Coronavirus-Related Production Shifts Bring Liability, Compliance Risks

By Mengqi Sun and Kristin Broughton

Companies that are shifting operations to make masks, ventilators and other medical equipment are taking on compliance and liability risks as they work to fight the new coronavirus, legal experts say.

Many companies have retooled manufacturing processes and supply chains to survive the market fallout from the pandemic. Others are doing so in response to government orders and appeals for help.

That has confronted compliance teams with responsibilities like vetting new vendors, distributors and suppliers to prevent possible sanctions violations and spot corruption risks. They also are working to ensure their new procedures and products meet federal guidelines governing once-unfamiliar industries.

“You’re just dealing with a whole host of new people and you’re doing it on a time frame that is extremely expedited,” said Timothy O’Toole, the leader of the white-collar defense practice group at law firm Miller & Chevalier Chartered who is advising companies on compliance issues.

General Motors Co., Ford Motor Co. and Toyota Motor Corp. are among the companies converting assembly lines to crank out ventilators. Last month, President Trump ordered GM to ramp up production of ventilators under the Defense Production Act. Volkswagen AG has used parts of its plants around the world to make masks, face shields and breathing aids. Smaller companies also have pivoted, such as sewing shops now making simple cloth masks.

It normally takes companies several months—or sometimes years—to build effective compliance programs around a new line of business or market. The assessment for potential compliance failures usually happens organically as companies ramp up production and learn about risks within the supply chain along the way.

But amid the pandemic, compliance teams have had to move briskly, striking a balance between accuracy and speed as they build compliance programs from scratch—all while adjusting to new remote-working environments.

“There is a huge amount of pressure to get these sorts of deals done and to get these sorts of changes made because the alternative could be to go out of business forever, and you’re normally not dealing in that environment,” Mr. O’Toole said. He said companies would benefit from more guidance from regulators on possible leniency related to compliance lapses that might happen during the pandemic.

Volkswagen is relying as much as possible on existing, pre-vetted suppliers to procure parts for the new products, but it has had to vet new supply-chain partners, regulations and government relationships. The German auto maker’s compliance teams are vetting corporate donations and relationships with government officials to avoid potential conflicts of interest on bids and ensure compliance with foreign bribery laws, said Hiltrud Werner, Volkswagen’s board of management member for integrity and legal affairs who oversees compliance.

Volkswagen’s compliance staff has shaved hours off certain due-diligence processes, including checks on relevant external laws and obtaining regulatory approvals for new products, she said. A key focus is ensuring that the company won’t be held liable for potential misuse of equipment or defective products, Ms. Werner said. “We are watching very, very carefully that all the regulatory processes are kept in place during the crisis,” she said.

Companies are eligible to receive immunity from wrongful-death lawsuits and other product-liability claims under a 2005 U.S. law, the Public Readiness and Emergency Preparedness Act. The law, known as the PREP Act and enacted amid concerns over bioterrorism and the avian flu outbreak, was designed to encourage the production of medical supplies during a public health emergency.

The U.S. Department of Health and Human Services has issued a declaration aimed at granting liability immunity to companies that produce medical equipment and supplies to fight the novel coronavirus. Ventilators, masks and diagnostic equipment are among the products that could qualify for the protections.

A key way to receive immunity is to apply for emergency use authorization, which is granted by the U.S. Food and Drug Administration and includes a number of compliance requirements. Companies also should set up processes to track the products they produce, and dispose of them when the liability protections for the Covid-19 pandemic expire in October 2024, according to Cheryl Falvey, a partner in the mass tort, product and consumer litigation group at Crowell & Moring LLP.

The legal immunity provided under the PREP Act, while broad, isn’t bulletproof. It doesn’t cover companies found to have knowingly produced a faulty product. The legal protections offered to companies under the PREP Act haven’t been tested rigorously in court, lawyers said.

“There are some processes in place,” Ms. Falvey said. “You don’t just get immunity because you signed up to do good.”