Avoiding costly supply chain disruption: a cautionary tale

July 2021 | SPOTLIGHT | RISK MANAGEMENT

Financier Worldwide Magazine

July 2021 Issue

By any independent standard, the US electronics industry is huge – it was worth over $300bn in 2019 – and growing annually. Would it surprise you to know that as big, essential and powerful as it is, a single rule issued in January of this year by the US Environmental Protection Agency (EPA) nearly brought this sector to a halt? To this day, the rule is causing extraordinary disruption as electric and electronic device manufacturers, importers, processors, distributors and others scramble to adjust in its aftermath. This article tells the cautionary tale of PIP (3:1). This sad and largely avoidable tale crystalises the importance of understanding the long reach of the US industrial chemical control law, the Toxic Substances Control Act (TSCA) and its seemingly limitless potential for disrupting global supply chains.

Background

Many have never heard of PIP (3:1), a little-known chemical the use of which is surprisingly pervasive, especially in the electric and electronic device industry. Phenol, isopropylated phosphate (3:1), better known as PIP (3:1), is a commonly used phosphate flame retardant used as an additive in thermoplastics and resins to meet electrical safety and flammability standards. PIP (3:1) has many applications beyond its use as a flame retardant, including its use in rubberised materials such as gaskets and seals, and in hydraulic and fuel applications. It is widely found in components in electric and electronic devices, including polyvinyl chloride (PVC) tubes, harnesses, cables, and sleeves, gaskets and covers of parts.

In amending the TSCA in 2016, Congress directed the EPA to take “expedited” regulatory action for certain chemical substances identified in a 2014 update to the EPA’s ‘Work Plan for Chemical Assessments’ as persistent, bioaccumulative and toxic (PBT). PBT substances are believed to be especially nasty given their potential to biomagnify and linger in various media for long periods.

One such chemical in the Work Plan is PIP (3:1). As required by the TSCA, the EPA proposed a rule in 2019 to address PIP (3:1) and four other PBT chemicals. The statute requires that the EPA issue a final rule no later than 18 months after issuance of the proposal, which the EPA did in early 2021. Consistent with the TSCA, the EPA reviewed applications of PIP (3:1) with a view toward eliminating or reducing to the greatest extent practicable uses of PIP (3:1), thus reducing exposures to human health and the environment.

A key fact contributing to the chaos is that PIP (3:1) is largely unregulated globally as a chemical substance. It is not considered a PBT in the European Union (EU), although it is under consideration as a PBT by the European Chemicals Agency (ECHA). PIP (3:1) is included in the ECHA’s Community Rolling Action Plan (CoRAP) and The Netherlands is evaluating it. The initial grounds for concern driving evaluation include PIP (3:1)’s potential endocrine disruption effects and its suspected PBT/very persistent and very bioaccumulative (vPvB) potential.

PIP (3:1)’s uncelebrated profile may have contributed to the proposed rule’s general lack of recognition as a potential showstopper when issued in July 2019. Some commenters noted that PIP (3:1) is widely used in commercial and industrial articles. This is at odds with the EPA’s statement in its ‘Response to Public Comment’ document that “there is little evidence to suggest that PIP (3:1) is present in commercial and industrial articles”. Industry petitioners have asserted otherwise, however, and filed suit in the US Court of Appeals for the DC Circuit charging that the EPA violated the TSCA in issuing the rule.

Despite these and other comments on the record, the EPA issued a final rule on 6 January 2021, that prohibited the processing and distribution in commerce of PIP (3:1), and the products or articles containing the chemical substance, for all uses, except for a handful of specific exemptions or prohibition phase-ins. The final rule also requires manufacturers, processors and distributors of PIP (3:1) to notify their customers of these restrictions. The rule also contains other prohibitions, which were to be effective as of 8 March 2021. The rule disallows sell-through opportunities for finished goods already in the channels of trade.

Think for a moment about the commercial implications of these restrictions. The final rule requires all importers and domestic manufacturers of articles, meaning finished goods sold or distributed to downstream processors and distributors, retailers or others, containing PIP (3:1) in any quantity (except for narrow exemptions set forth in the rule) to stop all processing and distribution in the US of any PIP (3:1) containing article as of 8 March 2021. The no-sell-through provision means that any inventory not yet in the channels of trade could not be distributed, including sold. The result has not been pretty.

After the New Year began, regulated entities seemed, finally, to realise, to their horror, the train wreck that was unfolding. The makers of electric and electronic devices were especially concerned as, the EPA noted, the prohibition on PIP (3:1) could “impact articles used in a wide variety of electronics, from cell phones to robotics used to manufacture semiconductors, to equipment used to make COVID-19 vaccines and keep them at room temperature”.

This wildly understated observation proved prophetic by mid-February for major electric and electronic device manufacturers, and their trade associations. Intense industry advocacy eventually persuaded the EPA to issue a rare ‘No Action Assurance’ (NAA). Such assurances are seldom-issued administrative expedients that advise regulated entities that the EPA will not pursue legal action for a specified duration to allow affected parties to get their act together, in this case for 180 days from 8 March or to 5 September for violation of the prohibitions pertinent to the processing and distribution of PIP (3:1) in commerce. The EPA stated that it took the action to avoid supply chain disruption while it gathered more information. The prohibitions relating to the release of PIP (3:1) to water, record-keeping requirements and downstream notification requirements remain in effect. On 8 March, the EPA also issued a proposed rule that reopened the comment period for all five PBT final rules. The EPA will use the information received during the comment period to determine the best path forward, plans that could include amending the PIP (3:1) final rule to include additional or alternative exposure reduction measures, or even extending the compliance date for some regulated products and articles.

Why is this a big deal?

Finished goods manufacturers have thought for decades that the TSCA is “that chemical producer law” and generally conducted their operations in blissful ignorance of it. Not anymore. If ever there were a wakeup call for article and finished goods manufacturers, the PIP (3:1) cautionary tale is it. Why exactly the international commercial sector was slow to grasp the business and logistical implications of a TSCA proposal with such breathtaking potential to disrupt remains a mystery. That failure aside, it is not as important as the takeaway message from this saga – the TSCA is not just for chemical producers and processors, and its formidable reach extends to the entire international chemical producer, importer and user community, including when the chemicals are components of articles and finished goods.

Finished goods, or ‘articles’ as the EPA calls them, can be and increasingly are subject to restrictions, as the PIP (3:1) rule plainly demonstrates. The EPA has issued other rules pertinent to chemical substances when part of an article, but the EPA is issuing such rules with greater frequency. That trend is expected to continue as the EPA implements the amended TSCA. Consider, for example, the TSCA Significant New Use Rules applicable to imported carpets containing certain perfluoroalkyl sulfonates, and the import or processing of various uses of elemental mercury in switches and meters.

The TSCA’s reach is long. This rule is a big deal as it illustrates perfectly, and in grim detail, what happens when a large swath of a commercial sector is caught off guard when a new rule prohibits the processing and distribution of articles containing a chemical substance widely used, particularly in electric and electronic devices with notoriously complex commercial value chains. PIP (3:1) is a commodity chemical made available to hundreds of thousands of electronic parts manufacturers around the globe that supply a complex web of commercial entities that make and distribute electronic devices. The complexity of the value chain is complicated by a general lack of transparency as to the specific chemical identity of the hundreds of component parts in these devices, especially where, as here, PIP (3:1) can be added specifically for its flame retardancy functionality to meet product flammability and safety standards.

Stakeholders must now go back through their supply chains and obtain declarations that the products and articles they are procuring from their suppliers do not contain PIP (3:1). This means, of course, that there are available alternatives to impart the same chemical functionalities as PIP (3:1), and that these alternatives satisfy safety and flammability standards that often must be certified by third parties. In cases where no alternative exists, the commercial consequences are grim, unless the EPA grants an exemption, allows for a phase-in that is practicable, or extends the NAA indefinitely, which is unlikely.

Stakeholders must be keenly aware of what chemicals the EPA is regulating, and intends to regulate for decades to come, under the TSCA. Failure to keep abreast of these developments and communicate to the EPA the impacts of potential restrictions will result in potentially avoidable commercial disruption and financial loss. Ask anyone in the electric and electronic device sector.

Lynn L. Bergeson is managing partner of Bergeson & Campbell, P.C. She can be contacted on +1 (202) 557 3801 or by email: lbergeson@lawbc.com.

Lynn L. Bergeson

Bergeson & Campbell, P.C.