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Focus on Regulation

The Trump Administration Issues Its R&D Budget Priorities for FY 2020

On July 31, the Director of the Office of Management and Budget, Mick Mulvaney, and the Deputy Assistant to the President, Office of Science and Technology Policy, Michael Kratsios, jointly issued a memorandum on “FY 2020 Administration Research and Development Budget Priorities.” This is an annual document, providing overall policy guidance to the federal agencies as they prepare their budget submissions for the next fiscal year. The guidance does not include any specific funding targets, or other specific direction. But the guidance does give an indication of Administration thinking, and that thinking is showing signs of better appreciating the role of federal research and development spending in building a more robust economy than reflected in last year’s guidance.

The aspect of the Administration’s approach to concerns that U.S. leadership in technology was slipping, endangering U.S. military superiority, that has grabbed the headlines has been the effort to rein China in – most notably through revisions to the law controlling foreign investments in the United States (CFIUS). These revisions are embodied in legislation entitled the Foreign Investment Risk Review Modernization Act (FIRRMA), which was incorporated into the National Defense Authorization Act for Fiscal Year 2019 (NDAA for FY 2019). As of this writing, the NDAA for FY 2019 has passed both chambers, and is awaiting presidential signature. Limiting Chinese investments in U.S. “emerging and foundational technology” companies, as FIRRMA will do, might limit the flow of U.S. developed technology breakthroughs to China, but it will do nothing to help the United States to make those breakthroughs in the first place. Indeed, it might even slow U.S. technological progress if the flow of Chinese capital to U.S. start-ups is reduced by implementation of FIRRMA.

More quietly, the FY 2020 guidance seems to reflect a different, more positive approach to the apparent slippage of U.S. technological superiority. The FY 2020 guidance declares that

Federal R&D dollars focused primarily on basic and early-stage applied research, paired with targeted deregulation, and investment in science, technology, engineering, and mathematics (STEM) education and workforce development, will strengthen the Nation’s innovation base and position the United States for unparalled job growth, continued prosperity, and national security.

The reference in the FY 2019 guidance to budget neutrality is nowhere to be seen in the FY 2020 guidance. Although both documents state that federal spending should focus on basic and early-stage applied research, the FY 2020 guidance notes the importance of programs that improve the transition of federally funded technologies from discovery to practical use. In addition, the FY 2020 guidance is sprinkled with far more references to specific technology areas, reflecting an enthusiasm that seems lacking in the FY 2019 guidance. There are references to artificial intelligence, autonomous systems, hypersonics, advanced microelectronics (including exploring novel pathways to advance computing in a post-Moore’s Law era), computing (and in particular quantum information science), and cyber capabilities (including adaptive and automated defensive measures). There is also a discussion of the importance of creating the conditions for the development of an industrial base for commercial activities in space.

Enthusiasm, and expressions of recognition of the importance of research and development, including recognition of the critical role that federal funding of basic research plays in the building of a foundation for technological leadership, is all well and good, but providing the resources to back up the words of the guidance is what really counts. If Congress adopts the Senate Appropriations Committee’s two billion dollar plus bump-up in R&D funding, compared to the House-passed bill and compared the President’s budget, that will go a long way in answering the question whether the U.S. has the will to do what is necessary to maintain its technological edge.

Please contact the authors of this post if you have any questions.

MDR and IVDR: the European Commission published some guidance documents

In the last couple of days, the European Commission published five new documents intended to provide guidance to manufacturers concerning the implementation of the EU Medical Devices Regulation (MDR) and the In Vitro Diagnostic Medical Devices Regulation (IVDR).

The documents which are available on the European Commission website include the following practical guides:

  • Factsheet for manufacturers of medical devices
  • The factsheet is intended to provide a general overview of the consequences of the MDR on medical devices manufacturers.
  • Implementation model: medical devices
  • The document is described as a step by step guide for the implementation of the MDR.
  • Exhaustive list: requirements for medical devices manufacturers
  • The document which was prepared by the UK Medicines and Healthcare Products Regulatory Agency (MHRA) on 23 February 2018 includes what is presented as an exhaustive list of requirements applicable to medical devices manufacturers.
  • Factsheet for manufacturers of in-vitro diagnostic medical devices
  • The factsheet is intended to provide a general overview of the consequences of the IVDR on medical devices manufacturers.

For manufacturers which have not yet started to work on their preparation for the new Regulations, the above documents could be really useful as a starting point. For manufacturers which have already started to prepare for the new Regulations, the MHRA list of requirements applicable to manufacturers could constitute a useful checklist to determine if all appropriate requirements have already been considered by the company.

Our team remains available to address any question in relation to these new guides.

New EU draft guidelines on clinical trials with ATMPs open for consultation

The European Commission, together with the EMA and the expert group of the competent authorities of the EU Member States, has developed draft guidelines (the “Guidelines”) governing good clinical practice specific to advanced therapy medicinal products (“ATMPs”).

The purpose of the Guidelines is to adapt existing good clinical practice rules (“GCPs”) to ATMPs. This step is required by Article 4 of Regulation 1394/2007 on ATMP, which provides that the European Commission to draw up guidelines on GCPs specific to this category of medicinal products.

The document relates solely to ATMP and will apply in addition to the GCP Guidelines of the International Council for Harmonisation of Technical Requirements for Pharmaceuticals for Human Use (“ICH”). The Guidelines also provide that investigational ATMPs must comply with the new guidelines on good manufacturing practice (GMP) specific to ATMPs.

The Guidelines discuss the areas in which specific rules would apply when a clinical trial is conducted in relation to an investigational ATMP.

By way of example:

  • The clinical trial design should take account of the specific characteristics of ATMPs and the patient populations likely to consume these. Because of the novelty and scientific uncertainties relating to ATMPs the Guidelines provide, in particular, that there may be a need for subjects to be on long-term follow-up after treatment;
  • Aspects of dosing and repeatability of treatment should be considered based on the specific characteristics of the product. Where the ATMP is expected to have long-term effects, dose escalation and repeated dosing should be considered with a view to control toxicity risks to the subject;
  • The Guidelines describe specific requirements for ATMPs containing human cells or tissues used as starting materials. In these cases, the trial application dossier should contain confirmation that the donation, procurement and testing of cells and tissues are in compliance with EU legislation, and that there is a bidirectional traceability system in place from the point of donation to administration of the medicinal product in the clinical trial;
  • The Guidelines underline that the quality of the investigational ATMPs may be highly dependent on their storage, transport and handling conditions. Sponsor should, therefore, provide investigators with detailed instructions concerning handling and storage of the investigational ATMPs;
  • The administration procedure should be clearly explained by the sponsor. The level of documentation should take into account the complexity and the novelty of the procedure;
  • The Guidelines acknowledge that in the case of ATMPs the retention of samples of the investigational medicinal product may be challenging due to scarcity of the starting materials. The general GCP rules requiring the sponsor to maintain sufficient quantities of the investigational product used in a trial to reconfirm specifications would not, therefore apply in the case of autologous ATMPs and certain allogeneic ATMPs (matched donor scenario).

The draft Guidelines can be found here and stakeholders are invited by the European Commission to comment on this consultation by 31 October 2018. The comments received will be taken into account by the European Commission in the finalisation of the Guidelines.

FDA launches Biosimilars Action Plan to spur biologics competition, finalizes labeling guidance

On July 18, FDA Commissioner Scott Gottlieb, M.D., announced the release of FDA’s Biosimilars Action Plan (BAP), saying it would help enable a path to competition for biologics from biosimilars, while preserving incentives for innovators to invest in further research.  On July 19, FDA also published the guidance “Labeling for Biosimilar Products,” finalizing an April 2016 draft guidance that Dr. Gottlieb said aims to help biosimilar manufacturers prepare labeling submissions in a manner that would achieve FDA approval.  The BAP specifically summarizes 11 steps FDA will be taking to foster the biosimilars market, including:

  • Establishing an Office of Therapeutic Biologics and Biosimilars (OTBB);
  • Exploring the option of data sharing agreements with foreign regulators, such that U.S. drug makers could evaluate biosimilars by using European or Asian drugs as comparator products;
  • Developing an index of biosimilars’ critical quality attributes relative to their reference products;
  • Implementing new FDA review tools, such as standardized review templates, that are tailored to applications for biosimilar and interchangeable products; and
  • Adding more data about approved biologics to the Purple Book.

In a July 16 statement on HHS’s Blueprint to lower drug prices, the Federal Trade Commission (FTC) had urged FDA to finalize a January 2017 draft guidance that would facilitate approval of intgerchangeable biosimilar products, which the FTC described as more likely to permit automatic substitution; Dr. Gottlieb also prioritized action on this interchangeability guidance in the BAP.

FDA announces public hearing on BAP

The FDA announced July 25 that it will hold a public hearing on September 4 to gather input on the BAP, as well as ways FDA can facilitate the development of biosimilars and ensure they enter the market in a timely fashion.  At the hearing at FDA’s White Oak HQ, the agency will solicit input from stakeholders on nine questions addressing scientific and legal challenges to bringing biosimilars to market and measures to reduce barriers to competition once they are on the market.  The registration deadline for persons seeking to attend or present at the hearing is August 14.

In its meeting notice, FDA requested comment on the potential application of “umbrella exclusivity” to biological products pursuant to section 351(k)(7) of the Public Health Service (PHS) Act.  Noting that umbrella exclusivity has long been used in the Hatch-Waxman context for small molecule drugs,

FDA points out that this approach aims to promote biological product innovation by shielding certain biologics from biosimilar competition.  Innovators should consider remarks to FDA emphasizing the importance of protecting improvements to their original products without fear that doing so within the 12-year statutory exclusivity period would expose the biologic to biosimilar competition before the sunset of the exclusivity period.  The deadline for submitting written comments is September 21.

Dr. Gottlieb decries “anemic” biosimilars competition

In his July 18 speech at the Brookings Institution, Dr. Gottlieb emphasized the “anemic” competition in the biosimilars industry, blaming a “rigged system” whereby “consolidation across the supply chain has made it more attractive for manufacturers, Pharmacy Benefit Managers, Group Purchasing Organizations and distributors to split monopoly profits through lucrative volume-based rebates on reference biologics…rather than embrace biosimilar competition and lower prices.”  Dr. Gottlieb also blamed litigation for delaying market access to biosimilars.

Dr. Gottlieb said the FDA would “soon” release the details of its analysis that found timely marketing of biosimilars in the U.S. could have saved consumers more than $4.5 billion in 2017.  Only three of 11 FDA-approved biosimilars have made it to market, and FDA has approved two biosimilars this year.  The agency is making clear its prioritization of promoting the manufacture and approval of additional biosimilars.

Brexit, medical devices and transfer of notified bodies. What will be the procedure?

In the recently published White Paper governing the future relationship between the United Kingdom and the European Union, the UK proposes a “common rulebook” between the parties in relation to goods. The White Paper discusses what is foreseen as the future relationship between the parties in some detail. Continue Reading

UK Government Publishes Guidance for Life Sciences Companies on Brexit Transition

The UK Government has published guidance for life sciences companies on the Brexit implementation period, which is intended to take effect from 30 March 2019 to the end of 2020. If the draft Withdrawal Agreement is finalised by the UK and EU, during the implementation period the UK will no longer be an EU Member State but the UK and EU will continue to access each other’s market on broadly the same terms as at present.

While the European Medicines Agency (EMA) has already published a number of guidance documents for companies, this is the first formal UK guidance for the life sciences sector. It has been produced by the UK Department of Health and Social Care (DHSC) together with the Medicines and Healthcare products Regulatory Agency (MHRA) and the Veterinary Medicines Directorate (VMD).

While the new guidance confirms the anticipated position rather than containing significant new information, it provides helpful reassurance that the UK authorities intend to take a pragmatic approach to issues such as authorising clinical trials and issuing UK marketing authorisations based on existing EU authorisations after the implementation period.

The published guidance includes:

  • Guidance on what the implementation period means for the life science sector (link);
  • Technical information on the implementation period (link); and
  • An update on the new EU Clinical Trial Regulation during the implementation period (link).

What are the key points in the new guidance?

The guidance confirms that life sciences companies will continue to be able to operate as currently. In particular, during the implementation period:

  • EU marketing authorisation holders and qualified persons (QP) can continue to be located in the UK;
  • The EU will continue to recognise UK marketing authorisations, manufacturing and distribution licences, GMP inspections, batch release testing and QP certification (and visa versa);
  • Pharmacovigilance activities of EU marketing authorisation holders can continue to be based in the UK, including the location of the qualified person for pharmacovigilance (QPPV) and of the pharmacovigilance master file (PSMF);
  • Labelling requirements will remain unchanged and multi-country packs for medicinal products will continue to be valid in both the UK and EU;
  • The EU will continue to recognise medical devices that have been CE marked by a manufacturer in the UK and devices that have been assessed by a UK notified body (and vice versa); and
  • The UK will continue to be treated as an EU Member State for the purposes of international agreements, including Mutual Recognition Agreements.

However, although UK companies will continue to be able to use both the EU centralised and decentralised procedures for marketing authorisations, the MHRA will no longer be able to act as the lead authority (Reference Member State) for the assessment of these applications. In particular, the guidance flags that companies should consider the expected conclusion date for applications submitted through the decentralised procedure, as the EU does not currently permit transfers of the appointed Reference Member State before the conclusion of the application process.

The status of new EU Regulations

The new EU Clinical Trials Regulation is expected to come into effect during the implementation period, and will apply in the UK during this period as part of EU law. The new Regulation streamlines the application process for multi-site clinical trials in the EU and simplifies reporting procedures. If the new Regulation does not come into effect during the implementation period, the UK Government has confirmed that it still intends to implement the Regulation into UK law as far as possible. The Guidance recognises that the UK’s participation in EU clinical trial systems after the implementation period will be subject to negotiation with the EU. If the UK is unable to negotiate continued participation in this system, the guidance reassures companies that the UK will put in place a streamlined and efficient approval process for UK clinical trials.

The new EU Medical Device Regulation (MDR) will apply fully from May 2020 (i.e. during the implementation period) and so will apply directly in the UK. The new EU In-vitro Diagnostic Medical Device Regulation (IVDR) only applies fully from May 2022, i.e. after the implementation period. The guidance reminds companies that IVDs which are in conformity with the new IVDR have been permitted on the market since May 2017 under the new regime, suggesting that this will continue to be the case following the implementation period.

Bills Introduced to Amend the Telephone Consumer Protection Act

Both Chambers of Congress are considering legislation that would amend the Telephone Consumer Protection Act (“TCPA”).  Introduced in the House by Congressman Pallone (H.R. 6026) and in the Senate (S. 3078) by Senator Markey, the Stopping Bad Robocalls Act adds a new definition, “robocall,” in place of “automated telephone dialing system.”  The new term would include devices that make calls using “numbers stored on a list” (in addition to dialing random or sequential numbers).  The new definition clarifies that robocalls do not include using equipment where “substantial additional human intervention” is required to place the call.

The bills would also require the Federal Communications Commission (“FCC”) to establish a nationwide database of reassigned telephone numbers.  In addition, they would require the FCC to implement caller ID verification regulations under which voice service providers would have to ensure that information is accurate and prevent calls from connecting where such verification cannot be made.

The bills would also extend the statute of limitations for FCC enforcement of TCPA violations from 1 year to 4 years.

How We Can Help
Our TCPA Working Group brings together more than 25 attorneys in our litigation, communications, commercial, and privacy practice areas.  We provide regular TCPA counseling to clients from a broad range of industries, including technology, healthcare, communications, transportation, and financial services.  We have secured dismissals and nominal settlements for clients in TCPA actions and have worked with the FCC to clarify rules addressing a number of key TCPA issues.  We also have significant experience in TCPA appeals.

The author wishes to thank Ryan Thompson in the Hogan Lovells D.C. office for his assistance in preparing this article.

MDR and IVDR: MedTech Europe calls for an extension of the transitional provisions

On 27 July 2018, the European trade association representing the medical technology industries, MedTech Europe, issued a position paper in which the association requests the European Commission, the European Parliament and all EU Member States to have an urgent discussion concerning the timelines for the application of the Medical Devices Regulation (MDR) and In Vitro Diagnostic Medical Devices Regulation (IVDR).

In the four pages position paper, MedTech Europe underlines that the industry has significant concerns about the implementation status of the MDR and IVDR which will be applicable on 26 May 2020 and 26 May 2022 respectively. The position paper stresses that:

“the industry’s ability to keep products on the market beyond the 26 May 2020 and 26 May 2022 deadlines, could be seriously jeopardized by the slow progress in putting into place the critical infrastructure that will enable the new regulatory systems to work.

In the event of insufficient time between the establishment of the system and the (re-) certification of products before the dates of application, products will not be allowed on the market anymore. Consequently, they will be no longer available for patients and healthcare systems.”

In the document, Medtech Europe questions the ability of notified bodies to be designated in time for transitioning medical devices companies to the MDR and IVDR but also the notified body’s current resources and expertise to deal with workload created by the new Regulations and the transitional periods.

Brexit could also impact the transition of the industry to the MDR and IVDR and the availability of medical devices on the EU market. Medtech Europe underlines that between 30 and 40% of medical technologies in the EU are CE marked with the involvement of UK notified Bodies. In case of a hard Brexit, these UK notified bodies may lose their rights to conduct conformity assessments and the CE Certificate of Conformity that they issued to manufacturers may lose their validity. Such situation would lead

The document also stresses that implementing acts, guidance, standards or common specifications still need to be adopted to ensure application of the new Regulations.

MedTech European proposes three options to address the issues raised by the timeline for the application of the new Regulations:

a) A ‘stop the clock’ mechanism, that freezes the remaining transition time for both Regulations until full readiness of the system has been achieved;

b) An extension of the critical dates of 26 May 2020 and 26 May 2022, for all products;

c) An extension of the critical dates of 26 May 2020 and 26 May 2022, for legacy products only.

Please do not hesitate to contact us should you have any question concerning the above development related to the MDR and IVDR.

SBA Update: Less Than 1% Minority Shareholder Interest Could Impact Eligibility for Small Business Contract Awards

The U.S. Small Business Administration (SBA) Office of Hearings & Appeals (OHA) recently held that an entity may be affiliated with another entity solely because it holds a very small minority ownership interest (less than 1%) in that entity. OHA’s ruling is noteworthy because under the SBA’s rules, the employees or revenue (depending on the NAICS code) of a concern and its “affiliates” must be aggregated when determining a small business concern’s size and eligibility for small business set-aside contracts. The decision should disabuse contractors and investors alike of any perception that very small minority ownership interests cannot give rise to affiliation.

Entities are considered affiliates under the SBA’s rules if one controls or has the power to control the other, or if a third party or parties controls or has the power to control both. It is well-established that one entity does not need to have controlling share of stock ownership (above 50%) in another for the two entities to be deemed affiliates under the SBA’s rules. However, some government contractors might believe that a very small minority ownership interest cannot create affiliation. OHA’s decision in Melton Sales & Service, Inc., SBA No. SIZ-5893 (Mar. 29, 2018) (Melton) confirms that such belief is mistaken.

In Melton, an unsuccessful offeror in an Army procurement protested the size status of the awardee, MTP Drivetrain Service, LLC (MTP). The protester contended that one of MTP’s affiliates, Joe Gear Holdings, LLC (Joe Gear), was also affiliated with VIPAR Heavy Duty Inc. (VIPAR) in part because Joe Gear was one of 120 stockholders that each held one voting share in VIPAR (an approximate 0.8% interest). The protester argued that because Joe Gear was affiliated with VIPAR, and MTP was affiliated with Joe Gear, that VIPAR was affiliated with MTP and that VIPAR’s employees should be counted when determining MTP’s size. OHA agreed, noting that Joe Gear was one of multiple minority shareholders in VIPAR whose investments were equal or approximately equal in size, and therefore there was a rebuttable presumption that each minority shareholder controlled VIPAR. OHA relied on the following SBA regulation at 13 C.F.R. § 121.103(c)(2):

If two or more persons (including any person, concern or other entity) each owns, controls, or has the power to control less than 50 percent of a concern’s voting stock, and such minority holdings are equal or approximately equal in size, and the aggregate of these minority holdings is large compared with any other stock holding, SBA presumes that each such person controls or has the power to control the concern whose size is at issue. This presumption may be rebutted by a showing that such control or power to control does not in fact exist.

Critically, OHA stated that the presumption that each minority shareholder controls an entity “may be rebutted with evidence to the contrary, such as evidence demonstrating another party such as the Board of Directors and CEO or President controls the concern,” but that absent “clear evidence demonstrating control or the power to control by another party, it is presumed that each minority shareholder has equal control over the subject concern, regardless of the size of the shareholder’s interests.” OHA also described the inability of any one of the 120 stockholders to individually exercise actual control over the entity as “immaterial” to the affiliation analysis. Because MTP in Melton did not establish that any party other than the 120 stockholders controlled the entity, it failed to rebut the presumption of affiliation.

OHA’s ruling in Melton did not impact the awardee’s eligibility for the contract award because affiliation with VIPAR did not push MTP above the size standard threshold that applied to the procurement. In many circumstances, however, affiliation with other entities can render a contractor ineligible for small business contract awards. Small business contractors doing deals therefore should be cautious in deciding how to structure minority investments in other entities. An investment may not make strategic sense if it results in the business being determined ineligible for small business contract awards. Similarly, private equity groups and other parties seeking to invest in small business concerns should be careful when structuring such investments because a minority investment that appears to give the investor no actual control over the company could be sufficient to create affiliation between the concern and the investor.

The authors are available for questions. The Government Contracts Practice at Hogan Lovells helps advise companies that may have questions concerning SBA regulatory implications of transactions with small business contractors.

UN treaty on business and human rights: Working Group publishes draft instrument

On 19 July, the UN working group tasked with elaborating an international, legally binding instrument on business and human rights published the text of a draft treaty (see the draft here and the accompanying statement by the Chair of the Working Group, here). In this blog, we look at its key terms and what it might mean in practice for transnational businesses.

Drafting history

In October 2017, following the last round of deliberations, we wrote that a number of fundamental issues remained unresolved, including:

  1. Would the treaty apply to all businesses or just those of a “transnational” character?
  2. How would an international treaty bind businesses?
  3. What would be the nature and extent of the obligations on businesses and would this give rise to corporate criminal liability?

Fundamentally, we expressed concern that the initial “Elements” of the treaty were, in several respects, inconsistent with the UN Guiding Principles and threatened to undermine the growing consensus on the business responsibility to respect human rights. The draft instrument goes some way to resolving these issues although in doing so gives rise to various new rule of law concerns – we consider each one in turn.

Would the treaty apply to all businesses or just those of a “transnational” character?

During consultations, a major source of contention was whether the treaty should, like the UNGPs, apply to all businesses or, as per the Working group’s mandate from the Human Rights Council, be restricted to businesses of a “transnational” character.

The draft treaty adopts the more restrictive approach, limiting the scope of its application to “business activities of a transnational character” (Article 3) which are defined as “any for-profit economic activity, including but not limited to productive or commercial activity, undertaken by a natural or legal person, including activities undertaken by electronic means, that take place or involve actions, persons or impact in two or more national jurisdictions“.

This restrictive approach risks creating an uneven playing field for domestic and transnational enterprises, particularly those operating in states where the protection of human rights under domestic law is weak. It may also deprive victims of a means to access a remedy against a domestic enterprise.  It is in the interests of both victims and business, not to mention fundamental to the rule of law, that the law should apply equally to all.

How would the treaty bind companies?

Although the draft Preamble underlines, as per the UN Guiding Principles, that “all business enterprises… shall respect all human rights“, the treaty is intended to be signed by States and envisages that the provisions regulating business activity will be enforced by the State Parties.  Specifically, the draft requires State Parties to:

  1. guarantee the right of victims to present claims to their Courts, and ensure their domestic judicial and other competent authorities have the necessary jurisdiction to hear such claims and allow victims to access remedies – Article 8(2)
  2. investigate human rights violations and, where appropriate, take action against those allegedly responsible “in accordance with domestic and international law” – Article 8(3)
  3. ensure that persons falling within the scope of the treaty that are within their jurisdiction (or control) undertake “due diligence” throughout their transnational business activities – Article 9(1)

Contrary to suggestions made during the earlier consultations, private persons (natural or legal) would not be directly bound by the provisions of the treaty. However, they would be subject to civil and criminal liability under the jurisdiction of the State Parties, as defined in the treaty (see below). This provides some clarity and brings the treaty in line with well-established principles of public international law.

What is the nature and extent of corporate liability?

The nature of corporate liability was another controversial issue during the Working Group’s third session in October 2017. This was not surprising given the variety of approaches to this question in domestic legal systems around the world and the lack of consensus on whether corporate liability exists for crimes under international law at all.

The draft instrument requires State Parties to provide (through their domestic law) for criminal, civil and administrative liability for violations of human rights in the context of transnational business activities and for effective criminal and non-criminal sanctions, including monetary sanctions.

In contrast to the limited attention previously given to this crucial question, draft Article 10 goes into some detail on the proposed civil and criminal liability regimes:

  1. Civil liability shall arise for harm caused by violations of human rights arising in the context of business activities that include: operations over which control is exercised; activities of subsidiaries or other entities in the supply chain that are “sufficiently closely” related and where there is a “strong and direct” connection between the alleged conduct and the wrong suffered; and where risk has been, or should have been, foreseen of human rights violations within the chain of economic activity. This proposed definition, which cuts against the established doctrine of separate legal personality, is likely to prove controversial.
  2. Criminal liability shall arise for persons that intentionally, whether directly or through intermediaries, commit human rights violations that amount to a criminal offence under international law or domestic law. The draft specifically extends criminal liability to principals, accomplices and accessories, as defined by domestic law. Given that the nature and extent of secondary liability varies extensively from one state to another, this gives rise to rule of law problems – the same conduct may constitute an offence in one state and not in another. Article 25 of the Rome Statute of the ICC already provides a regime for secondary liability under international criminal law and various national courts have deferred to this in domestic cases involving participation in international crimes (see for example the Supreme Court of Canada in Ezokola v Canada). From the perspective of legal certainty, it is regrettable that the draft instrument does not do the same.

Due diligence requirements

As mentioned above, the draft specifically requires State Parties to ensure that due diligence of business activities of a transnational character is undertaken.

Broadly consistent with the UN Guiding Principles, draft Article 9 defines due diligence as including monitoring, identifying, assessing, preventing and reporting on the human rights impacts of business activities, including those of subsidiaries and other entities under one’s direct or indirect control or directly linked to one’s operations, products or services. The draft instrument requires states to ensure that businesses incorporate these due diligence requirements in “all contractual relationships which involve business activities of transnational character“.  This is a significant ‘hardening’ of the ‘soft law’ regime under the UNGPs and would create a web of legally binding requirements to carry out due diligence.  The consequences of this over time would likely be a proliferation of disputes and a body of case law on the adequacy of due diligence.

Where can claims be brought?

Consistent with well-established principles of international law, the draft instrument vests jurisdiction in the courts of the State where either (1) the alleged acts or omissions occurred or (2) the natural or legal person(s) alleged to have committed the acts or omissions are domiciled (Article 5). It also requires states to incorporate or otherwise implement in their domestic law appropriate provisions for universal jurisdiction over human rights violations which amount to crimes (Article 10).

Interestingly, the draft treaty also includes provisions requiring State Parties to mutually recognise and enforce domestic judgments made in another State Party pursuant to the treaty, unless limited exceptions (e.g. procedural unfairness, public policy) apply. This would give victims of a human rights abuse in State A the right to enforce against assets held by the defendant in State B, even if there was otherwise no basis to do so.  If adopted, this would amount to a self-standing regime of reciprocal recognition and enforcement of human rights judgments.

In conclusion

The publication of the draft instrument represents a major milestone in the elaboration of a potential treaty, and marks significant progress on key issues left outstanding in October 2017.

The draft will provide the basis for meaningful discussions during the Working Group’s fourth session on 15-19 October 2018. Businesses and their advisors should continue to engage in the process to lobby for a treaty which is consistent with rule of law principles on legal certainty and equality before the law.

In the meantime, businesses that want to get ahead of the curve and anticipate any future changes in legislation prompted by any treaty should take steps to implement the operational principles set out in the UNGPs.

Watch this space for details of further developments on the treaty negotiations.


Julianne Hughes-Jennett, Partner, Peter Hood, Consultant, and Alison Berthet, Associate, are all members of Hogan Lovells’ Business and Human Rights Group.