United States: Is Your Supply Chain Ready For The EU’s RoHS Directive?

With less than six months to go before the European Union’s Directive on the Restriction of Use of Certain Hazardous Substances (RoHS) in electrical or electronic equipment comes into force across Europe on July 1, 2006, many companies are still uncertain how they will meet one of the biggest challenges to effective supply chain management in years. There are opportunities for companies that are wellprepared to be a step ahead of the competition.

Producers who place non-compliant products on the EU market can face potentially severe penalties, including fines, impounded goods, loss of the right to sell into the 25 EU Member States, potentially unrecoverable loss of market share, and adverse press and media coverage. The consequences of non-compliance may extend deep into the supply chain to companies that supplied the components that caused the failure to comply with RoHS. The impact of RoHS is not limited to the EU; companies operating in the Americas or Asia that supply components to customers who put products on the EU market must also be prepared to address RoHS or face the possibility of losing customers or even incurring liabilities.

These issues are not limited to those who sell into or are otherwise linked through the supply chain to the EU market. For example, China has recently announced initiatives similar to RoHS, and the U.S. has Federal and State (e.g., California's Proposition 65) laws that implicate product and packaging content, labeling, and supply chain management.

RoHS bans certain categories of electrical or electronic equipment (EEE) from the European market if the EEE contains certain restricted materials, including lead, mercury, cadmium, hexavalent chromium, polybromide biphenyls (PBB), and polybrominated diphenyls ethers (PBDE). Covered EEE includes:

1. large and small household appliances,
2. information technology and telecommunications equipment,
3. lighting,
4. electrical equipment and electronic tools (excluding large-scale stationary industrial tools),
5. toys, leisure and sports equipment,
6. monitoring and control instruments, and
7. automatic dispensers.

The categories are similar to those covered by RoHS’s sister legislation, the Directive on Waste Electrical and Electronic Equipment (WEEE Directive), with a few exceptions, (medical devices are covered by WEEE, but not RoHS, and visa versa for electric light bulbs and household luminaries).

Many details on how RoHS will be implemented and enforced will be determined at the Member State level, and may vary from country to county. However, many Member States have not yet finalized their implementing legislation and regulations. These factors will pose ongoing challenges to developing compliance strategies. Further, the European Commission continues to interpret the Directive, recently publishing three key Decisions relating to RoHS. These include a Decision setting out the maximum concentrations permitted regulated substances (up to 1000 ppm in homogenous substances, except for cadmium, which has an allowable level of 100 ppm), and two sets of exemptions from the scope of RoHS. The Commission continues to seek comment on additional potential exemptions from the scope of RoHS. Therefore, many of the details on RoHS compliance remain to be worked out.

Effective supply chain management is central to RoHS compliance. Some Member States have indicated that if a producer can demonstrate good supply-chain management and an effective due diligence program, it will decrease the likelihood or severity of enforcement sanctions if one of its products is ever found to have violated RoHS rules. However, the actual legal significance of such due diligence, in both enforcement and contractual contexts, remains to be seen since it is not a formal legislative or regulatory requirement.

RoHS does not establish enforcement mechanisms or proscribe mandatory testing requirements at the EU level. In the absence of formal legal direction, RoHS is essentially being "self-implemented" by the "producers" who are directly subject to the requirements of RoHS. "Producers" include manufacturers, sellers of "own-label" products (OEMs), and importers and exporters of goods to the EU, regardless of the sales technique used (including internet sales). These producers are taking contractual steps, through supply chain management, to conduct due diligence to determine that their products comply with RoHS.

A company can demonstrate due diligence by showing that it has taken "reasonable steps" to put in place a compliance system to prevent breaches of RoHS. What is "reasonable" will depend on the circumstances — the size of company, the type of risk, the impact of failure and the resources of the company. Many "producers" are seeking to demonstrate due diligence by showing that they have identified their components suppliers, obtained information about the materials contained in components/products, carried out selective sampling and analysis, and sought "declarations" from suppliers regarding the content of components.

These customer-mandated materials declarations are not required by the RoHS Directive itself, although it is possible that Member States might require them under national law. Even if such declarations are not required by law, it is likely that they will become standard practices in many industries. Many major EU,U.S. and Asian companies have already begun to require broad materials declarations from their suppliers. There is no set for mat or content and the legal effect of such declarations is untested. For example, the degree of legal protection material declarations will offer producers is unclear, and the liability of suppliers in the event a producer does not comply with RoHS is typically not defined. Further, it is not clear where liability for incorrect declarations will fall where there is a series or cascade of declarations through the supply chain.

Therefore, even if you are not a producer under RoHS (e.g., a non-EU supplier in the U.S. or Asia to a producer selling into the EU market), your customers that are RoHS producers may require you to demonstrate that the components you supply are "RoHS compliant" (even though RoHS may not, as a legal matter, apply to you). Some companies are demanding that their suppliers to go even beyond RoHS, seeking certifications regarding components and materials that are not regulated by RoHS.

These indirect obligations are being established by contract and industry practice, rather than legislation. Consequently, to some extent it will be a matter of commercial negotiation how far up or down the supply-chain the RoHS restrictions flow. Well-prepared companies, whether producers or suppliers, will find themselves a step ahead in negotiating favorable contractual terms.

Issues to think about in assessing whether your supply chain is ready for RoHS include:

• Am I a "producer" (i.e., do I place covered EEE on the EU market)?
• If I am not a producer, do I supply any covered EEE or components of covered EEE to "producers" who are subject to RoHS?
• What materials are in my products?
• Where did they come from and where do they go to?
• What rules and requirements apply (including relevant requirements for each Member State)?
• How are covered products or components identified (e.g., using part number differentiation or symbols to identify RoHS-compliant components and products)?
• What are my customers asking me to do or sign and what is the basis for these requests?
• What information must be provided and who do I tell?
• Is RoHS compliance integrated into product design, materials selection and purchasing and supply-chain managent (e.g., supplier identification and selection and identifying the components/materials they supply and their content)?
• Are compliance assurance measures in place (e.g., tracking, auditing, management review)?

As of January 1, 2006, Sidley Austin Brown & Wood LLP changed its name to Sidley Austin LLP. In the United Kingdom and Hong Kong, the firm will be known as Sidley Austin, and in Tokyo, the firm will be known as Sidley Austin Gaikokuho Jimu Bengoshi Jimusho, in association with Nishikawa & Partners.

This article has been prepared by Sidley Austin LLP for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Readers should not act upon this without seeking professional counsel.