Manufacturing & Distribution Client Advisory - September 2016

MANUFACTURERS SHOULD FOCUS ON CYBERSECURITY TOO

All too often the news is splashed with stories of cybersecurity breaches. These headlines call attention to instances where hackers steal millions of pieces of information at a time, usually from large retailers or government agencies. However, the news of only certain breaches distracts from the fact that every industry can suffer from cybersecurity breaches, including the manufacturing industry. Attacks on manufacturers can result in the theft of intellectual property and substantial damage to manufacturing processes. Manufacturers should take cybersecurity very seriously, prioritizing it in order to protect themselves from legal and financial liability.

One of the biggest threats facing manufacturers is the prospect of intellectual property theft. Whether it is the intellectual property of the manufacturer or the manufacturer's clients, the legal and financial ramifications of this can be devastating. Furthermore, such a breach could damage the manufacturer's your companys reputation, its most highly regarded assets.

Another threat, unique to manufacturing, could be a hacker remotely tampering with the manufacturing process or equipment. This could disrupt production and cause the loss of materials and equipment. Or, the tampering could be more subtle, causing defective products to enter the marketplace before the intrusion is discovered. This may result in recalls, financial losses, and legal exposure.

A challenge in dealing with these threats is increasing automation and the rise of integrated technology through the internet of things. Most advanced equipment is linked in some way or another with a companys network and this integration presents multiple intrusion points for hackers to gain entry into your system. These integrated technologies provide varying levels of security out of the box and are easily overlooked when assessing overall risks.

Cybersecurity should be a fundamental part of a manufacturer's business operations in order to prevent and/or mitigate the effects of a cybersecurity breach. Manufacturers should plan for, and take precautions to protect against, a cybersecurity breach. Manufacturers can utilize experts to assist in analyzing, identifying and minimizing the risk of an intrusion. Based on that analysis, cybersecurity protocols and programs can be developed, implemented, monitored and updated.
- By Nicole Harrell

*A special thanks to Caleb McCallum for assisting with the research for and preparation of this alert.

LAND USE ISSUES TO ADDRESS IN CONNECTION WITH EXPANSION OR EVOLUTION OF INDUSTRIAL OPERATIONS

Industrial and manufacturing clients are often savvy about zoning and permitting due diligence when developing a new facility but, even the most sophisticated clients tend to let their guard down on land use due diligence when (1) proposing to purchase or lease an established industrial facility, or (2) incrementally evolving their industrial processes at existing facilities (e.g., in response to changes in the market and/or technology over time). It is important to understand that most localities do not categorize all industrial uses the same for zoning and permitting purposes.

A proposed acquisition property that is currently or was formerly occupied by an industrial use, does not necessarily mean that your proposed industrial use is permitted on the property. Prior to the expiration of your due diligence contingency period in the purchase agreement or lease, you should obtain confirmation from the zoning administrator for the locality in which the property is located that your use is permitted on the property. Certain industrial uses may require a special use permit, even within a general industrial zoning district. Certain industrial uses may require rezoning of the property to an entirely different zoning district (e.g., a manufacturing use intended for an existing industrial warehouse building could require rezoning from Light Industrial to General or Heavy Industrial). These land use approvals typically require legislative action by the governing body of the locality and can involve a review process that takes a number of months to complete.

A real world example of the risk presented by failing to do proper zoning due diligence, is an existing business that purchased a vacant facility located on industrially zoned property which had previously been occupied by a competitor for a similar use. The business assumed, given the similarity in use, that it could occupy the facility and begin its operations shortly after closing. Unfortunately, in applying for its occupancy permit, the business learned that under the localitys zoning ordinance, while its proposed use was similar to the former use, its use had a different zoning designation and the business was required to rezone the property, obtain a special use permit, and obtain a new site plan approval which imposed substantial unanticipated costs on the venture and delayed its intended opening by almost 1 year.

Similarly, the occupancy or use classifications under applicable building and fire prevention codes can (1) vary with different industrial uses, and (2) change over time with the evolution of the industrial processes conducted in a facility. Accordingly, prior to the expiration of your due diligence contingency period in the purchase agreement or lease or prior to making changes to your industrial processes, you should determine (i) the existing use classification associated with the facilitys building/occupancy permit under applicable building and fire prevention codes, and (ii) whether your proposed use or change in use of the facility will result in a change in the use classification which can trigger substantial facility modifications in order to comply with applicable building and fire prevention codes.

A real world example of the consequences of failing to review occupancy/use classification and building/fire code requirements relative to the evolution of industrial operations within a facility involves a business that, over the course of several years, incrementally changed its end product and the process for producing its product in response to customer demands and an evolving marketplace. A minor chemical spill accidentally occurred at the facility and, during the regulatory inspection associated with the spill, it was determined that, based on the nature of the changes in operations at the facility from when it was originally permitted, the use was no longer classified under applicable building and fire codes as F-1 (Factory Industrial Moderate Hazard Occupancy) and was now classified as an H-4 (High Hazard Occupancy). This change in use classification required the facility to apply for a new occupancy permit under the H-4 use category, triggering (1) the requirement to comply with updated provisions of the building code (from which it was previously grandfathered), and (2) substantial facility modifications related to life safety and fire prevention in accordance with the high hazard use designation. The facility was forced to shut down for a period of time, damaging its position in the marketplace, and resolving the regulatory scrutiny served as a distraction from its business operations for over a year. -By Tim Trant


The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2017.

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