ESG Risks Related to Antitrust Law Enforcement and Liability | Cadwalader, Wickersham & Taft LLP

Hell is paved with good intentions.(Samuel Johnson); “Good intentions open many roads. Not all lead to hell.(Neal Shusterman)

Business enterprises are under pressure around the world to develop and adopt policies that promote social, environmental and governance (“ESG”) objectives. ESG is a broad label, covering issues that include, among others, environment (environmental sustainability; climate sensitivity in products and supply chains), social (inclusion and diversity) and governance (fairness and board diversity; executive compensation). Many ESG goals and policies are undoubtedly laudable from a societal perspective. Yet, perhaps surprisingly, lawmakers and antitrust authorities in the United States and Europe have raised concerns that behaviors associated with industry collaborations (particularly climate-related) could be challenged under the laws. antitrust.

Earlier this month, five U.S. senators, including ranking members of the Senate Judiciary Committee (Charles Grassley) and the Subcommittee on Competition Policy, Antitrust and Consumer Rights (Mike Lee), have writes to ESG practice leaders of more than 50 major U.S. law firms informing each firm of its “duty to fully inform clients of the risks they incur by participating in climate cartels and other misguided ESG schemes “. The letter goes on to warn that “the ESG movement is trying to arm corporations to reshape society in ways Americans would never endorse at the ballot box. Of particular concern is the collusive effort to restrict the supply of coal, oil and gas, which is driving up energy costs. Senators’ evident hostility to at least some ESG initiatives, Senators’ cross-shooting warrants examination of the relationship between applicable antitrust laws and industry activity.

Similarly, in a March editorial in The Wall Street Journal, Arizona Attorney General Mark Brnovich, referring to various climate initiatives by financial institutions such as the Glasgow Financial Alliance for Net Zero, accused “big banks and fund managers” of the “largest antitrust”. violation in history” by allegedly coordinating policies to “stifle energy investment”. And long before “ESG” was even a recognizable acronym, the FTC in 1984 challenged as anti-competitive a group of car dealerships in Detroit that came together to eliminate Sunday and weekday evening hours of operation to allow a better work-life balance for the dealer. employees.

In Europe, the European Commission (the antitrust arm of the EU) recently conducted a dawn raid on several fashion houses that focused on their thinking on developing common rules to create a fairer and more that reduces environmental waste and carbon emissions. . However, the ongoing investigation raises questions as to whether the companies in question have in fact banded together to agree conduct that could lead to higher prices, reduced production and possibly hurt emerging rival companies in industry.

How do all of these programs intended to promote the public good theoretically risk triggering potentially crippling antitrust actions and fines, even criminal liability? There are two relevant provisions of antitrust law, sections 1 and 2 of the Sherman Act. Section 1 prohibits “contracts, combinations and conspiracies” that unreasonably restrict trade. The operational concept for the purposes of potential ESG liability is that a breach of Section 1 must be based on concerted action. In other words, a violation of Article 1 requires an agreement between two or more actors. Companies that enter into collaborative arrangements, even under the banner of good faith ESG reform, nevertheless run the risk of being scrutinized under Section 1. This does not mean that such ESG reform efforts at the industry-wide violate antitrust laws. But it does mean that this activity must be conducted in accordance with risk-mitigating antitrust protection measures, such as filtering the types of information that can be shared between competitors or relying on benchmarking protocols that comply with the guidelines of the Federal Trade Commission and Department of Justice. In particular, parties to an ESG collaboration should take care to avoid sharing competitively sensitive non-public information, including information on current or future prices and marketing or sales plans. In trying to share industry best practice guidance, for example, proper benchmarking protocols with aggregated and anonymized information can help inform industry participants while protecting specific confidential data that may be risky to share among competitors.

Conduct by a single company to promote a given ESG policy is likely immune from antitrust scrutiny, unless the unilateral conduct can be challenged under Section 2, which prohibits monopolization. Although being a monopoly is not in itself illegal, the exercise of market power by a monopolist may constitute a violation of antitrust laws.

In sum, meritorious or not, a new reality is that legislators and antitrust enforcement agencies have begun to assert that anticompetitive harms can arise from ESG-focused industry collaborations. Companies that are considering engaging with industry groups to promote ESG policies, or companies that may be seen to have power in a local or national market for a good or service that are considering ESG policies, are well advised. to work closely with an antitrust attorney before proceeding with their plans. Particular “landmines” to avoid include: 1) reaching agreements rather than developing consensus goals, and 2) sharing current prices or future pricing plans.