When manufacturing new product lines, be aware of new compliance risks

In recent months, there has been no shortage of companies that have announced dramatic shifts in their manufacturing practices in response to PPE shortages—for example, clothing companies now making surgical clothing; footwear and apparel chains making face masks; personal care brands now making hand sanitizers. In another example, a company that normally manufacturers thermometers for home appliances pivoted to make personal disposable forehead thermometers.

“As so often is the case with opportunity, there also comes challenges,” said Scott Winkelman, a partner at law firm Crowell & Moring, which recently conducted a Webinar on the risks and opportunities of pivoting to new product lines. Oftentimes, companies come up against regulations that are foreign to them, regulators that are new to them, unfamiliar terrain as it relates to commercial risk, and some now even qualify as government contractors “and so must understand that complex array of regulations and rules,” Winkelman said.

In many instances, companies are suddenly finding themselves under the regulatory umbrella of the U.S. Food and Drug Administration when they’ve never had to think about FDA regulations before. Examples of FDA-regulated PPE include hand sanitizers, face masks, thermometers, surgical clothing, and more.

Adding to the complexity of FDA compliance—for companies that are both familiar and unfamiliar with FDA regulations—is that FDA rules and requirements are continuously changing. “Staying current is absolutely essential,” said John Fuson, a partner at Crowell & Moring.

For example, the FDA recently issued guidance stating that FDA device marketing authorization is not required for general-use face masks during the coronavirus pandemic, where they are “not intended for use in the diagnosis of disease or other conditions or in the cure, mitigation, treatment, or prevention of disease.”

From a compliance and risk management standpoint, Fuson recommended manufacturers that fall under the FDA umbrella should consider the following questions:

• Has the product been cleared or approved by the FDA?
• Does it fall under a safe harbor for enforcement discretion purposes?
• Has the product been properly labeled? In other words, have you ensured the label does not overpromise what the product can do?

During a public health emergency, the FDA can use Emergency Use Authorization (EUA) authority to allow the use of unapproved medical products, or unapproved uses of approved medical products, to diagnose, treat, or prevent serious or life-threatening diseases when certain criteria are met, including that there are no adequate, approved, and available alternatives. Thus, another compliance consideration among product manufacturers should be whether the product has been authorized under an EUA.

“The FDA has made clear that it will take enforcement action against companies that are distributing unauthorized or unapproved health products that pose a health risk,” Fuson said. “So, even in these relaxed times, we still need to make sure that we are meeting FDA’s expectations.”

“The FDA has made clear that it will take enforcement action against companies that are distributing unauthorized or unapproved health products that pose a health risk.” 

John Fuson, Partner, Crowell & Moring

Product manufacturers new to the FDA regulatory space also have new liability risk to think about. Thus, they should ensure they are evaluating any complaints received for injuries caused by, or associated with, their products; and understand what their reporting obligation to the FDA is in the event a complaint is received. “These are all questions that are being wrestled with in real-time as manufacturers struggle to get products to market,” Fuson said.

Import and export risks

Assuming a specific product is allowed by the FDA, it’s likely made overseas, which for some product manufacturers may bring about new regulatory requirements and import and export compliance risk—both of which have been quite fluid over the last several months. Among recent developments, the FDA has relaxed some of its regulatory requirements to help facilitate the importation of PPE.

For example, the FDA on March 24 issued an EUA for importing N95 respirators that have not been approved by the National Institute for Occupational Safety and Health (NIOSH). Under this EUA, among other criteria, the FDA accepts marketing authorization from Australia, Brazil, Europe, Japan, Korea, and Mexico, whose standards are comparable to NIOSH’s standards.

In another regulatory development, in response to continued respirator shortages, the FDA on April 3 issued a new EUA for non-NIOSH-approved N95 respirators made in China—but then revised and reissued the EUA on May 7, “based generally on concerns raised about the authenticity of certain respirators,” the FDA said in an FAQ on its Website.

In addition to the FDA, the Federal Emergency Management Agency (FEMA) in an April 10 Federal Register Notice announced that FEMA approval will be required for exports from the United States covering five types of PPE, effective through Aug. 10. Under this temporary final rule, Customs and Border Protection (CBP) will temporarily detain any shipment of covered gloves, masks, or respirators so that FEMA can determine whether to return the PPE for domestic use, or to allow, in whole or in part, the export. FEMA said it will make such determinations within a “reasonable time” of being notified of an intended shipment.

Several exemptions apply, 10 of which were added in an amended version of the final rule in response to concerns raised by private industry and healthcare workers regarding PPE that needed to be exported for certain intracompany purposes. Originally, the only exemption added applied to exports by U.S. manufacturers that have had continuous export agreements with customers outside the United States since at least Jan. 1, 2020, provided at least 80 percent of the manufacturer’s domestic production was distributed in the United States over the preceding 12-month period.

On April 21, FEMA amended the temporary final rule to add 10 additional exemptions, notably:

• Intracompany transfers of covered materials by U.S. companies from domestic facilities to company-owned or affiliated foreign facilities;
• Shipments of covered materials that are exported solely for assembly in medical kits and diagnostic testing kits destined for U.S. sale and delivery; and
• Shipments for which the destination is Canada or Mexico.

On April 27, the CBP published a set of FAQs for exporters regarding the FEMA rule. Prudent compliance officers may want to review these FAQs, in addition to the complete list of exemptions in the Federal Register, as compliance violations come at a hefty cost. The FEMA rule establishes a fine up to $10,000 or imprisonment for up to one year, or both, upon conviction. “There is some teeth to this,” said David Stepp, a partner specializing in global customs and international trade compliance at Crowell & Moring.

There is a lot to unpack here, and regulatory developments in this space are continuously evolving. Thus, CCOs, especially those at companies that have just begun manufacturing new products to address PPE shortages, should seek the advice of counsel and be sure to stay on top of the latest guidance and notices from the FDA, FEMA, and the CBP.