With COP27 coming up on November 6, many activists and regulators are looking at the pledges and initiatives made as a part of COP26 to see if any measurable progress has been made. One program that grew out of COP26 exuberance, the Glasgow Financial Alliance for Net Zero (GFANZ), is potentially in turmoil as three major US Banks are reportedly considering leaving the alliance. Part of the reason behind the alleged break-up is fear of litigation under US antitrust laws according to those reporting on it. Mark Carney, GFANZ’s chair, denied that the banks are actually departing the group.
Antitrust laws in the US are designed to prevent collusion between companies that would lead to monopoly conditions in the market and are designed to ensure that a healthy level of competition keeps prices in check. However, antitrust restrictions may have the adverse effect of prohibiting climate pacts and thus our economy’s ability to reach net zero.
What are Climate Pacts & Why Are They Needed?
Climate pacts are collaborations among industry participants in various sectors aimed at reducing carbon emissions. Their purpose is to set standards and benchmarks and promulgate best practices for companies. They are voluntary organizations providing industries with an answer to the collective action problem presented by climate change. Harvard Business Review identified “more than 150 business climate collaborations ranging from common carbon accounting frameworks and principles for responsible investments to shared net zero objectives.”
Those familiar with “The Tragedy of the Commons” understand unique issues associated with collective action. Rather than doing a deep dive into 19th-century British economic theory – that blog pitch was a “hard no” from the powers that be – here is a short summary of the core issues at play:
Climate action requires that companies pay significant upfront costs to avoid staggering long-term risk and costs. These upfront costs can make operations more expensive and thus goods become more expensive. Any single market participant that chooses not to pay the upfront costs gains competitive cost advantage. This leaves emissions-reducing companies at a competitive disadvantage. The end result? Everyone forgoes climate action to remain competitive. Emission reductions go nowhere and everyone suffers from the long-term costs when the bill comes due.
Climate pacts seek to avoid this fate by getting all (or at least most) market participants to agree to a set of standards and goals so the whole market addresses emissions reductions and no one firm undercuts the rest through inaction. But US law contains meaningful obstacles to joint efforts between companies, especially when those efforts involve aggregated effects on pricing or product/service costs.
US Antitrust Law in a Nutshell
US antitrust law is built on three foundational pillars:
- The Sherman Act – The Sherman Act was originally passed in 1890. It outlaws contracts, combinations, and conspiracies that unreasonably restrain interstate and foreign trade. The Sherman Act is unique in that it goes beyond civil penalties and authorizes the Department of Justice to bring criminal antitrust cases.
- The Clayton Act – The Clayton Act was passed in 1915 to shore up the Sherman Act. It imposes civil penalties against companies that engage in price discrimination, conditioning sales on exclusive dealing, mergers and acquisitions that substantially reduce competition, and serving on the board of directors for two competing companies. While entirely civil in its enforcement, the Clayton Act notably allows individuals harmed by these behaviors to bring a cause of action for triple damages and injunctive relief.
- The FTC Act – The FTC Act established the Federal Trade Commission as a federal regulatory agency tasked with enforcing provisions of the law that ban “unfair methods of competition” and “unfair or deceptive acts or practices.” The penalties of the FTC Act are civil in nature and the FTC also has the authority to enforce the Sherman Act through civil suits because the Supreme Court has ruled that all violations of the Sherman Act are also violations of the FTC Act.
Central to this conversation are also state antitrust laws. Many states have their own antitrust laws that are modeled after these federal laws. State Attorneys General can bring investigations and suits against companies under their state laws. Historically these state laws were primarily used in cases where the antitrust violations took place entirely within one state’s borders. This avoided the interstate commerce requirement for Federal enforcement. Although, as ESG continues to be further politicized, Attorneys General with anti-ESG mindsets may turn these statutes that were intended to be shields against unlawful market practices into swords against climate pacts and coalitions. The Arizona Attorney General has announced his intention to do just that in a Wall Street Journal opinion piece (subscription required) published earlier this year. At a Federal level, the Department of Justice under the Trump administration brought an investigation on antitrust grounds against car manufacturers that supported California emissions standards. However, when the political winds changed, that investigation was dropped.
Let’s be Reasonable – Exemptions and Defenses
While these investigations and threats may be frightening from a legal compliance standpoint, we should take a moment to acknowledge that thus far, there haven’t been any successful suits brought against companies for taking part in climate pacts. Antitrust laws are being used to intimidate companies, but the likelihood of success of a legal action is questionable. In part, this is because of the “rule of reason.” Most antitrust offenses – outside of price fixing, bid rigging, and market allocation which are considered “per se” unreasonable – are subject to the “rule of reason” which examines:
- whether the practice in question in fact is likely to have a significant anticompetitive effect in a relevant market and;
- whether there are any procompetitive justifications relating to the restraint.
The courts then weigh the anti-competitive harms of the practice against the pro-competitive effects of the practice. This doctrine is somewhat complex: there is more about it here. If anti-ESG AGs continue down the path of using antitrust laws as weapons against climate pacts, this aspect of the law may feature prominently in efforts to defend these pacts.
Additionally, certain industries are exempted by statute or common law from antitrust regulation. To name a few: insurance, baseball, and agricultural cooperatives are under either judicial or legislative exemptions. None of these exemptions apply broadly to climate pacts, but I mention them to bring up that Congress or the courts could create such an exemption for climate-related cooperation as it has in the past for other industries.
What this Means
As if general counsels didn’t have enough on their plates, antitrust litigation for potential climate risk management is now one more thing to worry about. When evaluating your company’s commitments and participation in climate pacts consider the following:
- What is your risk tolerance? There are plenty of companies that will shrug off the risk of antitrust litigation as being too unlikely to have any substantial impact on the company, yet others may avoid climate pacts in an effort to curtail those risks. Whatever your approach, it is important to have this conversation internally and establish a risk tolerance for your company.
- What are your commitments? Climate pacts come in various shapes and sizes and some may be more likely to run afoul of antitrust laws than others. For example, Race to Zero has recently had to confront the litigation risks associated with its stance that new coal production isn’t compatible with science-based targets. Review what commitments your company has made and which programs you are a part of in light of state and federal antitrust laws and determine what legal exposures they may create.
- What is your plan? If Attorneys General do come knocking at your company’s door, have a plan for your defense. Data that show both the overall positive economic impact of a net zero transition and the overall consequences of failing to act may be particularly helpful in defending your company’s participation in climate pacts.