Federal Court Holds that FIFRA Data Compensation Arbitraion Awards are Judicially Enforceable and Confirms Arbitration Award Applying per Capita Sharing of Data Costs

Harold Himmelman
Kathryn E. Szmuszkovicz
James B. Slaughter
Beveridge & Diamond, P.C.
Counsel to Cheminova A/S

A basic principle of data compensation under the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) - the enforceability of arbitration awards - was unequivocally affirmed by the United States District Court for the District of Columbia in a recent published opinion, Cheminova A/S v. Griffin L.L.C., 182 F. Supp. 2d 68 (2002) (Huvelle, J.). The court conclusively rejected an argument by a generic pesticide company that courts lack the authority to enforce arbitration awards issued pursuant to FIFRA's binding arbitration provisions. It held that "the plain meaning of Section 3(c)(1)(F) of FIFRA and the arbitration rules promulgated thereunder compel the conclusion that arbitration awards are judicially enforceable." Id. at 70. It also rejected arguments that data owners must seek cancellation of a generic company's pesticide registration and other administrative remedies before seeking to enforce an arbitration decision. This important decision dispels any doubt that arbitration under FIFRA is binding and that parties must pay compensation to data owners if they rely on the owners' data to obtain pesticide registrations.

The Cheminova v. Griffin opinion confirmed a FIFRA arbitration award of over $14 million in data compensation, in favor of Cheminova, the data submitter, and against Griffin, who cited and relied upon Cheminova's data to obtain its own United States Environmental Protection Agency (EPA) registration of the same products first registered by Cheminova. The award included interest and late payment fees. In the underlying award, a three-member arbitration panel reached a number of holdings important to FIFRA data compensation, including: (i) applying per capita sharing of costs rather than a market share approach; (ii) awarding compensation for a risk factor to the data owner; (iii) awarding historical data costs adjusted for inflation rather than theoretical replacement costs; and (iv) awarding interest on all costs running from the date of Griffin's application for a "me-too" registration, not the date of the grant of the registration or the date of the citation of a particular study. In the Matter of the Arbitration Between Cheminova A/S and Griffin L.L.C. (AAA Docket No. 23-171-00020-99) (June 29, 2001). The Cheminova arbitration decision joins a growing body of FIFRA arbitration rulings recognizing the importance of full compensation to companies who undertake the significant investments needed to generate pesticide data to meet EPA imposed requirements.

Background of Cheminova v. Griffin Arbitration and Confirmation Proceeding
FIFRA gives companies the option to obtain a registration from EPA to make and sell a pesticide already registered by EPA by relying on the health and safety data that another company previously has provided to EPA. Congress enacted this provision to avoid duplication of expensive scientific and technical work, to ensure protection of the innovative research and development activities of companies that generate these data, and to encourage competition in the pesticide marketplace through competition between new and safer products, as well as competition from generic versions of old products.

As a condition of securing a registration, Congress required those "follow-on" or "me-too" pesticide companies who choose to cite data previously generated by others to agree to compensate data owners for reliance on the owners' data. If a me-too company chooses this route to registration, then it must also agree to submit to binding arbitration under FIFRA to set the amount of compensation due the original registrant for use of its data if an agreement cannot be negotiated between the companies.

This binding arbitration procedure was followed in the Cheminova v. Griffin case after Griffin obtained a me-too registration to sell the insecticide malathion by relying on Cheminova's data. Griffin applied for its me-too registration in 1996 and obtained it in 1998 by citing to 118 Cheminova studies submitted to EPA, using the selective citation method under FIFRA. After eighteen months of arbitration proceedings and an eleven-day evidentiary hearing, a three-member arbitration panel awarded Cheminova $13.6 million in June of 2001, which increased to over $14.2 million through interest and late fees by the time of judicial confirmation of the award in January 2002 (the arbitration award is discussed in the second half of this article). Griffin failed to pay the award in the time set by the Arbitration panel and, as part of its efforts to obtain payment, Cheminova filed an application in federal court in the District of Columbia (the venue of the arbitration) to confirm the award as a district court civil judgment.

Griffin vigorously opposed Cheminova's application and sought to dismiss the confirmation proceeding. Griffin argued primarily that FIFRA did not expressly provide for judicial confirmation of arbitration awards and that Cheminova was relegated to petitioning EPA to revoke Griffin's registration to sell malathion, even though Griffin had been selling the product for three years without paying any compensation. Griffin also argued that Cheminova's only potential source of monetary compensation for Griffin's reliance on Cheminova's data would be a Tucker Act claim against the United States. All of these arguments were rejected by the District Court in the Cheminova v. Griffin decision.

FIFRA Provides for Judicial Enforcement of Arbitration Awards
The Cheminova opinion emphatically underscores the common understanding and practice in FIFRA data compensation arbitrations since 1978 that the proceedings are binding and enforceable. The court found meritless strained readings of the statute that would render complex arbitration proceedings hollow exercises. The text of FIFRA itself led the court to this result:

In light of FIFRA's unambiguous language and because judicial enforcement is necessary to effectuate the statute's express goals, it must be concluded that FIFRA confers jurisdiction on the judiciary to enforce arbitration awards. The statute's language is clear: if a follow-on registrant chooses to rely on another registrant's data, and the registrants cannot agree on compensation, FIFRA permits either registrant to initiate "binding arbitration proceedings." 7 U.S.C. §136a(c)(1)(F)(iii) (emphasis added). This language requires the registrants to determine their respective rights and duties with respect to compensation through arbitration. FIFRA further mandates that the arbitrator's findings and determinations are "final and conclusive." Id.

Cheminova, 182 F. Supp. 2d at 73. Judge Huvelle added that this language in FIFRA would be superfluous if FIFRA arbitration awards are not judicially enforceable. Likewise, the court rejected the assertion that FIFRA Arbitration Rule 37(c), which expressly provides for judicial enforcement of arbitration awards, is somehow ultra vires. Because the statute requires enforcement of arbitration awards, its implementing rule stating this explicitly is valid. Id. at 77.

The intent of FIFRA to compensate data owners buttresses the plain meaning of the statute that arbitration awards are judicially enforceable. Judge Huvelle emphasized that this purpose of FIFRA supports a finding of enforceability ("The primary purpose of the data-sharing provision is to guarantee compensation to original data submitters for the compelled use of their data."). Id. at 74. The Cheminova v. Griffin court reiterated the Supreme Court's observation in its 1985 FIFRA decision in Thomas v. Union Carbide that "[I]t is evident that Congress linked EPA's authority to issue follow-on registrations to the original data submitter's ability to obtain compensation." Cheminova, 182 F. Supp. 2d at 74 (quoting Thomas v. Union Carbide Agricultural Products Co., 473 U.S. 568, 582 (1985)). The Cheminova v. Griffin opinion reasoned further that "[w]ithout judicial enforcement, there would be no assurance that an original data submitter would be paid." Id.

Griffin's consent to binding arbitration under FIFRA was another factor supporting judicial enforcement of the arbitration award. The Cheminova v. Griffin court stated that "'explicit consent' is found in the written offer [to pay compensation] that all follow-on registrants must make as a prerequisite to taking advantage of the data-sharing program. See 40 C.F.R. § 152.93(b)(2)(iii). . . . Griffin thereby consented to have its rights determined by binding arbitration, which necessarily entails a right to judicial enforcement of any award." Id. at 77. Judge Huvelle also stressed that general arbitration law holds that private party agreements referencing "binding" arbitration, the same term used in FIFRA, assume a right to secure judicial enforcement of an arbitration award. Id. at 73-74.

The Cheminova v. Griffin court noted the importance of the timing of the me-too registrant's offer to pay compensation. Judge Huvelle observed that "Section 3(c)(1)(F)(iii) requires an offer to compensate be made before a prior registrant's data may be considered by EPA in a follow-on application . . . ." Id. at 74. This link between compensation to data owners and a me-too registration applicant's ability to even be considered for market entry underscored for the court the necessity of a clear right to enforcement of arbitration awards.

Potential Alternative Remedies for Data Owners Supplement, but Do Not Replace, the Data Owners' Right to Compensation
The Cheminova v. Griffin decision rejected arguments that data owners are relegated to various administrative claims against the me-too registrant or the government rather than compelling payment of arbitration awards. The court emphasized that a data owner's right to seek cancellation of a generic company's registration for failure to obey an arbitrator's decision is in addition to the right to compel payment - finding that FIFRA does not allow the me-too registrant to enjoy a "free ride" on the data owner's studies for any period of time.

Griffin contended that data owners could perhaps bring claims under the Tucker Act against the federal government to secure compensation for data used by me-too registrants. In rejecting this argument, the court noted that the U.S. Supreme Court previously had ruled that FIFRA's data sharing provisions do not affect a constitutional "taking" for data submitted to EPA after 1978. All of the data at issue in the arbitration were post-1978 data. Id. at 75 (citing Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1006-08 (1984)). Moreover, allowing a Tucker Act claim in this type of circumstance would frustrate FIFRA's purpose of determining data compensation through private arbitration with compensation paid by the me-too registrant. Forcing the government to pay compensation would give me-too registrants an impermissible "free ride at the public's expense." Cheminova, 182 F. Supp. 2d at 75.

Griffin also argued that FIFRA itself only allows a data owner such as Cheminova to first seek cancellation by EPA of the me-too's registration to sell the pesticide before it seeks to enforce the monetary compensation provided in an arbitration award. Judge Huvelle disagreed. FIFRA's plain meaning shows that cancellation of the registration is an alternate remedy if the me-too registrant "fails to pay compensation awarded in arbitration." Id. at 76. The court continued, "nothing in FIFRA indicates that this administrative remedy, registration cancellation, supplants or precludes judicial enforcement." Id. Moreover, registration cancellation would be an inadequate remedy that fails to meet FIFRA's goal of compensating the data owner. "It is difficult to imagine," wrote the court, "that Congress intended to permit a manufacturer, even for a limited period of time, to sell pesticides under a registration based on another party's data without compensating that party, and to thus enjoy a 'free ride' at a prior registrant's expense." Id.

Alleged Constitutionality and Ripeness Bars to FIFRA Award Enforcement Rejected
The final issue before the Cheminova v. Griffin court was a challenge by Griffin to the constitutionality of judicial enforcement of data compensation arbitration awards. The court held that Griffin had not challenged the merits of the arbitration award (and could not do so because of the passage of both the thirty and ninety day statutes of limitations for challenges to an arbitration award). Id. at 79 and n.8. Therefore, there was no basis for the court to address the proper scope of a court's due process review of a FIFRA arbitration award. Judge Huvelle, however, stated that both of the Supreme Court's decisions interpreting FIFRA in Union Carbide and Monsanto had upheld the constitutionality of FIFRA and that the Supreme Court in Union Carbide specifically found FIFRA's arbitration scheme constitutionally sound, based on its allowance of judicial review of arbitration findings for fraud, misconduct or misrepresentation. These decisions therefore "answered many of Griffin's generic due process concerns . . . . [and] it is difficult to understand Griffin's argument that due process requires judicial review for 'evidentiary errors, misinterpretations of applicable law and findings contrary to the clear weight of the evidence.'" Cheminova, 182 F. Supp. 2d at 78. The court also reiterated that FIFRA arbitrations must be viewed in the larger context of federal arbitration law, wherein "'[w]e have repeatedly recognized that judicial review of arbitral awards is extremely limited and that we do not sit to hear claims of factual or legal error by an arbitrator as [we would] in reviewing decisions of lower courts.'" Id. at 78 n.7 (quoting Teamsters Local Union No. 61 v. United Parcel Service, Inc., 272 F.3d 600, 604 (D.C. Cir. 2001)) (internal quotation marks omitted).

Griffin made a final argument that Cheminova's action for judicial enforcement was not ripe because Cheminova had not yet sought cancellation of Griffin's malathion registration. The court held that FIFRA specified that the arbitrator's decision was a "final and conclusive" (7 U.S.C. § 136a(c)(1)(F)(iii)) determination of data compensation and therefore all requirements for ripeness were met. Id. at 79. Importantly, the court reiterated the primacy of payment of data compensation as opposed to other remedies under FIFRA: "The administrative remedy, cancellation, and the alternative dispute resolution remedy, arbitration, are complementary means of addressing FIFRA non-compliance. For those parties that fail to engage in mandatory arbitration or fail to abide by an arbitrator's decision, cancellation is available. When both parties submit to arbitration, to make the result binding, judicial confirmation is available, and under the statute, this remedy should be given priority." Id. at 79.

The opinion in Cheminova v. Griffin, while not the first federal judicial confirmation of a data compensation arbitration award, is a milestone under FIFRA. Built carefully on the statute itself, Supreme Court FIFRA precedent, and principles of federal arbitration law, the Cheminova decision renders implausible any argument that a losing party in a FIFRA data compensation arbitration can refuse to pay the award.

Key Rulings of the $14 Million Data Compensation Arbitration Award
The underlying panel arbitration award confirmed by the District Court in Cheminova v. Griffin provides an important addition to the expanding body of data compensation rulings. The Cheminova panel award illustrates that pro-generic competition arguments of generic companies can not mitigate their obligation to fully compensate original registrants who take risks and invest heavily in the success of their crop protection products.

The principal components of the award to Cheminova were: (i) 50% of Cheminova's historical data costs for the data cited by Griffin, including technical support, management and regulatory costs paid by Cheminova; (ii) an inflation adjustment to these costs based on the All Commodities Producer Price Index; (iii) interest on the inflation-adjusted historical data costs from the date of Griffin's application for the registration; and (iv) a 10% risk factor payment applied to the inflation adjusted historical costs. This subtotal was reduced by 5% because Griffin did not receive "hard copy rights," i.e., physical copies of Cheminova's data that Griffin cited, which would be required to obtain a pesticide registration in California or Arizona (there is no authority under FIFRA to order a data submitter to provide hard copy to a me-too company).

The panel's twenty-three page decision addressed many reoccurring issues in data compensation arbitration. A pivotal issue is always what percentage of the data costs the me-too registrant must pay. The Cheminova and Griffin arbitration panel held that charging Griffin for 50% of the data costs (the per capita approach) "best effectuates the goals of FIFRA" and is in accord with "numerous other FIFRA arbitration decisions." Cheminova and Griffin Arbitration Award at 16, 17. The alternative of allocating costs by estimates of the parties' past or future "market shares" would "forc[e] more successful companies to subsidize their less successful competitors" and would be "difficult, if not impossible, to predict." Id. This per capita or "equal share" approach adopted by the Cheminova panel continues a trend that also serves to considerably simplify and expedite data compensation arbitrations and settlements.

Griffin also unsuccessfully argued that the costs of the studies cited should be valued at their current estimated "replacement cost" as opposed to Cheminova's evidence of actual historical costs for the data. The panel succinctly held that "the actual costs incurred by Cheminova provide the most reliable indication of what it would have cost Griffin to develop comparable data. Since Griffin elected to use Cheminova's data, it is reasonable to require Griffin to pay compensation based on Cheminova's actual costs." Id. at 8. In addition to the costs of the 118 studies cited by Griffin, the panel indicated that with appropriate proof it would order compensation for non-cited studies that are "necessary precursors" to later cited studies. Id. at 12. In this case, the panel ruled that Cheminova's evidence did not demonstrate a sufficient link between the precursor studies and the later cited data.

Included in the historical costs were Cheminova's study-specific technical support, management and regulatory costs paid to Cheminova's consultants. The panel also awarded a portion of costs paid to consultants for programmatic costs that could not be attributable to specific studies cited by Griffin, because "[a] complex data development program like the one at issue here inevitably requires expenditures that cannot be linked to particular studies, but that are necessary to the success of the overall program." Id. at 13.

Griffin challenged Cheminova's right to compensation for expenditures on malathion studies paid for by American Cyanamid Company, which sold its malathion business to Cheminova in 1991. The panel rejected this argument and reaffirmed the right to transfer data compensation rights, as specified in FIFRA. 40 C.F.R. § 152.98.

Cheminova also received a 10% risk factor enhancement to its inflation-adjusted historical costs. The panel ruled that on a case-by-case basis data owners should be eligible for compensation for the risk they bear that their investment in scientific studies to defend their product will not be successful. The panel observed that "there was [] no guarantee . . . that EPA would accept Cheminova's studies or that it would not demand additional data. Because Griffin avoided this risk, it should be required to pay a risk premium." Id. at 21. Again, the Cheminova panel ruling follows a trend to award a risk factor enhancement to historical data costs.

The parties agreed that an inflation-free interest adjustment on the historical costs was appropriate but disagreed regarding the date from which interest should be calculated. Griffin argued that interest should only run from the date of the award or, at most, from the date its malathion registration was granted by EPA. The panel rejected both of these arguments and adopted Cheminova's position that interest should accrue from the date that Griffin submitted its registration application to EPA. The panel's reasoning foreshadowed Judge Huvelle's later discussion of why data compensation obligations arise at the time of application for a registration: "While it is true that Griffin did not have an opportunity to earn a return on its investment until its registration was granted, that does not mean that Griffin did not receive a significant benefit from Cheminova as of the date of its application. Under FIFRA, Griffin was required to submit data with its application. Had it not used Cheminova's data, it would have been required to produce and submit its own data at that time. The benefit to Griffin was the cost that it avoided by using Cheminova's data. . . . Therefore, interest should run from the date of that application." Arbitration Award at 19-20.

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The District Court's decision in Cheminova v. Griffin underscores and buttresses the sound statutory and constitutional basis for binding and enforceable arbitration under FIFRA for determination of data compensation. Both data owners and me-too companies can focus on the merits of determining appropriate compensation, unfettered by concerns regarding the validity of the arbitration scheme or potential administrative remedies. Likewise, the arbitration panel decision in Cheminova and Griffin provides a detailed and clear explanation of the issues faced in most FIFRA data compensation arbitrations. These two decisions are now critical reference points for FIFRA practitioners and parties in the world of data compensation.