The Globalisation of Risks for Product Manufacturers - Time to Take an International View
Rod Freeman
Lauren Colton -
The globalised market for consumer products has been with us for a long time, and product manufacturers have thrived on the opportunities it has provided. However, the process of globalisation of liability and regulatory risks has been slower to follow.
This is now changing, and changing rapidly. The changes we are seeing in liability and regulatory risks in the United States, Europe and the rest of the world are producing a global risk environment for international product manufacturers – one that needs to be managed from a global viewpoint.
The fact that the pace of change has accelerated in recent times will be obvious to all international manufacturers of consumer products. The point more commonly catching such manufacturers off guard is that the nature of the changes is very different to what we have seen before.
With surprising regularity, international product manufacturers – even those with a substantial international market presence – continue to underestimate the potential impact on their business, and on their good reputation, of the changing regulatory and liability regimes around the world. This is often the result of manufacturers being lulled into believing – on the basis of historical evidence – that their primary liability risks lie almost exclusively in the United States. Such manufacturers are under the impression that if the risks in the United States are managed effectively, the rest of the world will likely fall into place.
It remains the case that the risks in the United States are substantial, and in many respects those risks are increasing in line with the global trends discussed below. However, manufacturers are learning that a nationalistic approach to product liability and product safety compliance is naive and outdated given the actual risks their businesses face in the modern world.
All product manufacturers ambitious for success in international markets need to take a consistent international approach when managing liability risks. They need to understand the changes around the world, to stay ahead of the important developments, and to continually adapt to anticipate and meet the challenges. Policies and practices on product liability and product safety which seek to “divide up” the world and to apply differentiated approaches are now less likely to be successful. Any approach by a product manufacturer operating globally that is based purely on national considerations is destined to end in tears.
The Convergence of Risks; Trans-Atlantic Trends with Global Implications
An obvious sign of the progressive globalisation of risks is the convergence of legal risks for product manufacturers between the United States and Europe. Traditionally, global product manufacturers have recognised that their product liability risks were focused predominantly in the United States. While litigation risks have always existed in other parts of the world, the threat of product liability litigation in Europe typically did not reach anywhere near the scale of such risks in the United States. The factors driving those differences have been well documented and much discussed.
However, those differences in risk are starting to become less clearly defined: this is generally the result of developments in litigation risks around the world which mimic the risk position in the United States. The unrelenting trend towards class action reforms at various levels in Europe is an obvious example. Alongside this, we are seeing greater litigiousness among consumers globally. This worldwide “litigious tendency” is driven by greater consumer access to information about product risks (whether real or imagined), greater awareness of “consumer rights” and a lower tolerance of risk in the community. These factors were identified in the Lovells report on Product Liability in the EU, published by the European Commission in 2003.
Conversely, in the past product manufacturers in most product sectors identified Europe as being the most challenging regulatory environment in the world: often more complex, and usually more demanding, than the regulatory environment in the United States. However, we are now starting to see significant regulatory reform in the United States, and many of the changes introduced have a distinctly European flavour.
In short, we are starting to see a convergence in the nature of the trans-Atlantic risks which product manufacturers must manage. There remain significant differences, and that will continue to be the case. But it is clear that traditional assumptions about the nature of the risks to be managed on either side of the Atlantic no longer hold true. It is vital that businesses change their practices in response.
These challenges are magnified when we consider the global position more broadly. While, internationally, there is no consistency in the nature or extent of the changes, we are certainly seeing a dual trend – reforms in many other countries are exhibiting influences from both the US litigation system and the EU regulatory regimes. The trend towards greater cooperation between national authorities around the world also adds to the increased risks.
The global risk landscape is further complicated by the slowly developing trend towards the globalisation of enforcement: formal communication agreements have been reached, or are under discussion, between authorities in Europe and countries including the United States, Canada, Japan, and Australia. These developments are lagging behind the other trends noted above, but the changes we have already seen are significant.
The United States: How a Single Issue Manifests Itself on Various Legal Fronts
In recent years, it has been increasingly common for a single issue to manifest itself on several legal fronts, forcing product manufacturers to defend themselves in different arenas.
Toyota: a cautionary tale
Earlier this year, Toyota instituted a massive worldwide recall, which included approximately 8.5 million cars in the United States with potential accelerator problems. Not surprisingly, the National Highway Safety Transportation Administration (“NHTSA”) initiated an investigation. But there was more. The United States House of Representatives and the United States Senate Commerce, Science and Transportation Committee held hearings, during which both Toyota and the NHTSA were questioned about why it took so long for the recall to take place. In addition, Attorneys General from various states also instituted investigations.
Literally within days of the recall, putative class actions were filed. Some of the lawsuits seek class certification on behalf of consumers for non-personal injury claims, including the lost value in and the use of their cars because of the alleged defect that led to the recall. Other lawsuits seek personal injury claims as well.
Toyota is also facing securities-related class action litigation on behalf of shareholders who purchased Toyota securities within a certain time period. For example, the putative class in one case is defined as individuals who purchased Toyota securities between 4 August 2009 and 2 February 2010. The basis for such claims is the allegation that Toyota and/or its officials and directors misled investors by failing to disclose design defects, which caused Toyota’s stock to trade at artificially high prices during the class period.
Manufacturers in the pharmaceutical and medical arena: beware
Manufacturers of pharmaceutical products and medical devices may face a similar situation. The United States Food and Drug Administration (“FDA”) is responsible for ensuring that pharmaceutical products are safe and effective before they are introduced into interstate commerce for human use. Among the vast array of potential safety issues the FDA may investigate are those associated with the use of a drug for a purpose for which it was not approved by the agency (also known as “off-label” use). The FDA may take regulatory actions to try to minimise “off-label” use. When such an action is taken, the pharmaceutical manufacturer will have to work with the FDA to address its concerns. However, it is likely that the FDA’s involvement will trigger the interest of other authorities.
The potential safety issue associated with the unapproved or “off-label” use of a product may also gain the attention of the Department of Justice (“DOJ”) and the Department of Health and Human Services Office of Inspector General (“HHS-OIG”); a civil or criminal investigation may follow. The investigation may be based upon alleged violations of the False Claims Act (31 USC § 3729-3733) (“FCA”). Typically, FCA allegations are premised on the notion that the pharmaceutical manufacturer, through Medicare and/or Medicaid (health insurance programmes for certain qualifying individuals), caused false or fraudulent claims for payment or approval of a particular pharmaceutical product to be presented to the United States government. Medicare and Medicaid establish standards for drug reimbursement if the use is “on-label” (ie, if the use is described in one of the approved compendia or, in some cases, if the use is supported by clinical evidence in certain peer-reviewed medical literature). Investigations of “off-label” promotion or marketing of a drug are based on the notion that manufacturers who knowingly cause non-reimbursable claims to be submitted violate the FCA. Because the DOJ has made this area a priority, companies are increasingly finding themselves having to comply with subpoenas, preserve documents, conduct internal investigations and engage with the DOJ or HHS-OIG. This can be a considerable burden.
Under the FCA, either the Attorney General or a private person – a “relator” – may bring an action (Id. § 3730(b)(1)). Increasingly, relators are pursuing FCA claims even when the federal government declines to institute or intervene in an FCA action.
While a private citizen may bring a qui tam action under the FCA, only the United States government may enforce the Food, Drug and Cosmetic Act (“FDCA”) (21 USC § 337(a)). Nevertheless, plaintiffs are increasingly trying to disguise alleged violations of federal statutes, such as the FDCA, as traditional product liability causes of action. Precedent for the dismissal of such claims exists.
Individual states may also institute litigation for the alleged “off-label” promotion of a pharmaceutical product – a state’s Attorney General would allege violation of the state’s consumer protection laws. States tend to coordinate on such matters, and may even be represented by a single attorney or group of attorneys.
Consumer protection claims may also be asserted by individuals in a civil action, as may more traditional negligence and product liability claims. The historical product liability case is a single case involving a single plaintiff. Today, it is the exception rather than the norm, and mass torts or class actions are instead the common litigation vehicle for plaintiffs seeking damages relating to the alleged “off-label” use of a pharmaceutical product. Both scenarios invite more claims.
In addition to potentially facing civil lawsuits, the pharmaceutical manufacturer may also face litigation based upon alleged securities violations stemming from statements and/or omissions concerning the pharmaceutical product that was subject to the regulatory action and/or investigation. While securities litigation is typically considered separate and distinct from pharmaceutical product liability litigation, the reality is that the same basic FDA law, science, and facts may underlie both types of lawsuits.
Product manufacturers must therefore be aware of the fact that a single legal issue may manifest on various legal fronts and should coordinate regulatory, litigation and business strategies.
The Danger of Underestimating European Risks
The complexity of Europe
One of the obvious challenges in Europe arises from the sheer volume of product regulation affecting almost every product sector. In some important respects, such regulation is welcomed by businesses: it serves to open up the European “single market” and provides certainty in terms of the expectations of the regulators in respect of the design and construction of the goods in question. However, the more sinister side to this regime is embodied in the political and administrative complexity of Europe. It is easy for the outsider to make the mistake of assuming that the EU operates as a coherent federation, with common laws regulating businesses throughout the 27 member states and beyond. The reality is very different.
While EU legislation – Directives, Regulations and Decisions – are normally binding on all member states, Directives need to be implemented into local law by national legislators, and virtually all of the measures fall to be interpreted and enforced by local authorities and courts. Enforcement, in particular, takes place within the context of local procedures, traditions and practices, which can vary enormously from member state to member state. The result is that the objective of a single EU market largely remains a dream, with some level of harmonisation being achieved by the European institutions, but success being only partial. Where, as is often the case, the European legislation is poorly drafted or controversial, and therefore compromised in its coherency, it can have the reverse effect for businesses, resulting in costly uncertainty, confusion and magnified risks. Those risks need to be carefully managed in a co-ordinated way, with the benefit of reliable local understanding and experience.
It is also important to understand that the European Commission’s powers of enforcement are extremely limited. Enforcement of product safety laws, for most sectors, rests with the national authorities. When it comes to product safety issues, and other issues of regulatory compliance for product manufacturers, each national authority retains its independence to make its own decisions for what is needed to protect its own citizens. In practice, as experience continually shows, national authorities will not necessarily reach the same conclusions on questions presented to them: this is a very important risk that companies need to manage when dealing with international safety and regulatory issues in Europe.
Product Liability Risks in Europe and the Concept of "Consumer Redress"
One of the significant policy developments in Europe over recent times has been the rise of the European Commission’s determination to promote “consumer redress”, namely the ability of consumers to enforce their rights against businesses. As part of this drive the Commission has expressed its belief that adequate “consumer redress” can only be achieved through “collective redress”, which some have come to regard as a euphemistic term in Europe for “class actions”.
It is particularly interesting to note in this regard that part of the justification for introducing reforms intended to promote “consumer redress” is to support the enforcement of regulatory regimes in Europe.
This justification will not be particularly surprising to those in the United States, as it echoes views that have often been expressed in that country to justify the expansive litigation system - private litigation is a tool to enforce regulation, and to “keep businesses in line”. However, this kind of thinking has not traditionally been part of European policy. In Europe, regulations are enforced by governments, not by private citizens. Indeed, government would be considered to be abdicating its responsibilities if it were to hand over enforcement to private citizens.
Consumer redress reform is ongoing in Europe at many levels. The emphasis on collective redress is controversial, and the ultimate outcome of the debate in the consumer products field remains uncertain. However, it is clearly an area where there will be future reform in Europe: such reforms will inevitably lead to greater risks for product manufacturers, in an environment where every EU country has implemented strict product liability laws, as prescribed by the EU Product Liability Directive.
The Changing Nature of the Regulation of Products in Europe
We are seeing some fundamental changes in Europe in the general approach to product regulation – those changes are happening at a number of levels.
This point is evident when we consider some of the more important developments in Europe over recent years. These include:
- The revised General Product Safety Directive (2004), which revolutionised consumer product safety regulation in Europe
- The Phthalates Directive (2007), which represents an early example of excessive use of the “precautionary principle” in product safety
- REACH (2008) – marking the dawn of a new era in product regulation introducing the obligation of “no data; no market”, and unprecedented measures for public disclosure of safety information
- The new Toy Safety Directive (2009) – the nature of the regulatory response to the “summer of recalls” in 2007 has implications for other sectors which will continue to evolve over many years into the future
- The New Machinery Directive (2009) – introduces explicit reference to the concept of “foreseeable misuse” into EU product safety regulation
- Guidelines on the operation of the RAPEX system (2010) – new rules for risk assessments
- ErP Directive (ongoing) – blurring the lines between consumer safety and environmental safety (see also RoHS Directive; and REACH)
Product Recalls and the Fatal Trap of Nationalistic Thinking
Manufacturers who enjoy the benefits of global markets also bear the risk that, if an unexpected safety issue arises warranting corrective action in the form of a recall, that action may need to be taken on an international basis. Historically, in the case of general consumer products the regulatory obligations when dealing with international product recalls focused on the United States, with the manufacturer having to deal with the Consumer Product Safety Commission. Equivalent obligations rarely arose in other parts of the world, such that manufacturers could focus on the practical aspects of their corrective measures without having to deal with enforcement authorities.
Many product manufacturers still fail to appreciate just how much the world has changed in this regard.
Regulations now exist in an increasing number of countries around the world that mirror the position in the United states, such that manufacturers are required to report product risks in consumer goods to the relevant authorities. Recent reforms imposing new reporting and other regulatory obligations on manufacturers operating in markets in the Middle East (eg, the UAE), parts of Africa (eg, South Africa), South America (eg, Brazil) throughout Asia (eg Japan) and into Australia are significant. Given their significance, it is remarkable that such reforms are still not properly understood even by many large international brand names.
There is now greater understanding among businesses that regulatory and reporting obligations have changed in Europe. However, there is still much naivety about the implications of those changes, and the complexity of the compliance obligations, especially as there is no central enforcement authority in the EU for most product safety issues. In fact, the compliance obligations arise as separate obligations in every member state of the EU, with different penalties for failing to comply potentially applying in each country.
New rules published by the European Commission for undertaking Risk Assessments in Europe make it even more critical that international product recalls are handled correctly, especially where the product carries a valuable brand name and reputation in the marketplace. The reality is that, under the new regime in the EU, failure to carefully manage the expectations of national authorities in each member state when dealing with a product risk is much more likely to lead to unnecessary complications that may not be easy to resolve, and that may have international implications. Successful liaison with national authorities worldwide will be key to ensuring that manufacturers can deal with their unexpected product safety issues in a controlled way that best protects their valuable brands and reputations.
Product recalls invariably involve risk to a product manufacturer’s most valuable asset – their good reputation in the market. In short, everything can be at stake if the issue is not properly controlled. The key to successful management of such issues is careful and prompt planning and coordination, if necessary with the assistance of advisers who are well experienced, and closely in touch with the issues around the world.
A Prudent Approach to Managing Global Risks for Product Manufacturers
Product manufacturers who are ambitious to continue to be successful in global markets must appreciate the developing (and increasing) risks in countries worldwide, and that such risks need to be carefully managed.
Proper management of these issues requires a good understanding of the complexities of the local markets, and the practical operation of the regulatory environment. These are not issues that can be handled remotely, or by those who are not sufficiently experienced in dealing with the regulatory issues from within these regions.
The real challenge this raises for global manufacturers is that there is a need for global consistency when dealing with safety and liability risks. Any global approach should be based on an appreciation that the risks are different around the world, and that the demands of local markets can be different.
The risks are continuing to change around the world, and businesses need to stay ahead – to anticipate the changes, adapt their business practices ahead of time, ensure their risks are managed, and that their valuable reputations in the market are protected. Businesses also need a thorough and timely understanding of the developments at local level. Reliance upon experienced advisers, who understand these issues, and are equipped to deal with them, is vital to ensure such goals are met.
Manufacturers that succeed in the effective management of these issues will achieve a competitive advantage over those who cut corners in these areas, or who fail to appreciate the significance of ensuring such risks are managed effectively.