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. To help meet this crisis, national leaders are seeking innovative solutions and turning to the private sector for assistance.
We are already seeing some manufacturers of products such as alcohol and perfume responding by voluntarily switching their production lines to make hand sanitiser (or to supply the necessary raw materials for hand sanitiser) in an effort to address shortages during the coronavirus outbreak. This alert covers the possibility of switching production in this manner during this unprecedented global crisis. It suggests considering the following key issues before entering into arrangements to supply such products to governments/public health services:
- Reputational risk.
- Regulatory approvals and taxation.
- Consent and consultation when changing employees’ jobs.
- Risks associated with competitor collaboration.
- Supply chain disruption and export controls.
- Emergency state powers relating to requisitioning, etc.
High level Analysis
The appropriate economic model for supplying products may not be clear at the outset of negotiations with a government body. However, moral or reputational pressure may mean potential suppliers will be concerned about pricing and may need or want to offer products for free or at cost. If pricing cannot be determined easily at the outset, give careful consideration to a mechanism to agree a price at a later point in time that is considered "fair" in the circumstances. It is very important to manage external communications around any proposals until such time that the negotiations have developed sufficiently in this respect.
Regulatory Approvals and Taxation
The regulatory position for producing hand sanitiser varies significantly by jurisdiction. For example, hand sanitiser may be classified as a cosmetic product, a biocide, or potentially even a medicine. Regardless of classification:
- It is illegal in many jurisdictions to supply hand sanitiser without obtaining some form of approval or ensuring compliance with a particular set of regulations.
- Any claims made in respect of products must be carefully vetted as there are strict regulations relating to product claims, which must normally be backed-up with detailed studies and supporting data.
- Potential suppliers should consider the tax implications of switching production (e.g. the treatment of the products that they will supply, availability of any tax relief, requirements to notify tax authorities).
In response to these issues, many jurisdictions are waiving approvals or other regulations, and ensuring that tax or internal revenue measures do not deter the manufacture of hand sanitiser. For example, in the UK, Her Majesty's Revenue and Customs (HMRC) has provided that:
- Licensed distillers and gin manufacturers do not need additional approvals to produce hand sanitiser meeting WHO requirements or certain denatured alcohols used in the manufacture of hand sanitiser.
- Businesses already authorised to use duty free spirits or certain trade specific denatured alcohols to produce hand sanitiser benefit from relaxed conditions such as the removal of annual usage limits.
- Businesses authorised to use certain other trade specific denatured alcohols are permitted to manufacture hand sanitiser.
Consent and Consultation when changing Employees' Jobs
From an HR perspective, manufacturers that are repurposing their existing production facilities to make 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.
Organisations will also have to consider their approach to managing working hours/overtime assuming facilities will be operating at capacity.
Risks associated with Competitor Collaborations
Coordinating with other firms to maximise the use of existing facilities may be the most efficient way to respond to this challenge. Although competition enforcement authorities generally recognise the importance of collaborative efforts to develop a response to this crisis, 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 supplies 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 appropriate.
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. Most recently, the European Commission has issued guidelines aimed at preserving free movement of goods and the integrity of supply chains with "green lanes" etc., 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 products such as hand sanitiser.
Emergency state powers relating to requisitioning, etc.
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.