Maintaining Critical Control

:
Outsourcing REACH Compliance

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on By Catherine A. Muldo

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expir t and broad including the EU’s lates ACH to provide regulator y compliance, Enabling experts on RE ion for your company. ation and d decis ensure proper authoriz RE ACH, may be a soun mpliance strategy will tant access effec tive co tsourcing provides ins your company with an siness interruption. Ou imposed ing any bu compliance schedule registration, while avoid rigorous and on-going e d maintain the ing RE ACH complianc to expertise to meet an if done right, outsourc s in your comnted regulation. And, pects of the substance by this newly impleme control over critical as re of confidential achieved without losing can be d with minimal disclosu subject to RE ACH, an t are pany’s supply chain tha ing trade secrets. ary information, includ and propriet
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od and final phase-in registration periods ranging As defined by the European Chemical Agency from 3 to 11 years.4 For “non phase-in substanc(ECHA), “REACH is the Regulation for Registraes” there is simply a registration period and no tion, Evaluation, Authorization and Restriction of staggered deadlines established under REACH. Catherine a. Chemicals.” (Regulation (EC) No 1907/2006). It In almost all cases, these substances must be Muldoon is chief is the world’s most ambitious law on public health registered before they can be manufactured or legal officer with BdP international, inc., a and environmental protection. It became law on imported into the EU. As of June 1, 2008, all non leading global logistics provider. She manJune 1, 2007, and is designed to consolidate existphase-in substances must be registered if they are ages all corporate legal ing laws and regulations governing chemicals into to be manufactured or imported into the EU.5 matters globally. She earned her Ba from The registration period exceeds 11 years for a uniform legal code regulating both existing and the Johns hopkins some 30,000 chemicals. No substance covered new chemicals manufactured in and imported to university and Jd from Seton hall School of by the regulation can enter the EU without the the European Union. REACH places significant law. Muldoon is vice proper registration and certification. The obligaresponsibilities on manufacturers and importers chair of Corporate Counsel Forum of the tory registration dossier requires disclosure of to collect data and share information about the international Bar assochemicals in your inventory and in preparations substances used in their respective products and ciation and a member of and speaker for aCC. or finished goods that you export, distribute or any risks posed by such substances to human She can be contacted at cmuldoon@bdpnet.com. handle. The nature and volume of each chemihealth and the environment. cal affects the final registration deadline, and REACH applies to chemicals used in industry therefore, it is critical that it is categorized and in everyday life whether in their raw form, in accurately. The process for calculating the volume of each preparation of a substance, or as finished goods. Specifically, chemical is also critical and must be accurate, as volume REACH requires EU-based chemical manufacturers and relates to deadline.6 This option of outsourcing provides a importers to “collect all available relevant information on means to compliance, while avoiding EU sales interruption the intrinsic properties of a substance, regardless of tonof REACH regulated products. nage manufactured or imported.”1 The intended result is a comprehensive flow of information concerning the risks of The REACH compliance process is complex: Its risks are substances throughout the industry and to consumers. Reggreat, and the penalties for non-compliance are daunting. istration of substances is affected through the submission of Manufacturers and importers are faced with extensive data a dossier to ECHA which includes information on the subgathering and sharing requirements, as well as the possible stance’s properties, use and safe management. Registration need for costly testing of chemicals to fill information gaps. is applicable to any substance manufactured in or imported There is potential for divulgence of confidential data and disto the EU in annual quantities of one ton or more per comclosure of trade secrets for the unschooled REACH navigator. pany, unless there is an exemption.2 Manufacturers, importIt is critical that REACH compliance be handled deftly and ers, distributors and downstream users all have obligations accurately in order to ensure that your company is compliunder REACH. Companies wishing to import products ant. Failing to comply with the registration and authorization to the EU must demonstrate REACH compliance, or their requirements jeopardizes that company’s place and business products will not be permitted entry to any Member State in the EU market. Manufacturers and importers which fail to market. This mandate is rigorous and compels companies to comply on time must cease the manufacture and importation begin the compliance process for REACH without delay. until they comply with the strict REACH timeframes. The obligations of REACH commence with the beginSupply Chain Solution: Is Outsourcing REACH ning of the pre registration period. Pre registration ran an Option for You? from June 1, 2008, to December 1, 2008. Companies In the event that your company is unable (or unwillwhich pre register chemicals enjoy the benefit of extended ing) to perform REACH compliance internally, can registration deadlines for those chemicals. The company your company transfer to a third party the obligation must then proceed through the full registration process for to comply with REACH? Can REACH obligations be those chemicals that are to enter the EU market. Deadlines outsourced? Simply stated, only a natural or legal person to complete registration for pre-registered chemicals are established in the EU can be a registrant. If your comNovember 30, 2010; May 31, 2013; or May 31, 2018. The pany is an exporter of chemicals to the EU and does not staggered deadlines depend on “tonnage band and the have a subsidiary in the EU, the options for outsourcing hazardous properties of the substance.”3 For “phase-in substances”—those that were already being are limited. Pursuant to REACH, foreign nationals to the manufactured or imported into the EU before the enactment EU, with the intention to continue business within the of REACH on June 1, 2007—there is a pre registration periEU market, cannot register their chemicals themselves.

Understanding REACH

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There are three options for such an entity: • Set up a subsidiary within the EU; • Work through the importer in the EU; or • Register through an Only Representative. The first two options may have undesirable and unanticipated commercial consequences. Creating a subsidiary entity can be costly and burdensome in terms of corporate maintenance and management. Working with an importer creates a complicated arrangement as confidential and proprietary information will be released to a third party. Any formula or component of a product will need to be disclosed, risking trade secrets and exposing a company to reverse engineering. Also, to the extent that it relies on the EU market, the company business is vulnerable to the filings of an entity with which it may have little connection or loyalty. Control and ownership over the registration is relinquished, making it difficult to alter future distribution channels in the EU. In fact, if an exporter changes suppliers, the non-EU manufacturer may lose access to the European market. The Only Representative option provides a mechanism for manufacturers located outside the EU to participate in REACH pre-registration and registration. The definition of an Only Representative for REACH purposes is loose. It must both be a legal entity established in the EU and have “sufficient background in the practical handling of substances and the information related to them to be able to fulfill the obligations of importers.”7 A critical advantage of the Only Representative is that it is not required to reveal to other participants in the data sharing process the identity of the “non-Community manufacturer” being represented.8

Eight Benefits of Managing REACH Compliance Internally
Managing REACH compliance internally may make sense for your company. Some of the benefits include: • Reducing exposure to liability by maintaining control over the regulatory compliance. • Increasing company awareness of key compliance issues for REACH and other regulatory schemes “across the board” in all departments. • Maintaining progress on your timeline and having more control over critical decisions. • Another layer of protection for confidential or proprietary material. • Greater influence on the direction and content of SIEFs. • Increased management stake in compliance. • A more cost-efficient means to comply with the complex regulatory scheme. • Seamless project management—no new faces to work with or new places to work at.

Specific Outsourcing Advantages for REACH Compliance Making the Only Representative Work for You
Certain companies do not have the capacity, or in the instance of REACH, the corporate structure, to establish an effective in-house compliance program. As indicated by the above deadlines imposed under REACH, time is of the essence. If you cannot move quickly to comply, the EU market will be closed to you until you have registered all substances that fall within the purview of REACH. Your Only Representative is your adviser for a global REACH strategy that works for your company and its particular needs. Such a strategy should complement your internal compliance department and program through REACH transaction auditing, training and the development of appropriate policies for present and future filings.

Selecting a Vendor: Expertise
Find the vendor best equipped to propel your business forward. As this complex regulatory scheme is newly-developed, it is not certain how REACH will be interpreted and enforced. Thus, there is no substitute for knowledge or technical skill of

the regulation when choosing a vendor. Given what is at stake, your Only Representative must be fluent in REACH and be an effective organizer and communicator. Look for evidence that the Only Representative will bring best practices to the table. This entity should have long-standing experience in EU regulations for chemical safety, chemistry and toxicology, environmental risk management, legal issues and information technology for seamless REACH implementation. The technical expertise is only one aspect of what is needed for your Only Representative to be effective. REACH mandates that the registrant undertake onerous data gathering and submission in order to meet the registration and authorization requirements. As your registrant, the Only Representative will be tasked with organizing your company’s data. As owner of that data, you should require that any information compiled for REACH compliance be transparent to you such that you are aware of the status of filings, information requests, decisions made and actions taken. Further, the information should be easily traceable so that you can track results, which offers your company ultimate control. When your involvement or communication is required, you can respond within the critical time. Finally, your Only Representative should possess excellent communication skills to advocate on your behalf. As the Only Representative is the registrant, that entity/person is the face of your company’s compliance with REACH to ECHA and the Member State’s governmental bodies. In order to be effective, the Only Representative must present your data in a timely and accurate fashion. Further, your Only Representative must hold his own when dealing with

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non-governmental bodies as well. For example, the Only Representative may need to be communicating with other registrants in a Substance Information Exchange Forum (SIEF) in the likely event that you are required to consolidate information. In addition, you might require that the Only Representative negotiate on your behalf if you need to present cost sharing test work or to value data held by the supplier or importers with whom they are working.

Cost
Regulatory compliance always comes with a price tag, and REACH is no exception. Ideally, this cost is managed efficiently so that the benefit is realized in a manner that is commercially reasonable. What should REACH compliance cost? If you are insourcing, you will need the appropriate corporate structure in place to satisfy the logistics of REACH in addition to ensuring that your team is up to the technical task, which may require personnel hiring/changes and a significant training investment. If you do not have a subsidiary in the EU, REACH requires setting up a company, obligating you to meet all local Member State requirements and its attendant banking, labor and tax consequences. Further, to manage the on-going REACH tasks in compliance activities, the corporate structure must maintain corporate standing and governance. Although the adage “never outsource your core value” may be applicable, there is little room for error with REACH. The cost of outsourcing may be appealing in light of the various obstacles to compliance for an exporter. How critical is the EU market to your business? Can you afford to miss a deadline? It is essential that you look first at your business objectives and the type of services at which your corporation excels. Does REACH fit into your compliance program easily? Dealing with REACH effectively requires more than just allocating costs. An effective cost analysis should begin with an honest review of your company’s existing structure and your team’s technical knowledge of the regulation. That piece is then weighed against the cost of securing a qualified vendor to handle outsourced services under REACH. This will likely provide a professional advantage to your company, as your resources will not be diverted from efforts integral to your company’s mission in order to satisfy REACH. A company can rely on experts in regulatory compliance and shift the responsibility of organizing and communicating information among the authorities, the industry, and consumers.

tremendous amount of responsibility and authority to give over to your registrant and can lead to grave consequences. For example, because you are dependent on a single registrant, be it your importer or distributor, if you intend to change your strategy and terminate or add distributors or importers, you are vulnerable to the registrant, who has retained your registration and can be an obstacle to the entry of your products to the EU. As a consequence of working with an importer/distributor as registrant, you will need to make a significant investment in such a relationship. To avoid what may be a hindrance to your ability to control your product’s entry to the EU, REACH carves out the “Only Representative.” The “non-EU manufacturer” must alert all EU importers in the same supply chain that an Only Representative has been appointed to fulfill the registration requirements under REACH. This absolves the importer from those same registration requirements and insulates the manufacturer from disclosing proprietary information to the supply chain. The Only Representative provision gives you the choice of whom you will inform of your company’s confidential business information including the substances in your inventory, preparation and articles. If there is any concern over reverse engineering, the practice of using an Only Representative under strict guidelines of confidentiality would quell that concern. The Only Representative is appointed by a “non-EU manufacturer” as essentially a proxy to handle the registration and data sharing requirements.

Appoint Your Only Representative
You have chosen your vendor, and the next step is to appoint that vendor to be your Only Representative to preregister, register and if necessary procure authorization for your substances with the goal of your continued business in the EU. The Only Representative can only be appointed by the manufacturer, formulator or producer and by this, the regulation implies that traders or export agents cannot make such an appointment. It is certainly best if the appointment is made as far up the supply line as possible as these organizations will have a better understanding of the substance. This arrangement should be formalized to avoid confusion as to the roles and responsibilities of your company and the Only Representative. Although how an Only Representative is appointed is not explicitly defined in the regulation, best practices would suggest that the agreement between the relevant parties be in writing. Clearly, the Only Representative must be appointed by the non-EU entity, and the role must be predicated upon agreement by the importer. The recommended practice is to get a letter from your company naming its Only Representative. This is your only protection as the letter should secure the agreement of the participants in your supply chain relating to the roles and responsibilities associated with REACH compliance.

Confidentiality/Control
Pursuant to REACH, the registrant owns the registration. If that registrant is your importer or distributer, that entity, rather than you, owns the registration of your data of substances and is responsible for communicating to ECHA. In order to be effective, this registrant will require you to disclose the detailed composition of your product. This is a

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Plan for the Outsourcing Transition
You have determined that outsourcing is your best option for compliance, and you have the commitment of your Only Representative. The next step is to plan for an outsourcing transition of REACH compliance. Transition is the number one management problem in an outsourcing program. Do you have the internal building blocks for success? In order to maximize the relationship, make sure you thoroughly understand and plan for each activity that will be a component of the transition. Generally, the success of a REACH outsourcing project depends greatly on your company’s commitment to compliance and the ability of your management team to maintain control of the outsourcing relationship. To that end, the focus should be on establishing the relationship and maximizing its benefits. REACH compliance must be a directive from the highest authority. The message that the Board Room “owns” the project is critical to its success, since it establishes that the company is invested from top to bottom in ensuring that the outsourcing relationship is working. It is essential that your company build an effective internal project management team, which may require some organization redesign. This team must be empowered with all oversight and decision-making authority on every aspect of the REACH project, including scope of work, incentives, penalties and risk mitigation strategies. The outsourced party is the Only Representative, the legally responsible person for the communication and registration of the specified substance. Operationally, your team can take on as much work as you desire behind the scenes. For example, your own technical specialists may organize the testing and prepare information for the SIEF, but the final submission is done by the Only Representative.

Scope of Work
You have negotiated the “how” through the appointment of the Only Representative, now pin down the obligations and the “what” of the contract, through a very detailed scope of work. To ensure a meeting of the minds, the scope of work is critical. Flexibility should be built in, but a clear understanding of objectives and duties is required for success. Specifically, the type of services that may be outsourced to the Only Representative in connection with REACH compliance could be stated as follows: • Evaluate risks and exposure associated with REACH; • Maintain all communications and negotiations with ECHA and all relevant Member State governmental bodies; • Identify and communicate with all importers, distributors and downstream users; • Prepare and submit the technical registration dossier; • Make the filings, register the chemicals, and pay all attendant fees; • Coordinate data exchange and testing strategies with SIEF group and Consortium members; • Create and submit safety data sheets and chemical safety reports; and • Audit and train where needed; • Prepare notification of substances of very high concern; • Address classification and labeling; and • Perform any other obligations resulting from authorizations or restrictions. The Only Representative must meet all applicable regulatory standards during the contract term. To avoid confusion, specify the regulations and statutes at issue and how the Only Representative will comply. Also, the Only Representative must comply completely with all on-going and new obligations of REACH. Clearly, it will not be possible to define all of the requirements and situations that may arise during this complex engagement. The only way to deal with the unexpected is to have a real partner, and to assign appropriate value to building a strong relationship with the Only Representative. This requires management time and effort. Make sure your team has the right personalities to achieve a successful partnership.

Negotiating the Contract
As parties will be bound by its legacy, a healthy outsourcing relationship requires a good contract. Think of the relationship as a partnership because REACH compliance is not an event but a process, which may change depending on your company’s supply and manufacturing goals and opportunities. The contractor should be appointed as the Only Representative to avoid any confusion as to its role with respect to REACH administration requirements. This will also assure that you are receiving quality services and appropriate accountability. A good REACH outsourcing contract will spell out all expectations, terms and responsibilities in the contract. Although the temptation is to negotiate a win on every term, it is important that the contract be reasonable. It may not benefit you to push the Only Representative to accept reduced pricing or unrealistic terms and conditions.

Pricing Terms
In seeking to outsource REACH compliance, there are some general pricing terms to consider in the contract negotiations to ensure that your company receives the full benefit of the relationship at a competitive rate. These are a few terms that address such issues: • Cost Plus Pricing—This method of pricing is arrived at when the Only Representative discloses its costs and adds a percentage in for a profit. • Fair Pricing Clause —This sets forth that you can be allowed to compare your outsourcing cost with the

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averages on the open market and negotiate for price reductions if your Only Representative’s costs are higher. • Most Favored Nation—This stipulates that charges must be at least as low as the Only Representative’s lowest charges to other companies for substantially similar services.

Other Key Outsourcing Contract Terms
Ultimately, your objective is compliance with a newlypassed regulation, and this must be written into your

contract. There are methods to incorporate incentives and accountability in these uncharted waters of REACH. First, to ensure that you have the right talent on the team of your Only Representative, it may be in your best interest to structure the contract to address project staffing. The contract should specify that you get the best people working on your account and as much personnel continuity as possible. You are seeking a guaranty of performance. To that end, the parties can develop incentives and

Registration Deadlines
When a company pre registers it benefits from extended deadlines. The deadline depends on tonnage band and hazardous properties of the substance as follows: A. November 30, 2010: Phase-in substances that were manufactured or imported into the EU at least once after June 1, 2007, in quantities of 1,000 tons or more per year per manufacturer or importer. This deadline also applies to other substances which are classified in accordance with Directive 67/548/EEC and R50 /53 and are manufactured or imported into the EU at least once after June 1, 2007, in quantities of 1 ton or more per year per manufacturer or importer or 100 tons or more per year per manufacturer or importer, depending on the substance and the category. B. May 31, 2013: Phase-in substances that were manufactured or imported into the EU at least once after June 1, 2007, in quantities of 100 tons or more per year per manufacturer or importer. C. May 31, 2018: Phase-in substances that were manufactured or imported into the EU at least once after June 1, 2007, in quantities of 1 tons or more per year per manufacturer or importer. The highest tonnage “per year” manufactured or imported after June 1, 2007, determines the deadline for registration. Substances not pre-registered but which are imported for the first time into the EU after December 1, 2008, may benefit from the above staggered deadlines if the information requested for pre-registration is provided within six months of the first import into the EU and no later than 12 months before the relevant registration deadline.

Timeline: REACH Registration
>1000 tons/yr P CMR 1 +2 (>1 ton/yr Registration R50/53 (>100 tons/yr) >100 tons/yr P Registration P Registration Data Sharing Authorization Not yet on the market June 1, 2007 2008 Non-Phase-in Substance Registration 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

End of phase-in

>1 ton/yr

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penalties to ensure that a high quality team is put (and kept) on your account and that they are contracted to perform. Where there is a risk to meeting the milestones of REACH, you mitigate that risk by identifying it and deploying a good strategy and process to manage it. The parties may agree to a continuous improvement provision stating that the Only Representative will improve its services levels yearly while meeting the ongoing obligations of REACH. This can be a clear incentive to both parties to make efficiency improvements if your contract grants a profit split between the parties in the event that such improvements are quantifiable. In addition, clearly defined penalties, such as a liquidated damages clause in the contract, may be critical to success. If crafted well, the risk of payment to recoup losses for inadequate performance will motivate your Only Representative to ensure compliance with the REACH milestones. Finally, confidentiality must be underscored in this context. You will need to disclose all chemicals within your substances to your Only Representative in order for those substances to enter the EU market. Otherwise, your Only Representative cannot comply. You should mandate by contract that your Only Representative to maintain the information with the strictest of confidence and use that information for the sole purpose of REACH compliance. Any other disclosure must be strictly proscribed. Otherwise one of the key reasons for using the Only Representative, maintaining control of your information, is defeated. Trade secrets, proprietary, or other highly sensitive information that provides a competitive advantage must be kept confidential indefinitely. Since the parties are in control of the terms of the engagement, there is no limit to creativity when negotiat-

ing and structuring the contract. In short, a good contract will spell out all the requirements of REACH compliance including a clear statement of expectations and responsibilities, the scope of the work and the fees, the open exchange of information and status reports, a process for changing the scope of work (in the event something unforeseen arises that requires additional attention), personnel requisites for performance, incentives and penalties. This is new territory. Don’t be afraid to make demands or audits in the contract to maintain a check and control on performance of your Only Representative.

Maintaining Your Competitive Edge While Ensuring Compliance
The pre-registration period is over. If the EU market is critical to your business, you need a solution to ensure REACH compliance. In your company’s cost benefit analysis, management must consider the value of the EU market and how the company expects to remain competitive while ensuring compliance. What factors will drive your decision whether to outsource REACH compliance? A successful outsourcing relationship for REACH compliance is ideal to maintain a company’s competitive edge while allowing trusted experts to handle the arduous, complex and ongoing compliance schedule. It is clear that with the right outsourcing assistance, a company will maintain ownership of the registration and control over the process of what, when and how its information is filed under REACH.
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NOTES
1. ECHA, “Guidance on data sharing,” sec. 5.2, (Sept. 2007) (visited June 24, 2008) http://reach.jrc.it/docs/guidance_ document/data_sharing_en.pdf. 2. ECHA, “Pre-register to benefit from extended deadlines” (visited June 24, 2008) www.echa.europa.eu/pre-registration_en.asp. 3. ECHA, “Pre-register to benefit from extended deadlines,” (visited June 24, 2008) www.echa.europa.eu/pre-registration_en.asp. 4. ECHA, “Guidance on Registration,” sec. 1.7.1.1 (May 2008) (visited June 24, 2008). 5. ECHA, “Guidance on Registration,” sec. 1.7.1.2 (May 2008) (visited June 24, 2008) www.reach.jrc.it/docs/guidance_document /registration_en.pdf. 6. ECHA, “Guidance on Registration,” sec. 1.7.2 (May 2008) (visited June 24, 2008) www.reach.jrc.it/docs/guidance_document/ registration_en.pdf. 7. ECHA, “Guidance on Registration,” sec. 1.5.3.4 (May 2008) (visited June 24, 2008). 8. ECHA, “Guidance on Registration,” sec. 1.5.3.4 (May 2008) (visited June 24, 2008) www.reach.jrc.it/docs/guidance_document/ registration_en.pdf.

ACC Extras on… Maintaining Critical Control
Program Materials
• The ABCs of Environmental Due Diligence (2001). Articles with caselaw, SEC rules, model site access, and confidentiality agreements, sample webpage and web-enhanced due diligence chart. www.acc.com/vl/public/programmaterial/loader.cfm?csmodule=security/getfile&pageid=20684 • Best Practices in Tracking Environmental Law Worldwide (2004). www.acc.com/vl/public/programmaterial/loader. cfm?csmodule=security/getfile&pageid=20417 ACC has more material on this subject on our website. Visit www.acc.com where you can browse our resources by practice area or use our search to find documents by keyword.

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