Successful collaborations between medical device OEMs and contract manufacturers are critical for advancing medtech, but they can backfire without carefully considered written agreements that protect their rights.
David J. Dykeman and Bethany A. Stokes, Greenberg Traurig
Medical device manufacturers are under increasing pressure to reduce costs and improve margins. Outsourcing certain operations, including product manufacturing, packaging and distribution, to a third party is becoming a popular business strategy for the top medical device original equipment manufacturers (OEMs). Medical device OEMs are outsourcing assembly and eliminating factories and equipment, while contract manufacturing organizations (CMOs) are becoming their new operational partners.
With contract manufacturing playing a larger role in medical device development, it is critical for medical device OEMs to form successful collaborations with contract manufacturers. Similar to the beginning of any relationship, medical device OEMs and contract manufacturers often enter into a collaborative relationship, trusting each other with confidential information and pooling patent rights held prior to the partnership. Unfortunately, these contract manufacturing relationships may end unexpectedly, leaving the parties in vulnerable positions unless their rights have been protected with a carefully considered written agreement.
Successful collaborations involve complex and intense negotiations related to issues such as research and development, control, profits – and ultimately, termination. Although each collaboration is unique, medical device OEMs and contract manufacturers should ensure that a written contract manufacturing agreement addresses the key aspects discussed below.
Ownership of intellectual property (IP)
Issues of ownership are often the biggest cause of disputes in collaborations. To avoid conflicts, the contract manufacturing agreement should clearly state the division of intellectual property ownership. In collaborations, ownership rights are often granted in proportion to the contribution made toward the invention, but can also be divided by technology field or level of expertise. Special consideration should be given to pre-existing intellectual property that each party brings into the collaboration. Medical device OEMs should make sure their background intellectual property is adequately protected. Additionally, contract manufacturing agreements should address each party’s responsibilities regarding (i) filing and maintenance of patent applications and patents; (ii) litigation obligations related to patent infringement suits and disputes; and (iii) improvements to the product or technology.
Although the contract manufacturer may benefit from access to OEM technology, the OEM desires control over improvements to the product or technology. A thorough contract manufacturing agreement will include grant-back assignment or license provisions to ensure that any improvements to the product or technology are granted back to the OEM.
Payments and royalties
Valuing the contribution of each party can create conflict because it often determines the power balance between the parties. Contract manufacturing agreements should detail each party’s contribution and how each party will be compensated for its efforts. Payments can be made as upfront payments, milestone payments or running royalties. Typically, once the agreement is in place, one party provides funds to cover initial costs. Alternatively, payments can be made when key milestones are achieved to minimize the risk associated with upfront payments.
Regulatory approval and inspection
For FDA regulated products, OEMs will need the assistance of contract manufacturers throughout the regulatory approval process. The contract manufacturing agreement should require that contract manufacturers assist in product and process documentation and plant inspections before and after regulatory approval.
In the event the collaboration deteriorates or is challenged in any manner, the medical device OEM should ensure its interests are protected. An indemnification provision is a fair treatment clause that should be included in all agreements with contract manufacturers. For example, if a contract manufacturer produces defective products, the contract manufacturer should indemnify the OEM for the cost of a product recall or replacement.
Sometimes unforeseen circumstances (plant capacity, machine breakdowns, shipping delays, natural disasters or other events) mean the contract manufacturer is unable to supply the requested quantity in a reasonable timeframe. In these instances, the contract manufacturing agreement should clearly state that the OEM has a right to find a back-up supplier and is able to use the designs and molds of the original contract manufacturer. The designs and molds can be held in escrow by a third party, but the parties should be sure to clearly define the triggering events to release the escrow materials.
Assignment and change of control
Although a standard provision in any agreement, assignment clauses should not be overlooked. The current wave of consolidation in contract manufacturing requires more attention to these provisions. If a contract manufacturing agreement can be automatically assigned without consent, parties may end up working with competitors or other parties they did not initially intend to. Parties should consider whether contract manufacturing agreements should be automatically assigned upon a merger, acquisition or change of control, or if prior written consent is required.
No matter how successful, most contract manufacturing arrangements will come to an end. Agreeing to the details of an orderly termination before entering the collaboration is critical to avoid a messy dissolution. Termination clauses should address (i) when a party may terminate the collaboration; (ii) what happens to the patent and other intellectual property rights upon termination; (iii) and the circumstances of termination. Parties will typically agree to termination in the event of a material breach of the agreement, insolvency, change of control, force majeure or failure to timely supply product. Parties should also require adequate notice of termination and agree on what, if any, contractual obligations will survive termination, for example confidentiality, intellectual property and payment obligations. In particular, ownership and control of the designs, molds and manufacturing documentation upon termination should be clearly addressed.
Negotiating a contract manufacturing collaboration often requires disclosing confidential information to the other party, who may also work with your competitors. Prior to divulging any confidential information, parties should execute a written confidentiality agreement that prohibits sharing confidential information with any third parties or using confidential information for purposes other than its intended use. If a separate confidentiality agreement is not entered into by the parties, adequate confidentiality provisions should be included in the contract manufacturing agreement.
Contract manufacturing is driving innovation and cost-savings in the medical device industry, trends that will likely continue. Prior to disclosing confidential information or addressing intellectual property rights, parties should protect their interests with a thoroughly negotiated written contract manufacturing agreement, which is the key to successful collaborations.
David J. Dykeman, is a registered patent attorney with more than 20 years of experience in patent and intellectual property law, and co-chair of Greenberg Traurig’s global Life Sciences & Medical Technology Group. Dykeman’s practice focuses on securing worldwide intellectual property protection and related business strategy for medical device clients, with particular experience in medical devices, wearables, robotics, life sciences and information technology.
Bethany A. Stokes is an associate at Greenberg Traurig. Stokes counsels clients on all aspects of procurement and enforcement of IP rights, including domestic and international trademarks and copyrights. She also focuses on technology licensing, including negotiating and drafting of licensing, joint venture, collaboration and other IP- related agreements.