Material world

EU directives regulating the presence of chemicals in major product categories have had significant extraterritorial effect, including in the US. Rather than achieving compliance through traditional governmental command-andcontrol mechanisms, compliance with these directives has so far been left largely to contractual arrangements in the commercial marketplace of the global economy.

This far-reaching compliance mechanism has affected US and other non-EU companies as much as it has entities in the EU itself. This impact will expand as the EU’s product regulation initiatives are mirrored in jurisdictions from California to China, and will grow stronger as the EU begins to implement its recently enacted comprehensive ’registration, evaluation and authorisation of chemicals’ (Reach) chemical regulation legislation.

Producer responsibility
Currently implemented examples of the EU’s product-orientated directives are those aimed at a broad range of electronic products. Directive 2002/96/EC on waste electrical and electronic equipment (WEEE) set criteria for labelling electrical and electronic equipment and established requirements for collecting and recovering waste equipment. EU Directive 2002/95/EC on the ’restriction of the use of certain hazardous substances’ (RoHS) in electrical and electronic equipment places severe limits on the presence of certain hazardous substances in electrical and electronic equipment.

These directives were preceded by Directive 2000/53/EC on the ’end-of-life of vehicles’ (ELV), which established vehicle recycling requirements and also restricted the presence of certain hazardous substances in vehicles.

These directives are part of a ’producer responsibility’ initiative intended to decrease the presence of hazardous substances in products and encourage the reclamation of products at the end of their useful lives.

Going global
The requirements of the WEEE, RoHS and ELV directives apply only to those entities that introduce covered products into the EU market. A manufacturing facility in the US or China is not directly subject to these directives. However, the nature of the global economy has rendered these distinctions largely irrelevant.

The traditional vertically integrated manufacturing firm has long been replaced by firms that obtain their components from suppliers around the world and that also distribute their products through the global distribution chain. Furthermore, the advent of global markets has resulted in more products that are suited for multiple markets, with similar platforms and components being used in products throughout the world.

When a major market such as the EU imposes product content requirements, those requirements reverberate throughout the global supply chain. Major ’original equipment manufacturers’ (OEMs) do not want to, and in many cases simply cannot, produce economically ’EU-only’ products. Similarly, most of their component suppliers cannot manufacture economically different versions of the same parts to meet different market requirements.

Reversing the common concern of a ’race to the bottom’ where international environmental requirements are concerned, the EU directives have created the opposite effect: a ’race to the top’, in which major OEMs and their suppliers have decided to comply with the EU requirements for all of their products and components, regardless of the markets where they will be sold.

Commercial considerations
The EU and member states have been slow to establish government-driven compliance mechanisms for the product content directives. So far the regulatory bodies appear inclined to rely primarily on demonstrations of due diligence by the private sector entities that are introducing covered products into the EU market. At least one member state has suggested that a company that has an effective due diligence/compliance system may be entitled to deference in the event that isolated instances of non-compliance occur. Thus the private sector has been given an opportunity to develop a credible compliance infrastructure that is based on commercial as well as regulatory considerations.

The infrastructure that the private sector has created to manage compliance with the WEEE, RoHS and ELV directives is largely integrated into the commercial workings of the global supply chain. The premise is deceptively simple: each supplier in the product chain should know the materials content of their components and should be able to declare to the next entity in the supply chain that such components do not contain any hazardous substances in excess of the permissible limits.

This is typically accomplished through contract documents: the supplier signs a ’certification’ or ’declaration’ that its components meet the applicable requirements.

The simple premise belies the difficulty in execution. The supply chain due diligence process involves hundreds of companies located in countries around the world, with varying degrees of sophistication and ability to determine with any confidence the concentrations of hazardous substances in their components. Testing can be expensive and technically challenging, yet relying solely on other documents such as material safety data sheets may not be adequate.

Legal challenges
The somewhat ad hoc nature of the private sector compliance infrastructure has created some legal challenges. Foremost among the legal challenges is simply getting the law wrong. For example, contract documents will sometimes incorrectly state that the listed hazardous substances are prohibited, when the EU directives actually provide for allowable concentrations. Another common mistake is confusing the restrictions on product content with restrictions on use: there are no use restrictions so long as the content restrictions are met.

These EU directives are only the beginning of product-orientated requirements with regulatory and legal ramifications throughout the global economy that are not limited to the region that originated the requirements. For example, California recently adopted restrictions similar to RoHS that directly rely upon the EU’s restrictions (with some modifications) to determine what is legal to sell into the California market.

Companies looking to compete successfully in the global economy, and their counsel, must understand how these requirements affect their operations and the public and private compliance mechanisms associated with them.

Christopher Bell is a partner at Sidley Austin