Framework for Synthesis of SIEFs and Consortia
The Registration, Evaluation, Authorisation and Restriction of Chemical substances Regulation1 (REACH) requires substances manufactured or sold in the European Union to be registered with the European Chemicals Agency (ECHA). Registration requires the development of detailed dossiers for each substance. The REACH Regulation seeks to reduce the registration burden by requiring that companies regis tering a particular substance, including direct competitors, collaborate in the development of the data required for registration.
REACH-mandated collaboration is obligatory throughout the registration process. REACH requires companies (in all but limited circumstances) to share data and jointly submit a technical dossier for the same substance. Companies are also obliged to participate in a Substance Information Exchange Forum (SIEF), a virtual data sharing platform existing in ECHA’s IT system. In addition to participating in a SIEF, many companies have organised themselves into private, voluntary consortia in which they collaborate to generate the necessary data to satisfy their REACH obligations.2
EC competition law, however, is inherently sceptical of coordination among competitors, and the European competition authorities aggressively pursue competition law enforcement. Far from offering relief from the competition laws, REACH itself states that “[t]his Regulation shall be without prejudice to the full application of the Community competition rules.”3 To comply with both REACH and EC competition law, companies need to find the right balance between their conflicting obligations to cooperate and to compete. This will become more difficult as companies actively participate in SIEFs and consortia and receive requests to share data. It is therefore important for pre-registrants to understand the ground rules that apply to REACH collaboration.
REACH and Competition Law
Articles 81 and 82 of the EC Treaty outline the fundamental competition rules applicable in the European Union. Article 81 of the EC Treaty (Article 81 EC) prohibits agreements, decisions by associations of undertakings and concerted practices that appreciably restrict or distort competition. Article 81 EC is focused on collaboration among market participants, with the most serious concerns arising from collaboration among competitors.
In contrast, Article 82 of the EC Treaty (Article 82 EC) is concerned with the unilateral conduct of “dominant” firms and forbids them from engaging in “abusive” conduct. While dominance is often viewed in terms of market share, the defining characteristic of a “dominant” firm is its ability to operate on a market independently of competitors, customers, or any other competitive constraint. Article 82 EC imposes special rules on dominant firms. Where a firm is dominant, it may have a duty to deal fairly with competitors and to avoid unfair or discriminatory conduct.
Competition law is enforced aggressively by the European Commission and by the national competition authorities of the 27 EU Member States.4 Fines for infringement of competition law have escalated drastically in recent years and can be as high as 10 per cent of a company’s annual worldwide group turnover. An association of companies, such as a consortium, can be fined up to 10 per cent of “the sum total of [the turnover of] each member active on the market affected by the infringement of the association,” as long as the infringement relates to the members’ activities.5 Companies infringing competition law may also be ordered to cease conduct deemed anticompetitive, have their agreements invalidated and be sued for damages by injured customers or competitors.
Why REACH Creates the Basis for Potential Competition Law Risks
REACH’s policy of “no data, no market” and its mandate that prospective registrants cooperate ensure that companies will face day-to-day issues that raise EC competition law risks. There are a number of reasons for this
REACH REQUIRES COLLABORATION
REACH explicitly requires collaboration among industry competitors to prepare the registration dossier for a particular substance. REACH, however, provides little guidance on what constitutes acceptable collaboration. This raises fundamental concerns because when competitors collaborate there is a risk that competition will be reduced. The frequent interaction among companies necessitated by REACH (including phone calls and meetings) creates significant opportunities for comp anies to intentionally or carelessly conclude agreements that reduce competition.
REACH REQUIRES DATA SHARING
Data sharing is specifically envisaged by REACH. While sharing technical data on health and environmental hazards and risk management measures in support of registration can be innocuous, data sharing also can lead to a reduction in competition. The exchange of competitively sensitive data is a basic concern of EC competition law. On the other hand, companies that are obliged to share their data could also face competition law risk where the terms and conditions on which they allow access create the possibility of discrimination against or unfair treatment of other prospective registrants.
REACH CONSORTIA INHERENTLY YIELD “DECISIONS BY ASSOCIATIONS”
Consortia are made up of industry participants, typically including direct competitors. Actions taken on behalf of a consortium represent an inherent agreement among competitors. As the product of an agreement, all decisions or actions by a consortium are subject to scrutiny under Article 81 EC.
REACH CREATES BARRIERS TO ENTRY
In order for a company to manufacture a substance in the European Union or import a substance into the European Union in quantities of over one tonne, it must submit a registration dossier by the relevant deadline. For many substances, preparation of the registration dossier involves significant human and financial resources and can take years to complete. This inherent barrier to competition creates risks that a company or group of companies will use REACH to reduce competition, exclude competitors or raise their rivals’ costs of competing.
Competition Risks Arise in Numerous Situations
The four features of REACH identified above create pre-conditions for a wide range of specific competition law risks. Most commentary on the interface of REACH and competition law has focused primarily on risks from improper information exchange.6 Ensuring that information exchanges do not infringe EC competition law is undoubtedly important, but it is only one of a number of potential pitfalls. Companies face competition law risks in other contexts commonly arising as they seek to comply with REACH.
DENIAL OF ACCESS/REFUSAL TO DEAL
Most companies will make significant investments to develop the data required for REACH registration. Faced with this reality, many companies will choose to work together through a consortium or informally in the SIEF in order to share the costs of REACH registration and ensure compliance with REACH.
Companies that develop data to comply with REACH, whether alone or jointly, want to protect the value of their investment. Companies have little incentive to prepare a REACH registration dossier, only to see their investment appropriated by their competitors that did not share in the costs. It therefore makes sense for companies to limit access to their data by market participants that do not contribute to creating it. This approach must be balanced against the requirements of REACH to share certain data on fair, transparent and non-discriminating terms, as well as the constraints of competition law. Competition law normally permits a single company to deal–or not deal–with whomever it chooses. However, where the refusal to deal (or grant access) results in market exclusion, competition law risks arise–under both Article 81 EC and Article 82 EC.7 Depending on the particular facts, market exclusion could occur where access to data is denied outright, data is accessible only on unreasonable terms, or access to the consortium that is creating the data is denied.
Denial of Access to Data
Straightforward denial of access to information necessary to compete can raise concerns over market exclusion. As a practical matter, companies or consortia are unlikely to deny other prospective registrants access to their data outright, primarily because of the express requirements of REACH.8 Companies that refuse to share data necessary for REACH registration with other prospective registrants will likely infringe REACH itself. Companies refusing to share data face financial penalties, limitations on the use of their own data or restrictions on their own ability to register.9
Refusing access to data could also infringe competition law. Data is a necessary input for REACH registration. Where access to that input is denied, a company could effectively be excluded from competing on the market. The level of competition law risk arising from a refusal to supply data, however, depends on a number of factors, including the market position of the parties involved.10 A company or consortium that contemplates denying access to its data to other prospective registrants should carefully analyse the risks under both REACH and EC competition law.
Providing Access to Data Only on Unreasonable Terms
Instead of refusing access to data outright, companies and consortia may seek to disadvantage other potential registrants by imposing high fees or unfair terms on companies seeking access to their data. At extreme levels, high fees or unfair terms can have the same effect as an outright denial of access to REACH data and result in market exclusion. This socalled “constructive” refusal to provide access also raises competition law risks.11
Competition law constrains the use of excessively high prices or unfair terms where the effect is to exclude other companies from the market. In the context of REACH, competition law concerns would arise where the high fees or unfair terms have the effect of precluding a potential market participant from registering or competitively weakening them. Assessing what constitutes an excessive fee or unfair or unreasonable conditions under competition law is a factdependent exercise. A particular price may be acceptable under one set of facts, but considered excessive and exclusionary under another. Companies and consortia can identify possible competition law risks by considering the relationship between the fee charged for data, the content of data offered, and the costs and resources required to generate the data.
Companies and consortia are entitled to fair compensation for the costs incurred in generating the data but may not charge excessive fees. Determining the level of fee is not a simple matter of adding up the laboratory costs and dividing by the number of potential registrants. Companies can consider a number of other factors. (e.g. personnel time, data analysis, data input and dossier creation, management and administrative costs, inflation or cost of capital) when determining the fee to be charged for access. In many instances, this will be explained as a “premium” to the basic costs. Difficult competition law questions thus arise over the level of premium that companies and consortia may charge for their data. For example, a company or consortium that has already invested substantial time, effort and resources in generating and compiling the data could likely charge a relatively larger premium for access to its data. In contrast, a larger premium would likely be unjustified where a company or consortium is at an early stage of data development, when little work has been undertaken or resources invested.
In addition to the fee, the terms for data offered by companies and consortia can also raise competition law risks. There are at least two distinct risks that companies and consortia can anticipate related to the terms for sharing the data.
First, competition law risks could arise where a company or consortium requires prospective registrants to license more data than they need to register a given substance. REACH imposes different data requirements for registration, depending on the quantity of the substance involved or where the substance will be registered as an intermediate. A company that only imports one tonne of a substance will face limited data requirements compared to a company that manufactures 1,000 tonnes which must submit more extensive data. As a result, a company or consortium that forces all companies to license all of their data on a given substance–regardless of whether they need it to register in their respective tonnage bands–could face competition law scrutiny unless the terms can be justified on efficiency or similar grounds.
Similarly, requiring a prospective registrant to acquire data for substances that it does not need could raise competition law concerns.12 A consortium often addresses several substances and may decide to pool the data on these substances into a single package that is then made available to other prospective registrants. Yet, prospective registrants may only need access to data concerning a single substance. In this context, competition law issues can arise where data covering multiple substances is pooled and offered only as a package, not on a substance-by-substance basis. Although competition law risks can arise in this context, providing access to data required for REACH registration on a packaged basis may be justified in some cases by read-across strategies or other efficiency grounds, depending on the particular circumstances.
Nevertheless, in either case, requiring prospective registrants to acquire and pay for data that they do not need must be analysed closely to minimise competition law risk.
Denial of Access to Consortia
A consortium may want to close or limit membership to other comp anies or impose a high premium for subsequent joiners. While there is often no requirement to admit new members, denial of access to consortia, whether actual or constructive, can raise competition law concerns in certain circumstances.
The more serious risks arise where denial of access to a consortium effectively precludes a company from access to a market. This can occur where a consortium has unique access to resources that are unavailable to non-members. It can also occur where the consortium is composed of important industry participants that take strategic decisions regarding REACH compliance and registration, which affect the competitiveness of non-members. Under these circumstances, a consortium’s decision to close membership could have the effect of excluding prospective members from the market or placing them at a competitive disadvantage.13 Denial of access to consortia also can raise competition law concerns where it prejudices the excluded company vis-à-vis other competitors in the industry that were allowed to join the consortium.
Denial of access to a consortium, whether by outright refusal of membership or by imposing unreasonable terms, can thus raise competition law issues. At the same time, companies may impose objective, reasonable criteria for membership that may effectively mean that not all interested companies will choose to join (or be permitted to join). Moreover, a consortium may be justified in closing membership or charging a high membership fee long after its formation, when substantial investment has already been made or work substantially completed. Similarly, denial of membership may be justified where continuing to admit new members would become administratively burdensome or unworkable, providing that access to the necessary data is ultimately granted (see above). The Commission has confirmed in a number of cases, particularly those involving the policy of joint development in intellectual property, that denial of members can be justified in certain circumstances.14 However, the Commission has declared that where certain companies have agreed to limit membership to a select group, access to necessary intellectual property must be granted on fair, reasonable and non-discriminatory terms.15
Consortium rules must be reasonable and not have the effect of unfairly excluding certain industry participants. Decisions to limit, restrict or close memberships must be considered carefully to assess the market impact.
Discrimination by a company (or consortium) with a dominant position on the market can raise competition law concerns.16 This is particularly true where the discrimination distorts the market to the advantage of the favoured competitors and potentially harms those that are discriminated against Competition law risks can arise where a consortium applies different rules to different types of members or to non-members.
Discrimination Against Consortium Members
Consortia establish their own rules, including rules concerning member fees, voting rights and terms for access to data. Consortia may wish to establish different rules for different types of members, such as different voting rights or rights to participate in consortium management. Competition law often requires that rules of industry bodies such as consortia or trade associations be objective, fair and transparent.17 As a result, a consortium may apply different rules to different members, provided that the rules satisfy these criteria. Moreover, what constitutes objective, fair and transparent rules may also change over the stages of REACH. Consortia ultimately have discretion to develop voting rights, fee structures, data access and other rules that reflect the interests and needs of their members. However, consortium rules that distinguish between types of members need to be carefully considered in context to ensure that they are objective, fair and not unnecessarily exclusionary.
Discrimination Against Non-Consortium Members (i.e., SIEF Members)
The interface between consortia and SIEFs can also generate competition law risks because a consortium may wish to impose different, less favourable terms on SIEF members that do not also belong to the consortium. This can arise in the context of information sharing. For example, a consortium seeking to protect its data may be reluctant to share data with members of a SIEF that are not also members of the consortium. The consortium may seek to create different terms of access to data for non-members than it grants to its members. It may also wis h to limit access for certain nonconsortium members (such as “professional” Only Representatives).
A consortium’s decision to discriminate against non-members may create competition law risks where the terms imposed by the consortium provide that non-members can only obtain necessary data on terms that are unfavourable or place them at a competitive disadvantage.18 Examples of discriminatory conduct that could create competition law risks include charging much higher prices to non-consortium members for data access than are charged to members, or only providing limited rights of access where the potential registrant requires greater access to data and studies in order to compete effectively against the consortium members. These practices, however, must be evaluated carefully as they may be justified by the particular circumstances.
Consortia should examine carefully the conditions on which data access is given to non-members to ensure that they do not unfairly discriminate against the non-members and place them at a competitive disadvantage in the market.
In order to prepare a registration dossier, competitors must work directly with one another (either through SIEFs or consortia). Such cooperation requires competitors to speak and meet frequently. They must take decisions on the scope of work and financing their efforts. As such, they must interact regularly. This creates a significant “opportunity” for them either intentionally or unintentionally to agree on matters that could restrict or dis tort competition. This creates a significant competition law risk under Article 81 EC. It is the most serious type of competition law violation and the most aggressively enforced.
Consortia formed for the purpose of REACH compliance resemble trade associations and should be treated as such for the purpose of competition law compliance. Purely technical meetings involving health and safety experts or technical staff are unlikely to raise significant competition law concerns. However, senior executives are often involved in consortium meetings to make financial or strategic decisions, for example, in a steering or executive committee meeting. Such meetings raise significantly higher competition law risks. Executives participating in these meetings may not discuss or agree on competitively sensitive topics such as prices, markets, output levels or similar issues. This would give rise to “hard core” cartel exposure.
Risks to the Secretariat
It is not only the individual member companies that bear the risk for serious competition law violations. A recent decision from the European Court of Justice (ECJ) confirmed that the secretariat of an association also can be subject to liability. In particular, the ECJ found that the secretariat of an organic peroxide trade association that had operated as a cartel was itself subject to Article 81 EC. The secretariat was subject to fines, even though it was not active on the market.19 In a separate case brought by Ireland’s Competition Authority, an individual was sentenced to a term of six months imprisonment because he “aided and abetted” a cartel as its “enforcer” although he was not active in the market.20
In light of these risks, it is important that consortia (and loose affiliations through SIEFs) implement adequate competition law safeguards. In the context of either a SIEF or consortium, meetings that involve agreements or discussions on commercially sensitive topics and information must be tightly controlled or avoided altogether. Legal counsel should be present at all meetings that involve senior executives or those with sales, marketing or production (other than purely technical) responsibility. The secretariat should ensure that appropriate agendas are prepared for high risk meetings and that accurate minutes are taken.
Information exchange is at the core of REACH’s registration activities. It must, however, be controlled because improper information exchange can itself infringe competition law–even where collusion cannot be shown. Improper information exchange is the most commonly identified competition law risk associated with REACH. ECHA’s guidance on data sharing limits its discussion of competition law to Article 81 EC concerning restrictive agreements, and focuses solely on the risks of improper information exchange.21
The main competition law risk from information exchange is that potential registrants could use REACH compliance to exchange information that could lead to a reduction in competition through excessive market transparency or direct collusion. The particular concern is that companies that exchange competitively sensitive information will be able to take decisions more effectively which directly or indirectly fix prices and reduce output or divide markets.
To reduce the competition law risk associated with information exchange, competitively sensitive information should not be shared in the context of a SIEF or consortium. Price, cost and customer data should never be shared. Outside of these categories of data, the most sensitive data will relate to volume information. While volume information may be required for certain exposure assessments, procedures should be implemented to avoid the improper use of the information. This would include use of a trustee or other third party to collect, aggregate or anonymise data in a way that prevents disclosure to the participants.
Recommendations for Risk Assessment
There are a number of steps that can be taken to reduce risk consistent with REACH compliance. Whether these are appropriate for a given company, consortium or SIEF, however, will depend entirely on the specific circumstances involved. Certain basic criteria should, however, be observed:
- Consortia and companies should not deny access to data required for REACH registrants.
- In setting terms and conditions for access to data, consortia and companies must be sure that the terms are fair, transparent and non-discriminatory.
- At least in the early stages, a consortium must assess carefully any action that prevents access to the consortium. Decisions to close the consortium or restrict membership must be carefully evaluated, and must be consistent and objectively justified. Where membership is refused, access to data must still be available to the excluded potential registrant.
- Consortia should ensure that they avoid imposing discriminatory or unfavourable terms on new members or nonmembers unless these can be tied to a legitimate, objective justification.
- Information to be exchanged must be clearly specified and rules established to avoid the exchange of competitively sensitive information, including rules for the use of a third party trustee where appropriate.
- Agendas and protocols should be established for all sensitive meetings involving senior executives or individuals with sales or marketing responsibility, and counsel should be present at such meetings.