This alert covers the possibility of expanding production of life saving medical equipment during this unprecedented global crisis. It suggests the following steps:
- Monitor of emergency state powers closely in terms of requisitioning, etc.
- Reach out to appropriate contacts in the relevant authorities. Industry trade associations are acting as intermediaries here and can help make fast connections.
- Understand governmental proposals to relax regulatory approvals and enforcement for medical equipment.
- Put in place virtual manufacturing contracts so as to "shadow" existing regulatory approvals.
- Carefully analyse product flows and monitor the supply chain for essential components.
- Ensure consent and consultation when changing employees’ jobs.
- Structure arrangements to fall within the boundaries of competition law or consider emergency engagement with the relevant antitrust regulators.
- Consider a temporary joint venture to provide certainty of production capacity.
- In negotiations, be reasonable and flexible to move things along as fast as possible.
- Recognise the different pressures in terms of speed, scope and term, pricing, technology transfer, and liability in consensual and compulsory government IP licensing.
As COVID-19 infections increase globally, the concern about a shortage of life-saving equipment and other essential supplies to prevent the spread of the virus and care for the sick also broadens. In particular, until a pharmacological treatment can be developed, ventilators are the vital treatment option for the minority of COVID-19 patients who require critical care. More broadly, there is urgent need for a rapid escalation in the manufacturing of a full range of test kits (self-administered, antibody tests, etc.). To help meet this crisis, governments are now turning to the private sector for assistance, not just in physical manufacturing but also for capabilities in design, procurement, assembly, testing and shipping. Most recently, the UK government appealed to its manufacturing sector to switch from making other products to producing ventilators1. Such requests are likely to become commonplace as national leaders seek innovative solutions to the crisis.
Whilst extraordinary in peacetime, businesses have rushed to help if they can. The purpose of this alert is help them understand and navigate the potential legal issues, with an overview and a high level analysis
High level Analysis
Requisitioning of Manufacturing Assets
Although seldom used, many governments have or are able to give themselves additional powers to requisition factories or other manufacturing facilities. To take three jurisdictions by way of example:
- On 14th March 2020 the Spanish Prime Minister announced a state of alert giving the government powers to requisition factories under Article 116 of the Spanish Constitution. The measure gives the government a range of powers, including the ability to requisition assets temporarily and occupy industries, factories, workshops, operations or commercial premises of any kind, with the exception of private households.
- In the United States, the President’s invocation of a national emergency, and enabling provisions under multiple pieces of legislation, expands the powers that can be exercised by the President in times of emergency.
- In the UK, the Civil Contingencies Act 2004 provides the government with particular powers in emergencies such as loss of human life, human illness and injury. We expect the UK government to prefer that manufacturing switches are voluntary but it is not inconceivable that powers under the Civil Contingencies Act could be used or the government may pass specific legislation to deal with the situation.
Sharing Manufacturing Knowledge
We already see some companies voluntarily switching their production lines to make essential supplies - for instance in France LVMH is converting its perfume factories to make hand sanitiser2, and in Spain, fragrance and fashion business Puig has offered the Government its production capacity for the manufacturing of hydroalcoholic and sanitising solutions3. In Italy, pharma company Menarini has converted its production plant to produce and donate disinfectant gel4. In the UK, distillery companies are said to be switching production to hand sanitiser5, and France's Pernod Ricard confirmed it is supplying its 96% proof alcohol to partners producing sanitising gel in the UK, France, Ireland and Sweden (with national tax authorities rushing to pave the way)6.
There are clear practical limitations on the ability of any general manufacturing businesses to make technically complex and highly regulated machinery. In order to meet the stringent quality requirements of medical device manufacturing in a short time frame, existing medical device manufacturers may need to provide new entrants with significant amounts of information, training and know-how before the new company could start operations. Design information, machining templates, software, quality assurance and other protocols for good manufacturing practice in the medical device industry would all need to be provided in order to boost production quickly.
Such materials are typically considered as confidential trade secrets, and there are no existing compulsory licences or government-use exceptions for trade secrets. Governments may have to rely on requisitioning powers, as mentioned above, or new laws to permit the requisitioning of such materials or to rely on a consensual approach to addressing shortfalls.
"Sharing" Regulatory Approvals with the New Entrants
For safety reasons, medical devices such as ventilators are subject to robust regulatory scrutiny and lengthy manufacturing approval processes. Given the urgency of the present global situation, the quickest solution for increasing manufacturing capacity is for new manufacturers to rely on existing, approved manufacturing procedures, quality assurance programmes and certificates of conformity held by existing medical device manufacturers. This could proceed by way of standard contract manufacturing arrangements being put into place between a licensed Original Equipment Manufacturer (OEM) of medical devices and the new manufacturer.
Virtual manufacturing arrangements such as these enable the production of 'clone' devices in a different factory (e.g. automotive) under the quality assurance systems and conformity certificates of an existing OEM, thereby adding manufacturing capacity as quickly and safety as possible.
An additional measure to increase speed to market of protective equipment and medical devices is for governments to relax regulatory approvals and enforcement - provided always that safety is not compromised. For example, for the EU / EEA market Commission Recommendation 2020/403 of 13 March 2020 on conformity assessment and market surveillance procedures within the context of the COVID-19 threat recognises that it is of paramount importance to ensure that appropriate protective equipment and medical devices are swiftly made available to those who need it most, and that the efforts of manufacturers and distributors - "working relentlessly" to increase manufacturing and distribution capacity - produce their full effects of increased supply feeding into the market without delay. The Recommendation therefore proposes:
- opening the EU market to protective equipment manufactured in accordance with WHO recommendations rather than in strict adherence to EU harmonised standards, provided that they give a level of protection corresponding to EU requirements;
- for medical devices, that Member States use their discretion to authorise derogations from EU conformity assessment procedures, as is currently permitted by EU law in exceptional circumstances;
- that for a limited period of time, market surveillance authorities allow the circulation of protective equipment or medical devices for which conformity assessment procedures, including the affixing of CE marking, have not been fully finalised, provided that the products are otherwise safe in accordance with EU law; and
- that Member States take appropriate measures to ensure that protective equipment or medical devices not bearing the CE marking are only made available to healthcare workers.
Supply Chain Disruption
New border controls have been implemented worldwide. While principally intended to prevent transmission of COVID-19 by restricting the movement of people, these measures may also have the effect of disrupting supply chains by slowing the movement of goods and in particular, components needed to make equipment such as ventilators. Most recently, the European Commission has issued guidelines aimed at preserving free movement of goods and the integrity of supply chains3, but it remains to be seen whether these will be followed in practice: a number of EU Member States have imposed restrictions on exports and intra-EU transfers of certain medical equipment (principally personal protective equipment). Such controls may be extended to the supply of components needed to produce medical equipment.
Changing People's Jobs
From an HR perspective, organisations that are repurposing their existing production facilities to manufacture a different product will need to ensure that staff have appropriate training. In some locations, even minor changes to job duties can also in theory require employee consent or consultation with unions / works councils. A move to a different facility will also commonly require employee consent and consultation. A strong communications plan to explain the proposed shift in production or any relocation (particularly if the alternative is reducing production output) should assist in managing employee risks. In the event of relocations, support to assist with the temporary move including providing transport or temporary financial assistance, will also assist in reducing the risk. Organisations will also have to consider their approach to managing working hours/overtime assuming facilities will be operating at capacity.
With governments calling on industry to increase production of medical devices such as ventilators and other emergency equipment needed to fight COVID-19, coordinating with other firms to maximise the use of existing facilities and the building of new capacity may well be the most efficient way to respond to this challenge. Although competition enforcement authorities generally recognise the importance of collaborative efforts to develop crises responses, antitrust risk surrounding discussions between parties operating in the same market, however well intentioned, remains. In particular, sharing competitively sensitive information or using discussions as an opportunity to set prices, restrict output, divide customers or markets, or coordinate on commercial strategy remains high risk.
The fact that governments are prompting, encouraging, cajoling or incentivising businesses to pursue such policies or initiatives to assist with the crisis will only generally translate into a viable defence in circumstances where the otherwise anti-competitive conduct is required by legislation, or if legislation has been imposed that creates a legal framework which eliminates all possibility of independent competitive activity. Companies collaborating to produce medical equipment required to fight COVID-19 should structure their arrangements so that they fall within the boundaries of competition law. If this is not possible, emergency engagement with the relevant antitrust regulators would appear to be appropriate4.
Cooperative Corporate Structures
In order to facilitate the quick collaboration and cooperation that may be required to increase production of medical devices such as ventilators and other emergency equipment, manufacturers of essential equipment may wish to consider pre-emptively which other producers they may be able to partner with to roll out this additional production capability, however unlikely this may have seemed previously. Companies that do not currently produce essential equipment but want to help should contact firms already making the equipment to see what imaginative solutions can be developed together.
One option could be to frame the cooperation as a temporary but necessary joint venture designed to provide certainty of production capacity rather than a long lasting business relationship. The form of any arrangement should not be a delaying factor in the ability to engage in a joint effort to bolster productions; the key is going to be able to ensure that appropriate management and control can be adopted to ensure that ventilators and other key equipment can be made to appropriate standards.
Timing will be pressured and negotiating the finer points of a joint venture or other corporate collaboration on the usual time scales and in the same detail may not be feasible. Adopting reasonable starting positions and being flexible on who holds the pen simply to move things along as fast as possible will be factors. There may be pressure to contract on the basis of letters of intent or heads of terms. If proceeding that way, be mindful of what is or is not binding and ensure there is a robust process to agree full terms.
Companies that own IP which is relevant to the manufacture of essential equipment such as ventilators may want to or be required to license their technology to others, either competitors in the same industry, or to other players who are drafted in to turn their hand to manufacturing in demand items.
Where consensual, the usual considerations will apply when licensing IP, but with particular pressure on:
- Speed. As with corporate structures, timing will be pressured and negotiating the finer points of a licence on the usual time scales and in the same detail may not be feasible. The points made about corporate structures regarding adopting reasonable starting positions, being flexible and using letters of intent or heads of terms apply equally to licensing.
- Scope and term. IP owners will be keen to limit the licence to what is genuinely necessary to cope with emergency demand and to have strong rights to bring the licensing arrangement to an end promptly and regain exclusivity when appropriate.
- Technology transfer. As noted above, it is likely that a simple permissive IP licence will not be sufficient, and licensees will require technology transfer assistance to start manufacturing items which are unfamiliar to them. Robust confidentiality protocols and requirements to destroy or return information after termination will be key.
- Liability. The usual considerations about balance of risk will be very different to a normal IP licence in which commercial considerations can influence where liability such as for product defects and IP infringements lies. A licensor will be keen to ensure it does not attract liability for manufacturing steps undertaken by a non-specialised licensee, whereas the licensee will want reassurance that the manufacturing process (which it did not develop) is sound. In the circumstances, perhaps both parties would look for government support in the circumstances.
- Pricing. Moral or reputational pressure may mean parties will be concerned about pricing. The appropriate economic model may not be clear at the outset depending on the terms on which the government will remunerate those who switch to providing essential items. If pricing cannot be easily set out the outset, give careful consideration to a mechanism to agree price at a later point in time and the compulsory licence and government use regimes could provide such a mechanism that is considered "fair" in the circumstances.
Governments may take the view that the situation merits imposing some degree of compulsory licensing of relevant IP or to invoke "government use" exceptions that typically exist under current legislation. At first glance, these avenues provide a potential solution; under the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) regime, compulsory licences can be awarded in circumstances where demand for a patented product is not being met (as is the case with essential medical equipment in a time of health crisis). Governments can also invoke exceptions for the use of patented inventions for the services of the public good. In each case, fair compensation must usually be provided to the patent holder. However, the process for implementing compulsory licences can be protracted, making that avenue unattractive. Government or "Crown use" exceptions can be implemented more quickly and could provide safeguards against liability for patent infringement.