As COVID-19 infections increase globally, the concern about a shortage of personal protective equipment ("PPE") for healthcare workers also broadens. We are already seeing some manufacturers of other products responding by voluntarily switching their production lines to make PPE in an effort to address shortages. This alert covers the possibility of expanding production in this way during this unprecedented global crisis. It suggests considering the following issues:
- Regulatory approvals
- Collaboration with an existing manufacturer
- IP licensing
- Antitrust risks
- State aid
- Consent and consultation when changing employees’ jobs
- Supply chain disruption and export controls
- Requisitioning of manufacturing assets
High level Analysis
The regulatory position for producing PPE varies significantly by jurisdiction, although it is illegal in most jurisdictions to supply PPE without obtaining some form of approval or ensuring compliance with a particular set of regulations. Further, any claims made in respect of products must be carefully vetted as there are strict regulations relating to product claims.
However, to increase speed to market of new PPE products, some governments are relaxing regulatory approvals and enforcement - provided always that safety is not compromised. For example, for the EU / EEA market, the European Commission's "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 PPE 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;
- that for a limited period of time, market surveillance authorities allow the circulation of PPE 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
- EU Member States take appropriate measures to ensure that PPE not bearing the CE marking are only made available to healthcare workers.
Collaboration with an existing manufacturer
Given the urgency of the present global situation, another option to boost manufacturing capacity quickly may be to rely on existing, approved manufacturing procedures, quality assurance programmes and certificates of conformity held by existing PPE manufacturers. This could proceed by way of standard contract manufacturing arrangements being put into place between an established PPE manufacturer and a new PPE manufacturer.
In order to facilitate the quick collaboration and cooperation that may be required to increase production of PPE, existing PPE manufacturers may wish to consider pre-emptively which other producers they may be able to partner with to roll out additional production capability, however unlikely this may have seemed previously. Manufacturers that do not currently produce PPE but want to help should contact firms already making the equipment to see what imaginative solutions can be developed together. Alternatively, they should consider reaching out to appropriate contacts in the relevant regulatory authorities or industry trade associations, which are acting as intermediaries and can help make fast connections.
Owners of IP relevant to the manufacture of PPE may want (or be required) to license their technology to others. Where consensual, the usual considerations will apply when licensing IP, but with particular pressure on:
- Speed. Timing is critical and negotiating the finer points of a licence on the usual timescales and in the same detail may not be feasible. Parties must adopt reasonable starting positions and be flexible.
- 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. 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 that 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. The parties may consider looking for government support given 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 - compulsory licence and government use regimes could provide 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 invoking "government use" exceptions that typically exist under existing national legislation. At first glance, these avenues provide a potential solution. For example, 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 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.
As noted above, coordinating with other firms may be the most efficient way to respond to this challenge. Although competition authorities generally recognise the importance of collaborative efforts to develop crisis 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 PPE 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 appropriate.
Manufacturers should also be mindful of the fact that regulators worldwide have expressed their concerns about suppliers of scarce products seeking to capitalise on the tight supply-demand balance by, for example, imposing excessive prices, or requiring the purchase of non-essential products together with high demand products (so-called “bundling”). Enforcement action could be taken under competition or consumer protection laws, or governments could ultimately regulate the prices of certain products.
There may be scope to obtain funding or other forms of economic support from governments to incentivise/facilitate the production of PPE. Despite the extraordinary circumstances, European Union Member States (and the UK) need to comply with the EU State aid rules. Unless an exemption applies, this normally means obtaining approval from the European Commission before subsidies or other economic support measures can be implemented. Where State aid is not approved or exempt, it remains prohibited and businesses must be prepared for the risk that it will need to be recovered by the Member State (with compound interest).
Consent and Consultation when changing Employees' 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 in theory require employee consent or consultation with unions / works councils. Organisations will also have to consider their approach to managing working hours/overtime assuming facilities will be operating at capacity.
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.
Supply chain disruption and export controls
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 (including parts and components that may be needed to manufacture goods). Most recently, the European Commission has issued guidelines aimed at preserving free movement of goods and the integrity of supply chains (e.g., creating "green lanes" at border crossings to facilitate the transport of goods), but it remains to be seen whether these measures will be followed in practice.
Additionally, many jurisdictions have introduced measures specifically restricting international movements of PPE. For example, the EU has introduced a licensing requirement for exports of PPE from the EU (with limited exceptions to enable exports to EFTA Member States and certain other destinations). Certain individual EU Member States have imposed more stringent restrictions, including by restricted intra-EU transfers of PPE. For further information on these measures, please see our previous alert here.
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.