Devil’s advocate – top legal compliance issues for 2010

Posted on 12 Mar 2010 by The Manufacturer

Edward Machin investigates three facets of legal compliance set to make it big in 2010.

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. So it would 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 three 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.”

With signs that the economy is beginning to recover, 2010 provides an ideal opportunity for manufacturers to get their house in order, says Rebecca Kelly of hlw Commercial Lawyers. Whether this means being ready to take advantage of an improved market for corporate finance transactions in 2011, or simply to ensure that their contractual procedures offer as much protection as possible, an understanding of even the most basic legal principles remains imperative in an increasingly competitive marketplace.

“Not only can a good contract be a very effective mechanism for deterring and preventing spurious — and potentially costly — litigation, but in a sale situation they are also a priority in terms of due diligence, says Kelly. “A robust set of contracts, together with a clear system for negotiating and agreeing such documents, demonstrates that a business is a well-managed and efficient operation.”

She says that there is no time like the present for those in the sector to carry out a ‘spring clean’ of their standard contracts, thus guaranteeing that they provide the maximum possible protection. Manufacturers should also examine their process for entering into contracts to make sure — as often as possible — that contracts are entered into on their standard terms.

Kelly recommends the following key points for manufacturers in carrying out their ‘contract spring clean’:

What, if any, standard contracts do you have for use with your suppliers, agents, distributors and customers?
If the answer is none, get a solicitor to prepare those for you. Standard contracts allow your staff to become familiar with their employment terms, meaning they can negotiate contracts efficiently and effectively. Standard contracts also allow you to maximise protection of your business’s interests by defining obligations and limiting your liability.

Review and update
The protection required by your business evolves as a company develops and the law changes. It remains prudent, therefore, to carry out regular reviews of your contracts to ensure your business’ needs are addressed and potential risks are minimised.

What are the risks you face as a manufacturer? What do you produce, and what protection do you need if something goes wrong with those goods? What do your customers need to provide you with to complete the manufacturing process? Has your business been the victim of bogus complaints in the past and, if so, what issues have been raised? A little time contemplating these factors will enable you to identify the important points you need to include in your contracts.

Contracting process
What processes do you have in place for negotiating and concluding contracts? It is important that whoever is responsible for concluding such documents has the necessary knowledge and experience to promote and protect your business.

Training and education
Similarly, personnel responsible for negotiating contracts should have a working knowledge of the contract formation process: offer; acceptance; consideration; intent. You need to make certain — as far as practically possible — that your terms prevail over those of a third party. There is no point having excellent standard contracts if, due to a lack of understanding on the part of employees, you end up being bound by a third party contract. Specific procedures should be put in place and regularly monitored.

Ultimately, says Kelly, “If you and your personnel are aware of what issues are critical to your business, you will be better placed strategically to negotiate your contracts. Less important points can be negotiated away in favour of critical ones.”