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Inside Life Sciences

Civil litigation: a proven tool for the agrochemicals industry
Inside Life Sciences

Inside Life SciencesIssue 3 | November 2017

Date
08 November 2017

Jeremy Hertzog Partner

Victoria Wilson Managing Associate

Recent reports from Europol regarding the seizure of 122 tonnes of illegal pesticides in the EU highlight that the problem of illegal pesticides is substantial, with no signs of it abating.


Civil litigation: a proven tool for the agrochemicals industry

Recent reports from Europol regarding the seizure of 122 tonnes of illegal pesticides in the EU highlight that the problem of illegal pesticides is substantial, with no signs of it abating. Europol estimates that annual revenues associated with such illegal trade are over €4.4 billion globally, while the European Directorate-General for Health and Food Safety estimates that at least 10% of the EU pesticides market is comprised of illegal products. According to the ECCA/ECPA, this may be the tip of the iceberg. 

Illegal pesticides damage the agrochemicals industry in two key ways:

  • Market destruction, the scale of which is impossible to quantify accurately as illegal products may go undetected for a long time or may never be discovered at all. For this reason, the industry can only guess at the scale of the problem by extrapolating from incomplete data and market intelligence.
  • The contents of illegal pesticides are unknown and have not been evaluated under EU regulatory processes. The pesticides may be formulated from illegal imports of active substances which are not authorised in the EU, or combined with inferior co-formulants which may impact on the efficacy or crop safety of the product. The use of untested, unauthorised actives and formulations can pose very real risks to farmers, public health and the environment.

Agrochemical companies have sought to tackle the problem by improving their anti-counterfeiting measures, such as introducing supply chain traceability and product and packaging authentication technologies, and supporting the co-ordinated operations of regulators and law enforcement authorities across the EU. 

While this action is critical, a recent High Court ruling has shown that civil litigation can be a powerful and rewarding means of tackling illegal pesticides and is a key weapon in the arsenal of agchem brand owners and authorisation holders. In the case of United Phosphorus (UPL), a leading global producer of crop protection products which was advised by Mishcon de Reya, successfully brought claims against UK manufacturers and traders of pesticides who had placed unauthorised copies of UPL's products on the market in Germany. This is thought to be the first UK case in which search and seizure orders have been used against counterfeiters in the agrochemical sector.

Abuse of the EU parallel trade regime

Parallel trade in the EU is based on the principle of free movement of goods which promotes competition and product availability. However, misuse of the parallel trade system is a favoured means by which illegal pesticides are placed on the market in the EU.

Article 52 of EU Regulation 1107/2009 sets out the procedure and conditions which must be fulfilled for a Member State to grant a parallel trade permit. This regime permits the cross-border sale of a product which is authorised in one Member State (the Member State of origin) to another Member State (the Member State of introduction), providing that the product is "identical" to a product which is already authorised in the Member State of introduction (the reference product).

Whilst traders must obtain permits for parallel trading pesticides from the regulatory authority of the Member State of introduction, this is merely a paper-based application. There is no uniform approach to repackaging or labelling, and no means by which the regulators check compliance with the conditions under Article 52 before granting a parallel trade permit.

Unscrupulous manufacturers and traders have exploited these shortfalls in the parallel trade regime, using it as a cover to place unauthorised, and therefore illegal, pesticides on the market in the EU. This has been noted by the Directorate-General for Health and Food Safety of the European Commission, which said: "There is considerable evidence to suggest that the parallel trade system is misused in order to both move illegal PPPs around the EU and to bring them to market; this is possible due to the absence of requirements to link the marketed parallel-traded product to the reference product batch at the time of sale."

UPL v Agchemaccess, Grosvenor Chemicals and others

In May 2015, UPL issued proceedings against two groups of defendants relating to their manufacture and sale of unauthorised pesticides in the EU: (1) Agchemaccess and a director, Nicholas Gooch (the ACA parties), and (2) Grosvenor Chemicals (and later its associated company, Whyte Chemicals, and a director, Melvyn Whyte) (the Grosvenor parties).

The pesticides in question were unauthorised copies of UPL's metamitron-based herbicide known as Metafol, for which UPL holds regulatory authorisations in a number of EU countries including the UK and Germany. The copy pesticides were manufactured in the UK by a toll formulator, the Grosvenor parties, and sold into Germany by the ACA parties under parallel trade permits on the basis that the copy pesticides were genuine, authorised Metafol.

Unusually for an agchem dispute, UPL commenced proceedings by first obtaining without notice search and freezing orders against the ACA parties, and a disclosure order against Grosvenor Chemicals.

The ACA parties settled UPL's claims shortly before trial by admitting liability for breaches of Regulation 1107/2009 and trade mark infringement, giving permanent undertakings and agreeing to pay compensation of £1.7 million to UPL. However, UPL's claims against the Grosvenor parties for unfair competition under German law and unlawful means conspiracy proceeded to trial in May 2017. 

In its judgment dated 25 July 2017, the High Court decided as follows:

  • Article 52 of Regulation 1107/2009 only permits the placing on the market of a plant protection product (PPP) under a parallel trade permit where the PPP is (i) authorised in the Member State of origin and (ii) "identical" to a PPP already authorised in the Member State of introduction (known as the reference product). An issue in dispute was whether the requirement for "identicality" included sharing "common origin" with the reference product, whereby the PPP must originate from the same or associated undertaking, or have been manufactured under licence in accordance with the same manufacturing process.

    The court confirmed that the EU parallel trade regime does require PPPs to have "common origin" with the relevant reference product. It is not enough that the PPPs merely have chemical identity or similarity to the reference product.

    Accordingly, the Grosvenor parties' copy PPPs were not authorised to be placed on the market in Germany under a parallel trade permit for Metafol, as (i) they were not authorised in the UK, being the Member State of origin; and (ii) they had not been manufactured by the same or associated undertaking, or under licence, as the reference product.
     
  • Grosvenor Chemicals and Whyte Chemicals were liable to UPL for breaches of German unfair competition law for knowingly assisting ACA and Mr Gooch to make sales of unauthorised, copy PPPs in Germany. Their blind eye knowledge was sufficient for the purposes of establishing liability for acts of knowing assistance under German law. For example, the Grosvenor parties had failed to enquire as to whether the ACA parties had proper authorisations to trade in the PPPs and were prepared to turn a blind eye as to their lack of authorisation; they knew that Mr Gooch was a rogue and therefore were put on inquiry; and they knew that the copy PPPs they formulated for the ACA parties were intended to resemble UPL's Metafol and were to be sold in Germany.
     
  • In respect of one transaction, the Grosvenor parties had placed copy PPPs on the market in Germany in breach of Regulation 1107/2009, and they were all held liable to UPL for breaches of German unfair competition law as direct perpetrators for the sale of unauthorised, copy PPPs in Germany.
     
  • The HSE had previously informed the Grosvenor parties that they, as toll formulators, did not fall within the pesticides legislation. Whilst the HSE's interpretation of the role of toll formulators is open to question, the court held that the ambit of conspiracy ought not to be extended so as to cover breaches of regulatory legislative provisions whose enforcement is the responsibility of a government authority where that authority has said that no prosecution lay.

Lessons for the industry

This case highlights a number of significant lessons which should inform the agchem industry's anti-counterfeiting strategies in the EU:

  • Large-scale and longstanding businesses with legitimate operations can be intimately involved in and responsible for the illegal trade of unauthorised pesticides. 
  • Toll formulators can no longer turn a blind eye as to whether their customers have relevant authorisations for the Member State in which they intend to market their pesticides.
  • A cross-border approach is required to tackle illegal parallel trade, and those that knowingly deal in counterfeit and otherwise illegal pesticides should be treated as any other counterfeiter. Accordingly, aggressive but proportionate civil litigation, including the most robust options of search, freezing and disclosure orders, may be appropriate.

Brand protection in all its forms requires a multi-pronged approach. Particularly in the agrochemicals sector, supporting the operations of regulatory and law enforcement authorities is critical. However, as shown by the above case study, civil litigation should also be considered by agchem brand owners and authorisation holders as a highly useful tool.