMA and European Commission are actively considering how individual exemptions should be applied in the context of sustainability initiatives Businesses should seek independent legal advice on whether their agreement may qualify for any of the exemptions set out above.

What does this mean for the beauty industry?

The CMA's greenwashing investigation and Guidance illustrate that it is turning its attention towards the environmental and sustainability areas of consumer protection and competition law. While the CMA remains serious in its approach to consumer protection, it is clearly also seeking to position itself as being in favour of sustainability progress. The Guidance in particular indicates that the CMA will take a measured approach when examining sustainability initiatives in light of the Chapter 1 Prohibition.  

However, the Guidance focuses on well-established exemptions and so does not provide any new insight. It remains to be seen whether the CMA will follow up with more detailed guidance (for example, in relation to individual exemptions) as it will not always be possible to apply the established exemptions to certain sustainability initiatives. The CMA states clearly in its Annual Plan for 2020/2021 that "it will communicate better to ensure that businesses engaged in sustainability initiatives know how to comply with competition law and do not unnecessarily shy away from those initiatives on the basis of unfounded fears of being in breach of competition law". It is worth noting that the European Commission has said that it expects to publish guidance covering these points as they relate to EU law by summer 2020. 

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