Sixth Circuit Limits Contractual Recovery of FIFRA “Data Compensation” Costs
On May 18, the 6th Circuit Court of Appeals resolved a Federal Insecticide, Fungicide and Rodenticide Act (“FIFRA”) dispute between two agricultural-chemical distributors, Drexel Chemical Company (“Drexel”) and Albaugh, Inc. (“Albaugh”). Drexel Chem. Co. v. Albaugh, Inc., Case Nos. 14-6340/6363 (Sixth Circuit, May 18, 2016). The dispute centered on Drexel’s ability to recover certain “data compensation” costs from Albaugh pursuant to a contract between the two. The court ruled that according to the parties’ contract only “data compensation” costs that were actually paid during the contract were recoverable. In contrast, costs incurred during the contract but not paid until after the contract’s termination were not recoverable. Additionally, the court ruled that the contract’s generic description of recoverable “costs” was not specific enough under Tennessee law to include attorney’s fees and arbitration costs. The court’s ruling demonstrates the importance of carefully describing the scope of “data compensation” costs in any FIFRA data cost-sharing contract.
FIFRA Data Compensation
FIFRA governs the sale and use of pesticide products in the U.S. and requires that every pesticide distributed or sold in the U.S. be registered with the EPA. A company that registers a pesticide under FIFRA is referred to as a “registrant.” The EPA requires that a registrant demonstrate the safety of a pesticide by submitting data proving the pesticide’s efficacy and safety. A registrant can provide the necessary data in one of two ways: (1) develop the data on its own; or (2) cite to relevant data previously submitted by other registrants. Citing to another registrant’s data can significantly speed up the registration process, but because the cost of developing pesticide data can be significant the EPA generally entitles the “original data submitter” to be compensated when another company cites to the “original data submitter’s” data. Even after a pesticide is initially registered, the EPA can later re-review that product and require registrants to submit new data.
Data Compensation for Atrazine Registrations
The Drexel case involved the pesticide atrazine, which was originally registered under FIFRA by the corporate predecessor of Syngenta Crop Protection (“Syngenta”). In the 1970s, Drexel obtained its own atrazine registration under FIFRA. In order to obtain its atrazine registration (and in lieu of generating the necessary data on its own), Drexel cited to health, safety and environmental data that Syngenta had previously submitted to the EPA. Under FIFRA (7 USC 136a(c)(1)(F)(iii)), Drexel was required to offer to pay Syngenta for such data. After FIFRA-mandated arbitration, Drexel and Syngenta split the costs for Syngenta’s data based on Drexel’s and Syngenta’s respective market shares for atrazine pesticides. They also agreed to split any future data-compensation costs on the same market-share basis.
In the late 1990s, Albaugh purchased a majority share in a foreign company that formulated atrazine. However, before Albaugh could import and distribute atrazine in the U.S. it also had to register with the EPA. In order to obtain its own atrazine registration, Albaugh offered to pay Syngenta for the use of Syngenta’s data. When Albaugh and Syngenta were unable to reach an agreement on the amount of compensation, Drexel offered Albaugh a solution: Albaugh would become a FIFRA “supplemental distributor” of Drexel, whereby Albaugh could sell pesticides under Albaugh’s brand name but pursuant to Drexel’s atrazine registration. Under the “supplemental distributor” arrangement, Albaugh would avoid having to pay data compensation costs to Syngenta (although Drexel was still required to generate or pay for any future data required to support its atrazine registration). As part of its consideration, Albaugh contractually agreed to pay 50% of “the costs of all future [data compensation] payments that Drexel makes to [Syngenta].”
In the early 2000s, the EPA reviewed all atrazine registrations and Syngenta submitted 190 studies in support of atrazine’s continued safety. After reviewing Syngenta’s new data, the EPA canceled all existing atrazine registrations (including Drexel’s) but allowed companies to re-register provided that they offer to pay Syngenta for its studies and also agree to conduct more safety studies required by the EPA in the future. Drexel accepted the EPA’s conditions, re-registered its atrazine registration and offered to pay Syngenta for its studies.
Before Syngenta responded to Drexel’s offer to pay, Drexel learned that Albaugh was considering leaving the atrazine business. Drexel became concerned that if Albaugh left the atrazine business, Drexel may be required to pay Syngenta for its atrazine studies without any financial assistance from Albaugh. Accordingly, Drexel asked Syngenta to invoice it $1.5 million for Drexel’s use of Syngenta’s data, which Drexel immediately paid. Drexel then invoiced Albaugh for $750,000 (i.e., 50% of the $1.5 million payment) based on their contract governing data compensation costs. Immediately after receiving the invoice, Albaugh terminated its contract with Drexel and ceased importing atrazine. After Albaugh terminated the contract, Drexel and Syngenta arbitrated additional atrazine data compensation costs, which eventually resulted in Drexel making three more payments to Syngenta.
The Drexel Case
Drexel sued Albaugh for breach of contract, arguing that the contract required Albaugh to pay Drexel for half of all of Drexel’s payments to Syngenta (i.e., Drexel’s $1.5 million payment before Albaugh terminated its contract with Drexel plus Drexel’s three additional payments to Syngenta after Albaugh terminated its contract with Drexel). The trial court awarded Drexel half of its costs paid before Albaugh terminated its contract with Drexel but refused to award Drexel for any costs paid after termination. The trial court also refused to award Drexel its arbitration costs and attorney’s fees. On appeal, the 6th Circuit was faced with determining: (1) whether Albaugh was responsible for costs incurred by Drexel prior to the contract’s termination but which were not paid until after termination; and (2) whether Drexel’s arbitration costs and attorney’s fees were within the meaning of “costs” under the parties’ contract.
With regard to the first issue, Drexel argued that it was immaterial when it actually paid Syngenta because Drexel’s offers to pay Syngenta were “irrevocable” once they were made (and all of the offers to pay were made before Albaugh’s termination of the contract). The court rejected Drexel’s argument and found that its offers to pay were not “irrevocable” based on: (1) Drexel’s failure to cite to any FIFRA provision supporting its argument; (2) FIFRA expressly leaving data compensation disputes to be resolved by the parties without the EPA’s involvement (i.e., whether or not Drexel ever had to pay depended wholly on Syngenta’s decision to collect on Drexel’s offer to pay); and (3) the common practice in the private sector, whereby original data submitters frequently do not pursue data compensation claims against companies that abandon their pesticide registration. With regard to the second issue, the court ruled that the parties’ contract (entitling Drexel to 50% of “the costs of all future [data compensation] payments”) required more specificity under Tennessee contract law in order to cover arbitration costs and attorney’s fees. Accordingly, the 6th Circuit affirmed the trial court’s ruling.
The Drexel opinion underscores the importance of carefully delineating the scope of recoverable “data compensation” costs under FIFRA cost-sharing contracts. Because potentially millions of dollars in “data compensation” costs may be at issue, it is important for parties to expressly clarify in their cost-sharing contracts whether the submission of an offer to pay is sufficient to trigger a party’s payment obligations and whether arbitration costs and attorney’s fees are within the meaning of recoverable “data compensation” costs.
Additionally, the Drexel opinion is notable for the 6th Circuit’s ruling regarding when a data compensation “offer to pay” is “irrevocable.” The 6th Circuit rejected Drexel’s argument that data compensation liability is irrevocable upon the mere submission of an offer to pay, thereby suggesting that an original data submitter must prove something more before establishing a right to data compensation. This ruling could have a potentially significant impact on future data compensation cases, particularly those involving companies who abandon their pesticide registrations after submitting offers to pay but before making any actual payment.
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