Legal Spotlight: Should REACH consortia charge ‘advantage compensation’?

Consortium agreements sometimes provide that new members joining the consortium after its formation or after a specific date shall not only pay the same costs as original memberst but also pay an additional amount. This can be described as “advantage compensation”, “entry fees”, “premiums” or some other term. The question, asks Jean-Philippe Montfort, is to what extent and under what conditions these advantage compensations are in compliance with the REACH Regulation and EU antitrust rules?

What does REACH say?

The REACH Regulation does not specify how registration consortia are to be organised. Consortia are private agreements that are subject to private contract laws and the parties are in general free to determine the terms of their contract, subject to compliance with mandatory legal provisions, such as EU antitrust rules.

However, the Regulation does regulate the formation and operation of substance information exchange fora (SIEFs) for the sharing of data between potential registrants of the same substance. In that respect REACH provides that the cost sharing data be determined in a manner that is “fair, transparent and non discriminatory” (Articles 27 and 30).

Since REACH consortia are organised by SIEF members to meet their compliance obligations, they are therefore bound to ensure cost sharing is “fair, transparent and non discriminatory”, an obligation which relates to underlying EU antitrust considerations.

Indeed, considering that REACH consortia are concluded between competitors, compliance with EU antitrust rules will require that these agreements are not intended to, nor have the effect of, restricting competition, for example by preventing or making it particularly difficult for potential new members to join the consortium, possibly to register their substance and thereby compete on the relevant market. This may well be the case if they contain provisions that are unfair and discriminatory and raise rivals’ costs to compete. There will be a particular risk if the consortium members collectively (or individually) enjoy market power, as part of an oligopoly in an antitrust market.

When is compensation fair?

The question therefore is whether and under what conditions advantage compensations in REACH consortia are fair, transparent and non-discriminatory and do not infringe EU antitrust rules.

The guidance document on data sharing produced by the European Chemicals Agency (ECHA) does not refer to advantage compensation. Rather, section 7.6 and example 10 in Annex 5 are based on the principle that new parties should pay the same financial contribution as existing members.

Nevertheless, an advantage compensation may be legitimate to the extent that it does seek to compensate founding or existing members for their work and expenses on consortium matters to date (“sweat equity”). However, this is different to the “risk premium” that some consortia charge to compensate data owners for their development risks. The recently launched ‘Code of Conduct for REACH Consortia’

(CW 18 June 2009) specifies that “entry fees, if any, should be objectively justified and the justification (calculation) provided to potential new members in advance to its decision to join the consortium”.

For example, if a new member joins one year after a consortium is formed and existing members have already participated in ten meetings involving preparation, participation, travel time and costs, an evaluation of that sweat equity could be made and applied to the new member, who would otherwise freely benefit from their work.

Ideally, the advantage compensation should therefore be set forth on the basis of objective and measurable elements, and not at the outset as a flat percentage of the consortium costs. However, if a flat percentage is set, it is important that it is commensurate to the sweat equity and not built as a barrier to new members. For example, a flat percentage of 20% of all consortium costs would be justified only if one were able to demonstrate that sweat equity indeed represented 20% of these costs on a rolling basis. Otherwise, it would be disproportionate and therefore unfair.

Another important element relates to the timing and transparency of consortium formation. If it was formed by a small group of companies who decided not to publicise their negotiations, for example before the pre-registration deadline of 1 December 2008, and if the consortium agreement then specifies that any new member has to pay an advantage compensation, then this may well reveal an intention to discriminate against new members, in particular if the advantage compensation in that case is not calibrated to compensate actual sweat equity.

Finally, an advantage compensation should not relate to study costs – the price that the members pay for existing or newly generated data. These may already integrate not only testing costs, but also administrative expenses and other factors (see ECHA guidance on data sharing, section 7.3.2). Imposing an advantage compensation on top of study costs would not be related to sweat equity, but would mean that companies pay different prices for the same studies. This would have the direct effect of discriminating between members to the detriment of newcomers and would raise serious antitrust concerns.