You are head of legal in a US manufacturing company. The group is launching a new product in Europe. The management has made sure
that it is manufactured according to US specifications. They assumed that it therefore met European Union regulatory requirements. They were wrong.
The implications for the company are huge. The products have already been manufactured and are being distributed. You are charged with telling the business that the products must be recalled at huge expense for the company.
Even more importantly, the damage this has caused your company’s brand is irreparable. A nightmare scenario – but one that has happened according to at least one of the delegates at the fifth Martindale-Hubbell Counsel to Counsel forum on best practice in legal services.
In a global market where the biggest concern for businesses is public image, the thorny issue of cross-jurisdictional regulatory approval can be worth billions of dollars in revenue.
How can in-house counsel best manage this? This was the issue debated by eight senior European in-house counsel who gathered in Belgium for the roundtable forum.
The delegates agreed that legal directors have a pivotal role in determining how a business should deal with regulatory approvals.
While the fine for failing to comply with regulatory compliance might be high, what can be far more serious for the group is the damage that regulatory mistakes can do to the corporate image.
Companies that want to be perceived as ‘the good corporate citizen’ do not want their names associated with non-compliance.
Gwyn Price, senior lawyer for American Express in Europe, the Middle East, Africa and the Indian subcontinent, said what was key was for the business to take a uniform approach to regulatory compliance across the group.
What is crucial is for the lawyers to understand that the decision to comply or how best to challenge is a commercial decision, and not a purely legal one.
Price heads a team of 18 lawyers across the region. He said that for American Express, a culture of compliance was critical. “American Express is among the most recognised brands in the world and we need to take this into account in every aspect of the business. We have to make sure the brand is reinforced and not damaged,” Price said. “If we are involved in a skirmish with the regulators it does not look good. A critical front-page splash in the Wall Street Journal can be devastating for the public image of the group.”
Consequently, legal advisers must think carefully before challenging local regulators through the courts – even if the case is legally strong.
It should not be forgotten that other mechanisms are available if compliance is an issue. Lobbying behind the scenes can achieve the desired solution without the adverse publicity.
In-house lawyers should be brought in at an early stage before the product is manufactured or launched, Gerhard Brand, head of legal at German manufacturing company Valliant said.
He added this did happen when the group decided to launch a German product across Europe.
“We decided it would have been expensive to create a different product to meet the needs of each country”, he said.
“So what we did was make a synopsis of the law in each jurisdiction before the final product was manufactured. The job of the engineers was to then create a product that met all the legislation.
“It was far more efficient and cost effective. The product was launched within the year and we were able to minimise the manufacturing costs – it was very successful.”
One of the biggest challenges for in-house lawyers is how to keep up with the regulatory codes in each jurisdiction, and how to be compliant without a presence in the country. One delegate said that in a global market, it was impossible to be 100% perfect. “It can be a job for the rest of your life.”
What corporate counsel can do, however, is make sure they have access to the best local advice.
Delegates were divided on whether it was best to place an in-house lawyer in each active jurisdiction, or rely on local law firms. Brand said it depended largely on the costs of the advisers in the jurisdiction. “We look at the subsidiaries and check the level of legal advice required. If it is cost effective we use internal counsel, if legal advice is only sporadic we use external law firms.”
What is crucial when instructing outside advisers is that they are familiar with the business and aware of the culture and approach of the company. The panel agreed that what they did not want was a law firm going hell for leather in a litigation that was legally valid but had devastating consequences for the profile of the group. One way of maintaining the consistency in approach is to insist that all instructions to law firms come through the legal department. At International Paper legal counsel Kristien Kaelen said that the legal department placed the responsibility for this firmly at the door of the law firms used by the group.
“We tell the firms that if business units contact them directly the firm must contact the legal department to let them know,” she said. The law firms have to send the invoice to the legal department before sending it to the business unit.
In such highly regulated industries like hers, Kaelen said it made sense for businesses to have a team of regulation experts with technical expertise for the product.
With paper mills subject to heavy environmental legislation, Kaelen said the group had environmental lawyers following the law in each jurisdiction and dealing with the day-to-day regulatory issues.
Delegates agreed in-house lawyers had a crucial role to play in educating and training the company on recognising the importance of compliance. This can be the biggest challenge – by the time products are manufactured it is too late to do anything. “The best motivation is to show employers what happens if you do not comply,” one delegate said. “After all, reputation is the most important thing a company has at the end of the day.”
This in an extract from the fifth Martindale- Hubbell Counsel to Counsel, sponsored by Eversheds and Arnold & Porter, which was held in Brussels earlier this year.
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