Devil’s advocate: top legal compliance issues for 2010

Posted on 6 Apr 2010 by The Manufacturer

Keeping manufacturers off the windy side of the law, Edward Machin investigates those facets of legal compliance set to make it big this year.

Laws, reckoned Prussian statesman Otto von Bismark, are like sausages: it is better not to see them being made.

Lawyers and parliamentarians aside, one would be hard pressed to find many nihilistic souls in industry to argue otherwise. That said, out of sight does not — or should not — mean out of mind for the modern manufacturer. Quite the opposite, in fact.

With the Westminster sausage factory showing little sign of easing its legislative production schedule, nearly every aspect of the manufacturer’s day-to-day operations is being delineated as never before.

It would therefore be a tall order to consider every application of legal best practice, not to mention statutory observance, for those in the sector.

Nonetheless, TM has selected a number of the most salient areas of compliance for manufacturers in early 2010. While not an exhaustive list, having canvassed manufacturers — in sectors ranging from aerospace and automotive to pharmaceutical and food & drink production — and legal professionals, the following topics emerged time and time again as being critical to maintaining healthy operational practices.

Product liability
Product liability, defined as the legal responsibility of manufacturers, wholesellers and retailers to the buyers or users of damages or injuries caused by the use of defective products, hit the headlines in February with the recall of 1.8m Toyota vehicles across Europe due to faulty accelerator pedals, including about 200,000 in the UK.

Similarly, in February the European Commission published guidelines for the management of the Community Rapid Information System (RAPEX) — its consumer product safety reporting mechanism.

Widely praised, and with product recall figures quadrupling since 2005, “The practical implications for product manufacturers and suppliers will [nonetheless] be significant,” says Rod Freeman, a partner at Lovells LLP.

“In the case of a voluntary recall, this will mean either that manufacturers and suppliers will have to provide proactively to the national authorities a much greater level of detail when making notifications around Europe, or they will have to expect to deal with more detailed inquiries from national authorities in all potentially affected markets.”

A practical view
“There is a significant rise in findings that warning labels are not always sufficient protection from liability for retailers or manufacturers,” says Victoria Curran, product liability lawyer at Weightmans LLP. “Moreover, the courts are taking a practical view of what the reasonably expected behaviour of a consumer should be — and wearing eye protection while loading the washing machine hardly counts as such,” she says, referring to a case in which the claimant suffered blurred vision, sensitivity to light and a possible tear in the eye due to faulty washing liquid.

Damages awarded in claims brought against retailers under the Consumer Protection Act are being passed on to the product’s manufacturers, with contracts between the parties frequently allowing for such arrangements. “Manufacturers often have little say regarding the terms of their contracts with larger retailers,” says Curran.

“Indeed, a worrying number of manufacturers end up agreeing to accept clauses indemnifying the retailers in full to maintain their supplier status.” With liability resting largely on their shoulders, manufacturers can seek to protect themselves by carrying out regular adequate tests and assessments of their products. “Producing up to date documentation on product testing and demonstrating compliance with specifications and any relevant standards is paramount in defending product liability claims,” advises Curran. “Moreover, being able to support the retailer’s defence with such documentation can even help build cooperation between the two parties and boost their defences.”

According to Weightman’s Curran, if a claimant is successful in establishing that a product has a defect, a label alone is unlikely to provide protection in court. Being able to demonstrate that everything practicably possible was done to assess and minimise risks to consumers is therefore key. “In some cases,” she says, “the courts have held that large manufacturing firms or retailers have the resources to provide an improved level of protection for the consumer, with significant damages awards being made against those that don’t.”

Intellectual property
While intellectual property (IP) rights are a valuable asset for any business, given the ever-evolving nature of law this aspect of legal compliance is particularly important for those in the manufacturing community. However, IP’s ethereal nature often makes it difficult to quantify, finance and protect; this can have serious practical and financial consequences for manufacturers, says Jaan Larner, a commercial solicitor at Keystone Law.

Capturing all IP
Businesses need to both recognise the different forms of IP — copyright; design rights; database rights; and patents, among others — and identify where within the business each IP asset will be created, says Larner.

“Most commonly IP is created by the research and development department. Accordingly, all employees and consultants working in that department need to have provisions in their contract that reserve the IP they create as the property of their employer and grant the employer powers to ensure this is so. Employment handbooks and manuals need to be drafted carefully to ensure that the working practices used allow the IP to be kept confidential and to be retained securely within the relevant part of the building. Indeed, once information is made public there is nothing the law can do to make it secret again,” he warns.

Many types of IP require registration before they can be defended against infringement.

However, says Larner, “Registration can be costly and invariably requires the IP being made public. Businesses should therefore consider what should be registered, when and at what cost with an IP strategy expert and then act accordingly.

Maintaining important IP is similar to maintaining plant and machinery; it needs the timely and regular attention of an expert.” Capturing IP, though, is not simply about preventing it escaping or being taken by employees.

Management must equally recognise that employees can be an excellent source of new IP.

“Manufacturers should consider incentivising all employees to contribute their ideas while ensuring that such ideas, once contributed, belong to the employer. Incentives of this nature are often well received, and have the effect of promoting loyalty amongst the work force,” says Larner.

IP created for the business by third parties
Third parties are commonly engaged to create IP: be it through training videos, branding, web sites, signage, designs or prototypes. “It remains critical that all this IP is reserved for the business and, moreover, that the third party is required to keep that IP confidential,” says Keystone’s Larner.

“This will often be resisted, given that third parties routinely seek to recycle this IP. Businesses should ask assume that the next person to engage the relevant third party will be a direct competitor, and should therefore either have strong protection in the relevant contract or should understand the commercial risks involved of not doing so.”

Dealing with IP infringement by third parties
Similarly, competitors often seek to steal IP rather than develop it independently, cautions Larner.

“Clearly this needs to be addressed from an early stage,” he says. “Businesses must therefore put in place monitoring systems to track their competitor’s actions while retaining an IP lawyer to move quickly to stop any infringement.”