How to Minimize Vendor and Supplier Disputes in Medtech

It is paramount for medical device companies to ensure standard purchase and supply documents address key requirements, legal terms, and specifications.

It is paramount for medical device companies to ensure standard purchase and supply documents address key requirements, legal terms, and specifications.

Henry Kopf and Amish Patel

In the medical device industry, most companies are both buyers and seller of various goods, services, and products. Buying and selling these goods, services, and products are basic activities that underpin daily operations of nearly any business. It is important to understand that even the most basic transaction, such as repeat transactions carried out by a form purchase order and order acknowledgement, are in fact legal contracts. The terms a purchaser or component supplier includes or does not include in a standard purchase order or acknowledgement form have true legal meaning and can be the determining factor in a future dispute. Having the correct terms in standard purchase and supply documents is of greater importance to companies in FDA-regulated industries, such as medtech, than in unregulated industries. Therefore, it is paramount for medical device companies to ensure standard purchase and supply documents address key requirements, legal terms, and specifications.

Article 2 of the Uniform Commercial Code (UCC) typically governs the sale of goods domestically. On the other hand, a transaction for services is typically governed by common law principles and will be addressed in a separate follow up article. If a transaction is a mix of goods and services, the transaction is categorized based on whether goods or services are the predominant basis for the transaction. UCC Article 2 was designed to encourage the smooth flow of business transactions and will generally ensure that a binding contract was formed even if the parties never fully agreed on all the specific terms of the transaction in a single signed comprehensive document. All states, except for Louisiana, have adopted a version of UCC Article 2. It should be noted that there are some subtle differences in each state’s version of UCC Article 2 that can have a profound impact in a future dispute between parties.

It is common practice that medical device companies and component suppliers do not negotiate and agree to every term of a transaction when the order is for “standard” items, lower value parts, or items purchased repeatedly in the ordinary course of business. In these situations, it is impractical to engage legal counsel to review the other party’s standard forms or have your legal counsel customize your own standard forms for a particular transaction. Instead typically, the purchaser will send the supplier an order referencing the purchaser’s standard terms and conditions of purchase. The supplier will then confirm the order and reference the supplier’s standard terms and conditions of sale. It is very unlikely that the terms of the transaction referenced in each party’s standard terms and conditions will match each other. The differences between each party’s standard terms and conditions create what is often referred to as the “Battle of the Forms” in a subsequent dispute.

In a Battle of the Forms dispute under UCC Article 2, the following can happen:

  • Additional terms that are not material in each party’s forms will be read into the contract if they are not contradicted by the forms of the other party.
  • Any material alterations are not accepted.
  • Contradictory terms between the forms are “knocked out” of the contract and replaced by UCC Article 2 gap filler provisions.

While this process may seem straightforward, in practice the opposing party can exploit this process in a dispute to create questions of fact in order to delay an unfavorable legal outcome or as leverage to obtain a more favorable settlement offer.

Medical device companies can avoid, or at least minimize, many of the pitfalls from disputes related to the purchase of goods by taking the following steps:

  • Ensuring that the price and quantity of goods is clearly defined.
  • Addressing whether partial shipments of goods are allowed.
  • Clearly defining FDA specifications and other industry standards (including recognized consensus standards) the goods must/will meet.
  • Clearly addressing the types and format of supporting documentation and certificates that are required to be delivered with the goods.

Medical device companies are highly regulated, therefore the last two points noted above are especially critical. Suppliers, aiming to create multiple revenue streams, often sell their parts in a variety of industries. For example, a silicone manufacturer may decide to expand into medical grade silicone components after cornering the aerospace industry. While thermal stability and low outgassing may be highly desirable properties in the aerospace industry, biocompatibility, leachables, extractables, and material traceability are more important to medical device manufacturers for medical-grade silicone. Therefore, medical device companies should include contractual provisions that clearly define and require the supplier’s goods to meet the applicable specifications set forth by the corresponding Code of Federal Regulations (CFR) and FDA as well as that the supplier’s facilities meet the quality system (QS) and current good manufacturing practice (cGMPs) requirements. Because the ultimate responsibility for meeting CFR and FDA specifications lies with the finished medical device manufacturer, it is critical to require such contractual provisions before entering into a transaction with a supplier.

Another example is that under the FDA’s premarket application process for Class III medical devices, medical device companies must provide extensive documentation supporting compliance with QS and cGMP requirements. If a supplier or a contract manufacturer is used, the medical device company must ensure the supplier or contract manufacturer is not only complying with the QS and cGMP requirements, but also provides the supporting documentation at the time of delivery. Overlooking such contractual provisions can be costly and delay the FDA approval process significantly.

An important protection for medical device companies is to have standard terms of conditions of purchase as well as terms and conditions of sale that are customized for their business. It is imperative that medical device companies also forward their standard terms to the other party, so that their terms can be applied to any future Battle of the Forms dispute. Without having standard terms in a Battle of the Forms dispute, medical device companies risk being subjected solely to the other party’s standard terms if the medical device company did not provide its own standard terms to contradict the other party’s terms. Typical issues and items to address in the standard terms and conditions of sale/purchase include intellectual property, product warranty, limitation on liability, indemnification, governing law and venue in a dispute, and assignment of the contract.

Medical device companies contract for the sale of goods on a regular basis and often do not have the time or resources to review the associated risks in detail. Through a combination of ensuring that key information is addressed in purchase orders/order acknowledgments and creating customized standard terms and conditions of purchase and sale, medical device companies can dramatically reduce the risks associated with a potential future dispute for the purchase and sale of goods.

 

Meet with more than 300 medtech industry suppliers at BIOMEDevice San Jose conference and expo, December 2-3, 2015, at the San Jose Convention Center.

 

Henry Kopf and Amish Patel are attorneys at Revolution Law. Reach them at [email protected] or [email protected].

 

[image courtesy of JESADEPHORN/FREEDIGITALPHOTOS.NET]

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