Top Five Considerations When Pivoting to Meet Demand for COVID-19 Related SuppliesApril 27, 2020 – Alerts
Faced with unprecedented commercial challenges that threaten their continued survival, many businesses have demonstrated their resilience by pivoting to pursue commercial opportunities that did not exist just weeks ago, such as meeting the increased demand for Personal Protective Equipment (PPE).
The demand for PPE such as respirators, face and surgical masks, and other gear worn to minimize exposure to COVID-19 will continue to increase as workplace restrictions are eased and Americans re-enter the workforce. For example, the Centers for Disease Control and Prevention (CDC) now recommends that everyone wear face masks to help slow the spread of the virus.
Every problem, such as the scarcity of sourcing and locating PPE, creates a new opportunity for businesses. But those opportunities also create new risks.
1) Importing PPE From Outside the U.S.
When entering into agreements with manufacturers outside the U.S. there are many factors a company should consider.
- Can this product leave the country of origin? Many suppliers are required to be duly licensed and certified in their country of origin to make and sell certain products. For example, Chinese export regulations require that the Chinese customs equivalent detain the shipment and inspect it before it can be exported.
- Will these items comply with FDA requirements? The FDA groups medical devices into three classes based on the risks associated with their use. While many products in Class I are exempt from pre-market review, items such as N-95 respirators fall within Class II and typically require pre-market review from the FDA. Considerations, including whether to trust the representations of the foreign manufacturer, may affect which items you purchase and how you market them for sale within the U.S.
- Contractual considerations. The contract can be embodied in a supply agreement or in the terms and conditions of a purchase order. It is important to specify the governing law for the contract. The international sales law called the CISG (United Nations Convention on Contracts for the International Sale of Goods) will unintentionally apply to most international sales contracts unless expressly excluded. Further, contractual considerations such as who bears responsibility for transporting the goods to the U.S., use of the proper Incoterms®, who bears the responsibility for clearing U.S. Customs, the payment of tariffs and/or taxes (which may or may not have been waived), and payment issues more generally (including the designation of the currency of payment), are all important to understand and account for when entering into the contract. The contract should specify inspection rights of the buyer and should consider allowing for inspection prior to shipment preferably by a qualified U.S. inspection company with offices in the seller’s country. If the foreign country has a quality certification process, presentation of those certifications should be required in the contract. And finally and importantly, the contract should mandate arbitration as a dispute resolution mechanism, since international arbitration is the most effective means of enforcement.
2) U.S. Manufacturing of PPE
- What, if any, exposure does a U.S. manufacturer have when responding to the critical need for PPE? In most cases, the Public Readiness and Emergency Preparedness Act (PREP Act) provides immunity from liability for any loss caused by use of “countermeasures” to disease or conditions determined by the declaration of a public health emergency. Except when there is willful misconduct, immunity is available to entities or individuals involved in the development, manufacture, testing, distribution, administration and use of certain PPE “countermeasures.”
- Is FDA or third-party testing required before placing items on the marketplace? In response to the pandemic, many federal agencies are helping companies cut through “red tape” that would normally cause barriers for companies attempting to enter the marketplace. However, depending on the specific item, FDA approval may still be required before sale to the public. In response, companies may consider selling non-medical supplies such as “face coverings,” which do not require pre-approval.
- Marketing and advertising PPE materials. Packaging and branding considerations are important now, possibly more than ever, when labeling and marketing PPE materials. Companies should consider the representations placed on their products and the liabilities that a “clever” marketing pitch can cause later.
3) The Sale and Resale of PPE Materials
- Where can PPE materials be sold? Whether importing or manufacturing PPE materials, it is important to consider where the products are being sold. If sold to a medical provider, the products may require advance regulatory approval. Further, as these are unusual times, a new consideration is the April 2020 Presidential Memorandum on Allocating Certain Scarce or Threatened Health and Medical Resources to Domestic Use which prevents “domestic brokers, distributors, and other intermediaries from diverting [certain PPE materials within the United States] overseas.” In fact, selling certain defined PPE materials outside of the U.S. can impose liability of one year in jail and/or a $1,000 fine.
- Repackaging and Quality Representations. Whether selling direct to the public or to distributors, it is important to consider if your products will be repackaged and or offered with certain quality representations. Resolving these issues at the outset may be vital to protecting your business from potential liability and or counterfeiting concerns.
4) Allowable Sale and Resale Prices
- Price Gouging Concerns. In our free-market society, prices ordinarily fluctuate on the basis of supply and demand. However, when a state of emergency is declared, as was done for the current global pandemic, certain controls on prices for a variety of items, including PPE materials, are put in place. Any dramatic price increases can lead to serious fines. Price gouging laws typically vary state-by-state. In some states, the regulatory authority will examine whether a company has unfairly increased prices. In others, the state attorney general will assess whether the prices offered are at a “gross disparity” to others on the marketplace.
5) Target Audience
- Healthcare Facilities. Shortages in PPE materials create serious issues for heroic front-line health care workers. However, before selling to hospitals and other health care providers, companies must consider certain regulations, including those imposed by the FDA, before entering into agreements.
- General Public. As our country prepares to get “back to work,” many companies and individuals will be in need of certain PPE materials such as face masks, face coverings, face shields, and hand sanitizer. Pivoting to a new market brings many legal considerations that must be taken into account, including contracts with commercial vendors, representations and warranties made to consumers, and product labeling.
Should your business need help in this arena, we are here to help. Please contact W. Ward Morrison at [email protected], Paul B. Edelberg at [email protected] or Alex L. Braunstein at [email protected], with any questions.