Sam Roberts, partner, and Elizabeth Meade, senior associate, at law firm Cooke, Young and Keidan, explores the fraud risks the COVID-19 pandemic has opened up in the medtech space, and the steps that companies can take to protect themselves legally.
The COVID-19 pandemic has created an unprecedented demand for medtech products, and with it, a range of opportunities. From a public health perspective, there is a need to track and control the spread of the virus through the introduction of lateral flow testing devices, and a need to monitor at-risk COVID-19 patients at home with pulse oximeters. From a business perspective, medtech devices are being utilised to keep people safe, and importantly, make people feel safe as normality returns with rapid testing, infrared thermometers, and the presentation of vaccine passports. Unsurprising, it has also been a bumper year for medtech M&A activity across all aspects of the industry, particularly for diagnostics firms.
At the same time, consumers have become more aware of, and perhaps more concerned for, their own health. This has given rise to a surge in the sale of wearable devices – some already familiar, such as Garmin and Apple watches (with ever advancing cardiac monitoring features), and some much less so, such as personalised ‘breath’ trainers.
But while booming demand traditionally leads to increased opportunities for those in the sector, it also means increased risk for those looking to purchase, partner or invest. There is no gold rush without the accompanying wild west.
The desire to bring products to market as quickly as possible to capitalise on an urgent need creates a breeding ground for the taking of shortcuts and the making of promises to investors and the wider market that may prove difficult to realise. Increases in demand, coupled with supply chain issues, can also create an ideal environment for the sale of counterfeit or imitation products, as less scrutiny is applied by desperate purchasers. Authorities have also been permitted, due to extreme urgency, to not comply fully with usual public procurement regulations. The fact that a business supplies products to governments may therefore not be a mark of quality.
These issues pose a range of risks to legitimate businesses operating in this sector. Suppliers that are unable to make good on delivery obligations may leave customers with onward obligations to their own customers exposed. Reputational issues may arise if the legitimate business is too closely associated with one that later gains notoriety, if for example the products do not work as advertised. Investors in such businesses can also find themselves sitting on a dud, with the investment wasted.
As with medicine generally, there are two broad things which legitimate businesses operating in this sector can do to protect themselves from fraud – prevent, and cure.
Regardless of the circumstance, prevention will involve doing due diligence on the other party. That may range from the products it manufactures to its ability to withstand supply chain issues. Samples should be obtained, and investigations made into the other party’s track record. Prevention can also involve building in valuable contractual rights, such as performance bonds and third-party guarantees, or the ability to reject goods or terminate for non-performance. Escrow arrangements and letters of credit can help to ensure the customer is not financially exposed. Liability caps should be high enough to remain useful and thought should be given to the types of losses that may be suffered before excluding them as recoverable under the contract.
Fraud exists on a spectrum of dishonesty, between an outright and deliberate intention to deceive at one extreme, and “Nelsonian blindness” at the other. In the authors’ experience, businesses which have engaged in fraudulent conduct frequently do not set out with that as their purpose. If the worst happens, there is therefore no “one size fits all solution”, but the cure will usually require involving a solicitor. While no one wants to end up in court, proactive and effective advice at an early stage can limit the downside risk and maximise the chances of restoring the business to its original position. Often, the early stage of a brewing dispute can be the one that matters most.
