Industry 4.0 – Legal challenges and methods to overcome them
Industry 4.0 (I4.0) is probably the most disruptive concept for most industries, affecting not only revenue and cost structures but also shaking up the core business and operating models.
One aspect that is often neglected, but will have a major impact on the success of I4.0, are legal issues and how they will affect digital transformation.
Pinsent Masons, a UK based legal firm, identified in a study focusing on the preparedness of mid-sized German companies for I4.0 and legal issues published in 20161, that 66% of companies see an increasing demand for legal support in the future. Although only 28% of these companies think that legal risks, for example related to data protection, will hamper the digital transformation of their company, major deficits exist in the identification of relevant legal risks.
Focus areas that will be influenced by implementing I4.0 principles will be:
- Liability (product liability, contractual liability and distribution/assignment of risk)
- Data Protection and IT Security
- Labor Law
- Intellectual Property
It will be essential for any company that pursues the digital transformation of its business processes to carefully examine all of the legal challenges that it will face. This will include risks that stem from the integration of external partners (e.g. R&D partners, suppliers and customers) in the supply chain of the company, with regards to data protection, security and agreements on liability.
The latter is extremely important since, with increased connectivity and integration, an agreement on who will be liable for faulty products will be crucial. Liabilities towards customers are to be evaluated based on the impact that the planned implementation of I4.0 will have. It will become more important to have in place clear contracts between the partners to avoid and/or limit risks.
The inclusion of respective insurances such as a cyber insurance can avoid lengthy and costly law suits. Cyber Insurances cover damages that will result from cyber-attacks or IT-system failures. In addition the rework and/or adaptation of a company’s general terms and conditions might also be necessary.
Data protection and IT security
Data protection and IT security have to be the responsibility of a company’s top management in the advent of I4.0. Apart from the organizational and technical impacts, the legal aspects of the digital transformation of processes and the introduction of new business models are to be taken into account from the beginning. The fact that personal data is protected will generate new challenges since data analytics will deliver a relationship with the individual. Hence each automotive OEM intending to collect data from their customers’ cars will need their approval first. Complexity is also added by the fact that IT security and data protection laws differ from country to country. Therefore the task of adhering to the various laws being faced in their markets will be complicated.
New technologies like Artificial Intelligence (AI) being introduced, for example in the manufacturing process, bring potential conflicts with existing labor laws and employee representative groups. This is understandable since the implementation of handling robots in assembly might make existing workers obsolete.
In order to avoid risk in digital transformation processes from employees and their representatives, company management must involve them early on in the planning phase. Open communication and early information about planned digital transformation projects are key to obtaining buy-in.
I4.0 will enable increasingly flexible work time models. Management, employees and their representative groups are asked to define agreements that allow for more flexible working hours whilst at the same time acknowledging topics such as time enforcement and regulations concerning overtime.
Digital transformation will also bring new job profiles and make existing ones obsolete. Therefore the qualifications of the existing workforce towards the requirements of the new digital world will be crucial. Both management and employees have to support and control this change.
Alongside this, I4.0 will also have an impact on the protection of intellectual property. The company and its employees have to acknowledge that the legal protection of R&D, production and company data is insufficient. Existing legal frameworks will not keep pace with the impact digitization will have on the protection of intellectual property. The expected increase in intellectual property disputes among partners and other parties can only be countered by the inclusion of individual agreements and contracts governing the right on the IP and rights to use it.
I4.0 will necessitate that companies pursuing digital transformation need to make substantial efforts to master legal changes in data protection, IT security, labor law and liability.
In general the effort for the companies to safeguard their business from a legal point of view will increase.
1Smart Mittelstand – Industrie 4.0: Rechtliche Herausforderungen an den deutschen Mittelstand; Pinsent Masons 2016