Out-Law Analysis | 25 Mar 2020 | 3:31 pm | 11 min. read
This effort, to meet significant demand for hand sanitiser, Covid-19 testing kits, and particular food-stuffs and medical products, for example, is indicative of a business community that is keen to do its bit to help, despite the inherent practical difficulties in repurposing production lines and developing new skillsets urgently. However, there are legal risks manufacturers must consider when exploring whether to enter an entirely new area of expertise to meet the demands of this crisis.
The need to streamline regulatory compliance processes will be critical but must be finely balanced with the need to ensure that appropriate standards are met, according to Allistair Booth of Pinsent Masons, the law firm behind Out-Law.
To take the example of ventilators, manufacturers are being called upon to join the race to produce in the region of 30,000 ventilators over the coming period in the UK. However, from a regulatory perspective the exercise of having ventilators manufactured by people other than the CE mark holders involves a delicate balancing act.
The medical devices regulatory regime is set up with the primary goal of ensuring patient safety. For ventilators:
But in the extraordinary circumstances we find ourselves, it is a live question as to whether patient safety is best served by:
The UK government has already published a specification for a ventilator system and invited parties to help. The Medicines & Healthcare products Regulatory Agency (MHRA) specification concerns the minimum standard of the "minimally clinically acceptable" ventilator to be used in the UK. It anticipates that the ventilators supplied would not be CE marked and compliance with the relevant international standard is unrealistic in the timeframe. "Nevertheless", it has said, "compliance with the essential safety standards must be demonstrated for patient safety".
Manufacturers assisting the government would be advised to review their product liability insurance coverage to check that any new products manufactured are covered by their existing policies
The UK government has also set up three consortia, led by Meggit (aerospace), Nissan (automotive) and McLaren (automotive), and has asked the army to speed up production of ventilators. The industry itself is also assisting in this process. Smith Medical, a manufacturer of ventilators, has sought capacity assistance from others and released their IP and specifications to enable this to happen.
But a balance must be struck. The ventilators are life saving devices. Their utility and reliability are essential and whatever solution is found, these two features should not be compromised.
As Chamika Hand and Rebecca Ransome-Lewis of Pinsent Masons explain, manufacturers assisting the government would be advised to review their product liability insurance coverage to check that any new products manufactured are covered by their existing policies.
There are a variety of types of product liability insurance which can be seen in specific wordings or under a company’s general liability insurance. The policies usually provide indemnity for damages and claimant’s costs that the insured becomes legally liable to pay in respect of bodily injury, property damage or completed operations. For example, manufacturers of medical devices often have bespoke polices based on their product lines and are required to advise underwriters of new products before they are manufactured and placed in to circulation. In the current crisis due to the urgent need for production to commence, it is important that these conversations with insurers are started as soon as possible.
Product liability policies generally have an occurrence trigger which allows an insured to report claims at any time during or after the policy term provided that the event or occurrence to which the claim relates occurred during the policy term. Manufacturers would also be wise to consider any exclusions that may apply. A products policy would generally exclude unsuitability or failure to perform, so liability for, say, a coronavirus testing kit that does not work satisfactorily may not be covered unless it has caused injury or property damage. Likewise the cost of recalling, replacing or repairing products supplied would generally be excluded from a product liability policy as this should be covered by a specific product recall policy.
Product recall policies, unlike product liability policies, generally provide cover for the cost associated with removing a batch or production run of products from the market place. This can include notification expenses, the costs of disposal/destruction, transport/storage costs and if necessary public relations or crisis management cover. Product recall cover may only apply to specific products listed in a proposal form or an appendix to the policy, so manufacturers will need to consider whether their existing insurance would cover new products.
In circumstances where insurers may be averse to taking on additional risk, the government may be willing to agree indemnities for companies involved with the national effort to deal with this pandemic. As a first step we would advise that manufacturers liaise with their insurance brokers to ensure that they have reviewed and updated their risk profile.
It should also be noted that business interruption insurance, whilst it usually requires there to be physical damage to the property, can – depending on the policy wording – cover disruption to the business without the need for physical damage. This could include where there has been an outbreak of a notifiable disease at the premises or closure of premises ordered by a public authority. These policies usually contain obligations to notify insurers of any alteration in the nature of business carried on at the business premises which materially increases the risk of an insured event, such as a fire, for instance. If new product lines involve greater risks, insurers may have the right to restrict the cover provided, impose additional terms, alter the premium or even cancel aspect of cover offered under the policy. Failure to notify could result in a reduction in the amount paid out in the event that a claim is made.
While manufacturers must urgently focus on their production capabilities when considering new product lines, there are also IP considerations, in particular the risk of patent infringement, according to Cerys Wyn Davies of Pinsent Masons. It would be expected that patent owners would not enforce their patents to prevent manufacture in the current circumstances, but the possibility of future demands for damages or royalties remains a threat.
The rarely used Crown use exemption from patent infringement can be invoked in these circumstances allowing the UK government to authorise others to make use of any patent rights without the prior agreement of the patent owner, to the extent they are for the “services of the Crown”. The authorisation only needs to relate to a particular act – here the reproduction of a ventilator design. It does not need to specify the patents being licensed. It is intended that the patent owner would be compensated at a later date by negotiation with the government. Government authorisation can be given retrospectively.
In the recent case of IPCom v Vodafone it was held that Vodafone’s emergency access to the mobile phone network services provided under a contract with the UK government had the necessary written authorisation from government to invoke Crown use and to shelter Vodafone from patent infringement. The same should apply to Crown use of any designs incorporated in the ventilator technology.
The government might also be able to rely on the exemption in Article 31 of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which is an international legal agreement between all the member nations of the World Trade Organization (WTO). That article entitles the government to waive the obligation on the authorised party to make “efforts to obtain authorisation from the rights holder on reasonable commercial terms and conditions”.
However, it is anticipated that these measures should not be required if the relevant patentees cooperate voluntarily with the government and manufacturers to ensure critical human needs are met as quickly and fully as possible. As well as doing the right thing the benefits of positive PR should be another deterrent to IP action.
Katherine Metcalfe and Simon Tingle of Pinsent Masons said that an important step in repurposing a manufacturing plant to meet different production demands is to consider any significant risks that may arise out of the changes, and relevant control measures.
Risk assessments should focus on any new machinery being adopted for use within the amended production line; it should also consider the new substances to which employees might be exposed as part of any new or varied production processes and the nature of other risks which may arise from increased use of specific machinery.
Risk assessments should also consider the varied production operation as a whole; for example, elevated workplace transport risks, increased number of workers – and the increased demand for supervision, a greater number of young workers and the introduction of workers into new or unfamiliar areas of production.
As with all good health and safety planning, the risk assessment should act as a 'blueprint' for good health and safety management. This should also assist an employer to comply with the general duties to ensure, so far as is reasonably practicable, both the health, safety and welfare of employees and the health and safety of third parties to the extent that the risk relates to its business operation. More specific health and safety legislation may also apply in certain circumstances.
In broad summary:
The European Commission and national competition authorities around Europe, including the UK’s CMA, have acknowledged that the exceptional circumstances of the Covid-19 crisis may trigger the need for companies to cooperate to ensure the supply and fair distribution of scarce or essential products to all consumers, according to Alan Davis of Pinsent Masons. This would include joint production initiatives. The authorities have said that they will not actively intervene against necessary and temporary measures put in place in order to avoid a shortage of supply.
The general view is that such cooperation would generally be compliant under competition law on the basis that either it would not amount to a restriction of competition or the cooperation would be individually exempted because it would create efficiencies that would most likely outweigh any restriction of competition. The authorities have, however, warned against companies extending their cooperation from what is necessary and will take action under competition and consumer law against any unlawful cartel behaviour or abuse of dominance, including excessive pricing. The CMA said that companies should not “exploit the crisis as a ‘cover’ for non-essential collusion". This includes exchanging information on longer-term pricing or business strategies, where this is not necessary to meet the needs of the current situation.
As Michael Fletcher of Pinsent Masons explains, any supplier who switches production lines may find it cannot meet existing orders. In practice, it may be that some orders are no longer required or that the customer is either happy, or willing, to defer delivery in order to permit the supplier's shift to manufacturing new products.
In any event, it will be important for companies to understand the impact under existing contracts of a change in production. That will then inform conversations with customers, or with manufacturer's own suppliers; for example if leased equipment would be used for a different purpose or if component parts of standard products are no longer required. Companies should ensure they understand the full supply chain and how their decision to switch to a new product will affect it. In any discussions with counter-parties, manufacturers should ensure that they agree appropriate variations to existing contractual commitments in order to mitigate the risk of breach of contract arguments.
When considering existing contracts, it is important to consider the wording of any force majeure clause in the contract. In particular, consider whether it specifically covers "epidemic or pandemic", and whether it specifies any acts of government that would trigger the clause. It is also important to understand what the effect of a force majeure event would be; for example does the event need to prevent performance, or alternatively hinder or delay performance, in order for a breach of contract to be excused? Alternatively, the common law principle of frustration could be considered if continued performance of a contract would be impossible, illegal or radically different from what had been contemplated; the lock-down may well see circumstances in which this principle applies.
In asking employees to turn their hand to developing or manufacturing a new product, a central issue will be employee flexibility
However, where a decision by a company to switch supply in order to help the fight against Covid-19 is voluntary, it may not be easy to rely on a force majeure clause or frustration to justify non-performance; there would need to be a separate event that triggered the clause or principle.
In asking employees to turn their hand to developing or manufacturing a new product, a central issue will be employee flexibility, Ed Goodwyn of Pinsent Masons highlights. Employers should first review their contracts and policies to see whether they have in-built flexibility within them already upon which they can reply. The core issue is whether asking an employee to do something different to their normal duties falls within what is called a “reasonable request” of the employer; it is a matter of fact and degree how far outside the scope of their normal duties employees can be expected to work where there is no contractual provision.
Generally, the reasonableness of the request may depend upon the size of the business and the nature of the employee's role. An employee in a small business in which everyone mucks in where necessary may reasonably be expected to be more flexible than an employee in a large organisation where roles are clearly described and demarcated. Equally, employees may be found to have behaved unreasonably in refusing to carry out duties beyond the precise scope of their job.
In the present climate, the likelihood is that employees will accept changes to the alternative of potential redundancy, and the trade unions are generally being supportive in the current situation. It will be important nonetheless to carry the hearts and minds of employees in proposing significant changes to roles.
Just as manufacturers look to be adaptable in order to meet the demands of the current circumstances, so the law and the holders of legal rights will need to be adaptable too, according to Nicole Livesey of Pinsent Masons. The private sector's incentive to collaborate for the public good will hopefully mitigate risks to manufacturers, as will the incentive on the holders of rights, such as patent holders, not to enforce those rights if it impacts upon the delivery of vital manufactured equipment. Nonetheless some risks will remain. In doing the right thing, in a very fluid environment, suppliers will need to be conscious of the risks they could face so that, if there could be any exposure, they can ensure mitigation wherever possible.
25 Mar 2020