Identifying Risks In Forming a Producer Responsibility Organization

Following the recent shock and awe felt by North American producers at the prospect of individual producer responsibility (IPR) for their coming circular economy legal obligations, attention has inevitably shifted towards the role to be played by producer responsibility organizations (PROs) as potential surrogates for producers in the discharge of their core resource recovery duties, while the legal liabilities remain non-transferrable.  Producers will want to ask themselves…

You Want Us to Join a Not-for-Profit Collective?  

For many producers, the idea of joining a “collective” along with their fiercest competitors might seem surreal, but this is exactly what makers, importers and distributors of tires are now doing in Canada.  In fact, joining a PRO has become the preferred approach for most producers when faced with the alternative of assuming the waste management collection and diversion of their products directly.

Arguably, the first question to be asked once a collective compliance strategy is adopted is whether the PRO should be a private for-profit enterprise or a not-for-profit.  The (one and only) easy answer for producers in Canada today seems to be not-for-profit, as the regulator and diversion market has signaled a strong preference for this model.  It remains to be seen, however, as to whether a mix of both forms of PROs will emerge over time, as has been in the case in the EU.

We’re In Trouble Before We’ve Even Begun?

The many potential pitfalls with a PRO, however, arise long before it’s operational.  At the formation stage, considerations include:

  • How large can a PRO become before its actions risk an “abuse of dominance” claim arising from the difficulties in competing on scale alone?
  • If the PRO is to be a monopoly or, at least, market-dominant, what must be in the founding documents to best comply with competition law?
  • If there are competitive law concerns, are there distinctions within the PROs functions as to which might be justified as legally dischargeable only through collective efforts, such as collection of used tires?
  • If the target producer group is more narrow, does limiting a PRO to a defined of class of producers create competitive disadvantages for excluded producers?  If so, how much accessibility is necessary and with what participatory rights?
  • When do membership commitment periods required by a PRO become an illegal barrier to producer movement?
  • Can PROs impose mid-reporting year breakage penalties?
  • How generous can a PRO’s financial reserves become before they create barriers to exit, thereby restraining trade?
  • Does offering non-market rates for participation in a PRO to some parties breach competition rules?
  • If a producer also provides services, such as collection, to the PRO, does that warrant different membership terms?
  • What forms for decision-making participation does the PRO offer a producer and when is it advisable for a producer to assume that role?
  • What additional protections should be producer and its representative obtain before engaging directly in the governance of a PRO?

Exactly Who is Doing Our Resource Recovery and What’s Their Deal?

Other essential risk considerations, including reputational concerns, at the PRO formation stage can relate to the reliability of the resource recovery supply chain parties, including the terms of their engagements.   A plan to simply reconfigure an exclusive supply chain akin to the one enjoyed by producers under the government scheme prior to IPR isn’t legally tenable.  As a result, they should consider:

  • When does the success of a PRO in securing beneficial service terms become evidence of collusion?
  • Can the PRO “cherry-pick” preferable service areas and leave the outlying areas to its competitors?
  • How much of the capacity of preferred service providers can a PRO reserve before it’s anti-competitive?
  • What if a PRO knowingly contracts in excess of its supply chain needs, limiting competing PRO access?
  • How much vertical integration is permissible before competition issues are triggered?
  • Do the service contracts create improper barriers to supplier switching and what kind of breakage penalties may be enforceable with a resource recovery regulator?  (Is there any certainty in adopting the 3 year terms favoured by the EU?)

It may be obvious that risk considerations assumed by producers in joining a PRO arise in all phases of an IPR circular economy and impact the entire lifecycle of a product and its diversion.  What may be less obvious, but no less significant, is that such risks must be managed long before a PRO engages in any actual resource recovery.

Jonathan D. Cocker heads the Firm’s Environmental Practice Group in Canada and is an active member of firm Global Consumer Goods & Retail and Energy, Mining and Infrastructure groups. Mr. Cocker provides advice and representation to multinational companies on a variety of environment, health and safety matters, including product content, dangerous goods transportation, GHS, regulated wastes, consumer product and food safety, extended producer responsibilities and contaminated lands matters. He appears before both EHS tribunals and civil courts across Canada. Mr. Cocker is a frequent speaker and writer on EHS matters, an active participant on EHS issues in a number of national and international industry associations and the recent author of the first edition of The Environment and Climate Change Law Review (Canada chapter) and the upcoming Encyclopedia of Environmental Law (Chemicals chapter).