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S P O T L I G H T

A Note From the Publisher“Brussels Rules the World”

This issue of Spotlight continues athree-part series of articlesdiscussing how EU legislationaffects global business.

Companies increasingly need tostructure their European businessventures to conform to EU regu-lations and to develop corporatestrategies for dealing with poten-tially trade-restrictive EUlegislation and regulation. Whererules earlier only confined poten-tial damage to the environment,regulation is increasingly orientedto new concepts of integratedpollution control.

EU legislation and resultant inter-national policies increasinglyfocus on measures to reduce theenvironmental impacts of prod-ucts. This product life cycleapproach affects all businessesthat place their products in theEU market. Initiatives such asIPP and WEEE extend a manu-facturer’s responsibilities fromenvironmental impacts generatedat its production facility, nomatter its location, to those associated with a product’sconsumption and eventual end of life.

There are ways for limiting therisks for business by preventativemeans: dispute resolution, WTOarbitration, lobbying. Developingstrategies can only be done on acase-by-case basis and requires asound understanding of the law,policy, and politics relevant to theissue.

Thurston Moore

O N I N T E R N AT I O N A L B U S I N E S S O P P O R T U N I T I E SM A Y 2 0 0 3

S P O T L I G H TS P O T L I G H T

Product design and product componentselection and use in manufacturing are nolonger a matter exclusively for engineers,designers, and product developers.Traditionally, the law only dealt withissues such as warnings and instructionsfor use, which are not at the core ofproduct design or component choice.Increasingly, however, product design andcomponent selection are themselvesdriven by legislation, and thus lawyers

must now get involved. Further,manufacturers are increasingly required toshoulder the costs or responsibility for recycling. or disposal of their productsthrough new product return (or “take-back”) legislation. Because Europe is afrontrunner in this area, and oftenimposes the most stringent requirements,it effectively forces corporations to live up to European requirements around the world.

EU Product-Related Standards Drive Product Design and Manufacture in Multinational Enterprise Lucas Bergkamp, Partner, Hunton & Williams, Brussels andJosefina Bunge, Associate, Hunton & Williams, Brussels

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SPOTLIGHT ON INTERNATIONAL BUSINESS OPPORTUNITIES

Product-focused EU legislation governscritical aspects of the design andmanufacturing of products rangingfrom toys to cars, and from electronicsto any product containing certainchemical substances. Multinationalcorporations that design and manufac-ture products for the globalmarketplace should take such EU lawrequirements into account at thedevelopment, design, andmanufacturing stages of new products.Existing products should be regularly

reviewed for compliance with EU law.Further, new product-related legislationsets requirements and standards thatmay create barriers to internationaltrade in products that are inconsistentwith World Trade Organization(“WTO”) disciplines.

This article reviews some of the maintrends in the EU’s product standardspolicy. It discusses the EU’s newintegrated product policy, its proposednew chemicals policy, its phthalatesban, and its proposed electronicsregulation. These are only someexamples of how EU policies andlegislation affect product developmentand design. There are many otherexamples. The EU’s biotechnologypolicy, for instance, has effectivelycaused many food companies todiscontinue the use of biotechingredients in their production process.The EU’s automotive vehicle take-backlegislation also imposes bans onproduct components.

Integrated Product PolicyImplements “Producer

Responsibility”Thus far, the EU’s approach to

product regulation has beenbased chiefly on direct

command and controlregulation. Over time, the

emphasis has shiftedfrom “means” to“results” requirements,

but the basic idea is governmentcontrol. With respect to product take-back, recycling, and disposal, forinstance, the EU developed the basicconcepts initially in the 1995Packaging Waste Directive. ThisDirective sets so-called essentialrequirements that are aimed atensuring that packaging material isreusable, recyclable, compostable, or

can be incinerated with sufficientenergy recovery. All packaging, in andof itself and on a product, must meetthe Directive’s essential requirements,including limits on the concentration offour heavy metals — limits whichdecrease over time. In addition, theDirective imposes targets for therecovery and recycling of packaging.EU member states must ensure thatthese targets are met. The sameconcepts have since been applied toautomobiles and electrical andelectronic products (see also below),and have been embodied in theconcept of “producer responsibility”and “extended producer responsibility.”

These principles assert that theproducer remains responsible for hisproducts throughout their life cycle,including the disposal phase. Theobjective is to force “the producer totake the environmental impactsoccurring throughout the product’s lifecycle into account as part ofproduction decisions,” by imposingliability on the producer for thoseimpacts. Once producers are maderesponsible for the adverse environ-mental and health effects of theirproducts, the reasoning goes, they will redesign their products to reducethese effects.

The EU is now attempting to impose awatered-down version of these prin-ciples on all products. The EuropeanCommission has proposed a new“Integrated Product Policy” (or “IPP”).IPP is aimed at creating conditionsunder which products with a reducedimpact on the environment and humanhealth will be able to gain market sharein the EU’s fifteen member states. Theimportant question is whether this“incentive” approach will be replacedby the “liability” approach already usedwith packaging, cars, and electronics.

Environmental and Health and SafetyConcerns Are the DriversMuch of the recent EU product-focused legislation is driven byconcerns about products’environmental impact at somepoint in their life cycle, as in thecase of electronics, or healthconcerns, as in the case oftoys made from soft PVCcontaining phthalates.These EU regulationsare aimed at reducingthe environmentaland healthimpacts ofproducts byrequiring,e.g., thatthey be recyclable or reusable, or by restricting the use ofhazardous chemicals. Since muchof this legislation is based on the notorious “precautionaryprinciple,” there is often no hardscience to back up the regulatoryrequirements.

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Greening Supply and DemandAs part of the IPP, the Commission hasproposed a series of measures intendedto “green” both the supply and demandside and which include a wide range ofregulatory instruments. Product priceswould be adjusted by reduced taxesand subsidies for green products.Demand for green products would bestimulated by ensuring thatconsumers be providedwith more and betterinformation about theproducts they buy,including increaseduse of ecolabeling.Demand would begreened also bygetting large, public-sector organizationsto adopt greenprocurementstrategies. Greenproduction would bepromoted by requiring eco-design (“design for theenvironment”), encouraging life-cycle analysis of products andproduction processes, and integratingenvironmental considerations intoEuropean product standards. TheCommission has suggested too that“product panels” be established toguide product design and develop-ment. Such panels, which are currentlyactive in some EU member states, bringtogether industry and representatives ofconsumer and environmental organiza-tions to develop new standards forparticular products or product groups.

Needless to say, many of theseproposals create a potential fordisguised protectionism favoringdomestic producers. In setting reducedtax rates, granting subsidies, adoptingcriteria for green procurement, or

awarding eco-labels, there is ampleopportunity for discrimination againstnon-EU producers, overt or hidden.Indeed, many of the Commission’sproposed instruments could raiseserious issues under international tradeWTO law.

New Chemicals Policy Hits All ManufacturersIn a 2001 White Paper on a futurechemicals policy, the Commission hasproposed an overhaul of the EU’schemical policy. Based on a review ofthe existing EU chemical legislation,the Commission concluded that itscurrent chemical legislation does notprovide a “high level of protection,” asthe Treaty requires. A major problemidentified by the review is “the generallack of knowledge about the propertiesand the uses of existing substances”that were already on the EU market inSeptember 1981 and that are thereforelisted in EINECS, the EuropeanInventory of Existing Chemical

Substances. Existing substances, whichamount to some 90 percent or more ofthe total volume of all substances onthe market, are not subject to testing asto their properties. The risks assess-ment process applicable to someexisting substances to evaluate theirproperties, which is conducted by themember state governments, is slow,ineffective, and inefficient.

The new chemicals regime would bebased on the precautionary andsubstitution principles. TheCommission’s White Paper on

the proposed newprogram acknowledgesthat chemicals produce“benefits on whichmodern society is entirelydependent,” but also notesthat “certain chemicals

have caused seriousdamage to human health

resulting in suffering andpremature death and to theenvironment.” Having thus set thestage, the White Paper continues “thelack of knowledge about the impact ofmany chemicals on human health andthe environment is a cause of concern.”Phthalates in toys and penta bromodiphenyl ethers (a flame retardant) inbreast milk, according to the WhitePaper, “expose the weaknesses of thecurrent EU chemicals policy.” Toaddress the current weaknesses, theCommission proposes several newprograms. It proposes to impose testingand notification requirements forcertain existing substances that arecurrently exempted, and to establish anew pre-marketing authorizationscheme for certain other chemicals. Inaddition, it proposes an obligation onproducers to provide information ontheir chemicals to the public. Theseobligations would not necessarily fallexclusively on chemical producers.

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Indeed, as discussed below, theproposed regime would affect all“downstream” users of chemicals in amajor way.

The REACH System Covers AllChemicals and All Users of ChemicalsThe main feature of the proposedstrategy would be the creation of asingle system for existing and newsubstances. The proposed system iscalled “REACH”, which stands for theRegistration, Evaluation, andAuthorization of Chemicals. Under theREACH system, the requirements,including the testing requirements, thatapply to a specific substance woulddepend on the proven or suspectedhazardous properties, uses, exposure,and volumes of chemicals produced orimported.

The current system requires pre-markettesting and notification of new chemi-cals, but does not impose pre-

marketing authorization. The proposedsystem would require pre-marketauthorization for certain substances,both new and existing. The REACHsystem would involve three elements:registration, evaluation, andauthorization. Registration of basicinformation would be required forapproximately 30,000 substances,including all existing and newsubstances exceeding a production orimport volume of one ton*. Thisinformation is to be submitted bycompanies to a central database. TheCommission estimates that 80 percentof these substances would require onlyregistration. Evaluation of theregistered information would berequired for all substances exceeding aproduction volume of 100 tons(approximately 5,000 substancescorresponding to 15 percent) and, “incase of concern,” also for substances atlower tonnage levels. The evaluationwould be carried out by authorities

and would include a “substance-tailored testing program focusing onthe effects of long-term exposure.” Fullpre-market authorization would berequired for substances with certainhazardous properties that give rise to“very high concern.” These substancesinclude carcinogenic, mutagenic orreprotoxic substances (“CMR”)(categories 1 and 2 under the currentDangerous Substances Directive) andpersistent organic pollutants (“POPs”),as defined in the StockholmConvention. Authorization would bespecific and limited to a substance’s use“for particular purposes demonstratedto be safe.” The number of substanceslikely to be subject to authorization isestimated at 1,400 (5 percent of theregistered substances). The proposedpre-marketing authorization schemewould be expensive, would seriouslyrestrict chemical producers’ and users’freedom, and would involve significantbureaucratic delays.

Registration

Evaluation

Authorization

The Proposed REACH SystemThe EU estimates that of the expected 30,000 existing and new substances exceeding a production or import volume of one ton,80 percent will require registration, 15 percent will require evaluation and 5 percent will require authorization. The proposedscheme would be costly, seriously restrict producers’ and users’ freedom, and involve significant bureaucratic delays.

* The EU uses the metric ton: Metric Ton, a unit of mass equal to 1000 kg or 2204.6 pounds sometimes called a long ton; unlike the US.

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As noted above, this regime wouldapply to new and existing substances.However, a transitional period of 11years would be allowed to phase in thelarge number of existing substances.“In general,” the White Paper explains,“existing substances produced in highervolumes will have to be registered first.Yet the system will be flexible enoughto allow for earlier registration ofsubstances of concern produced inlower tonnage.”

Responsibility for Reporting DataFalls on All ManufacturersUnder the new regime, responsibilityfor generating data and assessingexposure risks associated withchemicals would be placed on industry,not the government. Not onlyproducers and importers of bulkchemicals, but also downstream userswould be required to report data.Downstream users would beresponsible for reporting data on thesafety of their products, and theauthorities may require additionaltesting be carried out “where uses differfrom those originally envisaged by themanufacturers or importers and the

resulting exposure patterns also differsubstantially from those evaluated bythem.” In addition, producers andimporters of products containingsubstances (known as “articles,” whichare currently exempted from testing)may be requested to provide“appropriate information” whereproducts categories (e.g., toys ortextiles) can lead to “significantexposure of humans and environment”to chemical substances. The additionalinformation generated by downstreamusers would allow for more selectivetesting and targeted risk assessments.

Consumer Right to Information About Chemicals in ProductsThe EU believes that citizens shouldhave a right to access informationabout chemicals to which they may beexposed, and acknowledges theconsumer’s right of choice. “Consumersneed access to information onchemicals,” the White Paper argues, “tomake informed decisions about thesubstances that they use.” Adequateinformation would enable theconsumer “to make a judgment onwhether alternative products on the

market are more favorable in terms oftheir intrinsic properties and risks.”The information would therefore haveto be presented in such a way that it“enables a person to understand therisks and to develop a sense ofproportion in order to make ajudgment on the acceptability of thoserisks.” In terms of substance, theinformation would cover health effects,environmental effects, other serioushazards, and instructions for safe use of chemical products. Producers,importers and downstream users, theWhite Paper stresses, “should mainlybe responsible for providing thisinformation to consumers.” TheCommission believes that this wouldlead to better informed purchasingdecisions.

Obviously, the EU’s new chemicalpolicy would raise major issues for allproducers and downstream users ofchemical substances. They may befaced with bans or serious restrictionson the use of chemicals in theirproducts, onerous reportingobligations, and duties toinform consumers. Theseobligations should informproduct development anddesign at an early stage.

Electrical and ElectronicEquipmentIn the context of theEU’s producerresponsibility policy, newlegislation on electricaland electronic equipmentis pending at the EU. Thislegislative package forelectronics would involvethree directives. Twoproposed directives are faralong in the legislativeprocess, a third one is stillon the drawing board. Theproposed directive on wasteelectrical and electronicequipment (known as the“WEEE Directive”) wouldmake producers responsiblefor the take-back, recovery,and treatment of virtually allend-of-life electrical andelectronic equipment. Aconceptually similar take-backscheme has already beenadopted for vehicles (the “End-of-Life Vehicles Directive”). Asecond proposal provides forrestrictions on the use ofhazardous substances inelectrical and electronic equip-ment (the “RoHS Directive”). TheCommission’s EnterpriseDirectorate General is consideringa third proposal that would setforth eco-design rules (the “EEEDirective”). The first two proposalsraise policy and international tradeissues; the third proposal is highlyproblematic from a WTO lawperspective and probably trade-illegal. In addition to these Unionproposals, there has beenconsiderable legislative activity on end-of-life electronics at thenational level.

Waste Electronic Equipment Is Broadly DefinedThe WEEE Directive’s scope would bebroad. It would cover virtually all end-of-life electrical and electronic equip-ment: large and small householdappliances, IT & telecommunicationsequipment, consumer equipment,lighting equipment, electrical andelectronic tools, and toys. The Directivewould cover also components (e.g.,screens, keyboards, circuit boards, andsuch), sub-assemblies, and“consumables,” i.e., short-termdisposable parts that are part of theproduct at the time of discarding, andnot themselves “electrical or electronic”(e.g., toner cartridges). The term“producer” includes anyone whomanufactures and sells electrical andelectronic equipment under his ownbrand, resells equipment produced byother suppliers under his own brand,or imports such equipment into theUnion.

The Directive would establish generalprinciples of WEEE management andfinancing, and permit member states towork out the specifics on the basis ofnational and regional conditions andpreferences. The measures proposed bythe Commission include: (1) separatecollection of WEEE from other wastestreams, (2) take-back obligations onproducers of electrical and electronicequipment and on distributors thereof(who can pass the WEEE back to theproducer), (3) minimum standards forthe treatment of WEEE, (4) certainrecovery targets, (5) financingobligations on producers and importersfor the treatment of WEEE, and (6)information and reporting obligations.

The WEEE Directive, as currentlydrafted, will likely fail to achieve theharmonization that the Commissionconsiders essential to guaranteeing

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comparable competitive conditionsbetween electronics manufacturers.Being based on Article 174 of theTreaty, the Directive sets forth only themain, minimum principles for themanagement of WEEE and thefinancing thereof. Member stateswould remain free to adopt more“protective” measures, such as stricterpre-treatment requirements, or tomake producers financially respon-sible also for the collection ofWEEE from households. Suchnational measures obviouslycreate diverging economiccircumstances across theEU. Further, EUinstitutions are stillhaggling over theissue of how thefinancing of take-back and re-cycling programsshould be regulated; individualfinancing would imply that eachmanufacturer pay only for the costallocable to handling its products,while collective financing would notnecessarily have this implication.

Restrictions on Hazardous Substances in ElectronicsTo reduce the amount of hazardoussubstances that ends up in theenvironment, the EU is also about toadopt the proposed RoHS Directive.This complicated piece of legislationwould impose concentration limitswith respect to certain hazardoussubstances in electronic equipment,such as lead. Certain applicationswould be exempted, however. It wouldalso effectively require that othermaterials be substituted for variousheavy metals and brominated flameretardants in new electrical andelectronic equipment. The limits wouldnot, however, apply to equipment that

is already on the market before thenew regime’s effective date.

Electronics Design for the EnvironmentFinally, the Commission is workingalso on a proposal for a Directive onthe Impact on the Environment ofElectrical and Electronic Equipment.

This Directive would harmonize“requirements concerning the

design of electrical andelectronic equipment to ensure

the free movement of theseproducts within the

internal market, aimingto improve their overall

impact on theenvironment.” The

proposal’s basicthrust would bethat manufac-

turers should perform a comprehensiveenvironmental impact assessment ofEEE products throughout their lifecycle and seek to ensure that theproducts’ design represents the“optimal balance between environ-mental factors and technical andeconomic aspects” of production. Indesigning the product, manufacturersmust also consider how the productwill be disposed of or recycled whenthe consumer is finished with it.

Plastic Toys Are Subject toPhthalates BanBased on asserted human healthconcerns, the EU has imposed a“temporary” ban on the use ofphthalates, a class of chemicals used tosoften plastics, in toys for childrenunder three years of age. The fear isthat these chemicals may causeunfavorable health effects to childrenwho ingest these chemicals whensucking on soft-plastic toys. The ban

on phthalates was supposed to betemporary, but it has already beenextended several times. The ban hasprompted the leading US toymanufacturer to switch entirely tosoftening agents derived from edibleoils and plant starches.

EU-Driven Product DesignWhatever the merits of its legislation,the EU has changed the process ofproduct design. And there is more tocome. Product developers anddesigners for multinational enterpriseshould now not only consider theperformance and cost of materials anddesigns, but also the regulatoryrequirements that affect the choice ofmaterials and product design. Some ofthese requirements are relatively simple(e.g., bans on certain ingredients),while others impose more complicatedtests (e.g., “design for the environment”rules). The new EU chemicals regimewould have an enormous effect on allmanufacturers selling products in theEC, who would have to ensure notonly that the chemicals they use areregistered and authorized for theirspecific applications, but also thatreporting and disclosure with respectto these chemicals will not put them ata competitive disadvantage. Therelevant requirements are set not onlyat the EU level, but also at the nationallevel, which further complicates the jobof the product designer. However,there is no choice. If corporations donot pay sufficient attention to theserules, they may pay a hefty price whenproducts are not admitted to Europeanmarkets or have to be recalled. ■

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Many of the preceding articles in thisissue of Spotlight have this theme incommon: EU legislative and regulatoryrequirements have a significantpotential to result in trade barriers. Inparticular non-EC manufacturers areexposed to a risk that their productswill be subject to unlawful, unfair, ordiscriminatory EU regulatoryrequirements. As a result, they maysuffer a competitive disadvantage, losemarket share, or even have towithdraw completely from theEuropean market. EU law is not verygenerous when it comes to providingprivate rights of action against EUregulation. In some cases, however,remedies may be available tomanufacturers that are faced with

unlawful, unfair, or discriminatory EUlaw requirements. In addition, WorldTrade Organization (“WTO”) law mayprovide a remedy.

LobbyingIn many instances, an ounce ofprevention is better than a pound ofcure. Non-EU manufacturers may beable to prevent the adoption by the EUof unfavorable regulatory requirementsthrough an effective corporate publicaffairs or “lobbying” program.

Such a program should involve anumber of elements. First, it shouldinclude a mechanism for monitoringpolicy initiatives that are important tothe corporation. Significant policy

initiatives include not only draftproposals for legislation or regulation,but also scientific studies that mayprovide a basis for future legislativeproposals. Second, significant initiativesshould be analyzed carefully todetermine how the corporation’sbusiness will be affected. Third, if aproposed measure would have adverseeffects on the corporation’s business,the corporation should develop aposition that explains why and how themeasure would adversely affect thepublic interest and what alternativemeans are better suited to pursue theparticular policy objective. Fourth, thecorporation should develop a plan forconveying its position to key decision-makers and others. Throughout this


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RemediesAgainst

Unlawful,Unfair, or

DiscriminatoryEuropean

RegulatoryRequirements

Lucas Bergkamp, Partner, Hunton & Williams, Brussels

Turner Smith, Partner, Hunton & Williams,

Washington, DC

process, a deep understanding of thepolitics behind the issue and thepositions of other “stakeholders” andoptimal “packaging” of the corpora-tion’s message, are necessary. Inaddition, the corporation shouldconsider soliciting support fromindustry associations, such as theAmerican Chamber of Commerce, and government agencies, such as the US Mission to the EU and the USTrade Representative (the “USTR,” seealso below).

Influencing the EU legislativeprocess has recently becomesomewhat easier for non-EUcorporations. In numerousinstruments, the EU hasexpressed itscommitment totransparency, publicaccess, andstakeholderconsultation andparticipation. It hasalso committed toinvolving interestednon-EU cor-porations in itslegislative andregulatory processes,and has entered into aregulatory cooperationagreement with theUnited States.

Legal RemediesOf course, lobbying, or legislativeadvocacy, is not always effective. Insome cases, the politics behind aproposed measure are such thatrational argumentation does not help.In those cases, corporations shouldexamine whether they have any legalremedies against the EU regulatoryrequirements that cause them grief.

Causes of action against unfair EUmeasures may be available underWTO, EU, and national law. Undernational law, member state legislationor enforcement proceedings based onsuch legislation may be actionable. Theapplicable provisions of national law,including the pertinent standing rules,determine what specific actions may beavailable to a

corporationin each member state. Actions undernational law can normally be initiatedonly once the particular member statehas implemented (or is in the processof implementing) the disputed EUlegislation.

EU Rights of ActionIn general, the EU Treaty does notgrant private persons a right to initiateaction before the European Court ofJustice (“ECJ”) seeking the annulmentof EU legislation or regulation.However, private persons do havelimited standing to bring actionsagainst “decisions” that are of “directand individual concern” to them. The

EU Treaty does not define theterm “decision.” The ECJ

has defined thisterm as “a

measuretaken by a

Union

institution,acting as a

body, intendedto produce legal

effects and constitutingthe culmination of procedure

within the Union institution.” On thebasis of this narrow interpretation, theECJ has held that “informal” acts suchas letters, communications, andstatements issued by Commission staffdo not qualify as decisions subject tojudicial review. The requirement of

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WTO LawUnder WTO law, private parties have no

standing to bring actions against trade-restrictive measuresadopted by countries that are members of the WTO. Their

governments, however, do have this right. Thus, the United Statesgovernment has standing to file complaints against trade-illegal EU

measures. The United States has had some success in challenging EU measuresthat constituted trade barriers. For instance, the WTO Appellate Body ruled in

favor of the United States with respect to the European Union ban on bovine meatfrom cattle treated with certain hormones. WTO litigation for the United States is

handled by the USTR.

With the adoption through the WTO of an efficient and effective dispute resolutionmechanism and the specific international agreements on sanitary and phytosanitarystandards and technical barriers to trade, WTO proceedings have become an attractiveoption for challenging trade-restrictive EU regulatory requirements. The two specificagreements just noted impose limits on the European Union’s ability to adopt regulatoryrestrictions based on such vague principles as the precautionary principle. WTO law,for instance, requires that there be a “rational relation” between the problem

identified by the European Union and the regulation adopted by it. Thus, theEuropean Union must be able to back up its measure with credible scientific

evidence. The main limitation faced by private parties is that theycannot litigate directly before the WTO. However, they can work

with the USTR, push their home government to file suit,and play an important “behind-the-scene” role in

actual proceedings before the WTOcourts.

“direct and individual concern” hasbeen interpreted by the Court toexclude generally binding EUmeasures, such as directives andregulations. Thus, a corporation maybring an annulment action before theECJ if an EU measure takes the form ofa “decision.” Most relevant regulatoryrequirements the EU may adopt wouldprobably not be in the form ofactionable decisions. However, somedecisions made in connection with alegislative procedure may be actionableunder this heading.

Thus, in general, a private party doesnot have standing before the ECJ tochallenge the validity of generallybinding EU legislation and regulation.Consequently, private parties have nocause of action against EU directives,the most common EU legislativeinstrument. To obtain standing, theyhave to establish that the measure is, infact, a “disguised decision.” Thus far,the ECJ has not enthusiasticallyentertained such arguments, but it hascreated a limited opening where acontested provision of a directive affectslegal persons “by reason of certainattributes which are peculiar to them orby reason of circumstances in whichthey are differentiated from all otherpersons.” If a directive is very specificand affects an easily identifiable andsmall group of parties, the Court mayfind that it meets this test and grant theprivate claimant standing.

Note that a recent judgment of theCourt of First Instance has effectivelycreated a right of action against directlyeffective EU regulations where nojudicial review would otherwise beavailable. This judgment, if it is upheldon appeal, would expand standingrights for private parties significantlyand set an important precedent.

Noncontractual LiabilityIn addition to injunctive relief, which,as discussed above, is available only insome cases, private parties may have aclaim for damages against the EU.Many regulatory restrictions result inserious economic harm to corporations.If such restrictions are unlawful, acause of action against the Uniongrounded in noncontractual liability isavailable. However, claims for damagesagainst the EU grounded in noncon-tractual liability have generally failedfor a number of reasons. First, nationallaw remedies must first be exhausted.Second, a sufficiently serious breach ofsuperior rule of law must be estab-lished, or, if an area is deemed to becharacterized by wide discretion, itmust be shown that the EU “manifestlyand gravely” disregarded the limits onthe exercise of its powers. Third, itmust be established that the allegeddamage goes beyond the normal risksinherent in the activities in the sectorconcerned, and that the damage wasconfined to a clearly defined group oftraders.

A directive that violates some aspect of EU law, e.g., the proportionalityrequirement, could trigger the EU’snoncontractual liability. However, it would seem necessary first to exhaustnational law remedies against the lawsimplementing the directive. If the ECJdeclares the claim admissible, a mereviolation may not be sufficient. Aserious breach or “manifest and gravedisregard” in exercising discretion inadopting the directive would likelyhave to be established. As a result, evenif a directive is in violation of, say, the proportionality principle, it will nottrigger the EU’s liability unless theviolation is deemed either serious, or if discretion is involved, manifest andgrave.

Informal ComplaintIn addition to these traditional, formallegal remedies, certain informal“remedies” are provided for. A privateparty could file a complaint with anational government or theCommission arguing that there isviolation of EU law. A nationalgovernment or the Commission couldcommence an action against themember state at the ECJ. If the nationalgovernment or Commission does notbelieve that there has been a violationof EU law, they, of course, will notinitiate action before the ECJ. Where anational law merely implements an EUdirective, the Commission is not likelyto take action.

Access to DocumentsTo be effective in lobbying and toexamine whether a legal remedy maybe available, access to documents heldby EU institutions often is critical. Inthis regard, the EU Regulationregarding public access to EuropeanParliament, Council, and Commissiondocuments (the “Documents AccessRegulation”), which entered into forceon 3 December 2001, may turn out tobe a substantial improvement. Underthis regulation, any natural or legalperson residing or having its registeredoffice in a member state has a right ofaccess, subject to certain exceptions, todocuments held by EU institutions,including the European Parliament,Council, and Commission. This rightof access applies to both documentsdrawn up and documents received bythe institutions, and in all areas of EUactivity. It applies also to the legislativeprocess. “In particular,” the DocumentAccess Regulation provides, “docu-ments drawn up or received in thecourse of a legislative procedure shallbe made directly accessible” to thepublic in electronic form or through a


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register. Importantly, the DocumentAccess Regulation provides not only foradministrative review procedures, butalso grants a right to judicial review toenforce access rights.

Corporate StrategyCompanies should develop corporatestrategies for dealing with potentiallytrade-restrictive EU legislation andregulation. This strategy should startwith establishing an effective EU public affairs effort. Lobbying shouldbe informed also by an analysis ofapplicable WTO and EU lawrequirements, as well as available legalremedies. Indeed, in a lobbyingcampaign, an argument to the effectthat a proposed EU measure is trade-illegal, or otherwise unlawful, can be apowerful deterrent. Recent moves bythe EU to provide for more trans-parency, greater access to documents,and greater stakeholder involvement inlegislative and regulatory procedures,make corporate public affairs programsmore effective and less costly.

Specific strategies should be developedin dealing with specific EU measuresaffecting a corporation’s business. Wherethe EU does not respect WTO or itsown law, companies may have a causeof action. They may have standing tobring suit against an EU measure beforethe ECJ or a national court. Theyshould consider also pushing a nationalgovernment to bring an action underEU or WTO law. Developing thesestrategies can only be done on a case-by-case basis and requires a soundunderstanding of the law, policy, andpolitics relevant to the issue. If donewell, however, such strategies can bevery effective in securing access tomarkets and improving the corporation’sbottom line.

Finally, a private party has a right tofile a complaint with the EuropeanOmbudsman. Established in 1994,the Ombudsman is an independentoffice empowered to receivecomplaints from any EU citizen orlegal person concerning instances of “maladministration” in theactivities of the Union institutions,with the exception of the Court ofJustice. The Ombudsman is required“to conduct enquires for which hefinds grounds,” except where thealleged facts are or have been thesubject of proceedings. If he finds aninstance of maladmin-istration, hemust give the institu tion concernedan opportunity to present its viewswithin three months and then issuea report to the European Parliamentand the institution concerned. Theconcept of maladministration hasbeen interpreted by theOmbudsman as the failure of an EU institution or body to comply with a bindingrule or principle.

In the Ombudsman’s review ofadministrative behavior, codesadopted by the EU institutions playa major role. The Commission, forinstance, has adopted a Code ofGood Administrative Behavior(Relations with the Public), whichsets forth general principles of goodadministration, guidelines for good

administrative behavior, and ruleson the rights of third parties anddealing with enquires. The general principles of goodadministration include lawfulness,nondiscrimination and equaltreatment, proportionality, andconsistency. The guidelines for goodadministrative behavior requireobjectivity and impartiality, and thetimely provision of information onadministrative procedures tomembers of the public. The rules onthird party rights require thatCommission officials, where EU lawrequires consultation, listen to allparties with a direct interest, justifytheir decisions, and, where EU lawprovides a right of appeal, indicatearrangements for appeal. In dealingwith enquires, the Code requiresthat Commission officials answer in the most appropriate manner and as quickly as possible (there are specific rules for requests fordocuments, correspondence,telephone communications, andelectronic mail). Under the Code, any person may lodge acomplaint about a violation with the Secretariat-General of theCommission or the Ombudsman.The Ombudsman has no power toimpose sanctions, but his decisions,at least in some cases, havesignificant impact. ■


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COMPLEX EMPLOYMENT

RULES ARE CRITICAL TO

EUROPEAN BUSINESS DEALS

Tom Manley, Partner, Hunton & Williams, Raleigh andChristopher Kuner, Partner, Hunton & Williams, Brussels

Tom Manley, Partner, Hunton & Williams, Raleigh andChristopher Kuner, Partner, Hunton & Williams, Brussels

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A major difference between businesstransactions in the European Unionand the United States is the far biggerrole employment laws play in Europe.European employment rights are asmuch public policy as they arecontractual. US dealmakers rely onbroad latitude to alter workplacearrangements as a key tool for affectingthe value of business restructurings. InEurope, though, an intricate web ofrules has been crafted to protectemployees and their agents duringsuch business events. These are lawsthat can materially affect dealvaluations — and even control — ofthe transaction.

In order to treat the complexities andhigh costs of European workplaceregulations as opportunities rather thanobstacles, it helps to understand twobasic reasons for the vast difference inEuropean and US employmentrelations.

Social Philosophy. Europeanemployment laws reflect a philosophyof capital and labor as “social partners”overseen by a benevolently paternalstate. To a much greater degree than inthe United States, capitalism is seen asa servant of the public and of thecitizens who are, among other things,employees.

Multiplicity. The politics of its memberstate economies have prevented theEuropean Union from “harmonizing”labor and employment laws to thesame extent as some other areas of thelaw. So, unlike in the United Stateswhere uniform federal laws routinelypreempt inconsistent state rules,employment law compliance in theEuropean Union means coordinatingthe very diverse laws and procedures ofindividual member states.

EmploymentContracts,Labor Unions,and WorksCouncilsEuropean lawsrelevant to M&Aactivity are designedto protect the threefoundational elementsof Europeanemployment laws.These fundamentalsare not alwaysfamiliar to USlawyers.

First, virtually allEuropean employeesare deemed to havean individualemployment contract — to which avariety of legislated and collectivelybargained rights attach. This is verydifferent from the US doctrine of “atwill” employment, under whichemployees can be fired for any reasonother than an unlawful one. Employersin the European Union cannotunilaterally alter terms of employmentas they often do in the United States;dismissals can involve elaborate noticeprocedures and generous severancepayments.

Second, European labor unions operateunder a diverse array of collectivebargaining models much different fromthose in the United States. Unions inthe United States customarily concludeperiodic plant-level labor contractsunder a single federal legal-adversarialbargaining model. In the EuropeanUnion, basic work and pay patternsmay be set at the national, regional, orsector level by groups of unions andemployer associations in bargainingprocesses that have a more semi-public

or social-partner nature. Labor contractterms are then often automaticallyincorporated directly into individualemployment contracts.

Finally, there are works councils —statutory inventions intended toimplement the social philosophy ofprivate enterprise and employeedemocracy working as partners atvarious levels of the economy. Whileunions focus on traditional concerns ofdistributive economics and political orlegal advocacy, works councils areaimed more at the integrative aspects ofthe capital or labor social partnership.Since they combine representativesfrom different levels of managerial andblue-collar employees, works councilssometimes provide a more productiveforum than unions for discussion ofbusiness matters. In some instances,they are also entitled to exerciseextensive rights of co-determination onimportant business issues.


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Acquired Rights, CollectiveRedundancies andConsultation or Co-DeterminationEuropean employee protections in theM&A context are of three basic types:(1) “transfer-of-undertaking” or“acquired rights” laws, (2) “collectiveredundancy” (mass dismissal)regulations, and (3) consultation or co-determination rules. EU directivesprovide basic principles for each type,to which member states are expected toconform. In each area, though, thereare still individual state regulatorymazes to negotiate.

Transfer-of-undertaking laws providethat an entity that acquires the rights todirect a business automatically acquiresthe employment contract obligations ofthe transferor of that same business.The transferee must also respectobligations regarding works councils,unions, and collective agreements, untilthey are terminated or replaced undermember state laws. Pension plans donot transfer under these laws; EUdirectives require that member statesotherwise protect employee pensionrights. Employees may ordinarily notbe dismissed as a result of a businesstransfer.

EU directives also seek to harmonizecollective redundancy laws to preventconcentration of layoffs in memberstates where dismissal rules are mostlenient. Companies must (1) notifystate and employee representatives ofplanned dismissals above a certain level(e.g., 20 employees in 90 days), (2)satisfy consultation and justificationstandards before dismissals can occur,and (3) abide by supplemental noticeand severance rules. Most memberstates require, in addition, thatcompanies (4) reach agreement withemployee representatives on “socialplans” to limit and mitigate the harmcaused by dismissals.

Both transfer-of-undertaking andcollective redundancy laws rely onconsultation and co-determination asthe chief mechanisms to cope with thelabor and employment impact ofbusiness transactions. A member state’sM&A laws may require, for example,that consultation with employee agentscommence “in good time” and proceed“with a view toward agreement” overspecified topics in order to “avoid, limitor alleviate” adverse consequences toemployees. On matters such as socialplans, the laws may require co-determination of criteria for dismissalsand severance benefits.

Transfer-related consultation is but oneaspect of the EU trend to expandemployee involvement on a variety oftopics and organizational levels. By2005, EU member states must requireregular consultation with employeerepresentatives over a company’seconomic status, probable businessactivities, employment trends, anddecisions likely to lead to work ororganizational changes. Still anotherdirective requires EU-level workscouncils for companies with over 1000employees and 150 in two or more

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countries. Further laws maymandate co-determination for suchsteps as transferring employee dataoutside the European Union andmonitoring employee e-mail andcomputer usage.

Timing, Tone, Value, and ControlBecause they can be deal-criticalin unfamiliar ways, Europeanemployment laws havebecome an integral partof company planning forEU transactions.Valuations can varyhugely based on thegenerosity of state-prescribed employeework terms andbenefits, the capitalmobility limitsimposed on pensionsystems, and theparties andprocedures requiredfor consultation overthese and otheremployment-relatedmatters.

Employment laws may alsoinfluence the form and structure ofa transaction in order to controlwhether, what, how much, andwith whom consultation mustoccur. Moreover, consultationtiming can be key to control andleverage in negotiating withemployee representatives and stateregulators. Trigger events foremployment laws can differ fromthose required for deal closings, forexample, and differing conflict-of-

law standards can determine theeffects of employment contractsand collective agreements.Minimizing the risk of regulatorydelays based on employeeobjections over such matters can becritical.

Required consultations can alsoprovide opportunities to set thetone for workplace relations, toclarify operating objectives, and tonegotiate improvements inworkplace productivity. Evenamidst European protective laws,careful planning can equipcompanies with significant leveragein negotiating with employeerepresentatives.

The diversity of employment lawsamong EU member states meansthat companies have choices inplanning business deals there. Thesurvival of collective contracts andemployee representatives maydepend on those choices, as may acompany’s ability to change work

terms after reorgan-ization.Though em-ployee

dismissals cannot bejustified by business

trans-fers per se,thoughtful plan-

ning enablesexplanation ofthe “technical,economic ororganiza-tional” cir-cumstancesthat makethem per-missible undersome member

state laws.

As with otherlaws, the European

Union’s morestringent regulation of

deal-related employmentconsequences will have a

disproportionate effect on theway our multinational clients dobusiness. It underlines once againthe importance of Hunton &Williams’ strategy to integrate thefirm’s labor and employmentexpertise with our internationaltrade and business capacity, andwith the experience of ourEuropean partners in dealing withcomplex regulatory regimes acrossall EU member states. ■


Hunton & Williams, a major international law firm, publishes this newsletter to highlight the opportunities and challenges businesses facein the global economy and to illustrate innovative solutions to help companies achieve their objectives.

www.hunton.com© 2003 Hunton & Williams LLP

Photographs are for dramatization purposes only and may include models. Likenesses do not necessarily imply current client, partnership or employee status. This material is forinformational purposes and is not intended as legal or professional advice. You should not act upon this information without seeking professional counsel.

Professor Lucas Bergkamp is a partnerwith Hunton & Williams’ corporate &technology team. He serves asmanaging partner of the Brussels office. [email protected]+ (32-2) 643-5815

Josefina Bunge is an associate with thefirm’s resources, regulatory &environmental law team. She works inthe Brussels office. [email protected]+ (32-2) 643-5828

Christopher Kuner serves as partnerwith the corporate & technology team.He works in the firm’s Brussels [email protected]+ (32-2) 643-5856

Thomas Manley is a partner withHunton & Williams’ labor &employment law team. He works inthe Raleigh [email protected]+1 (919) 899-3053

Turner Smith serves as partner on theresources, regulatory & environmentalteam. He works in the firm’sWashington, DC [email protected], +1 (202) 955-1692

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