Prime Authorized Points Going through the Manufacturing Sector in 2022 | Blogs | Manufacturing Business Advisor

As the worldwide economic system faces the third 12 months of the pandemic, producers are not centered on determining when issues will return to “regular.” As an alternative, they’re making use of classes discovered from the previous few years to grow to be much more agile and resilient as they evolve their operations to reach this “new regular.”  Foley’s Manufacturing White Paper explores the shifts within the manufacturing sector within the detailed sections under.

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Corporate Environmental Impact: SEC Proposes Detailed Climate-Related Disclosures

Introduction

           
AUTHORS           
Sandy Winer | [email protected]    
Brooke Clarkson | [email protected]  
Michael Kirwan | [email protected]    
Eric Pearson | [email protected]    
Sarah Slack | [email protected]    
Pete Tomasi | [email protected]    
Hillary Vedvig | [email protected]    

In response to increasing demand by the investment community over the last dozen years, the Securities and Exchange Commission (SEC) has published guidance calling for greater disclosure by public companies of the risks and costs of climate change on their businesses. The SEC’s efforts to promote greater transparency on corporate environmental impact culminated on March 21, 2022, with the promulgation of a proposed rule setting forth a sweeping array of new requirements for detailed disclosure of those risks and costs, with particular attention to greenhouse gas (GHG) emissions. If adopted, the rule would impose on publicly-held manufacturers significant obligations not only to make these disclosures but also to establish an extensive system of disclosure and accounting controls needed to ensure the periodic capture, assessment, and dissemination of a company’s exposure to climate-related risk and impact on the environment. Appropriate maintenance of any such system would require rigorous assessment of the adequacy of design and operating effectiveness of those controls.

The SEC has announced a very small window (no more than 60 days) in which to receive comments to this rule proposal. The Commission is under considerable pressure from investors and Congress to take action as promptly as possible. While the rule proposal is simply that — a proposal — manufacturers should expect much of the proposed package to become part of the agency’s mandatory disclosure regime. Accordingly, manufacturing companies will likely need to consider and quantify the impact of environmental factors on both the upstream and downstream aspects of their business and the metrics by which to measure and report that impact.

Highlights of the Proposed Rule on Corporate Environmental Impact

The proposed rule requires a public company to make more robust disclosures in its periodic reports filed with the SEC regarding its exposure to climate-related risks and its impact on the environment, focusing primarily on emission of greenhouse gases (carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, sulfur hexafluoride, and nitrogen trifluoride). The proposed rule, which draws significantly from the guidance provided by the Task Force on Climate-Related Financial Disclosures (TCFD) and the Greenhouse Gas Protocol (GHG Protocol), requires:

  • Climate-related risk disclosures in registration statements under the Securities Act of 1933, as amended (the ’33 Act) and in annual reports under the Securities Exchange Act of 1934, as amended (the ’34 Act).
    • The proposed rule describes climate-related risks as both material physical risks (the risks posed by the impact of climate change such as climate-imposed damage or disruption to the operation of the business) or transition risks (the risks posed by transitioning to a lower-carbon economy and the attendant policy, reputation, legal, technological, and market-driven efforts to mitigate climate change).
  • Disclosure of climate-related targets or goals and transition plans, if any, as well as the relevant baseline, metrics, and time expected to achieve the targets or goals.
  • Reporting on Scope 1 emissions (direct GHG emissions from sources owned or controlled by the company) and Scope 2 emissions (emissions primarily resulting from the generation of electricity purchased and consumed by the company) by disaggregated greenhouse gases (the seven gases listed above), as well as in the aggregate and in terms of intensity. GHG intensity is the ratio between GHG emissions and economic value — the ratio of metric tons of carbon dioxide, for example, per unit of total revenue or production.
  • Reporting on Scope 3 emissions if those emissions are material or if the company has set a GHG emissions reduction target or goal that includes its Scope 3 emissions. Scope 3 emissions include emissions resulting from a company’s activities but generated from sources that are neither owned nor controlled by the company. These emissions include, for example, those associated with the production and transportation the company purchased from third parties, employee commuting, business travel, and the processing or use of the company’s products by third parties.
    • The proposed rule includes an additional phase-in period for Scope 3 emissions disclosure, a safe harbor for Scope 3 emissions disclosure, and an exemption from Scope 3 emissions disclosure for a company meeting the definition of a smaller reporting company.
  • Attestation reports for accelerated filers and large accelerated filers for Scope 1 and Scope 2 emissions.
    • The proposed rule allows such attestation reports to be provided by a party other than a registered public accounting firm.
  • Inclusion of certain climate-related financial statement metrics and related disclosure in a note to the company’s audited financial statements, including disaggregated climate-related impacts on existing financial statement line items. Disclosure would be required if climate risks affect 1% or more of the absolute value of the line item – meaning gains and losses are added, not netted, in reaching such disclosure determinations.
  • Financial statement metrics will be subject to audit by an independently registered public accounting firm and considered within the scope of the company’s Internal Controls Over Financial Reporting (ICFR).
  • Disclosure of how a company identifies, assesses, and manages climate-related risks; how such risks are likely to affect its strategy, business model, and outlook; and whether such risks are likely to have a material impact on its business and consolidated financial statements over the short-, medium- or long-term.
  • Disclosure of oversight and governance of climate-related risks by a company’s board of directors and management. This oversight will require companies to design and test an array of disclosure and accounting controls needed to ensure the board and management are fully informed and to achieve compliance with the transparency obligations set forth in the proposed rule.

The proposed rule, therefore, will require public companies to develop and design new disclosures and accounting controls that will need to be mapped, tested, and audited.

The SEC’s Prior Efforts to Enhance Climate-Related Disclosures

On February 8, 2010, the SEC published extensive interpretive guidance regarding the extent to which existing disclosure requirements mandated significant and detailed discussion in periodic reports of the risks and costs of climate change that confront public companies. On March 4, 2021, the SEC announced that its Division of Enforcement had created a 22-person ESG task force to investigate and recommend enforcement proceedings in response to misleading statements regarding climate risks and failures by money managers to invest and maintain proper procedures, consistent with any professed commitment to prioritize ESG in deploying investor funds.

On March 15, 2021, Acting SEC Chair Allison Lee alluded to the rapid increase in investor interest in the impact of climate change on public companies and the hunger of the investment community for considerably more climate-related disclosure to inform its investment decisions. Acting Chair Lee stated that the SEC wanted more public input into its process of fashioning further guidance on disclosure in this space and solicited answers to 18 questions she believed should inform the SEC’s efforts to enhance the disclosure of climate-related information in the periodic reports of public companies.

On April 19, 2021, the SEC’s Division of Examinations published a Risk Alert describing observed shortcomings of money managers’ actions given their professed commitment to investing with an emphasis on ESG. To further inform preparers of securities filings of the heightened expectations of the SEC, in September 2021 the SEC’s Division of Corporation Finance published a form comment letter containing sample observations on the method and quality of climate-related disclosures of a hypothetical public company. Subsequent to releasing this form comment letter, the SEC sent similar comment letters to 38 issuers. The responses from these issuers, in turn, informed the crafting of the proposed rule.

Continuing the SEC’s drumbeat, on December 7, 2021, Chairman Gensler predicted the SEC’s anticipated climate-related risk rules would require public companies to measure the impact of their commitments to mitigating climate change and the challenges they face in responding to climate change. After the Commission signaled earlier in 2022 that its expected rule proposal might be delayed, Senator Elizabeth Warren wrote a letter to Chairman Gensler expressing her displeasure and characterizing the delays as “unwarranted and unacceptable, and violat[ive of] the commitment you made seven months ago [during Gensler’s confirmation process].” On March 15, 2021, Senator Warren again commented on the SEC for its delay, stating “it’s taken far too long for the SEC to take action.”

Overarching Disclosures

The proposed rule requires a public company to disclose information about its climate-related risks that are reasonably likely to have a material impact on its business, including consolidated financial statement metrics and GHG emissions metrics that are aimed at helping investors assess climate-related risks. More specifically, the proposed rule requires a public company to disclose:

  • The oversight and governance of climate-related risks by a company’s board and management; any board committees responsible for oversight of climate-related risks; whether any specific board member has climate-related risk expertise and, if so, a description of such expertise; and how frequently the board committees discuss climate-related risks.
  • How any climate-related risks (physical risks or transition risks) identified by the company have had or are likely to have a material impact on the company’s business and consolidated financial statements, which may become manifest over the short-, medium-, or long-term. Companies would be required to describe what they mean by short-, medium-, or long term. Companies also would be required to describe physical risks as either acute or chronic and would have to provide the ZIP code location of the properties or operations subject to physical risk.
  • How any identified climate-related risks have affected, or are likely to affect, the company’s strategy, business model, and outlook. Companies would need to disclose how these risks affect their consolidated financial statements. If companies use carbon offsets or renewable energy credits in their emissions reduction strategies, they would need to disclose the short- and long-term risks associated with such offsets and credits. If companies use an internal carbon price to evaluate climate risk or determine climate strategy, they would be required to disclose how such a price was determined, including the price per metric ton of carbon dioxide. If companies describe the resilience of their business strategy, they would need to describe any analytical tools, such as scenario analyses, that they used to evaluate the impact of climate risks. Use of scenario analyses will require a robust description of the assumptions and parameters of such analyses.
  • When responding to any of the proposed rule’s provisions concerning governance, strategy, and risk management, however, a company may also disclose information concerning any identified climate-related opportunities.

  • The company’s processes for identifying, assessing, and managing climate-related risks and whether any such processes are integrated into the company’s overall risk management system or processes.
    • Reporting on the impact of climate-related events on the line items of the company’s consolidated financial statements and related expenditures, and disclosure of financial estimates and assumptions impacted by such climate-related events and transition activities, including:
    • Severe weather events and other natural conditions;
    • Physical risks; and
    • Transition activities (including transition risks identified by the company).
  • Scopes 1 and 2 GHG emissions and intensity, separately disclosed, and Scope 3 GHG emissions and intensity, if material, or if the company has set a GHG emissions reduction target or goal that includes its Scope 3 emissions.
  • The company’s climate-related targets or goals and transition plan, if any. Any transition plan discussion would need to address relevant metrics and targets.

When responding to any of the proposed rule’s provisions concerning governance, strategy, and risk management, however, a company may also disclose information concerning any identified climate-related opportunities.

Specific GHG Disclosures

Under the proposed rule, all companies must disclose Scope 1 emissions, which are direct GHG emissions that occur from sources owned or controlled by the company. In addition, all companies must disclose Scope 2 emissions, which are emissions primarily resulting from the generation of electricity purchased and consumed by the company. Companies must disclose both Scope 1 and Scope 2 emissions as disaggregated constituent greenhouse gases and in the aggregate, including in terms of intensity. The SEC reasoned that by requiring disaggregated data, investors could gain actionable information regarding the relative risks to the company posed by each constituent greenhouse gas in addition to the risks posed by its total GHG emissions by scope.

Scope 3 emissions are indirect emissions not accounted for in Scope 2 emissions, meaning emissions that are a consequence of the company’s activities but are generated from sources that are neither owned nor controlled by the company, such as suppliers, vendors, and customers. Scope 3 emissions are required to be disclosed if those emissions are material or if the company has set a GHG emissions reduction target or goal that includes its Scope 3 emissions. The proposed rule includes a phase-in period for Scope 3 emissions disclosure, a safe harbor for Scope 3 emissions disclosure, and an exemption from the disclosure requirement for a company meeting the definition of a smaller reporting company.

In addition to the aggregate emissions of GHG, the proposed rule requires disclosure of the sum of Scope 1 and 2 emissions in terms of GHG intensity. For companies reporting Scope 3 emissions, they must also disclose a separate GHG intensity for those emissions.

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Liability for Non-Compliance

The proposed rule requires companies to file, rather than furnish, climate-related disclosures. Thus, the disclosures are subject to potential liability under Section 11 of the ’33 Act and Section 18 of the ’34 Act. The exception would be for disclosures furnished on Form 6-K, as disclosures on Form 6-K are treated as furnished under the SEC’s foreign private issuer disclosure system.

Scope 3 emissions disclosure also would enjoy a safe harbor from certain forms of liability. The SEC recognizes that information about Scope 3 emissions is outside a company’s control and may be difficult for a company to verify, such that a company will need to rely on estimates and assumptions. The proposed rule, as a result, provides that a Scope 3 emissions disclosure would not be a fraudulent statement unless it is shown that such statement was made or reaffirmed without a reasonable basis or was disclosed other than in good faith.

In the commentary to the proposed rule, the SEC notes that the existing safe harbor for forward-looking statements under the ’33 Act and the ’34 Act would be available for forward-looking climate-related disclosures. It should be noted, however, that the safe harbor protections for forward-looking statements under the Private Securities Litigation Reform Act of 1995 do not apply to companies that are filing an IPO registration statement and are otherwise subject to the proposed rule’s climate-related disclosure requirements.

Timing

The comment period for the proposed rule ends on the date that is 30 days after the date of publication in the Federal Register or May 20, 2022, whichever period is longer. May 20, 2022, which is 60 days after the SEC released the proposed rule, is in keeping with the SEC’s current practice of providing relatively short comment periods.

The proposed rule outlines a phase-in process for all companies, with the final compliance date dependent on the company’s filer status as a large accelerated filer, accelerated or non-accelerated filer, or smaller reporting company, and the content of the item of disclosure. If the effective date of the proposed rule occurs in December 2022 and the company has a December 31 fiscal year-end, the compliance date for the proposed rule disclosures in annual reports, other than the Scope 3 emissions disclosures,1 would be:

  • For large accelerated filers, fiscal year 2023 (filed in 2024);
  • For accelerated and non-accelerated filers, fiscal year 2024 (filed in 2025); and
  • For smaller reporting companies, fiscal year 2025 (filed in 2026).

Large accelerated filers and accelerated filers would have additional time to transition to the attestation requirements for Scope 1 and 2 emissions. They would have one fiscal year to provide limited assurance and two additional fiscal years to providing reasonable assurance.

For large accelerated filers:

  • Initial Disclosures – fiscal year 2023
    (filed in 2024);
  • Limited Assurance – fiscal year 2024
    (filed 2025); and
  • Reasonable Assurance – fiscal year 2026 (file 2027).

For accelerated filers:

  • Initial Disclosures – fiscal year 2024
    (filed in 2025);
  • Limited Assurance – fiscal year 2025
    (filed 2026); and
  • Reasonable Assurance – fiscal year 2027 (file 2028).

Filers that have a non-calendar year fiscal year­end that results in their 2023 or 2024 fiscal year commencing before the compliance dates of the proposed rule would not be required to comply with the GHG disclosure requirements until the following fiscal year.

Other Observations and Closing Thoughts

The proposed rule refers to materiality in a number of instances in connection with the disclosures that should be made. Although there was speculation prior to the release of the proposed rule that the SEC might change the traditional definition of materiality for purposes of climate-related disclosures, the SEC did not do so.

In recognition of potential legal challenges to the proposed rule, the SEC has made the argument in the release of the proposed rule that (1) the proposed disclosures are an outgrowth of current investor demand; (2) many issuers, namely large accelerated filers, are fairly far along in reporting on climate-related matters and; (3) the proposed rule would eventually simplify matters for companies and investors by providing a single reporting standard, in contrast to the multiple reporting standards and non-uniform reporting under such standards. Whether smaller reporting companies would be able to ramp up in a timely and cost-effective manner to comply with the proposed rule is an open question. The SEC acknowledges in the Incremental and Aggregate Burden and Cost Estimates section of the release for the proposed rule that the costs of implementing the proposed rule are very significant, but what is not said is that the cost of not adopting the proposed rule may be more significant.

If adopted, the proposed rule would require publicly-held manufacturers to significantly expand their investment in the development, design, maintenance, testing, and auditing of disclosure and accounting controls. This investment likely would include taking on additional personnel; training; development of software applications; new procedures governing the capture, assessment, and disclosure of the climate-related information discussed by the SEC; and attestation designed to assess the effectiveness of the new controls. The quality of that investment, however, will go a long way in minimizing the adverse consequences of any subsequent suggestion of non-compliance.

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1 Companies subject to the Scope 3 emissions disclosure requirements would have one additional year to comply with those disclosure requirements.

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Human Rights Compliance in Supply Chains

           
           
           
           
AUTHORS           
David Simon | [email protected]     
Rohan Virginkar | [email protected]     
David Levintow | [email protected]   
John Turlais | [email protected]     

Companies in the manufacturing industry who wish to address the “S” in ESG can start by addressing human rights compliance in their supply chains. While some firms are far along in this journey, many are just getting started. For those in the latter category, we recommend that you follow these initial steps: (1) conduct a supply chain human rights risk assessment, (2) conduct human rights compliance due diligence on high-risk suppliers, (3) add appropriate human rights compliance language to your supply agreements, and (4) develop a human rights monitoring and auditing program. Proactively taking these steps now is all the more important, considering the current strain on supply chains due to global events, component shortages, and ever-increasing regulatory and enforcement scrutiny.

1. Risk Assessment

To begin, compile a list of your company’s 20 largest suppliers and organize them by location, the type of goods they supply to you, and the cost. Next build a basic, but reasonable, risk heat-map, which assesses the likelihood of a human rights violation and the adverse impact such a violation could have on the business. Doing so allows you to identify those suppliers who might expose your company to legal liability or reputational damage associated with human rights violations. The factors described below are a good place to start, although others may be relevant depending on the nature of your business.

Begin with a jurisdictional analysis. Countries that pose a higher risk of tolerating child or forced labor can be fairly easily identified using public information:

 

Next, look at the industry in which your supplier operates. What type of products are you purchasing from them, and what are the history and risks of human rights violations historically associated with that industry?

 

To visualize this data as a risk heat-map, we combined these two criteria, and blended the data with Global Slavery Index data on prevalence of modern slavery. The resulting map is below:

2. Due Diligence

Once high-risk suppliers have been identified, you should conduct some compliance-focused due diligence on them to further probe the risk of human rights violations in your supply chain. Here, many manufacturing companies will already have a serviceable template from which to start: the process used to evaluate third-party intermediaries for purposes of complying with anti-corruption laws, such as the Foreign Corrupt Practices Act (FCPA) or U.K. Bribery Act (2010). The process for identifying forced and child labor risks in a company’s supply chain can be similar, even though the substance and context are different. Basic due diligence tools include:

Human Rights Compliance Questionnaires: Requiring suppliers to complete a detailed questionnaire is one way to obtain information helpful in assessing the likelihood of human rights risks in your supply chain. Some model questions that can be used for most suppliers are included as:

  • Do you have a human rights compliance policy?
  • What specific policies or practices are in place to address human rights risks (including modern slavery, illegal child labor, and human trafficking)?
  • How do you assess and/or manage risk associated with human rights issues?
  • Who or what function is responsible for overseeing compliance, with policies addressing human rights issues?
  • What procedures do you employ to check the ages and confirm the identities of your employees?
  • Have you been the subject of any government investigation or audit relating to your labor practices?
  • Have you been the subject of any fines or penalties from any government authority, relating to your labor practices?
  • What, if any, due diligence do you perform on your suppliers or third parties to address human rights issues?
  • Are your facilities located in countries with a reputation for human rights violations?
  • Do you subcontract any manufacturing to entities located in countries with a reputation for human rights violations?
  • Do you procure any product components from entities located in countries with a reputation for human rights violations?
  • When contracting with third parties, do you include terms and conditions and other standard contractual provisions that address compliance with respect to human rights issues?
  • How are instances of noncompliance with your compliance policies addressed?

Reputational Report: Commissioning a background report on higher-risk suppliers can enable you to vet answers provided in response to questionnaires as well as identify prior associations with human rights violations (or violators), government enforcement actions, or other issues or reports that adversely reflect on the supplier’s reputation.

Red Flag Follow-Up: Investigating any red flags identified in either the questionnaire responses or the background report is a must. For example, a supplier might, without engaging in due diligence, purchase product components from manufacturers in countries with a reputation for human rights violations. Red flags such as these do not mean that you cannot work with the supplier; investigate the issues to determine the appropriate way to proceed. Flags come in varying shades of red, and determining the appropriate response requires following up to better understand the facts and circumstances and, potentially, to engage in specific remediation.

3. Contractual Clauses

A lot of compliance starts and ends with contractual clauses, because these are sometimes the best (or only) leverage companies have with suppliers. We view proactive risk mitigation through thoughtful contracting as obviously necessary (though clearly not sufficient). Good contracts will address the following issues:

  • Inclusion of appropriate representations and warranties that the supplier is abiding by all applicable human rights laws;
  • Requirement that suppliers maintain or adopt reasonable and appropriate human rights compliance measures; and
  • In appropriate circumstances, a requirement that the supplier permit periodic audits of relevant documents, records, obligations, and creation of audit rights.

The American Bar Association’s Business Law Section has drafted a set of Model Contract Clauses to guard against human rights abuses in international supply chains. Manufacturers should review these provisions and consider inclusion of them when contracts with suppliers are renewed or when establishing relationships with new suppliers.

4. Monitoring & Auditing Program

The last step is the most challenging. For a human rights compliance program to be taken seriously, it must include some form of continuous monitoring, supported by periodic audits. At a minimum, manufacturers should require high-risk suppliers to regularly certify compliance, reengage in due diligence of suppliers on a periodic basis, subject selected suppliers to periodic audits, and include training on relevant laws or company policies. Some hallmarks of a monitoring and evaluation program are detailed in the UN’s Guide to Supply Chain Sustainability:

  • Supplier Self-Assessment: Self-assessments, which can involve similar questions to those detailed in the questionnaire described in Section 2, can identify suppliers that have improved their human rights compliance practices, as well as those that may require additional scrutiny. At the least, self-assessments can reinforce, for suppliers, a company’s expectations with regard to human rights compliance.
  • Facility Tour: A visual inspection of a supplier’s factory can identify instances of noncompliance.
  • Records Review: This should involve review of compliance policies, health and safety records, and any subcontracts with suppliers.
  • Management Interview: Understanding senior management’s commitment to human rights compliance is critical to understanding any risk posed by a supplier.
  • Workforce Interviews: While management may be best positioned to speak about the supplier’s approach to compliance, the boots on the ground are often the best source to understand how that theory translates into practice (if it does).

Effective audits are expensive and time consuming. But here, too, companies can look to vendors for support, as quite a few now conduct ethical trade audits. Taken together, the foregoing four steps will jump-start your company’s supply chain compliance program and position you well to manage and mitigate risk. The sooner, the better.

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Hot Topics in Consumer Product False Advertising Class Actions: An Increased Focus on Ethics, Sustainability, and Safety Claims

           
           
           
           
           
           
AUTHORS           
Jaikaran Singh | [email protected]   
Charles Niemann | [email protected] 

Overview

The past 18 months have witnessed a steady increase in the filing of consumer class actions involving allegations of false or deceptive advertising related to consumer products. While such cases traditionally focused on product features or performance, more and more class actions challenge advertising describing the environmental, sustainability, and ethics practices of the consumer product manufacturers themselves. In addition, more plaintiffs are bringing false and deceptive advertising claims based on affirmative statements of product safety or a failure to disclose the presence of supposed harmful substances. This article discusses examples of recent cases that illustrate these trends.

“Greenwashing” Suits

The rise in “conscious consumerism,” or the commitment to purchasing decisions that have a positive social, economic, and environmental impact,1 has resulted in a number of consumer product manufacturers touting their products as “sustainable,” “ethical,” “environmentally friendly,” “green,” and “cruelty free.” But what happens when details emerge about purportedly unethical or unsustainable practices within these manufacturers’ supply chains? As the examples below illustrate, putative class action plaintiffs have been quick to challenge the manufacturer’s marketing claims about environmentally friendly actions, the sustainability of their products, and “cruelty-free” or ethical manufacturing processes.

  • In Lee v. Canada Goose US, Inc., the plaintiff alleged that the manufacturer’s representation that a coat had fur obtained through “ethical, sustainable, and humane sourcing” was misleading given the coat manufacturer’s use of leg traps and snares. Rejecting the manufacturer’s argument that the plaintiff’s “subjective views” regarding fur-trapping standards “do not render the Company’s statements misleading or deceptive,” the district court denied the motion to dismiss, reasoning that the allegations “support[ed] the reasonable inference” that the manufacturer’s “purported commitment to ‘ethical’ fur sourcing [was] misleading because [it] obtains fur from trappers who use allegedly inhumane leghold traps and snares.” 2 Although the court found that the complaint sufficiently alleged false advertising, the parties later stipulated to a voluntary dismissal (with prejudice) when it was discovered that the plaintiff never relied on the challenged product representation at time of purchase.
  • In Dwyer v. Allbirds, Inc., the plaintiff alleged that advertised figures relating to the average carbon footprint of a popular footwear and apparel company’s products were misleading because they failed to account for the larger environmental impact of wool production, thus “excluding almost half of wool’s environmental impact.” The complaint also alleged that the manufacturer’s wool supplier had not taken adequate measures to ensure that the “sheep live the good life,” as claimed on the manufacturer’s website. The manufacturer moved to dismiss, asserting that its carbon-footprint calculation was described accurately and that statements about sheep living “the good life” are too imprecise to form the basis for an actionable legal claim. In dismissing the complaint without leave to amend, the court held that it was not plausible for a reasonable consumer to think the carbon-footprint calculation was done in a way other than as described and that the challenged animal welfare statements were “classic puffery,” intended to be humorous, not a factual claim.3
  • A proposed class in Marshall v. Red Lobster Mgmt. LLC has accused a popular seafood restaurant chain of lying about the sustainability of its Maine lobster and farmed shrimp, saying the restaurant chain’s suppliers use inhumane methods and environmentally damaging practices. The complaint includes causes of action under California’s consumer protection statutes. Defendant’s motion to dismiss is pending.4
  • Hanscom v. Reynolds Consumer Products LLC involves consumer class claims challenging the marketing of recycling bags as “Perfect for All Your Recycling Needs” and “Designed to Handle All Types of Recyclables” as false and misleading because the bags themselves are not recyclable. Rather, the complaint alleges the bags contaminate the recyclable waste stream, decrease the recyclability of otherwise recyclable materials, and are not recyclable because they are made from low-density polyethylene (“LDPE”) plastic. Citing the growing problem of unrecycled plastic waste, the complaint alleges that many consumers seek to purchase products that are either compostable or recyclable, and that defendants capitalized on consumers’ demand for “green” products by falsely implying their “Recycling” bags are recyclable.5

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False Advertising Challenges to Product Safety

Claims alleging false advertising as to the safety of products for failure to disclose alleged health risks reflect another trend seen in recent years. Some of these safety claims relate to the growing concern with Per- and polyfluoroalkyl substances (“PFAS”), nicknamed “forever chemicals” because they do not break down in the environment, and benzene, a carcinogenic chemical alleged to be present in dozens of sunscreen, after-sun products, and antiperspirants. Plaintiffs have also sued manufacturers of pet foods and cosmetic products for advertising claims about their quality and safety notwithstanding the presence of harmful ingredients. Below are examples of false advertising lawsuits stemming from marketing claims regarding product safety and the failure to disclose the presence of alleged harmful substances.

  • Several of the largest cosmetics manufacturers face class action lawsuits alleging that they misled plaintiffs by failing to disclose the presence of PFAS in products. These suits include Vega v. L’Oreal USA, Inc., GMO Free USA v. Cover Girl Cosmetics, and Onaka v. Shiseido Americas Corp. Each of these lawsuits alleges that advertising claims about product safety and sustainability were false given PFAS’ environmental toxicity and association with high cholesterol, thyroid disease, ulcerative colitis, and certain types of cancer. These complaints allege that, because the manufacturers failed to disclose the presence of PFAS, consumers were misled and deceived by the product labeling.6
  • Following a study and FDA citizen petition filed by a self-proclaimed independent laboratory pharmacy, a number of plaintiffs filed lawsuits against manufacturers of sunscreen and aerosol body sprays based on alleged benzene contamination. These complaints allege that no reasonable consumer would expect to find any benzene, a known carcinogen and reproductive toxin, at levels above the limits set by FDA in consumer products. The large number of complaints filed in federal court led to consolidated Multi-District Litigation proceedings in the Southern District of Florida. Some defendants have entered into class-wide settlements of these claims.7
  • Other benzene litigation remains ongoing, including a putative class action pending in the Southern District of Ohio alleging that Proctor & Gamble “wrongfully advertised and sold … Aerosol Antiperspirant Products without any labeling to indicate to consumers that these products may contain benzene.” 8 Another class action lawsuit pending in the Northern District of Illinois alleges that Unilever failed to disclose the presence of unsafe level of benzene in its antiperspirant products, thereby misleading consumers who relied on Unilever’s representations regarding product safety.9 A motion to dismiss the complaint is currently pending.
  • In Weaver v. Champion Petfoods USA Inc., a pet food manufacturer’s packaging touted its “biologically appropriate” dog food made with “fresh regional ingredients” prepared in their “award-winning kitchens”—“never outsourced.” Plaintiff alleged these claims were false and misleading because, according to plaintiff, there was a risk the dog food contained BPAs and pentobarbital. The trial court and Seventh Circuit were not persuaded, as it was “undisputed that humans and animals are commonly exposed to BPA, no BPA was added to the dog food, and the level of BPA purportedly in the dog food posed no health risks to dogs.” The mere risk that any small amount of BPA was present in the food did not render the product representations misleading to a reasonable consumer.10
  • In Goldfarb v. Burt’s Bees, Inc. the plaintiff brought suit challenging Burt’s Bees’ label claim that its dog shampoos and conditioners are “99.7% Natural,” when in reality they allegedly contained synthetic chemicals that are harmful to pets. The complaint points to FTC guidance on the use of the term “natural” in advertising materials, asserting that consumers have the right to take manufacturers at their word when they claim a product is “100% natural.” Despite rumblings for years11 that further regulatory or legislative guidance on the use of the term “natural” in advertising is needed, to date FDA has not provided a definitive definition.12 The case was voluntarily dismissed within months of filing as the parties reached an out-of-court resolution.
  • Based on a November 2021 report concluding that certain spices contained unsafe levels of arsenic, lead, and cadmium, plaintiffs filed a class action complaint against a spice manufacturer alleging it knowingly concealed the presence of heavy metals in its products. As support for their claims, Plaintiffs pointed to affirmative representations that the manufacturer made about the quality, safety, and integrity of the spice products, focusing on the company’s slogan: “The Taste You Trust.”13 A motion to dismiss the complaint is currently pending.

Conclusion

With increasing consumer interest in “environmentally friendly” and “ethically produced” products, as well as a greater awareness regarding product safety and ingredients used, manufacturers have employed marketing strategies seeking to address consumer demand and tastes. Given recent case trends, however, caution should be taken in making advertising claims regarding the company’s sustainability practices or on matters of product safety involving potential health risks. Consumer product manufacturers should review their labeling and advertising on these topics to avoid or minimize the risk of potential false advertising or failure to disclose claims. Although many of these types of statements have been regarded as non-actionable puffery or there may be no duty to disclose, it will be important to monitor these cases for further guidance from the courts as to whether these are short-lived liability theories or a long-term threat that is here to stay. 

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1 https://bschool.pepperdine.edu/blog/posts/conscious-consumerism.htm 

2 Lee v. Canada Goose US, Inc., No. 20 Civ. 9809 (VM); 2021 WL 2665955, at *7 (S.D.N.Y. June 29, 2021).

3 Dwyer v. Allbirds, Inc., No. 21 Civ. 05238, 2022 WL 1136799 (S.D.N.Y. April 18, 2022).

4 Marshall v. Red Lobster Mgmt. LLC, No. 21 Civ. 04786 (C.D. Cal. June 11, 2021).

5 Hanscom v. Reynolds Consumer Products LLC, No. 21 Civ. 03434 (N.D. Cal. May 7, 2021).

6 These suits include GMO Free USA v. Cover Girl Cosmetic, No. 2021 CA 004786 (D.C. Sup. Ct. Dec. 29, 2021); Onaka v. Shiseido Americas Corp., No. 21 Civ. 10665 (S.D.N.Y. Dec. 14, 2021).

7 In re Johnson & Johnson Aerosol Sunscreen Marketing, Sales Practices and Products Liability Litigation, No. 21-md-03015, Dkt. 25 (S.D. Fla. Oct. 29, 2021).

8 Bryski v. The Procter & Gamble Co., No. 22 Civ. 1929 (S.D. Ohio Nov. 4, 2021).

9 Barnes v. Unilever United States Inc., No. 21 Civ. 06191, Dkt. 41 (N.D. Ill. Mar. 25, 2022).

10 Weaver v. Champion Petfoods USA Inc., No. 18 Civ. 1996 (JPS) (E.D. Wisc. Dec. 18, 2018); 3 F.4th 927, 935 (7th Cir. 2021).

11 E.g., HR 5017, introduced in November 2019, would have amended the FDA Act to define “natural” with a certain set of standards.

12 Goldfarb v. Burt’s Bees, Inc., No. 21 Civ. 04904 (VM) (S.D.N.Y. June 3, 2021).

13 Balistreri v. McCormick & Co., No. 22 Civ. 00349 (SVK) (N.D. Cal. Apr. 14, 2022).

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Flexible Strategies for Managing Uncertainty in Manufacturing Supply Chains

           
           
           
           
           
           
AUTHORS          
Vanessa Miller | [email protected]     
Nicholas Ellis | [email protected]     

In 2022, manufacturers still face many of the same issues that bedeviled the industry throughout 2021, as well as a host of all-new challenges, including the impact of the war in Ukraine, labor shortages, and unprecedented inflation. Unfortunately, as with many aspects of pre-pandemic life, the relative stability in the global supply chain that industries enjoyed for many years is unlikely to be restored any time soon. Manufacturers and their suppliers must be agile to adapt to these new and continuing challenges.

This article highlights several key areas of focus for companies looking ahead, including seeking greater flexibility and risk sharing in pricing, warehousing/ inventory, and managing freight costs. Among other strategies, companies should consider updating many of their traditional operational and contracting practices in order to enhance flexibility in a more unpredictable world. While the changing landscape presents challenges, it also presents opportunities for growth. The companies that adapt quickly will be the companies that are best positioned to thrive going forward. 

With full Commission oversight of antitrust investigations rescinded, there may be “less accountability and more room for mistakes, overreach, cost overruns, and even politically-motivated decision making,” according to FTC Commissioners Phillips and Wilson in their dissenting statement of September 14, 2021. Whether and how this lowering of the threshold for the FTC to launch antitrust investigations could affect automotive industry participants is unknown, but it does reflect a change worth considering. As both the FTC and DOJ have authority to review and challenge consummated deals — even deals that were notified and received HSR clearance — one possible outcome of these resolutions is to increase the number of investigations of consummated transactions.

1. Manufacturing Supply Chain Challenges for 2022

For many companies, and for manufacturers in particular, 2021 was a year defined by shortages, increased costs, and other unprecedented supply chain challenges. The lockdowns of 2020 quickly gave way to shortages of many raw materials and components, as supply could not keep up with surging demand. While the global shortage of semiconductors may be the most well publicized of these issues, many companies also faced difficulty in obtaining other materials, including lumber, steel, resin, and foam. In keeping with the Law of Supply and Demand, these shortages quickly turned into rapidly escalating costs for many companies, with hefty price increases that were not contemplated in the seller’s original quotations and, in many cases, are not expressly covered by their long-term supply contracts.

In addition to difficulty obtaining materials, many companies faced significant operational and logistical hurdles. They encountered and continue to face difficulties in obtaining sufficient labor to keep their operations running at full capacity. Companies also had to contend with myriad logistical challenges, including port delays, the Suez Canal blockage, a dearth of containers, a scarcity of truck drivers, and massively increased costs for shipping. The cost of shipping containers from Asia to the United States soared, increasing over 500% as compared to just a year earlier.1 Companies also faced surging labor costs. Under the burden of these significant challenges, the manufacturing supply chain exchanged a fresh wave of force majeure declarations and notices of commercial impracticability. Unlike the situation in 2020, when many manufacturers shut down in unison, such declarations often were the subject of significant disputes as parties wrangled over responsibility for costs to maintain operations and timely deliver products.

Compounding these difficulties, many companies’ efforts to manage their supply chains were further complicated by unpredictable (or unmanageable) demand. Some companies were caught by surprise when demand for their goods surged in the face of COVID-19 instead of falling off, as the worst predictions of economic devastation largely were avoided. This has led to significant misalignments of demand and capacity throughout the manufacturing supply chain. Some manufacturers have been left struggling to meet demand from their customers, while others have seen their sales drop, or get deferred, as their buyers have to reduce production due to shortages or delays in obtaining other components needed to manufacture the final products. In a global manufacturing system that for decades had been predicated on ever-increasing efficiency — having exactly the right goods in exactly the right place at exactly the time they were needed — these problems all have contributed to significant inefficiencies that are now contributing to surging inflation.

Unfortunately, 2022 already has proven to be another difficult year for many manufacturers. Analysts predict that the raw material shortages and other supply chain disruptions will continue into at least 2023, even if there are some signs of gradual improvement.2 COVID-19 remains an ongoing threat to disrupt supply chains. While there appears to be little appetite for a return-to-lockdowns in the United States, lockdowns remain a possibility in many other countries. In particular, China has hewed closely to a “zero-COVID” strategy and recently re-imposed lockdowns in a number of cities. Faced with an expanding outbreak of the Omicron sub-variant BA.2 in March and April, China imposed lockdowns in Shanghai, a city of 26 million people.3 As a result, many manufacturers were forced to shut their production facilities or only managed to maintain production through drastic measures of having their work force effectively live at the factory. Continued spread of the outbreak may threaten production in other regions.

On top of the continuing challenges posed by COVID-19 and existing material shortages, many manufacturers must now contend with the impact of the war in Ukraine. Companies with operations in Ukraine have faced the obvious and significant disruptions that come from an ongoing armed conflict. Companies with operations in Russia, or whose customer base or supply chain are tied to Russia, have been left scrambling as they comply with both the legal and ethical hurdles to continuing such relationships, including the ever-expanding list of sanctions. Even those companies whose operations are not tied directly to Ukraine or Russia are being affected, as the war and sanctions affect both the prices and availability of numerous commodities, including for example energy, wheat, neon, and aluminum. These disruptions and shortages (and the next disruption around the corner) are likely to continue causing headaches and financial uncertainty for manufacturers and will continue to drive up costs.

MWP

2. Strategies for Approaching the Changing Circumstances in the Global Supply Chain

For most of the last two years, many manufacturers have operated in some form of crisis management mode as they waited for the return to “normal.” Unfortunately, it is rapidly becoming apparent (to the extent it was not already apparent) that there will not be a return to the conditions that existed before the pandemic any time soon. COVID-19 will be with us, in one form or another, for the foreseeable future and the fallout from the war in Ukraine (including many of the sanctions imposed on Russia) is likely to continue. The era of minimal inflation that has prevailed in much of the world for the last decade appears to be over. For these and a variety of other reasons, companies likely face a period of greater instability and volatility in the global supply chain. So how can companies shift out of crisis management mode and adapt their business practices to survive, and even thrive, in the new environment? This article presents four key strategies that companies should consider, from the contracting stage through operations.

A. Focus on pricing provisions and parameters triggering pricing relief — For many years, in many segments of the manufacturing industry, long-term contracts at a fixed price have been the standard practice. In some cases, contracts may even require that a supplier provide annual price reductions (year-over-year costs savings or pricedowns). Provisions allowing a supplier to increase prices are relatively rare, with the exception of contracts for certain raw-material-intensive components. Both buyers and sellers alike, having lived through repeated cycles of spikes and declines in raw material pricing, recognized that long-term fixed price contracts for such components often proved to be untenable and utilized various forms of indexing or other flexible pricing for such components. In the current environment, with inflation and significant pricing volatility, companies are rethinking the traditional structure for supply contracts. Long-term contracts at a fixed or even declining price may no longer be practical. As has been the case in the past with raw material intensive components, companies should focus on implementing greater pricing flexibility into their contracts to account for changing costs, whether through some form of defined indexing, a periodic opportunity to renegotiate and market test, or other creative approaches.

B. Warehousing and inventory banks — For decades the traditional model for many manufacturing companies has been lean, just-in-time (JIT) inventory management, as companies have maintained only minimal levels of inventory. This was historically an incredibly efficient model — as long as everything was running smoothly and on time. However, as the pandemic and supply chain issues have laid bare over the last two years, once all of the proverbial “fat” has been stripped out of the system, there has been nothing left to cushion any shock to the system. Buyers and sellers both must now weigh the potential benefits of lean inventory against the risks posed by a supply chain that is far less stable and predictable than it was two years ago. Many companies have incurred significant costs for expedited freight, overtime, shutdowns, and other expenses that have far outstripped any savings and efficiencies realized from trying to maintain a lean inventory. As a result, many companies are looking at ways to mitigate these risks. In addition to looking at re-shoring and shortening supply chains (which primarily are long-term strategies with little capacity for short-term relief), many companies are rethinking their inventory models and moving to implement warehousing and larger inventory banks as a shield against shortages and disruptions. While this approach can be an effective strategy, it is not without its own added costs. Companies must think carefully when implementing such a strategy (either on their own initiative or at the request of their customers) to ensure that the costs are properly apportioned and accounted for.

C. Stress-testing, dual sourcing, and contingency planning — In many industries, the drive toward minimizing cost, as well as the expense associated with qualifying a new supplier, have driven a trend toward single sourcing material and component suppliers. In the new, less-predictable world of the global supply chain, companies that have not done so already should review their supply chains to understand where potential risks exist and whether a single-source strategy still makes sense. This often requires digging into the details and understanding where all levels of the supply chain are sourced. For example, a company purchasing components from two separate suppliers, one of which is located nearby, may feel that it has mitigated its risk. However, if both of its direct suppliers are obtaining 100% of their raw material from the same sub-supplier, the company still is exposed to risk based on the sole source. Even if companies do not actively dual source components, it is prudent to have a contingency plan and understand what alternative sources are available if necessary, and how quickly a new supplier can be engaged, in the event of a disruption to the current supplier.

D. Shifting risk for freight costs — For many companies, freight costs have taken on outsized significance over the course of the last two years, both due to increased need for expedited freight and to rapidly increased costs (and delays) for ordinary shipping. Traditionally many buyers have treated most shipping costs, including costs for expedited freight (even in cases of force majeure and commercial impracticability) and costs to ship components from lower-tier companies, as something for which their suppliers are responsible. However, many companies are questioning this structure and pushing back. Numerous companies have struggled with increased costs for shipping, particularly those needing to obtain components from Asia. As discussed above with respect to pricing and costs more generally, companies should look for ways in which to share some of the burden and risk of these costs with their customers. Many companies also have struggled with a need for frequent (and for some periods, near constant) expedited freight in order to compensate for delays in the supply chain. As most companies know, costs for expedited freight can rapidly become exorbitant and threaten to surpass their profit margins on a program for an entire year or even longer. In recent years, buyers and sellers have treated costs for expedited freight as a zero-sum game, with buyers demanding that their suppliers pay the entire costs for expedites and suppliers often balking and refusing to pay such costs (even if otherwise obligated to do so under the applicable contract/ law). Given that the challenges in the supply chain show no sign of alleviating soon, companies should consider possible new approaches in which both buyers and sellers each share some of the risk for expedited freight arising out of issues that are outside of their control.

3. Conclusion

The global supply chain has changed, and manufacturers must adapt to the new circumstances. The challenges faced by manufacturers in 2021 have continued into 2022, and many show no signs of abating. If manufacturers have learned anything from the last 18 months, it is to expect the unexpected and apply the “lessons learned” to navigate challenges going forward. These challenges will require companies to reevaluate many of their contracting and operations, including their approach to managing the risks inherent in pricing, warehousing/inventory, and freight costs. More volatility in the supply chain requires that contracts be more flexible in order to allow for a bend-but-don’t-break approach to resolving challenges as they arise.

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1 https://www.reuters.com/business/china-us-container-shipping-rates-sail-past-20000-record-2021-08-05/ 

2 https://www.supplychaindive.com/news/shortages-2022-outlook-supply-semiconductors-aluminum-food/617537/

3 https://www.reuters.com/world/china/shanghai-lockdown-deepens-after-new-surge-asymptomatic-cases-2022-04-05/

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Industry 4.0 Heralds a Sea Change in IP Protection for Manufacturers

           
           
           
           
           
AUTHOR           
John Lanza | [email protected]   

Smart Manufacturing, often referred to as “Industry 4.0,” refers to the fusion of digital manufacturing techniques with traditional manufacturing techniques. While there are many technologies that can be identified as playing a part in smart manufacturing, this article will focus on four that are currently receiving attention: cloud adoption, the Internet of Things (IoT), machine learning and artificial intelligence, and additive manufacturing. Successful deployment of smart manufacturing technologies can lead to faster, more efficient production that is also safer for factory floor workers. Implementation of these technologies also poses intellectual property challenges to which manufacturers may not be accustomed but that, if managed appropriately, promise great rewards.

Cloud Adoption

Cloud computing refers to the distribution of data and applications over multiple locations, allowing on-demand access to the data and applications from several locations by users. As with many other industries, manufacturers are adopting cloud-based computing techniques to enable agile manufacturing and provide real-time data to the production floor. For example, capacity loading information from several production machines, perhaps located at several different geographic locations, can be shared to a cloud so that it is accessible by a distribution unit in real time. This enables the distribution of work to production machines in an efficient manner.

Market Research Future forecasts $111.9 billion of cloud computing investment in the manufacturing sector. Manufacturers contemplating moving their production processes to the cloud should take a moment to assess whether the new process is patentable. While it may seem counterintuitive that moving an existing manufacturing process to a cloud-based platform would yield patentable subject matter, a brief survey of issued patents shows that changes necessary to modify a process so that it executes properly on a cloud-based platform can, indeed, lead to patentable subject matter. Moreover, newly-generated software routines to implement the cloud-based process are likely the subject of copyright, and protection for such materials should be evaluated.

A related issue for manufacturers moving to cloud-based platforms is the security of their systems and data. Cloud-based systems, because of their inherent interconnectedness with other systems, are susceptible to attack. In 2020, targeted ransomware emerged as a pervasive cyber threat to manufacturing. Such attacks are expected to increase as manufacturing companies adopt increasingly digital profiles. Companies adapting smart manufacturing technology need to protect their intellectual property and the resultant data that is generated. Data breach remediation is also likely to be important; information-stealing attacks make up about a third of cyberattacks on manufacturing concerns, with one in five companies successfully compromised.

The Internet of Things

The Internet of Things (IoT) refers to inclusion of sensors, processing ability, and communication technology in physical devices. IoT has already begun to change how we view devices in our homes; smart TVs, smart thermostats, and smart appliances are seemingly ubiquitous. That perspective change is coming to manufacturing as well, as several companies race to release a universal operating system for all IoT devices. Beyond the obvious changes to the manufacturing floor itself, manufacturers should be aware of two foundational changes IoT will make to their business: IoT will make protection of trade secrets increasingly difficult, and IoT will radically change the relationship a manufacturer has with the end consumer.

Traditionally, many aspects of a manufacturing line were protected as trade secrets. For example, the exact setting used for a machine to process raw material into the desired result might be something known only to the individuals tasked with running that machine. In the IoT world, that machine is interconnected with other machines, and that interconnectedness makes it a potential target for attack. Successfully compromised machines may give up their settings, preferences, and other secrets that make a manufacturing line “special.” So again, cybersecurity and data management will need to be priorities, not afterthoughts, in the factory of the future.

Looking outwardly, IoT radically changes the traditional relationship a manufacturer has with the end consumer, as it allows the manufacturer to have access to data regarding use of its end products. While collection of actual data on consumer usage is a fantastic benefit for manufacturers, it comes with obligations surrounding both the collection of that data and securing the data after it has been collected. Provided that the data collected from end users is done in a transparent, privacy-responsible manner, that data represents a commercial asset that may ultimately prove more valuable than the original business.

Machine Learning and Artificial Intelligence

The terms “machine learning” and “AI” are usually used to refer to techniques to enable machines to think like human beings. Applications of these techniques in manufacturing can include predictive maintenance, predictive quality and yield, digital twinning, generative design, energy consumption forecasting, and supply chain management. This area of technology may represent the largest opportunity for manufacturers to develop and maintain trade secrets relating to their operations. Identification of specific algorithms and the inputs provided to those algorithms to produce a desired result will differ between manufacturers, and a manufacturer that hits on a constellation of choices that results in superior performance will likely want to keep that from others in the field.

Additive Manufacturing

Additive manufacturing, sometimes referred to as “3-D printing,” continues to attract interest and venture capital money despite the recent decline in the consumer market. Additive manufacturing allows lighter, stronger alloys to be used instead of traditional materials. It also enables a more efficient supply chain in which parts are manufactured when and where they are needed, rather than being manufactured in one place and shipped to another.

Although some recent developments point to a future in which large, complex items such as entire vehicles can be printed, most current use cases for this technology are to produce parts or subsystems for use in larger systems. The ability to use additive printing technology to manufacture machine parts requires manufacturers to be cognizant of the patent law doctrine of repair and reconstruction, which distinguishes between permissible repair of a patented article and impermissible reconstruction of a patented article, the latter of which is patent infringement. Manufacturers of larger systems will likely want to consult with patent counsel to ensure that their patent coverage is as robust as possible. Similarly, manufacturers of smaller components may require more extensive indemnity provisions in service contracts to shift the risk of patent infringement back to the customer.

Each part manufactured by 3-D printing is represented as a data file that is used by the printer to manufacture the desired object. Manufacturers will want to consider to what extent their data files can be protected by copyright, allowing them to control the ultimate manufacture of the object represented by the data file.

Finally, manufacturers may find themselves able to protect their printing activities using trademark protection. If, for example, a manufacturer has a specific process that allows them to 3-D print a certain material, or finds that objects printed using their process have superior characteristics to parts printed using other processes, that manufacturer may wish to develop a brand strategy around the process, e.g., Printed Using MagicTM.

Smart manufacturing technology holds great promise for manufacturers while posing intellectual property issues with which many traditional manufacturers may be unfamiliar. Manufacturers that are able to identify those issues and capitalize on the opportunities they present will have the advantage in the shift to Industry 4.0.

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Manufacturing Employers Face Significant Labor Challenges in 2022

           
           
           
           
           
AUTHORS           
Dan Kaplan | [email protected]     
Jeff Kopp | [email protected]   
Felicia O’Connor | [email protected]     

As employee retention issues and the “great resignation” make headlines, the manufacturing industry not only feels the pressure of a tight labor market in 2022, but also faces additional labor challenges. Despite signs earlier in the year that the COVID pandemic was waning, it continues to impact employers’ ability to remain fully staffed. Employers continue to face a changing and complex landscape with respect to continued remote work, labor shortages, and COVID-protocol-related accommodation requests. However, COVID matters are not the only key issues facing employers in the manufacturing industry this year. Changes to the National Labor Relations Board (NLRB or Board) and its general counsel in 2021 mean that unionized and nonunionized employers will face challenges in the traditional labor arena as well.

1. COVID, COVID, COVID — As Cases Begin to Increase Again, Employment Related Challenges Continue in 2022

A. Remote Workforce Issues

Through the surges and slowdowns of COVID cases during the course of the pandemic, one pandemic-related change seems here to stay: a greater number of workers are working remotely. While some businesses are encouraging workers to come back to the office, others have enhanced remote work opportunities and face the challenges associated with a fully or partially remote workforce. Employers should take care to consider the legal implications of this change. If an employer now has employees working remotely in states where it previously did not have operations, there may be tax and other implications. Generally the laws of the state where an employee works will govern the employee’s employment. If employees are working in a new state or locality, employers should ensure they are up-to-date on and mindful of those state and local laws that may differ from other locations where the employer operates. Are there local sick leave laws? Changes to enforcement of non-compete agreements? Requirements for reimbursement of expenses? Careful consideration of local employment laws and regulations can prevent costly missteps.

B. Labor Shortage Pain – Difficulties in Hiring and Retention

Many employers are also currently facing an extreme labor shortage that has not only impacted hiring, but also retention of employees. In order to entice applicants and encourage employees to remain with the company, many manufacturing employers have increased financial and other incentives. Signing bonuses, attendance bonuses, and other financial incentives can be an effective means to recruit and retain talent. In doing so, manufacturing employers (who often have a large number of non-exempt workers) should be knowledgeable of the various wage-and-hour requirements to avoid any risk of unpaid wage or other claims. Employers should carefully consider whether the incentives they implement should be factored into the regular rate when calculating overtime. Likewise, employers should ensure that such incentives are consistently and fairly implemented.

C. Accommodation Requests for COVID Protocols

Since the outset of the pandemic, employers have had to contend with various requests for accommodation relating to COVID protocols, whether related to mask requirements, vaccine mandates, or leave issues.

As an initial matter, employers should be aware that COVID can be a disability under the ADA, depending on the employee’s symptoms. If an employee requests leave for COVID-related symptoms, beyond what is typically granted by company policy, employers should involve legal counsel to determine on a case-by-case basis whether it may be considered a disability that would require the company to engage in the interactive process.

Even if an employee does not test positive for COVID, employers may receive requests for accommodation due to a disability or religion that prohibits the employees from complying with COVID-related protocols. Many employers are familiar with this issue if they have a mask policy or vaccine policy. Employers should engage in the interactive process in such cases, in order to determine whether a reasonable accommodation can be granted that does not impose an undue burden on the company.

To the extent employers are permitting some employees to work from home, it is wise to make sure that decisions are made on a consistent basis and are based on the employees’ job duties. In a manufacturing environment, where at least some portion of the employee population likely has to be physically present in the workplace, remote-work decisions based on concrete job requirements will help to avoid future claims of unfair treatment.

MWP

2. Increased Union Activity to be Fueled by Changes to NLRB Standards and Priorities

COVID-related matters are not the only key issues facing employers in the manufacturing industry in “the coming year. We have already seen some diversions from the Trump-era labor board. As such, changes to NLRB standards and priorities will continue to affect unionized and nonunionized employers through 2022 and beyond.

In a striking example of the coming changes in the traditional labor space, on April 7, 2022, NLRB General Counsel Abruzzo issued GC-Memo 22­04, which describes her position with respect to employers’ so-called “captive audience meetings”: mandatory meetings held by the employer in which it gives its position regarding union organizing. The meetings have long been permitted under Board interpretation of the NLRA. Abruzzo’s position, as described in the memo, would represent a dramatic shift in longstanding Board precedent. Abruzzo’s position is that the meetings “inherently involve an unlawful threat that employees will be disciplined or suffer other reprisals if they exercise their protected right not to listen to such speech.” She plans to urge the Board to reconsider its precedent and find mandatory meetings of this sort unlawful, because she believes the current precedent “is at odds with fundamental labor-law principles, our statutory language, and our congressional mandate.” The meetings have historically been an important tool for employers to get their message out to employees during a union-organizing campaign. If the Board does, in fact, overturn the precedent, employers will be challenged to find other ways to communicate with employees during a union campaign that are permitted under the NLRA.

Last year, on July 22, 2021, NLRB General Counsel Jennifer Abruzzo issued her first memo, which set her agenda and priorities for her four-year term. In addition, with various terms expiring and resultant Democratic nominations submitted for consideration, the Board itself has also changed from a Republican to a Democratic majority, led by Chairman Lauren McFerran. Not surprisingly, the memo and Democratic majority on the Board mark a significant change in priorities from the Trump-era NLRB to a more union- and employee-friendly stance. The following potential changes in standards and priorities of the NLRB are anticipated:

A. Closer Scrutiny Involving Employee Handbooks

The NLRB is likely to increase scrutiny of employee handbook provisions that may be construed to restrict activities protected under Section 7 of the National Labor Relations Act (NLRA). Under the Trump-era Board, the NLRB had adopted the Boeing test with respect to employee handbooks. This test assessed a facially neutral handbook policy by balancing the alleged restrictions against the employer’s legitimate justifications for implementing the policy. The test was much more flexible and employer-friendly than the previous standard under the Lutheran Heritage case, which prohibited any handbook policy, including those that did not explicitly prohibit protected activities, if the rule could be “reasonably construed” by an employee to restrict such activities. At the time, the Board viewed such rules to have a chilling effect on protected activities and thus considered them a violation of the NLRA. The Boeing case is specifically referenced in the general counsel’s August 12, 2021 memo as a case “involving board doctrinal shifts” that upended prior precedent that “struck an appropriate balance between the rights of workers and the obligations of unions and employers.” This shows that the general counsel, and very likely the Board, are poised to return to the more employee-friendly Lutheran Heritage precedent. In anticipation of this change, employers should review their handbooks for possibly problematic policies and be ready to change such policies if the Board issues a decision overruling the employer-friendly Boeing standard.

B. Possible Increased Application of Weingarten Rights

As unionized employers know, Weingarten rights are the rights of represented employees to have union representation present when requested at an investigatory interview that may lead to discipline. Under current Board precedent, Weingarten rights only exist in a union environment. Specifically in 2017, the Board declined to extend Weingarten rights to an employee who was not represented by a union, but who had requested to have a co-worker present during a disciplinary interview. Over the years, the Board has changed its position on a few occasions regarding whether nonunion employees have the right to request representation during investigatory interviews. In 2000, the Board had held that nonunion employees did have a right to such representation but then changed its stance in 2004. The general counsel memo references the current Board precedent, which does not extend the right to nonunion employees, as an “area or initiative” bearing reexamination. Employers should watch for Board changes in this area and make sure its human resources employees and others conducting such interviews are up-to-date on any changes with respect to whether nonunion employees are entitled to representation upon request.

C. Access to Employer Property for Unionizing Purposes

Another area where nonunionized employers should be aware of potential change in Board precedent is with respect to union organizers’ access to, and use of, the employer’s property. Under the current state of the law, pursuant to Tobin Center for the Performing Arts, an employer is permitted to exclude off-duty contractors from the non­public areas of its property even when they seek to engage in Section 7-protected activity unless the contractors (1) work regularly and exclusively on the property, and (2) the employer fails to show that the contractor has one or more reasonably non-trespassory alternative means of communication (meaning they do not require using the employer’s property). Under the UPMC case, which is current Board precedent, employers have the right to refuse union access to even public spaces on an employer’s property.

Under the new Board, the state of the law is likely to return to the New York New York Hotel and Casino standard, under which employers could not restrict off-duty employees from using non-work areas to distribute pro-union literature. Similarly, the UPMC standard is likely to be overturned in favor of the prior Sandusky Mall standard, under which employers could not restrict a union from using public spaces on an employer’s property for union organizing activity if the employer permitted other commercial, civil, and charitable activities in that space. Close scrutiny by employers of the current Board precedent, and changes in this area, is advised where the company is facing union organizing activities in order to avoid the filing of an unfair labor practice charge and possible implementation of a bargaining order.

D. Expansion of Interpretation of Protected Concerted Activity

Employers can also expect an expanded interpretation of Section 7 “protected concerted activities” under the new Board and general counsel. This may include expanded rights of employees to use their employer’s communication systems for protected activity. The general counsel memo specifically identifies cases in which an employee’s right to use the company email system (or other company communication systems such as Discord, Slack, or Groupme) for protected workplace communication should be given special attention. The memo identifies the current Board precedent as involving “Board Doctrinal Shifts” (from the prior Purple Communications standard, which held that employers must permit their employees to use company email systems to engage in protected activity to the current Rio All-Suites Hotel and Casino, which overruled Purple Communications and permits employers to restrict such employee email communications). The general counsel memo also identifies current board precedent that narrowed the scope of protected activity as requiring reexamination. Specifically it references current Board precedent that employees who acted on behalf of interns were not engaged in protected activity because it was not for “mutual aid and protection.”

This signals that the general counsel and Board will seek to expand the definition of “mutual aid and protection” and thereby the definition of protected concerted activities. With these and other related examples, employers can expect a return to an expanded view of protected concerted activities, which will restrict the actions employers can take with respect to such activities even if the actions are impermissible under current law.

These are just some of the examples of changing precedent from the NLRB that are likely to affect unionized and nonunionized employers alike. The changes are all union-friendly and likely to help fuel increased union activity in the coming years. As with the quickly changing legal environment respecting COVID related issues, manufacturing employers should stay up to date on new decisions from the NLRB (and be aware of enforcement priorities of the general counsel) to avoid labor-related liability in 2022 and beyond.

As these examples highlight, manufacturing employers face unique challenges in 2022 due to a frequently changing legal landscape. Employers should be vigilant regarding updates to the current state of the law in these and other areas.

Back to the Table of Contents

CPSC Continues Enforcement Push in the First Quarter of 2022

           
           
           
           
           
AUTHORS           
Erik Swanholt | [email protected]     
Kristin Sikora | [email protected]   
Amanda Soler | [email protected]     

This article covers the first quarter of 2022 (Jan. 1, 2022 through March 31, 2022).

As predicted based on agency indications in 2021,1 the Consumer Product Safety Commission (“CPSC”) has continued its push towards increased enforcement2 in the first quarter of 2022. While recall trends this quarter (and over the past several years) have not been the best indicator of increasing enforcement,3 initial appearances can be deceiving. As recent news in the exercise industry has shown, the CPSC will not shy away from unilateral action even in the case of a voluntary recall.4 Additionally, the agency seems to be focusing increased attention on other mechanisms, including fines and administrative actions.

The enforcement push may be attributable to several factors, including the Senate Commerce Committee’s December 2019 conclusion that the CPSC has been too lenient on manufacturers whose products may pose dangers to consumers.5 Since then, and after the election of President Biden, the composition of the Commission has changed. Joining Republican-appointed Commissioners Dana Baiocco and Peter Feldman are Democrat-appointed Commissioner Richard Trumka, Jr. and Chair Alexander Hoehn-Saric, confirmed in October 2021.6 One commissioner position remains open,7 and President Biden has nominated Mary Boyle, the agency’s current executive director, to fill it. (Her nomination remains pending before the Senate Committee on Commerce, Science, and Transportation.8) If confirmed, the CPSC would constitute a 3-2 split in favor of Democratic appointees; however, how that will impact the CPSC’s path forward is unclear. What does seem clear, is the Commission’s effort to distance itself from the perception that it is too lenient and to emphasize that it “will use its authority to the fullest to keep American families safe.”9 As further described below, this means increased activity.

Statements Signaling Increased Activity

The CPSC has leaned into increased activity, and the agency has allocated funds to initiatives that support this stated goal. Individual commissioners have also expressed support for agency programs and objectives that naturally result in increased enforcement.

For example, on September 28, 2021, Commissioners Dana Baiocco and Peter Feldman released a joint statement announcing the passage of the agency’s fiscal year 2022 operating plan via a 2-to-1 vote.10 The joint statement emphasizes several aspects of the agency’s plan, including the following:

  • Robust port surveillance by expanding staff (i.e., adding an additional 27 port inspectors), focusing on facilities where low-value eCommerce shipments enter the country and through the development of an eFiling Program to enhance targeting capability;
  • Vigorous compliance by strengthening agency enforcement operations through a nearly 30% increase in resources for the Office of Compliance and movement to reinstate the Children’s Product Defect Team that was disbanded in 2018, and investing in enforcement technology;
  • Hazard identification by investing in staff, research, testing capabilities, expanded laboratory facilities, and high-quality data that informs decision making;
  • Communications by increasing the Office of Communications operating budget by nearly 25% to allow the agency to maintain a robust Internet presence that includes traditional social media, CPSC websites, and apps to track product safety developments;
  • Security and accountability improvements by taking steps to address the CPSC Inspector General’s recommendations, including those related to the 2019 data breach, and establishing security policies to guard against known cyber risks; and
  • Diversity and product safety equity by enhancing recruitment efforts, analyzing workforce data, and developing proactive programs that seek to foster inclusion, equity, and diversity and by better serving vulnerable, diverse, and disenfranchised communities through targeted communications and outreach.11

More recently, Chairman Hoehn-Saric stated that it is his “preference to see speedy reporting and remedial action by manufacturers… [but that] the CPSC will not hesitate to move forward on our own when … [manufacturers] refuse to conduct recalls when our staff finds their product presents a substantial product hazard.”12 He also affirmed the Commission’s aggressive tack on reporting by stating “failing to report dangerous products puts consumers at an unnecessary risk and will not be tolerated,” which is why “in the last 5 months [the CPSC has announced] close to $100 million in penalties” for failures to report and late reporting.13 Commissioner Peter Feldman’s recent tweets echo this same sentiment, as he has expressed support for increased rulemakings to improve the safety of adult portable bed rails14 and voted to oppose a corrective action plan that did not clearly identify how the proposed remedy would benefit future consumers.15

Not only is the CPSC increasing activity generally, but it is also specifically considering the racial disparities in injury rates and deaths caused by consumer products. On April 14, 2022, the CPSC announced a public forum for all interested stakeholders to discuss its newly released Equity Action Plan that focuses on improving data collection “to better assess disparities and [the CPSC’s] efforts to reach the communities that are most in need.”16

CPSC Voluntary Recalls and Notices of Violation

In the first quarter of 2022, the CPSC announced 74 recalls, including several infant and children’s products, recreational vehicles, and novelty items.17

The CPSC also issued several product violation notices. Data available through February 2022 shows that the CPSC issued 426 Notices of Violations.18 Most of these violations are “Stop Sale and Correct Future” or “Correct Future Production.”19

Notably, manufacturers and retailers in the exercise industry were the subject of increased CPSC interest and activity. First, the CPSC recalled certain treadmills due to fire hazard risks.20 Then, on January 31, 2022, the CPSC issued a $6.5 million penalty against an exercise manufacturer for failure to immediately report serious injuries involving its exercise equipment, specifically cable crossover machines and dual adjustable pulley machines.21

Continued Rise of Actions Related to Infant and Child Safety

Consistent with its efforts last year,22 the CPSC has maintained its focus on infant and child safety.23 On January 26, 2022, the CPSC approved a new federal mandatory standard related to crib mattresses that takes effect in the fall of 2022.24 The new federal rule will include marking, labeling, and instructional literature improvement requirements aimed at reducing infant injuries and deaths related to suffocation, entrapment, and laceration hazards.25

Many of the recalls issued so far in 2022 relate to infant and child safety.26 Notably, when an infant products company refused to undertake a voluntary recall following two infant deaths, the CPSC filed an administrative complaint addressing suffocation hazards related to their infant lounger products.27 The CPSC’s complaint asks for an order, among other things, requiring the company to notify all persons who sell or distribute the products to immediately cease distribution, notify state and local public health officials, give prompt public notice (including posting a clear and conspicuous notice on their website and on any third-party website they have a presence on, including social media), and to mail and email a notice to every distributor, retailer, and purchaser.28 This case is ongoing.

New Trend: Penalties for Failure to Report

Manufacturers, importers, distributors, and/or retailers of consumer products have a legal obligation to immediately report product safety hazards and defects to the CPSC. This reporting obligation covers: (1) A defective product that could create a substantial risk of injury to consumers; (2) A product that creates an unreasonable risk of serious injury or death; (3) A product that fails to comply with an applicable consumer product safety rule or with any other rule, regulation, standard, or ban under the CPSA or any other statute enforced by the CPSC; (4) An incident in which a child (regardless of age) chokes on a marble, small ball, latex balloon, or other small part contained in a toy or game and that, as a result of the incident, the child dies, suffers serious injury, ceases breathing for any length of time, or is treated by a medical professional; and (5) Certain types of lawsuits.29 Failure to fully and immediately report this information may lead to civil or criminal penalties.30 Generally, CPSC staff advises “when in doubt, report.”31

The Chair’s recent statements about failure to report and late reporting, combined with agency actions, signal that the CPSC will be paying increased attention to lax reporting.32 For example, in January 2022, the CPSC resolved a failure to report complaint with a civil penalty of $6.5 million.33 The CPSC generally issues at least one civil penalty a year, but it issues criminal penalties much more rarely. Indeed, before the agency’s historic corporate criminal enforcement action in 2021, the last criminal penalty was issued in 2013.34 Given the CPSC’s resurrection of the criminal penalty in 2021 and early foray into civil penalties this year, industry should be prepared for increased penalty activity in 2022 and beyond, particularly as it relates to reporting obligations.

Other CPSC Administrative Actions

Of particular significance is a pending recall lawsuit against Amazon. The CPSC filed its complaint against Amazon on July 14, 2021 regarding various products, including children’s sleepwear products that failed to meet flammability requirements, carbon monoxide detectors that failed to detect carbon monoxide, and hair dryers without proper safety immersion protections.35 Although Amazon notified customers that the products could present a hazard and offered a refund in the form of an Amazon gift card, the CPSC alleged these actions were insufficient to remediate the hazards posed by the products and did not constitute a fully effectuated mandatory corrective action.36 This complaint marks a departure from the CPSC’s custom of seeking enforcement against manufacturers; instead, here the CPSC targeted the distributor by suing the e-marketplace that sells the manufacturers’ items. The CPSC explained that it “must grapple with how to deal with these massive third-party platforms more efficiently, and how best to protect the American consumers who rely on them.”37 Distributors like Amazon can expect such increased scrutiny from the CPSC to continue.

Interestingly, the CPSC has also shown that it will not tolerate ex parte communications following the issuance of a complaint. Two days after Amazon received the complaint, representatives for Amazon attempted to “propose a meeting . . . to discuss a path forward . . .” in three separate emails to the CPSC.38 Such ex parte communications are prohibited and are publicly posted on the CPSC’s website. The last time the CPSC posted prohibited ex parte communications was November 28, 2017.39 The Amazon case remains ongoing; the CPSC issued a subpoena to the Government Accountability Office on March 22, 2022.40

What Does It All Mean?

If the CPSC’s recent activity is any indicator, the industry can expect to see more aggressive enforcement in the form of the usual voluntary recalls but also fines, forced recalls, and enforcement actions. The CPSC is likely to continue acting independently and publicly sharing its concerns about the safety of particular consumer products without agreement from or cooperation with targeted manufacturers or distributors.

For those companies under the CPSC’s purview, it is important to be proactive both in terms of continued (and, if appropriate, improved) product safety vigilance and in the creation and maintenance of a product safety program, so that responding to and reporting product safety issues occurs as quickly as possible.

———————————————————-

Erik K. Swanholt & Kristin M. Sikora, Consumer Product Companies Beware! CPSC Expected to Ramp up Enforcement of Product Safety Regulations, (Feb. 24, 2021), https://www.foley.com/en/insights/publications/2021/02/cpsc-enforcement-of-product-safety-regulations

2 See Erik K. Swanholt & Kristin M. Sikora, CPSC Takes First Step to Expand Enforcement (Apr. 21, 2021), https://www.foley.com/en/insights/publications/2021/04/cpsc-takes-first-step-expand-enforcement.

3 The CPSC reported 74 recalls in the first quarter of 2022, 256 recalls in 2020, and 219 recalls in 2021. See https://www.cpsc.gov/Recalls.

4 CPSC sharing link to a video of a child being injured by the Peloton Tread+ (Apr. 17, 2021), https://www.cpsc.gov/Newsroom/News-Releases/2021/CPSC-Warns-Consumers-Stop-Using-the-Peloton-Tread.

5 Press Release (Dec. 19, 2019), https://www.commerce.senate.gov/2019/12/senate-commerce-committee-report-details-failures-by-the-u-s-consumer-product-safety-commission-to-protect-consumers.

6 See Chair, https://www.cpsc.gov/About-CPSC/Chairman/Alexander-Hoehn-Saric.

7 See Current Commissioners, https://www.cpsc.gov/About-CPSC/Commissioners.

8 See PN1542, https://www.congress.gov/nomination/117th-congress/1542?s=1&r=16.

9 Remarks of CPSC Chair Alexander Hoehn-Saric, International Consumer Product Health and Safety Organization (ICPHSO) 2022 Annual Meeting, (Feb. 16, 2022), https://www.cpsc.gov/s3fs-public/Hoehn-Saric-Speech-at-ICPHSO-CPSC-50th-anniversary.pdf?VersionId=pQbe_blvNvsJpQ3wNl047026W1x7Vgu8.

10 Joint Statement of Commissioners Dana Baiocco and Peter A. Feldman on the Passage of the Fiscal Year 2022 Operating Plan, Consumer Product Safety Commission (Sept. 28, 2021), https://www.cpsc.gov/s3fs-public/FY22OpPlanJointStatement.pdf?VersionId=vYdSOfbkYTyz.Xpl9UOof1AACeGW3evJ. 

11 Id.; see also Memorandum from Mary T. Boyle to the Commission attaching the Consumer Product Safety Commission’s Fiscal Year 2022 Operating Plan (Sept. 15, 2021), https://www.cpsc.gov/s3fs-public/Commission-Briefing-Package-Fiscal-Year-2022-Operating-Plan-Web.pdf?VersionId=CiBFs8Iuv3qhs8jA9HubboRTV2um.BiA

12 Remarks of CPSC Chair Alexander Hoehn-Saric, International Consumer Product Health and Safety Organization (ICPHSO) 2022 Annual Meeting, (Feb. 16, 2022), https://www.cpsc.gov/s3fs-public/Hoehn-Saric-Speech-at-ICPHSO-CPSC-50th-anniversary.pdf?VersionId=pQbe_blvNvsJpQ3wNl047026W1x7Vgu8.

13 Id.

14 Twitter @FeldmanCPSC (Mar. 16, 2022), https://twitter.com/ feldmancpsc.

15 Twitter @FeldmanCPSC (Apr. 7, 2022), https://twitter.com/ feldmancpsc.

16 CPSC Proclaims Stakeholder Roundtable on Could 25, 2022 to Hear from Public on New Fairness Motion Plan; Joins Over Ninety Federal Companies Releasing Fairness Motion Plans (Apr. 14, 2022), https://www.cpsc.gov/Newsroom/Information-Releases/2022/CPSC-Proclaims-Stakeholder-Roundtable-on-Could-25-2022-to-Hear-from-Public-on-New-Fairness-Motion-Plan-Joins-Over-Ninety-Federal-Companies-Releasing-Fairness-Motion-Plans.

17 See https://www.cpsc.gov/Remembers.

18 See https://www.cpsc.gov/Remembers/violations.

19 “For all merchandise regulated by the CPSC, the Fee points a Letter of Noncompliance when there’s a violation of a compulsory normal. It advises the corporate of the violation and of the character of the mandatory corrective motion (to appropriate future manufacturing (CFP); to cease sale and CFP; or to recall, cease sale, and CFP).” https://www.cpsc.gov/es/Information.

20 Recall Alert (Jan. 28, 2022), https://www.cpsc.gov/Remembers/2022/Johnson-Well being-Tech-Remembers-Matrix-T1-and-T3-Business-Treadmills-Due-to-Fireplace-Hazard-Recall-Alert.

21 Press Launch (Jan. 31, 2022), https://www.cpsc.gov/Newsroom/Information-Releases/2022/Core-Agrees-to-Pay-6-5-Million-Civil-Penalty-for-Failure-to-Report-Critical-Accidents-Involving-its-Train-Gear.

22 Erik Ok. Swanholt & Kristin M. Sikora, Current Exercise on Toddler and Youngster Security (Oct. 7, 2021), https://www.foley.com/en/insights/publications/2021/10/recent-activity-on-infant-and-child-safety.

23 See Press Launch (Jan. 26, 2022), https://www.cpsc.gov/Newsroom/Information-Releases/2022/CPSC-Approves-New-Federal-Security-Customary-for-Crib-Mattresses-Rule-to-Present-a-Safer-Market-for-Mother and father.

24 Id.

25 Id.

26 See https://www.cpsc.gov/Remembers.

27 Press Launch (Feb. 9, 2022), https://www.cpsc.gov/Newsroom/Information-Releases/2022/CPSC-Sues-Leachco-Over-Suffocation-Hazard-from-Faulty-Toddler-Loungers-Seeks-Discover-and-Refund-to-Shoppers-from-Firm.

28 See Recall Lawsuits: Adjudicative Proceedings, https://www.cpsc.gov/ Remembers/Recall-Lawsuits-Adjudicative-Proceedings.

29 See Responsibility to Report back to CPSC: Rights and Obligations of Companies, https://www.cpsc.gov/Enterprise–Manufacturing/Recall-Steerage/Responsibility-to-Report-to-the-CPSC-Your-Rights-and-Obligations.

30 Id.

31 Id.

32 Remarks of CPSC Chair Alexander Hoehn-Saric, Worldwide Shopper Product Well being and Security Group (ICPHSO) 2022 Annual Assembly, (Feb. 16, 2022), https://www.cpsc.gov/s3fs-public/Hoehn-Saric-Speech-at-ICPHSO-CPSC-Fiftieth-anniversary.pdf?VersionId=pQbe_blvNvsJpQ3wNl047026W1x7Vgu8.

33 See Press Launch (Jan. 31, 2022), https://www.cpsc.gov/Newsroom/Information-Releases/2022/Core-Agrees-to-Pay-6-5-Million-Civil-Penalty-for-Failure-to-Report-Critical-In]uries-Involving-its-Train-Gear#:–:textual content=Corepercent20Agreespercent20topercent20Paypercent20percent246.5,itspercent20Exercisepercent20Equipmentpercent20percent7Cpercent20CPSC.gov. 

34 See Press Launch (Oct. 29, 2021), https://www.justice.gov/opa/pr/gree-appliance-companies-charged-failure-report-dangerous-dehumidifiers-and-agree-91-million#:–:textual content=Consistentpercent20withpercent20Justicepercent20Departmentpercent20policy,%2491percent20millionpercent20totalpercent20monetarypercent20penalty.

35 Id.

36 Id.

37 Press Launch (July 14, 2021), https://www.cpsc.gov/Newsroom/Information-Releases/2021/CPSC-Sues-Amazon-to-Power-Recall-of-Hazardous-Merchandise-Offered-on-Amazon-com.

38 Id.

39 Id.

40 Id.

Again to the Desk of Contents

Mexico Nearshoring Traits Throughout the Manufacturing Panorama

           
           
           
           
           
           
AUTHORS           
Alejandro Gomez | [email protected]     
Nicholas Ellis | [email protected]   

Lots of the certainties to which companies had grown accustomed over the past decade have been shaken, and there are a variety of points over which corporations have completely no management. On this article we offer a path for corporations to start addressing worldwide manufacturing in an incessantly altering world.

The demand remains to be on the market, doubtless below new challenges, and your organization´s potential to satisfy it could want some readjustment. Such rearranging might contain repositioning your international assets primarily based on proximity to the place they are going to be wanted, fairly than primarily specializing in price of manufacturing (follow generally known as “nearshoring” or “reshoring”).

Many North American corporations seeking to make use of a nearshoring or reshoring technique are learning Mexico as a attainable location for manufacturing. This text considers a number of of the important thing points that corporations ought to ponder when evaluating a closer-to-home technique and, particularly, concerns for doing enterprise in Mexico.

Select Your Markets and Areas for Manufacturing

Step one for any firm contemplating a reshoring or nearshoring technique is to find out the place on this planet lies the demand that your organization will probably be supplying. In different phrases, which shore?

Most corporations will start with their present markets; nevertheless, if they’re languishing or if an organization wants some room to develop, the logical method to go about it’s to search for new goal locations with an urge for food for precisely the kind of merchandise you’re providing. One easy approach to do that is to look into publicly obtainable data concerning the most important import markets on your firm’s manufacturing.

The Harmonized Tariff Schedule (HTS) teams international imports and exports on the similar six-digit ranges after which grows inside every nation as much as 10- or 12-digit numbers that permit a person to establish extra particulars in that six-digit tree trunk. As soon as corporations have recognized their potential untapped markets (largest importers of your merchandise), they’ll use publicly obtainable data to look into the nation´s nationwide obvious consumption, that’s, the results of home manufacturing plus imports minus exports, to find out the true dimension of the market.

The choice as to what markets an organization ought to goal will then drive the place to find manufacturing with a purpose to shorten provide strains. For corporations serving the U.S., however for which native manufacturing shouldn’t be an possibility, a logical selection is to think about Mexico as a producing location.

Mexico affords plenty of benefit as a nearshoring location — these are comparatively identified, but they make a compelling case for the nation when learn collectively:

  • Mexico advantages from entry certainty to the USMCA area, a uncommon benefit in current instances;
  • Mexico represents the lowest-cost manufacturing website inside USMCA;
  • Mexico’s workforce has important expertise in heavy and sophisticated manufacturing;
  • Import duties are virtually nonexistent, supply lead instances are arduous to match by every other nation on this planet, time zones largely coincide with these within the U.S., and principal manufacturing areas have direct flights out of the U.S.;
  • Mexico affords plenty of commerce facilitation packages which were confirmed to work all through the years;
  • Mexican-origin exports get pleasure from preferential tariff entry to the world´s most engaging vacation spot markets, as a result of prolonged internet of Free Commerce Agreements; and
  • The USMCA grants Mexican exports favorable remedy concerning potential commerce treatments and U.S. nationwide safety measures.

MWP

Take Benefit of the Manufacturing Efficiencies of A number of Nations on the Similar Time

When deciding on a location for manufacturing, there are lots of price parts that should be thought of. Along with price of labor, utilities, uncooked supplies, and so on., corporations should think about the impression of varied tariffs, duties, and non-tariff rules1 that can apply when importing materials/elements into the nation the place items are produced, plus any further prices related to export/import of the ultimate items.

Whereas some prices can’t be modified, there are methods by which corporations can have an effect on the tariffs, duties, and non-tariff rules to which they’re topic. This may be completed by way of the lawful “engineering” of Guidelines of Origin, that’s, working across the quantity of inputs, processing, and general transformation that foreign-made inputs should undergo with a purpose to be thought of Mexico-originated and enter the U.S. below a decreased — which may be as little as 0% — import responsibility charge, as per the USMCA.2

We must always at all times needless to say all cost-saving venues convey with them a naturally related stage of compliance red-tape that your organization must be totally observant of. This requires an orderly effort and, as your organization is normally busy as an lively producer, it ordinarily wants exterior skilled assist of some type.

Alternatives in Mexico to Exchange Tariff-Penalized Chinese language Items

Though some have argued that Vietnam and different nations could possibly be the winners within the U.S.-China commerce warfare3, Mexico has many benefits that will tip the percentages in its favor. It is very important be aware that in 20194 the sum of tariff charges and transportation price charges concerning imports into the US was 1.09% for Mexican merchandise, versus 14.28% for Chinese language merchandise, and 10.62% for Vietnamese merchandise.5 6

Most corporations would agree that by now the U.S. China commerce warfare has made the Chinese language-origin items much less engaging as a result of elevated tariffs. Current information holds that, as of mid-2022, the typical import responsibility charge for Chinese language exports was 19.3%,7 whereas for Mexico was nearly non-existent when complying with USMCA guidelines or origin necessities. Concerning transportation, the typical worth for delivery a container from China into the U.S. was roughly $10,000, whereas the associated fee for crossing a truck from Mexico into the U.S. could possibly be as little as $250 8 9

This creates a gap which may be stuffed by different exporting international locations. Dussel-Peters has recognized a listing of six-digit HTS subheadings — 77 in whole — by which the Chinese language share of imports into the US fell past its -3.51% common throughout 2017–2019, and by which the Mexican imports elevated above its 0.97% common throughout the identical interval, 2017–2019.10 The relevance of those 77 subheadings is that Mexico already counts with the for-export manufacturing capability to exchange the void left by the Chinese language imports; because of this the capability is already there for exporting into the U.S.

Lastly, Mexican manufacturing closely depends on commerce promotion packages, which require important periodic filings to the Authorities; 11 as well as, as Mexico makes use of over 1/3 of overseas content material 12 in its manufacturing exports — with electronics, automotive, and auto components standing out for his or her excessive ranges — it is important to be endorsed correctly with a purpose to preserve an orderly manufacturing operation within the nation.

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Particular permits, reference costs, quotas, earlier notices, and so on. could also be required for a product to be imported.

2 One other method to look into that is working across the general processing completed in Mexico to convey the semi-finished product to be accomplished within the U.S. and regarded as a Made in USA product.

3 Enrique Dussel-Peters “TRADE OPPORTUNITIES FOR MEXICO IN THE CONTEXT OF THE TENSIONS BETWEEN THE UNITED STATES AND CHINA SINCE 2017”. OCTOBER 2021. Tenaris Tamsa. p. 10.

4 Sadly, the newest obtainable information at this stage of element. More moderen info under.

5 Breakdown of the sum of tariff charges + transportation price charges concerning imports into the US from Mexico: tariff charge of 0.20% + transportation price charge of 0.89% = 1.09%. For imports from China: tariff charge of 9.81% + transportation price charge of 4.47% = 14.28%. And for Vietnamese merchandise: tariff charge of 6.56% + transportation price charge of 4.06% = 10.62%..

6 Dussel-Peters. “TRADE OPPORTUNITIES FOR MEXICO…” pp 9 and 10.

7 https://www.piie.com/analysis/piie-charts/us-china-trade-war-tariffs-date-chart, consulted Could 27, 2022.

8 https://www.businessinsider.com/shipping-costs-inflation-outlook-container-prices-high-supply-chain-crisis-2022-3, consulted Could 27, 2022.

9 https://www.ivemsa.com/mexico-competitive-manufacturing-costs/, consulted Could 27, 2022.

10 Dussel-Peters. “TRADE OPPORTUNITIES FOR MEXICO…” Appendix 9, https://dusselpeters.com/357.pdf, consulted Could 27, 2022.

11 Specifically the Maquila program (all Maquila authorizations have by now transformed into IMMEX permits which stand for Manufacturing, Maquila, and Export Companies Industries Program), the Sectorial Promotion Program (PROSEC), Eighth Rule Allow, Refund of Import Duties to Exporters (Disadvantage), Inspection at Origin (Clearance Registry), and Integral Firms Certification Scheme (Licensed Firms Registry).

12 36.4% in 2016. Dussel-Peters. “TRADE OPPORTUNITIES FOR MEXICO…” p. 12.

Again to the Desk of Contents

Strategic IP for Safety of Product Producers

           
           
           
           
           
           
AUTHOR           
Gary Solomon | [email protected]   

Product producers should aggressively defend their markets by managing a complete mental property technique. Relying on the character of the producer, patents, logos, copyrights, and/ or commerce secrets and techniques are important to lowering exterior competitors. A powerful IP program may dissuade current workers and executives from turning into a future competitor. Many producers have discovered the arduous approach that the price of not having a robust IP program is finally extra pricey than not having one.

Manufacturing merchandise requires an organization’s full dedication for profitable execution. Manufacturing is an all-encompassing exercise, beginning with conceiving a product to create, then performing analysis and improvement (R&D), and finally performing manufacturing. Relying on the character of the product being produced, the magnitude of complexity can vary from simplistic to futuristic. These in manufacturing know that regardless of how easy a product is to supply, the price of manufacturing may be important as a result of labor and supplies.

One threat {that a} producer usually can not management is competitors. Competitors is available in numerous varieties, starting from truthful rivals, who produce merchandise that carry out related features, to unscrupulous rivals, who “knock off” or copy a product. One other kind of competitor is the one which deliberately creates a product that could be very related however strategically avoids mental property of the product being produced (generally known as a “design-around”). One more kind of competitor is that of a former worker who learns (or steals) from you and competes utilizing what was discovered or inappropriately taken.

Whereas competitor threat is unpredictable, one method to reduce competitors is to strategically create, procure, and implement mental property. With the numerous prices of R&D, manufacturing, and market dangers, the power to guard the funding of making and advertising merchandise is vital. With the added threat of unscrupulous “knock-off” rivals (usually from non-U.S. international locations) and rivals that design-around mental property meant to guard the funding, the worth of a strategic mental property program is that rather more of an crucial.

Mental Property and Producer Varieties

Mental property consists of patents, logos, copyrights, commerce secrets and techniques, and know-how, and every of those property carry out completely different features that defend towards would-be and precise rivals. In defending producers, a holistic method to mental property is strongly advisable, which means one IP kind is usually not sufficient.

There are two varieties of producers thought of on this article: (1) contract producers who produce merchandise for entrepreneurs of merchandise and (2) model product corporations who both manufacture their very own merchandise or have the merchandise manufactured by contract producers. In every of those producer varieties, managing mental property is a crucial issue for cover of merchandise and/or manufacturing processes to supply the merchandise.

IP Issues for Defending Merchandise

Producers within the 21st century should be nimble and able to quick execution. Competitors has by no means been so fierce due to the proliferation of the worldwide economic system, together with typical market rivals, former producers, and future rivals who at present work throughout the firm, simply to call a number of.

Traditionally, corporations primarily confronted competitors throughout the U.S., however the ease of transportation and ecommerce makes anybody all over the world a possible competitor. Whereas know-how will increase the pace of product improvement, know-how, akin to 3D laser scanners and mass spectrometry, will increase the pace of reverse engineering and copying others’ merchandise.

Producer Competitors Challenges

For model product corporations, copycats can weaken or erode a product market or create important pricing pressures. And the extra in style the model, the quicker the rivals present up. To make enterprise much more difficult, the power of rivals to distribute knock-off or aggressive merchandise has grow to be a lot simpler on ecommerce websites on which producers or distributors create listings or digital shops.

For contract producers, competitor producers is usually a “race to the underside” by way of manufacturing margins, particularly if the contract producer frolicked and assets to develop manufacturing processes. By means of examples, for a glass producer that develops improved glass, an antenna producer that develops antennas, or a pharmaceutical producer that develops processes that enhance manufacturing yields, the price of creating these merchandise and processes may be very costly.

Patents can be utilized to guard the merchandise (e.g., glass, antennas, or medicines) but in addition could also be used to guard the techniques and processes for producing the merchandise. Patents defend the construction, operate, and decorative look of the bodily items, however may defend software program and processes to supply the merchandise. Logos are used to guard the names and logos of the products but in addition could also be utilized in some circumstances to guard the commerce gown or bodily look of the bodily items. Copyrights might defend software program used to function the bodily items (e.g., vehicle) but in addition could also be used to guard the gear used to supply the bodily items. Commerce secrets and techniques might defend the bodily items (e.g., formulation of medication or beverage), however may be used to guard how the bodily items are produced (e.g., strategies for producing glass or chemical compositions). Every of those mental property varieties are usable for the completely different aggressive conditions that each contract producers and model product corporations face.

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High quality Mental Property and Strategic IP Program to Defend Producers

The stakeholders of producers embrace buyers and workers. If rivals start to erode market share, the selection an organization has is to both implement their mental property rights or win the advertising sport. To implement mental property rights, nevertheless, high quality mental property and a strategic mental property program is usually wanted. “High quality mental property” signifies that high quality patents, sturdy logos, well timed filed copyrights, and well-managed commerce secrets and techniques exist or are no less than in course of. “Strategic mental property” signifies that mental property property are created through the early levels of product improvement (e.g., whereas R&D efforts are underway) and are rigorously crafted. Strategic mental property should proceed all through the lifetime of a product or manufacturing cycle (e.g., preserve a pending patent software to permit for different safety when the rivals arrive). Additionally, as new applied sciences are developed, new mental property must be created.

When rivals seem, a considerate evaluation of all sides of the mental property of a producer must be thought of for current infringement and for whether or not future IP may be procured primarily based on pending patent functions, frequent legislation logos or commerce gown, or frequent legislation (unregistered) copyrights. Mental property takes time to acquire — as little at 10 days for an expedited copyright submitting when an infringement exists, four-to-six months for an expedited patent software, a 12 months for a trademark, and probably years for patents, relying on the character of the invention. Therefore, a strategic and complete enforcement plan must be decided as early as attainable when a competitor seems.

It will be significant for corporations to finish some IP housekeeping to guard their concepts. These embrace:

  • Patent Project Provision: All executives, workers, and contractors/consultants must be below an obligation to assign mental property, most notably creative concepts. An inventor is the primary proprietor of the creative concepts, even when written right into a patent software paid for by an organization. With no written task, the invention proprietor is the worker and even government. If that worker or government leaves the corporate with the thought to both grow to be a competitor or be part of a competitor with out that innovation being assigned in writing, an instantaneous competitor might exist. Worse but, if that very same inventor licenses that unassigned innovation to a competitor (sure, it’s authorized!), an even bigger downside might exist for the stakeholders. Embrace the patent task in an employment settlement to assist deter executives, workers, and contractors from turning into rivals.
  • Copyrights: For merchandise that embrace software program, a copyright software must be filed with the U.S. Copyright Workplace for every and at every main replace. A copyright submitting inside three months of publication ensures statutory damages (and infrequently lawyer charges) within the occasion of infringement. Though copyrights are routinely assigned to the corporate by workers, contractors wouldn’t have the identical automated task, so absent a work-for-hire provision in a consulting settlement, for instance, the software program, pictures, movies, and so on. might not be owned by the corporate.
  • Commerce Secret Safety: Keep a listing of commerce secrets and techniques and restrict entry to people with a need-to-know standing within the occasion an worker, government, or different particular person leaves an organization with the “crown jewels” of the corporate. For software program, file a copyright software with redacted supply code to say commerce secret safety the place attainable.

Mental Property Ideas for Producers

Preserve Your Finger on the Pulse: Manufacturing and new product improvement occurs quick and has the power to alter manufacturing strategies and product specs quickly. In consequence, it is very important make sure the mental property for safeguarding the manufacturing strategies and product specs finally displays the ultimate product. Therefore, manufacturing and product managers must be tasked with making certain the IP stays present for every product.

Identification of IP Rights: Engineers are likely to dismiss their very own creativity by pondering no matter they develop is simply frequent sense, however options to issues through the improvement stage may be the distinction between nice IP safety and a competitor appropriating a good suggestion. As such, “patent harvesting” with engineering design groups is vital to adequately establish IP rights for producers.

Create an IP Sport Plan: High quality IP requires a stable sport plan to repeatedly monitor and defend priceless IP all through a product lifecycle, ranging from R&D to a number of generations of a product.

Avoiding Different IP: Avoiding IP owned by others is usually a problem, however as a part of the IP sport plan, materials discount in time-consuming and costly IP infringement of IP owned by others may result. Freedom-to-Function searches may be carried out on each the patent and trademark sides, and instructing workers to keep away from copying from third events might help to keep away from all areas of IP.

Right here’s a technique for higher integrating your IP program with product improvement to safe the IP earlier within the product lifecycle. Communications ought to happen in three phases:

1. After Idea Acceptance however Earlier than Design/Engineering: For shopper merchandise, as a result of the price of patent infringement is so excessive, it’s strongly advisable to conduct a Novelty Search and/or Freedom-to-Function Search to assist make sure the idea has progressive options which can be probably patentable and assist keep away from patent infringement. From the search outcomes, the patent counsel can give attention to creative options to guard the product and information the corporate on how finest to keep away from patent infringement. Contemplate submitting a provisional utility patent software and/or design software(s) right now.

2. After Engineering Design is Accomplished: As soon as the creative options are discovered, file patent software(s). These must be both provisional or non-provisional relying on the potential for the product to additional evolve. Funds may play an element within the determination. (Notice: for merchandise with distinctive decorative design options, file design software(s) to keep away from unintentional lack of worldwide rights).

3. After Prototyping is Full and Previous to Manufacturing or Product Announcement: Carry out a closing test to see if any further product options must be protected. Ensure the corporate’s workflow consists of IP lawyer signoff to make sure all patent filings are full earlier than asserting or releasing the product! Additionally, guarantee logos and copyrights are filed and patent and trademark clearance assessments are inside acceptable threat tolerances.

Conclusion

With no complete mental property program, product producers are topic to better competitors. Relying on the business of the producer, patents, logos, copyrights, and/ or commerce secrets and techniques are important to lowering exterior competitors. Producers also needs to preserve an IP program to dissuade current workers and executives from turning into future rivals. Many producers have discovered the arduous approach that the price of not having an mental property program is finally extra pricey than not having one.

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Enhanced U.S. Authorities Scrutiny of Provide Chains Will increase Compliance Expectations for U.S. Firms that Supply from or Function Overseas

           
           
           
           
           
           
AUTHOR           
Greg Husisian | [email protected]  

Regulators have despatched a number of current messages that the U.S. authorities expects corporations to topic their total provide chain to in depth due diligence, primarily based on state-of-the-art compliance measures. These embrace the issuance of an uncommon briefing by the Departments of State, Treasury, and Homeland Safety on the necessity for provide chain due diligence1, a particular advisory from the Division of Homeland Safety on provide chain due diligence and compliance finest practices, and a seven-figure penalty for a corporation not partaking in “full spectrum” provide chain due diligence2. The Workplace of Overseas Property Management (OFAC) has additionally applied a number of sanctions regimes that focus on the acquisition of products that depend on human trafficking or compelled labor, together with particular sanctions focused on the Xinjiang area of China. And at last, Customs now’s tasked with blocking items which can be the product of compelled labor, together with with regard to items from the Xinjiang area of China, which carry a rebuttable presumption that they’re the product of compelled labor, until the importer of report can present specified proof on the contrary. Items related to any sanctioned nation, firm, or individual can lead to financial sanctions points, together with massive potential penalties and even private legal responsibility. In consequence, it’s important for corporations that supply from or function overseas to interact in systematic opinions of their provide chains. These corporations mustn’t assume their sourcing from third events, and never their very own operations, will defend them from legal responsibility for violations of financial sanctions and different legal guidelines that focus on provide chains. With Customs now additionally taking actions to chop off imports from corporations that profit from compelled labor or human trafficking by blocking such items on the border, the regulatory and reputational stakes from a flawed provide chain have by no means been increased.

Firms that supply internationally accordingly have to take concrete steps to make sure they’re sourcing their inputs from clear sources. Thus, corporations that supply from or function overseas ought to strongly think about putting in the next compliance measures:

  • Performing a scientific threat evaluation to find out their key publicity areas for financial sanctions, compelled labor, and human trafficking violations throughout each the corporate and at its provide base.
  • Performing a worldwide evaluation of their phrases and circumstances for all distributors and suppliers to make sure they mirror present compelled labor, human trafficking, and financial sanctions regulatory necessities aimed toward suppliers.
  • Adopting procedures to require suppliers to signal annual certificates of compliance stating they are going to adjust to all U.S. financial sanctions, compelled labor, and human trafficking necessities.
  • Taking steps to confirm compliance by suppliers with compelled labor and human trafficking necessities, together with by way of requiring suppliers to offer proof of ample and lawful wages paid, compliance with all U.S., EU, Australian, and different relevant compelled labor and human trafficking necessities.
  • Guaranteeing suppliers promulgate compelled labor and human trafficking contractual necessities to all sub-suppliers and take concrete steps to comply with by way of on the efficient implementation of those necessities.
  • Conducting provider audits that embrace (1) verification of compliance with all compelled labor and human trafficking necessities, (2) verification of fee data associated to manufacturing supplies, and (3) the evaluation of provider financial institution statements.
  • Offering particular scrutiny and oversight of corporations that supply from high-risk jurisdictions akin to China, India, and different areas the place respect for the rule of legislation is decrease and violations extra frequent.
  • Implementing inner controls and oversight techniques of firm operations and provide chains to make sure compliance tasks are adequately carried out.
  • Guaranteeing all screening of suppliers for potential matches to OFAC, EU, and different financial sanctions lists of embargoed individuals is happening usually, and all suppliers are screening their sub-suppliers for a similar kind of potential matches.
  • Offering financial sanctions coaching for key workers in the US and in overseas operations that supply overseas concerning U.S. sanctions rules and different related U.S. legal guidelines and rules.
  • Disseminating typical purple flags that may point out a violation of the financial sanctions, compelled labor, and human trafficking rules.

As a closing be aware, OFAC stresses not solely compliance dedication by senior administration, together with senior executives and the board of administrators, but in addition the dedication of “ample assets” to compliance. The conduct of provider audits shouldn’t be cursory however fairly must be the kind of evaluation that’s prone to catch points even by suppliers who is likely to be taking steps to cover their violations. With OFAC and Customs taking concrete steps to implement these newer supply-side rules, it’s important that corporations that supply from and function overseas use risk-based rules to establish areas of main threat and use this threat evaluation to information their audit groups to conduct applicable audits.

The significance of monitoring the availability chain for potential compelled labor is bolstered by new laws, efficient June 21, 2022, which bans imports of all items made in complete or partly from any good from the Xinjiang Uyghur Autonomous Area (“XUAR”) in China. This happens pursuant to the Uyghur Compelled Labor Prevention Act (“UFLPA”), which deems all items mined, produced, or manufactured within the XUAR to be produced by compelled labor.

Below the ULFPA, imports of all items mined, produced, or manufactured wholly or partly within the XUAR, or by entities on the UFLPA Entity Listing, are presumed to be made with compelled labor and can’t enter the US until the importer can rebut that presumption. Notably, any items from China are actually below elevated scrutiny by Customs, as a result of the Act covers any items that even “partly” are manufactured utilizing inputs from the XUAR. As a result of it’s common for items made by way of Asia to make use of Chinese language elements, Customs will probably be extra intently scrutinizing all imports from Asia to find out if they need to be seized on the U.S. border.

Customs is emphasizing the significance of U.S. importers of report conducting cautious due diligence, efficient provide chain administration, compelled labor compliance checks and audits, and different measures demonstrating that items originating in China, and even from different international locations that use Chinese language-origin components and elements, don’t come from the XUAR or in any other case profit from compelled labor or human trafficking.

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Customs and the Division of Homeland Safety have issued two paperwork to assist importers of report comply with by way of on advisable compliance measures:

  • Customs has revealed “U.S. Customs and Border Safety Operational Steerage For Importers,” which lays out each how Customs will apply the rebuttable presumption that merchandise from the XUAR depend on compelled labor, what kind of proof may be used to rebut the presumption, and the way Customs will determine when to grab items that fail to beat the presumption. Customs additionally offers particulars concerning the due diligence, provide chain tracing, provide chain administration, and commodity-specific provide chain tracing documentation that’s required. https://www.cbp.gov/websites/default/information/property/ paperwork/2022-Jun/CBP_Guidance_for_Importers_ for_UFLPA_13_June_2022.pdf.
  • The Division of Homeland Safety has issued its “Technique to Forestall the Importation of Items Mined, Produced, or Manufactured with Compelled Labor within the Folks’s Republic of China,” which particulars the U.S. Authorities’s compliance expectations within the areas of due diligence, efficient supply-chain tracing, and provide administration measures for corporations importing from China. https://www.dhs.gov/websites/default/ fi les/2022-06/22_0617_fletf_ufl pa-strategy.pdf.

Notably, Customs has requested 70.3 million for fiscal 12 months 2023 so as to add enforcement assets to implement this legislation. In consequence, any corporations that import ought to count on aggressive Customs scrutiny of imports from China – and even from Asia normally – to find out whether or not the products include components and elements with a hyperlink to the XUAR. Importers accordingly ought to rigorously evaluation their provide chain compliance measures to make sure that they’re suitable with these new authorized necessities.

As a closing cautionary be aware, it is also vital to notice the intersection of those supply-chain-specific necessities with normal adjustments within the OFAC financial sanctions rules. The invasion of Ukraine, and the response of the US to implement very strict sanctions on Russia and Belarus, solely underscore the significance of the correct administration of worldwide provide chains. Russia, particularly, lengthy has been a significant provider of such items as vitality merchandise, aluminum, copper, and different uncooked supplies. Many of those imports are actually both blocked for import (e.g., vitality merchandise) or may be imported solely by scrupulously following the brand new financial sanctions necessities. Any firm that depends on provides from Russia — even when these items aren’t imported into the US — must evaluation rigorously all such provide preparations to make sure their compliance not solely with the U.S. import and financial sanctions restrictions but in addition the coordinated responses of the EU and different governments. All of the cautions the U.S. authorities raises about doing “full spectrum” due diligence apply equally to the brand new sanctions now in place towards Russia and Belarus.

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The Division of Treasury (which accommodates OFAC), the Division of State, and the Division of Homeland Safety issued a particular advisory titled “Dangers for Companies with Provide Chain Hyperlinks to North Korea,” which highlights the dangers of financial sanctions evasions and sourcing from corporations that depend on compelled labor. https://www.cbp.gov/websites/default/information/property/paperwork/2018-Aug/Northpercent20Koreapercent20Sanctionspercent20_percent20Enforcementpercent20Actionspercent20Advisory.pdf.

2 OFAC introduced a $996,080 settlement with a Californian cosmetics firm, e.l.f. Cosmetics, Inc. (ELF), for alleged violations of the North Korean Sanctions Rules primarily based on the corporate “unknowingly” importing 156 shipments of false eyelash kits from two suppliers in China that contained supplies independently sourced by these suppliers from North Korea. https://www.treasury.gov/resource-center/sanctions/CivPen/Paperwork/20190131_elf.pdf. 

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2022 Antitrust Outlook for Producers — Important Modifications Below the Biden Administration

           
           
           
           
           
           
           
AUTHOR          
Greg Neppl | [email protected]     

The Biden Administration is pursuing aggressive antitrust legislation enforcement. This text identifies some points to look at.

On July 9, 2021, President Biden issued an government order on “Selling Competitors within the American Economic system.” Whereas directed at numerous federal businesses and departments, the order particularly requires “vigorous” antitrust enforcement by our two federal antitrust businesses, the Division of Justice – Antitrust Division (DOJ) and the Federal Commerce Fee (FTC). Whereas traditionally U.S. antitrust enforcement has been marked extra by continuity than abrupt change, we are actually seeing shifts in company course that might have an effect on many companies and industries, together with producers.

2022 M&A Associated Developments

Merger and acquisition exercise by producers is usually excessive, as corporations search to develop progressive merchandise, broaden product portfolios, set up new provide chains (or make vertical acquisitions of distributors and suppliers), and put money into or purchase applied sciences to place themselves to higher compete with one another, in addition to with new entrants (usually funded by enterprise capital).

How the antitrust businesses will method M&A exercise amongst producers could possibly be influenced by the various antitrust adjustments proposed (or already imposed) below the Biden Administration. These matters embrace:

  • Potential Modifications to the Horizontal and Vertical Merger Pointers: President Biden’s government order on selling competitors known as on the FTC and DOJ to “evaluation the horizontal and vertical merger pointers and think about whether or not to revise these pointers.” A subsequent FTC/DOJ press launch, dated July 9, 2021, said that the “present pointers deserve a tough look to find out whether or not they’re overly permissive.” Hypothesis abounds as to how the businesses may search to revise these pointers. Market share caps, the elimination of the Herfindahl-Hirschman Index (HHI) as a measure of market focus, and making use of a “public welfare” normal (rather than the long-established “shopper welfare” normal) because the antitrust guidepost for figuring out anticompetitive mergers have all been proffered by commentators. Some advocates have argued {that a} “public welfare” normal ought to embrace consideration of a variety of points akin to results on labor, company governance points, environmental considerations, racial impacts, and wealth inequality considerations. The FTC reportedly has requested data in merger opinions on matters like unionization, fairness, franchising, and environmental, social, and governance points (ESG), which would seem unrelated to conventional antitrust concerns and the “considerably reduce competitors” normal for merger challenges set forth by statute in Part 7 of the Clayton Act. Such an enlargement of the cognizable points related to merger opinions may considerably alter the predictability of company merger enforcement efforts. Such revisions, if made — or even when utilized by the antitrust businesses informally, as an train in company “enforcement discretion” — may mark a change in merger enforcement, with impacts on strategic planning, enterprise confidence, and enterprise valuations.
  • Vertical Merger Pointers Withdrawn by the FTC: In September 2021, the FTC voted unilaterally to withdraw its approval of the Vertical Merger Pointers adopted collectively by the FTC and DOJ in June 2020. (Thus far, DOJ has not equally withdrawn its approval of those pointers.) The utility of this company enforcement steerage to companies and the antitrust bar is due to this fact in query, no less than in transactions pending FTC evaluation.
  • FTC “Casual Interpretations” of HSR Guidelines are Below Evaluation: For many years the FTC’s Premerger Notification Workplace (PNO) has supplied common casual steerage to the antitrust bar on deciphering and making use of the merger notification guidelines set forth within the Hart-Scott-Rodino Antitrust Enhancements Act of 1976 (HSR) and implementing rules. In a weblog submit dated August 26, 2021, nevertheless, the FTC’s Bureau of Competitors said a priority that these “casual interpretations might not mirror trendy market realities or the coverage place of the Fee.”1 Whereas HSR casual steerage remains to be obtainable, the weblog submit famous that the FTC is “at present within the strategy of reviewing the voluminous log of casual interpretations to find out one of the best path ahead.”
  • FTC “Warning Letters”: The FTC introduced in August 2021 that it could ship letters to events to transactions below FTC investigation stating that, regardless of imminent expiration of the HSR ready interval, the FTC investigation stays open, and if the events select to shut the transaction, they’re “doing so at their very own threat.” The authorized significance of such a warning letter in any subsequent FTC problem to a consummated transaction has but to be examined. At a minimal, nevertheless, such letters might inject deal uncertainty by probably delaying closings and lengthening the timeframe for deal opinions past the statutory ready interval established by the HSR Act.
  • Antitrust Issues with “Know-how” Acquisitions: President Biden’s government order on selling competitors cited “dominant tech corporations” as “undermining competitors and lowering innovation” by way of “killer acquisitions,” together with the acquisition of “nascent rivals.” Whereas primarily centered on know-how acquisitions by “Massive Tech” platforms, this know-how acquisition concern may apply to different industries. As cutting-edge know-how turns into more and more vital to many manufacturing companies, know-how acquisitions may obtain better company scrutiny.

2022 Extra Antitrust Developments

Modifications below the Biden Administration lengthen past M&A. A few of these embrace:

  • Antitrust Issues with “Labor Markets”: Many manufacturing companies are labor intensive, and the Biden Administration has signaled that “labor markets” are a subject of excessive antitrust curiosity. The FTC and DOJ have lately held plenty of workshops addressing competitors points affecting labor markets and the welfare of employees. Matters mentioned included labor monopsony; the usage of restrictive clauses in labor agreements, together with non-competes and non-disclosure agreements; data sharing and benchmarking exercise amongst competing employers; and the connection between antitrust legislation and collective bargaining efforts within the “gig economic system.” Worker non-competes had been a specific focus of those workshops. DOJ has (even previous to the Biden Administration) pursued corporations engaged in worker “no-poach” agreements, typically as a legal antitrust violation. Producers will wish to comply with Biden Administration labor coverage adjustments, together with the attainable use of antitrust legislation to effectuate labor coverage adjustments.
  • Antitrust Curiosity in Provide Chain Disruptions: Many producers have advanced provide chains. On November 29, 2021, the FTC voted to conduct a research of whether or not and the way the availability chain interruptions of the previous 12 months have affected competitors. The research will look to reply two central questions which may be of curiosity to producers: (i) why these disruptions occurred and (ii) whether or not they’re resulting in particular “bottlenecks, shortages, anticompetitive practices, or contributing to rising shopper costs.” In response to the FTC announcement, an order for detailed data will probably be despatched to 9 massive retailers, wholesalers, and shopper good suppliers in the US. That mentioned, the FTC actually may broaden this probe to incorporate different corporations, together with producers in numerous industries.
  • Authorizations for FTC Antitrust Investigations: In July and September 2021, the FTC — by way of some 15 resolutions — licensed a obligatory course of for FTC investigations over a variety of antitrust matters, together with proposed and consummated mergers, suspected monopolization, and suspected abuse of mental property. Below these resolutions, a single FTC commissioner might authorize FTC workers attorneys to problem obligatory course of (akin to civil investigative calls for and subpoenas). Beforehand, such prior delegations utilized nearly completely to shopper safety investigations, versus antitrust investigations. With full Fee oversight of antitrust investigations rescinded, there could also be “much less accountability and extra room for errors, overreach, price overruns, and even politically-motivated determination making,” in keeping with FTC Commissioners Phillips and Wilson of their dissenting assertion of September 14, 2021.2Whether or not and the way this reducing of the brink for the FTC to launch antitrust investigations may have an effect on producers is unknown, nevertheless it does mirror a change price contemplating. As each the FTC and DOJ have authority to evaluation and problem consummated offers — even offers that had been notified and acquired HSR clearance — one attainable final result of those resolutions is to extend the variety of investigations of consummated transactions.
  • Prison Prosecution of Monopolists? Whereas probably legal, DOJ has, in current historical past, pursued monopolization circumstances civilly below Part 2 of the Sherman Act, and reserved legal prosecutions for cartel conduct challenged below Part 1 of the Sherman Act. However, Deputy Assistant Legal professional Normal Richard Powers said on March 2, 2022 that DOJ is ready to convey legal prices for monopolization “if the info and the legislation lead us to the conclusion {that a} legal cost primarily based on a Part 2 violation is warranted.” Had been DOJ to pursue this path, it could mirror a substantial change to DOJ’s legal antitrust enforcement practices.

The Persevering with Dangers from Cartel Conduct

The developments mentioned above are largely pushed by the Biden Administration, though one antitrust threat that transcends administration adjustments and partisan strains is cartel conduct. We can not overlook the teachings of DOJ’s long-running investigation of auto components suppliers, one of many largest legal investigations ever pursued by its Antitrust Division, which resulted in prices towards some 48 corporations and yielded virtually $3 billion in legal fines. Settlements of sophistication motion and different non-public plaintiff claims reportedly exceeded $1 billion.

Whereas DOJ’s Antitrust Division has lengthy pursued each corporations and people criminally in cartel circumstances, the Biden Administration’s Deputy Legal professional Normal Lisa Monaco introduced in October 2021 that DOJ would improve efforts to cost people in white-collar prosecutions. It’s possible you’ll recall the well-known “Yates memo” from 2015 — issued by then Deputy Legal professional Normal Sally Yates — asserting stepped-up efforts to prosecute people. The October 2021 announcement seems to resume and reinvigorate this give attention to prosecuting people.

Producers might have little management over Biden Administration-initiated adjustments to the merger and non-merger enforcement insurance policies mentioned above. An efficient antitrust compliance program, nevertheless, pays actual dividends by detecting and deterring cartel conduct. Although DOJ traditionally didn’t give credit score for antitrust compliance packages in making charging selections and sentencing suggestions, it introduced adjustments to each insurance policies in July 2019. These adjustments enhance the authorized advantages of implementing an efficient antitrust compliance program.

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Reforming the Pre-Submitting Course of for Firms Contemplating Consolidation and a Change within the Remedy of Debt, Federal Commerce Fee, August 26, 2021, https://www.ftc.gov/enforcement/competition-matters/2021/08/reforming-pre-filing-process-companies-considering-consolidation-change-treatment-debt (Final Accessed Could 25, 2022).

2 Dissenting Assertion of Commissioners Noah Joshua Phillips and Christine S. Wilson Concerning the Issuance of Eight Omnibus Resolutions, U.S. Federal Commerce Fee, Sep. 14, 2021, https://www.ftc.gov/system/information/paperwork/public_statements/1596256/p859900njpcswomnibusdissent.pdf (Final Accessed Could 25, 2022).

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The Newest Patent Developments in China: What Producers Must Know

           
           
           
           
           
           
AUTHORS           
Chase Brill | [email protected]   
Roberto Fernandez | [email protected] 

Introduction

For corporations that promote in China, manufacture in China, or face rivals manufacturing in China, Chinese language patents are an more and more essential aspect of a robust patent portfolio. Whereas many producers have introduced plans to diversify their provide chains away from China in view of persistent disruptions through the COVID-19 pandemic, these efforts have been sluggish to materialize. Within the meantime, China continues to expertise explosive progress in each patent filings and enforcement proceedings, far outpacing the U.S. This enhance is pushed by each the continued reliance on Chinese language operations in international provide chains and by concerted efforts of Chinese language lawmakers to strengthen patent rights and enhance consistency in enforcement proceedings. This text summarizes these current efforts at each the China Nationwide Mental Property Administration and within the Chinese language court docket system.

Patent Submitting Traits in China

China affords three distinct varieties of patent safety: invention patents, utility fashions, and industrial designs.

The invention patent is analogous to a U.S. utility patent. It’s topic to a rigorous examination course of for each novelty and creative step, which might take 2–5 years to finish, and has a 20-year time period.

The utility mannequin has no equal within the U.S. and is usually missed by U.S. producers when setting submitting methods. It’s topic to a shortened examination course of for novelty solely, usually grants in 6–12 months, and has a 10-year time period. It requires decrease submitting charges and annuities, and is tougher to invalidate as a result of its decrease inventiveness requirement.

One threat {that a} producer usually can not management is competitors. Competitors is available in numerous varieties, starting from truthful rivals, who produce merchandise that carry out related features, to unscrupulous rivals, who “knock off” or copy a product. One other kind of competitor is the one which deliberately creates a product that could be very related however strategically avoids mental property of the product being produced (generally known as a “design-around”). One more kind of competitor is that of a former worker who learns (or steals) from you and competes utilizing what was discovered or inappropriately taken.

Whereas competitor threat is unpredictable, one method to reduce competitors is to strategically create, procure, and implement mental property. With the numerous prices of R&D, manufacturing, and market dangers, the power to guard the funding of making and advertising merchandise is vital. With the added threat of unscrupulous “knock-off” rivals (usually from non-U.S. international locations) and rivals that design-around mental property meant to guard the funding, the worth of a strategic mental property program is that rather more of an crucial.

The commercial design is much like a U.S. design patent, protecting solely the outward look of an article of manufacture, and has a 15-year time period (prolonged from 10 years in June of 2021).

Like U.S. utility functions, Chinese language invention functions are usually revealed 18 months after submitting. Examination of the numbers of Chinese language invention patents revealed reveals a pointy enhance in 2021 in comparison with each 2020 and 2019. This enhance was not replicated within the U.S., which as an alternative remained stagnant.

Determine 1: Variety of Invention/Utility Patent Functions Printed per 12 months (Supply: TotalPatent One®)

Whereas U.S. publications decreased in 2021, Chinese language publications rose greater than 13%. In fact, as a result of 18-month publication delay, these numbers mirror 2019 software filings, and it’s doubtless that 2022 publication numbers will lower as a result of begin of the COVID-19 pandemic in 2020.

Utility fashions, nevertheless, noticed no such slowdown. The variety of utility fashions granted ballooned from about 2.4 million in 2020 to over 3.1 million in 2021. The 2021 numbers mirror 2020 filings, which means that the variety of utility mannequin filings elevated in spite of the pandemic. Whether or not this represents an general enhance in patent filings or as an alternative a shift from invention functions to utility mannequin functions (e.g., as a cost-savings measure as a result of decreased 2020 IP budgets) is but to be seen. Both approach, utility fashions advantage critical consideration for producers, notably these whose merchandise have decrease lifespans.

The elevated exercise in China additionally extends to design patents. In 2021, the variety of design patents granted in China was practically 24 instances the quantity granted within the U.S.

Determine 2: Variety of Design Patents Granted per 12 months (Supply: TotalPatent One®)

China’s current adjustments to design patent legal guidelines, akin to rising the design patent time period from 10 years to fifteen years, doubtless indicators that China’s dominance in design patent filings will proceed in 2022 and past. Importantly, producers mustn’t fall for the misperception that design patents are restricted to shopper merchandise; quite the opposite, design patents can be found on any merchandise, no matter the place they fall throughout the general manufacturing course of, and no matter whether or not they’re seen to the tip shopper. They’re notably helpful to forestall knockoffs, which stay a pervasive downside in China. And apart from being enforceable in Chinese language courts, design patents can be utilized to facilitate takedowns on Alibaba and Amazon, considerably including to their worth.

Traits in Patent Enforcement in China

The speedy enhance in Chinese language patent filings has been accompanied by the same enhance in patent enforcement. China’s efforts to strengthen patent rights might have inspired producers to interact in additional enforcement in China whereas additionally fueling the submitting of further patent functions to create future enforcement alternatives. One other issue doubtless driving elevated enforcement and filings is the current change to Chinese language patent legal guidelines, which offers for as much as quintuple damages for intentional infringement, elevated statutory damages from 1 million yuan to five million yuan (roughly $780,000 USD), and a rise within the statute of limitations from two years to 3 years.1 Regardless of the purpose, the chance for enforcement in China appears to be like fully completely different than it did a decade in the past.

In 2019, China created the IP Tribunal, centered on centralizing appeals of selections concerning most IP disputes and serving a operate considerably analogous to the U.S. Court docket of Appeals for the Federal Circuit. The Tribunal is a focus of China’s coverage adjustments, supposed to enhance the standard of IP safety and standardize enforcement by offering specialised judges for listening to disputes. Certainly, all the judges have no less than a grasp’s diploma in a science subject, and over 30% maintain PhDs.

After finishing its three-year pilot program, China has continued to put money into the Tribunal and heralds its improvement as deepening reform in IP safety. Of the practically 2,600 newly-received non-administrative circumstances in 2021, 22% had been for disputes involving invention patents and 31% had been for disputes involving utility mannequin patents.2

Just like the interaction between patent legislation and antitrust legislation within the U.S., Chinese language patent disputes usually contain “monopoly” legal guidelines. Monopoly circumstances proceed to see heightened significance in China. In 2021, the Tribunal determined a case the place it dominated {that a} settlement settlement to a patent infringement lawsuit was not narrowly tailor-made to the infringement dispute and as an alternative prolonged to actions that had been supposed to limit and exclude market competitors.3 In reaching this conclusion, the Tribunal held that the settlement contained restrictions that had nothing to do with the scope of safety of the patent in query. The takeaway from this case is that patent agreements in China are prone to come below elevated scrutiny from an anti-monopoly perspective and must be deliberately centered on the scope of safety supplied by the patents at problem. Producers with IP agreements in China could be clever to evaluation them in gentle of this determination.

Other than administrative and judicial arenas, Chinese language patents may also be enforced in a specialised system created by Alibaba, the Chinese language e-commerce large.

This method requires a patent proprietor to register its rights on Alibaba after which file a grievance figuring out infringement occurring on Alibaba. In 2021, greater than 640,000 logos, copyrights, and patents had been registered on Alibaba.4 Whereas Alibaba didn’t launch what number of of those had been patents, the numerous utilization of Alibaba throughout all IP warrants consideration by patent house owners.

What to Look ahead to in 2022 and Past

As in most authorized arenas, the panorama in China’s patent system is consistently shifting, and the following few years look to be motion packed. First, the approaching months will see the continued improvement of an ongoing dispute on the World Commerce Group (WTO), between China and the European Union (EU), concerning the power of Chinese language courts to affect proceedings in different international locations by assessing fines on the events.5 The EU has taken problem with China’s coverage of “prohibit[ing] patent holders from asserting their rights in different jurisdictions by commencing, persevering with or implementing the outcomes of authorized proceedings earlier than a non-Chinese language court docket.” In response to a Request for Consultations issued to China by the European Union, “[t]he prohibition materialises by way of Chinese language courts issuing so known as ‘anti-suit injunctions’ enforced by way of each day penalties in case of infringement . . . .” Critics argue that China applied this coverage with a purpose to shackle litigants to Chinese language courts, which might present unfair benefits to Chinese language entities. Proponents argue that the coverage ensures the integrity of the Chinese language courts to resolve disputes with out concern of discussion board procuring. A response from China is due on the WTO within the coming weeks. Except this coverage adjustments, Chinese language patent holders are prone to think about the good thing about enforcement in China on the threat of being precluded from enforcement exterior of China.

China additionally lately joined WIPO’s Hague system for the Worldwide Registration of Industrial Designs, making it attainable for an applicant to acquire design rights in China and different Hague international locations utilizing a single software. With the prolific nature of design patent software filings in China, the Hague system may quickly see a radical uptick in utilization.

2022 additionally marks the efficient begin of the Regional Complete Financial Partnership (RCEP) — a Free Commerce Settlement between China, India, Australia, New Zealand, Vietnam, Cambodia, Myanmar, Japan, South Korea, Thailand, Malaysia, the Philippines, Indonesia, Brunei, Laos, and Singapore — forming the most important buying and selling bloc by whole international home product.6 Whereas deferring to the Commerce-Associated Features of Mental Property Rights (TRIPS) Settlement, the RCEP consists of in depth IP provisions, one among which being that “every Occasion shall present that any individual might do an act that might in any other case infringe a patent if the act is completed for experimental functions referring to the subject material of a patented invention.”7 The event of this and different provisions of the RCEP within the years to come back is prone to have a big impression on international IP technique.

China’s Nationwide Mental Property Administration (CNIPA) has proposed revised examination pointers for implementing the amended patent legal guidelines,8 and a choice on the revisions might are available 2022. The proposals embrace:

  • Eliminating the 15-day mail delay “grace interval” for deadlines to reply to communications from CNIPA;
  • Allowing delayed examination of a design patent software for as much as 36 months;
  • Allowing examiners to require submission of a video file exhibiting animation of a graphical person interface claimed in a design patent software;
  • Implementing inventiveness examination (along with the present novelty examination) in utility mannequin functions;
  • Precluding utility fashions from receiving patent time period adjustment (PTA), which turned obtainable to utility fashions below the modification to the patent legislation entered in 2021 (albeit in restricted circumstances);
  • Precluding PTA for invention patents filed concurrently with utility mannequin functions; and
  • Delaying examination of an invention software that’s filed concurrently with a utility mannequin software.

These revisions to the examination pointers, mixed with the opposite upcoming adjustments mentioned above, point out that 2022 will probably be a 12 months of change in Chinese language follow. Producers could be clever to remain abreast of those points and others in order to maximise the worth of their international patent portfolio.

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Determination of the Standing Committee of the Nationwide Folks’s Congress on Amending the Patent Regulation of the Folks’s Republic of China, Xinhua Information Company, October 18, 2020, http://www.gov.cn/xinwen/2020-10/18/content_5552102.htm (Final Accessed Could 20, 2022).

2 Annual Report of the Mental Property Tribunal of the Supreme Folks’s Court docket (2021), Mental Property Court docket of the Supreme Folks’s Court docket, February 28, 2022, https://ipc.court docket.gov.cn/zh-cn/information/view-1783.html (Final Accessed Could 20, 2022).

3 (2021) Supreme Court docket Zhimin Zhong No. 1298; Supreme Folks’s Court docket of the Folks’s Republic of China; Civil Judgment, Mental Property Court docket of the Supreme Folks’s Court docket, March 21, 2022, https://ipc.court docket.gov.cn/zh-cn/information/view-1873.html (Final Accessed Could 20, 2022).

4 2021 Annual Report on Mental Property Safety, Alibaba Group, https://information.alicdn.com/tpsservice/8f603e2d95fbb318d22a7315c9833e80.pdf (Final Accessed Could 20, 2022).

5 Request for Consultations by the European Union, February 18, 2022, https://commerce.ec.europa.eu/doclib/docs/2022/february/tradoc_160051.pdf (Final Accessed Could 20, 2022).

6 RCEP: Asia-Pacific Nations Type World’s Largest Buying and selling Bloc, BBC, November 16, 2020, https://www.bbc.com/information/world-asia-54949260 (Final Accessed Could 20, 2022).

7 Regional Complete Financial Partnership (RCEP) Settlement, Article 11.40 (November 15, 2020).

8 Discover on Public Solicitation of Feedback on the Draft Revised Pointers for Patent Examination (Draft for Feedback), China Nationwide Mental Property Administration, August 3, 2021, https://www.cnipa.gov.cn/artwork/2021/8/3/art_75_166474.html (Final Accessed Could 20, 2022).

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Subscription Mannequin Regulation Traits and Takeaways

           
           
           
           
           
           
AUTHORS           
Kendall Waters | [email protected]   
Erik Swanholt | [email protected] 

Subscriptions are an indispensable instrument for recurring-revenue enterprise fashions, together with amongst purchasers within the manufacturing sector providing services or products subscriptions, but their rising reputation has been a goal for regulators and litigants alike. 2022 is poised to proceed shaping this rising panorama, that includes additional regulatory frameworks, federal and state enforcement, and continued potential for personal litigation. Retaining a pulse on the shifting regulatory framework and principal shopper safety themes on this area might help manufacturing corporations with subscription mannequin choices put together for the street forward.

Federal Regulatory Framework for Subscription Fashions

Current developments from the Federal Commerce Fee (FTC), together with an enforcement coverage assertion and press launch, sign an intent to escalate enforcement exercise towards subscription auto-renewal choices, extra formally known as “damaging choices.” Adverse choices embrace choices the place there’s a “time period or situation below which the vendor might interpret a shopper’s silence or failure to take affirmative motion to reject a very good or service or to cancel the settlement as acceptance or persevering with acceptance of the provide.” The FTC categorizes a few of these choices as “unlawful darkish patterns that trick or lure customers into subscription providers.” Whereas recognizing that assessments are individualized, the FTC has supplied fundamental pointers for avoiding “unlawful darkish patterns,” together with:

  • Clearly and conspicuously disclosing materials phrases, together with the existence of the damaging possibility provide, the provide’s whole price, and how one can cancel the provide;
  • Disclosing these materials phrases earlier than customers conform to the acquisition;
  • Acquiring customers’ categorical knowledgeable consent to such affords; and
  • Avoiding unreasonable limitations to cancellation.

Current FTC enforcement actions present extra steerage on how manufacturing corporations can implement compliant damaging possibility options. Within the late spring of 2022, the FTC introduced a settlement with an internet platform primarily based, partly, on the corporate’s provision of subscription plans that had been tough to cancel. Whereas case-specific, that settlement order once more underscored key compliance options accredited by the FTC. Shoppers’ affirmative consent must be obtained individually from every other consent. For on-line and written choices, the patron should affirmatively settle for the damaging possibility characteristic (together with by test field, signature, or one other comparable methodology). For disclosures to be “clear and conspicuous,” corporations ought to give disclosures, in the identical method as the unique communications, that are simply noticeable, unavoidable, and comprehensible. Whereas corporations ought to present order affirmation for the renewed subscription, that discover ought to include solely the necessities and mustn’t embrace advertising supplies. To make cancellations simple, customers who subscribed orally shouldn’t be positioned on maintain by customer support for greater than 10 minutes, and firms ought to return any shopper’s voicemail inside one enterprise day.

Developments for State Regulation of Subscription Fashions

Consistent with federal steerage, state auto-renewal legal guidelines more and more require companies to inform customers clearly and conspicuously about what customers are signing up for, acquire shopper’s affirmative consent to subscribe, present acknowledgment of the order, and provide a easy technique of cancellation. Nonetheless, the evolving patchwork of state statutes usually impose distinctive and altering necessities on consumer-facing companies, together with manufacturing corporations providing services or products subscription fashions. The next states have lately enacted new or revised auto-renewal statutory frameworks:

California: California has new necessities for its auto-renewal legal guidelines that can take impact in mid-2022. California already required “clear and conspicuous” discover of the subscription provide’s phrases, a shopper’s affirmative consent to these phrases, and an easy means for cancellation.

The amended legislation introduces reminder discover and on-line termination necessities and goes into impact on July 1, 2022.

In sure cases, corporations should ship reminder notices that clearly and conspicuously state the next:

  • The subscription will routinely renew until the patron cancels;
  • The size of the renewal interval and any further phrases;
  • Strategies for shopper cancellation;
  • For digital discover, both a hyperlink to cancel or one other moderately accessible digital methodology to facilitate cancellation; and
  • Firm’s contact data.

For free trial intervals longer than 31 days, typically an organization should ship the patron a reminder discover between 3 and 21 days earlier than the tip of the trial interval.

For a subscription with an preliminary time period of 1 12 months or extra, the corporate should ship the patron a reminder discover between 15 and 45 days earlier than the tip of the preliminary time period.

For on-line termination, the net cancellation methodology should permit cancellation at will and with out partaking in any additional steps that hinder or delay the patron’s potential to terminate instantly. This requirement is extra stringent than these in different jurisdictions. Firms ought to provide no less than one of many following:

  1. a “prominently situated direct hyperlink or button,” or
  2. a pre-written and instantly accessible termination e-mail {that a} shopper can ship to the corporate with out having so as to add data.

Colorado: Colorado’s current legislation additionally requires clear and conspicuous phrases; a written acknowledgment with the provide phrases, cancellation coverage, and cancellation steerage; and a easy means for cancellation. Companies should embrace an internet hyperlink that gives customers with detailed automated renewal provide data.

Delaware: Delaware’s legislation applies the place damaging possibility packages have an preliminary time period of 1 12 months or extra, with a renewal interval of no less than one month. Delaware requires clear and conspicuous phrases, together with disclosure of automated renewal phrases, renewal reminders, and a easy means for cancellation. Earlier than submitting any lawsuit, Delaware requires customers to provide discover to the vendor and a chance to remedy.

Illinois: Illinois’s statutory regime now applies to all automated renewal packages fairly than simply annual packages. Illinois requires discover, cancellation, and affirmative consent necessities corresponding to different states’ necessities.

Idaho: Efficient January 2023, Idaho will impose sure discover and cancellation necessities for subscriptions with a time period of 12 months or longer. Idaho requires clear and conspicuous disclosure of automated subscription renewal phrases and cancellation strategies. Cancellation strategies should embrace free on-line cancellation of the subscription and cancellation in the identical method that the patron used to subscribe. Companies should present customers with a renewal discover 30-to-60 days prematurely of renewal, which should describe the products, state the worth, inform the patron concerning renewal, and supply no less than two cancellation strategies.

Virginia: Virginia now requires clear and conspicuous disclosures earlier than the renewal phrases for automated renewals, the patron’s affirmative consent to the settlement containing the automated renewal provide phrases earlier than charging the patron, and an acknowledgment of the automated renewal or steady service provide phrases, cancellation coverage, and knowledge concerning how one can cancel in a way that’s able to being retained by the patron.

MWP

Auto-Renewal Subscription Litigation Traits

As state legislatures direct extra consideration to enacting and amending auto-renewal legal guidelines, non-public litigants have adopted swimsuit. This consists of pricey class motion litigations and settlements towards corporations providing subscription fashions for both services or products. Nonetheless, different corporations have prevented shopper auto-renewal litigation efficiently on the movement to dismiss part, establishing that the corporate supplied requisite discover as a matter of legislation. Whereas this technique was efficient with less-defined statutory necessities and less-robust case legislation, this technique might show more and more tough as states present granular statutory necessities for compliance. Extra stringent and pervasive state rules, and rising FTC steerage, are creating a brand new panorama for litigators to navigate, and customers might have extra instruments obtainable to plausibly allege claims.

Key Subscription Mannequin Regulation Takeaways

Readability, consent, and comfort are distinguished options for mannequin subscription packages. The FTC’s enforcement coverage assertion and up to date settlement order are useful frameworks for manufacturing corporations providing services or products subscription fashions. Nationwide corporations ought to think about regulatory schemes in high-impact states like California, which not solely has a substantial shopper inhabitants however historically can also be a forerunner within the shopper safety area. Companies with a extra focused attain also needs to think about related statutory necessities of their key states. Some bank card corporations, like MasterCard, are additionally beginning to impose discover necessities on non-public corporations. Authorities rules and personal actor necessities proceed trending towards conspicuous and clear disclosures and consent.

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