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Legal innovation in Industry 4.0




The economy in the post-COVID-19 era: a legal perspective on the accelerated digital transformation

We analyze, from all areas of business law, the main digital and technological challenges that will face companies after the pandemic, and offer possible answers and legal solutions.

The health crisis caused by the spread of COVID-19 has forced the majority of companies and organizations, of all sizes and across all industries, to accelerate -or implement in a very short period, where they were not already in operation - processes for the digital transformation of their ways of operating to allow them to continue with their activities as far as possible in the emergency situation, and to adapt to a change of habits among the public in general, and consumers in particular.

The world has turned digital overnight and businesses need to adapt rapidly to a new reality, based on having to reduce all face-to-face exchanges and physical contact to a minimum, and large-scale replacement with remote ways of communicating.

This sudden acceleration of the change to digital does not seem anywhere near ending now that we have come through the most critical phase of the pandemic, in view of the foreseeable continuity of physical distancing measures, along with the leap forward which this crisis has meant in the adoption of digital technologies at the majority of organizations and among the public in general.

Against that backdrop, beyond analyzing the rapid legislative changes made in the health emergency and confinement phase, attention is needed, from a legal perspective, to the new challenges and risks associated with this new phase of widespread accelerated digital transformation in the various areas of business and social activity.

At Garrigues Digital we want to provide answers and to propose legal solutions, combining thoroughness and pragmatism, to the various challenges posed in each of the sectors, business models and technologies which are going to play a prominent role in this acceleration phase of digital transformation.

The essential role of logistics

The health crisis has given greater visibility to a business sector that has been key for ensuring supplies to the public, and at the same time has enabled many businesses, and micro companies, whose “digital” dimension was minimal, to continue operating. The unstoppable e-commerce boom, the coexistence of physical and digital channels or omnichannel retailing, emerge as the reality that we will now inhabit, an ecosystem in which logistics play an essential role and enables products to reach consumers where they wish or choose: their home, their workplace, a convenient place, lockers, the establishment itself, among others.

Technology which has been a great ally of the logistics of e-commerce can also become a real driving force for achieving a way out of the crisis. As explained by María Marelza Cózar, senior associate in Transport and Shipping at Garrigues, we are witnessing or will witness the growing importance of traceability and of real-time information on products and their delivery to customers (RFID, monitoring, geolocation, IoT, big data). Also the use of standalone technologies in deliveries (delivery vehicles, drones and even ground drones) or the digitalization of the information and documents associated with logistics and transport (the EU has taken another step in the digitalization of transport and logistics by creating a legal framework which requires the authorities to process legally required documents in an electronic format). Added to this is the use of blockchain technologies and DLT applied to the supply chain (large projects in international air and shipping transport, finance in international trade, etc.). Understanding the changes and accompanying businesses with the necessary support to face the legal issues that may arise in that innovation process will be key.

3D printing as a solution

Additive manufacturing or 3D printing has provided essential materials and medical equipment for combatting the pandemic, including ventilators, fasteners for masks to be used by healthcare personnel and even tests. The so-called maker community has spared no effort, showing the potential of this technology for redirecting production quickly and effectively, as noted by Cristina Mesa, principal associate in the Industrial and Intellectual Property Department. There are still a few stumbling blocks to be removed in relation to production costs, speed of printing or the availability of suitable materials for printing, but the potential is there. A different matter, from a legal perspective, is who assumes responsibility for the final product: how can we know that the CAD file which is circulating on the internet is not protected by intellectual or industrial property rights of third parties?, who can be held accountable for the use of a product which turns out to be defective? the well-intentioned ‘home’ manufacturer? the hospital that has decided to use an unapproved device? There are a lot of questions that will need to be resolved in the short term, and the answers are not going to be easy.

Geolocation, in the spotlight

Geolocation-related technologies and their business and social applications are also now resurging and the debate as to whether they sufficiently protect privacy has been rekindled, explains Alejandro Padín, partner in the Garrigues Corporate Law/Commercial Contracts Law Department. This is actually an old dilemma, but the focus has changed. In view of the complexity of the solutions that are proposed, it is very important to identify properly the technology involved in each case so as to be able to make correct business decisions. An app which geolocates individually is not the same as an app which identifies pseudonymized contact data, and the purpose of preventing infections is not the same as the purpose of restricting access to establishments. The existing geolocation applications will be expanded for certain services such as logistics, already discussed, for the purpose of providing better services and identifying the situation of a delivery at a given time. In short, as Alejandro Padín emphasizes, it will be essential to conduct a thorough case-by-case analysis of the proposed solutions, so as to be able to take advantage of the benefits offered by technology without undermining people’s rights.

The great challenge for retail businesses

Stores and businesses in the retail industry in areas such as fashion are going to have to adapt to an unknown environment, by incorporating innovative measures which pose a huge challenge in terms of organization and management, Cristina Mesa explains.

Blockchain and similar technologies may be particularly useful owing to their potential in relation to traceability. For example, the entire supply chain of a vaccine could be traced, from its manufacture to supply to the patient. What do we achieve? Greater confidence in its safety thanks to the traceability of elements such as the cold chain or the location and removal of defective batches. It is also now imaginable that digital vaccination records will be created with reinforced reliability due to the use of blockchain technology, in addition to being complete and able to be trusted.

In the retail trade generally, as a consequence of the confinement, online purchases of all kinds of products has increased considerably, and this has expanded the scopes usually associated with these purchases, from one angle, as regards the types of products purchased and, from another, as regards the traditional profile of the purchaser. Thus, online purchases of food and perishable products have become normal and people who had never used this channel have begun online shopping.

Accelerated revolution in payment methods

As pointed out by José Ramón Morales, partner in the Garrigues Corporate Law/Commercial Contracts Department and co-head of the Garrigues FinTech Hub, payment methods are also undergoing an accelerated transformation, which includes a more intense use during this phase of contactless face-to-face payment solutions by smartphone or other devices with tokenized cards and fingerprints (replacing cash payments, but also payments with a physical card and the entry of a PIN using a touchpad) and online payments (in the context of the exponential increase in online commercial transactions, both B2C and B2B, since the commencement of the confinement measures). In these environments, difficulties are still encountered for combining the user’s experience and the rapid adoption by numerous sectors of the new remote instruments, with measures for protection from fraud and undue chargebacks arising from the DSP2 requirements; the initial deadline of September 14, 2019 to complete the implementation by stores and organizations of strong customer authentication (SCA) systems, which the supervisory authorities extended in principle until December 31, 2020, may be endangered by the new economic and organizational environment arising from the health crisis. Therefore, there is intense pressure from the sectors affected for it to be extended beyond the end of 2020.

Cybersecurity: more necessary than ever

The rapid large-scale adoption by companies, organizations and individuals of remote technology has increased the number of attacks and has exposed vulnerable areas that can be taken advantage of by cybercriminals. According to INCIBE, it is not that a greater number of attacks are occurring, but there is increased vulnerability for entities that were not prepared for an intensive use of technology in their processes. We have also seen phishing attacks made by taking advantage of the health crisis and attempts to steal information using social engineering techniques adapted to this situation. All of this will lead to an increased awareness among organizations regarding the need to adequately protect themselves from cyberattacks, Alejandro Padín warns.

Secure electronic transactions

Although electronic transactions were already highly developed and widely used in the business world, the current situation has further intensified these types of relationships conducted electronically. Many companies have stopped accepting physical invoices and require electronic formats only, and many manual processes have been converted to digital.

This increase in electronic transactions in business has also boosted electronic identification systems, such as the use of electronic signatures, electronic certificates or seals and third-party verification systems. This trend will continue in the future, because the necessary trust in this technology has been built and its ease, reliability and convenience has become clear, as Alejandro Padín notes.

The revolution in information… and privacy

Everything we have said up to this point and everything we will say below are thoughts on the economic and legal evolution and developments with one common element which has pervasive effects. That element is the automated management of information using technology and, in practically every case, that information contains personal data relating to individuals.

This fact, together with the essential nature of the use of personal data for certain purposes directly related to combatting the pandemic (contact tracing apps, immunity passports, etc.) brings back to the foreground the need for any project which is carried out to be guided by principles of privacy by design and privacy by default, so that the greatest efficiency of systems and technology can be achieved with the greatest protection for citizens’ privacy. These two purposes, Alejandro Padín explains, are, contrary to what some have said recently, perfectly compatible.

Impact of online contracting in the B2B environment

It is obvious that online B2B platforms provide a series of benefits for businesses, because they offer greater transparency in the availability of products, services, suppliers, prices and purchase conditions and, due to not operating in a particular time zone, these platforms have a global nature.

It would appear to be too soon to determine the scale of the economic impact on B2B platforms after COVID-19, but they are still working to meet the most immediate needs of their markets.

In particular, businesses that have considered digital commerce as a secondary channel now have to rethink, using a digital mindset, every element of their business. This is an opportunity to strengthen their commitment to e-commerce, by extending the range they offer and creating new service lines.

Although we are faced with an opportunity to increase revenues, attract new customers and promote a change in channels, in the opinion of Pablo Vinageras, counsel in the Garrigues Corporate Law/Commercial Contracts Department, successfully managing the situation will depend on digital channels having the necessary capacities and scale to absorb the impact, and to comply with the relevant legal aspects.

An ongoing commitment to B2B e-commerce seems to be the trend, because there are numerous benefits to be gained by participating in the digital era with these platforms.

Culture turns digital

Culture was one of the worst hit industries by this crisis. Attendance restrictions will mark a turning point for this industry, which will have to reconsider its business model and look for alternatives, largely digital, as explained by Antonio Muñoz Vico, principal associate in the Garrigues Industrial and Intellectual Property Department.

In the music industry, online concerts have become popular, but they are largely fundraising events which do not allow artists to earn a living. The pandemic will not bring live events to an end, but rather will force them to be transformed: the large music festival business is threatened and contracts with large organizers could be replaced by other more modest contracts with theaters and music venues where it is easier to control large gatherings. Furthermore, the idea that artists can charge for their online concerts is beginning to take shape.

Audiovisual figures show that streaming has increased with confinement and that subscriptions to platforms are still growing, but the pandemic has caused hundreds of filming projects to be suspended. The Ministry of Culture has published a “safe filming” protocol which is beginning to be used on some sets. Movie theaters must implement strict disinfection procedures and increase their seating capacity gradually, while the virus will increase the popularity of outdoor and drive-in cinemas.

The outlook is rosier for the book industry. Writers already worked in confinement anyway, bookstores have opened and booklovers are gradually filling them. Book launches may be feeling the effects, but authors are getting used to platforms such as Zoom or Teams and bookshops could perhaps become managers of these online events. The hardest hit will be book fairs, which must have safety procedures in place to ensure orderly access.

Museums will reopen in June and virtual visits will continue, but will they be able to charge for them? At the moment, it cannot be said safely that they will.

The great opportunity for startups

The pandemic which we are suffering is affecting businesses differently: the more digital businesses are keeping or even increasing their market share, whereas many of the more traditional businesses are experiencing serious difficulties. As explained by Alejandro Sánchez del Campo, of counsel in the Startups & Open Innovation practice at Garrigues, startups are facing this situation with a weakness (access to third-party funding has become very difficult in recent weeks), but also with many advantages over traditional SMEs: they are much more flexible, they are used to assuming risks, pivoting -changing their business model- is in their DNA and they know how to make the most of the advantages offered by technology.

Any crisis is also an opportunity and, at least in the short term, there is undoubtedly a gold mine for startups that are capable of providing a solution for the new problems caused by COVID-19, especially if the product or service that they develop is easily scalable.

Labor challenges

In the labor area, the post-COVID-19 era may also bring technological advances, as noted by Cecilia Pérez, partner of the Garrigues Labor and Employment Department.

Businesses have had to adapt in record time, by arranging for employees to work from home generally in activities where this is practicable, and it seems, at least for the time being, that it will be part of the “new normal”. This will bring new advances in technological solutions to enable cooperation between teams, hold virtual meetings or provide training courses and organize events.

In relation to how working hours are recorded, we may see changes arising from working at home arrangements (option of clocking in and out remotely) and from the need to prevent infections at the workforce where the system requires the clocking machine to be touched to take fingerprints. Will we return to the proximity card system, will applications on the computer or cellphone be enhanced, or will there be iris recognition clocking?

We may also see a proliferation of technological solutions to help monitor social distancing or to detect possible contacts with someone who is infected. Bot-sourcing could take off, with the development of new technologies which could replace people so as, on the one hand, to comply with social distancing requirements in activities which could not otherwise be carried out, and, on the other hand, to enable businesses to be more efficient in order to come through the crisis.

Close attention must be paid to all these issues so as to choose the technological solution that will allow the sought aim to be achieved while observing the law in force at a given time.

Taxes in a new era

In relation to tax, business will be well-advised to watch out for the studies of the Commission for Social and Economic Reconstruction recently created by the Spanish parliament (lower house), whose initial studies seem to suggest a reform of the tax system. There seems to be little doubt that it will affect digital businesses, as pointed out by Ramón Tejada and Álvaro de la Cueva, partners in the Garrigues Tax Department.

It will also affect the long-planned tax on certain digital services which is expected to levy 3% on any income from the provision of online advertising services, online intermediation services or from the sale of data if performed by companies which have a global net turnover exceeding 750 million euros.

It needs to be recalled that this tax would, in principle, be temporary, until the OECD and/or the European Union conclude their work on the taxation of digital companies.

These studies, which have been delayed due to COVID-19, revolve around two major issues: (i) determination of the present value in digital businesses and the mechanisms for distributing the income generated by them among the various countries involved (an issue very closely related to the valuation of intangibles) and (ii) the new concept of “digital permanent establishment” which to be implemented in practice will almost certainly give rise to a new multilateral instrument which amends the tax treaties currently in force.

In more specific areas such as that of fintech companies, where an acceleration in the development of new payment applications, financial management, etc. with electronic support is foreseeable, greater clarity will be necessary in relation to the tax treatment of these services, because the provision of these services is giving rise to numerous requests for resolution being submitted to the tax authorities over the possible existence of a permanent establishment or the VAT treatment of services to establish the place where the service is deemed to be provided (place of supply rules) and to determine whether the supplied service be exempt from VAT.

Companies’ relations with their shareholders and investors

Corporate life has been transformed throughout the state of alarm, all kinds of companies (listed or unlisted) and entities governed by private law have been allowed to adopt resolutions by their governing bodies in writing without holding a meeting, where the chairperson so decided or this was requested by two of its members, even if their bylaws did not provide for those procedures. The holding of shareholders’ meetings by videoconference or conference call has also been allowed with certain requirements, even if there was no bylaw provision. Pablo Vinageras claims that this trend will probably prevail and will be encouraged even more in view of the practical convenience and efficiency shown.

Corporate transactions and finance

The digital transformation has affected many elements of companies’ operations and of their contractual relationships, but perhaps the area of closing agreements and the form of documenting transactions (acquisitions, finance agreements, commercial collaboration agreements) remotely is one of those which still has the greatest room for growth and development, because many formalities require attestation by a notary (with the presence of the parties at the notary’s office), among other requirements; and, in business practice, physical signature and on paper still takes precedence, without which doubts arise over the legal certainty and reliability of the electronic evidence generated. The need for the large-scale remote execution of numerous operations and transactions which before this health crisis were executed physically is undoubtedly going to accelerate the changeover to digital solutions for executing contracts, for which we already have a legal framework (national electronic signature rules, European Regulation eIDAS) that provides us with the means to answer many of the legal questions posed by this development, Pablo Vinageras concludes.

Changing times for dispute resolution

And if things go wrong and end up in court, technology is also beginning to play an important role here. The current situation may lead to online trials no longer being an anecdote and gradually becoming increasingly important.

For China, which is already relying on artificial intelligence to administer justice, the use of videoconferencing to hold hearings has not posed major difficulties. In the United States it has also been possible to resolve the problem of distancing, to a greater or lesser extent, thanks to the rapid adoption of procedures conducted by videoconferencing. Judges, lawyers, witnesses … all connected to a screen. In other cases less ‘techy’ solutions have been chosen, such as the telephone or even the elimination of the oral hearing when it was considered that the pleadings and the documentary evidence provided by the parties were sufficient for the judge to be able to deliver a judgment, as explained by Cristina Mesa, principal associate in the Garrigues Industrial and Intellectual Property Department.

The case of the United Kingdom is particularly striking. Specific figures are reported of hearings held online, which are estimated at close to 90% of the total in recent weeks. The data are offered with the reservations to be expected in a health emergency, but we can make out a clear revolution in the sector.

It should not be forgotten, however, that for decades in the U.S. and the United Kingdom judicial proceedings have been held by telephone, and using other technology more recently, because they have a very different procedural system from Spain’s. Judges have been calling lawyers to hearings by telephone for years.

In Spain, the first virtual trial was held using Skype Business on May 11 in the court of judicial review number 2 in Santander. At the risk of sounding facetious, it has been said that the health crisis which we are facing has done more for working at home than any other measure that has been adopted until now. It will probably, and desirably, also serve as a catalyst to modernize the Spanish justice system.

For the more curious among you, the website provides very valuable information regarding the experiences and best practices of the countries which have chosen, to a greater or lesser extent, to digitalize justice during the health crisis.