Suppliers and Liability: Coping with the Materials Shortage

Medical Device & Diagnostic Industry Magazine
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An MD&DI April 1998 Column

BOTTOM LINE

What manufacturers can do to ameliorate suppliers' concerns about product liability suits while maintaining access to raw materials.

In 1990, besieged by product liability lawsuits from dissatisfied patients, jaw-implant manufacturer Vitek, Inc. (Houston), filed for Chapter 7 bankruptcy. In reaction, attorneys looked for another means of recovering damages for their plaintiffs. They thought they found one in DuPont Co. (Wilmington, DE), which had supplied the raw materials for Vitek's jaw implant. Fifty-two lawsuits were brought against DuPont and defeated through trial or summary judgment. DuPont spent thousands of dollars in legal fees protecting itself.

Cases like these have made material suppliers wary of being named in product liability lawsuits involving medical device companies that have used their raw materials. Many raw material suppliers are large, high-profile businesses that make attractive targets for plaintiffs and attorneys who assume they have substantial financial assets or ample liability insurance coverage. Raw material suppliers may lament this state of affairs, but there is little—barring tort and legislative reform—they can do to stop it. As a result, at least 14 suppliers of raw materials have announced that they will substantially limit or terminate their sales of raw materials and components to medical implant makers. Other biomaterials suppliers are threatening to do the same.

This situation puts a crunch on the medical device manufacturers—especially implant makers—who depend on these raw materials. For example, Edward Voboril of Wilson Greatbatch Ltd. (Clarence, NY) recently stated, "The biomaterials availability crisis triggered by the breast implant scare has put a lot of small device companies at risk of not surviving."¹ Both device firms and patients have a stake in the raw materials availability issue. Without some solution, life-sustaining implants such as pacemakers, defibrillators, and brain shunts may not be available to end-users in the future.

Several product liability tort reform measures have attempted to address this issue. A tort reform bill vetoed by President Clinton in 1996 did contain, in the president's view, a laudable provision that would have provided liability insulation for implant materials suppliers.

There are few easy solutions to the liability problem. One short-term solution to shortage problems is to stockpile raw material inventory. However, at some point the inventory will run out, and the device manufacturer will need to scramble for supplies or rethink its product mix. Fortunately, medical device firms can take several other steps to address the biomaterials availability crisis.

SOLUTIONS

Hold-Harmless Agreements. Raw material suppliers may want a guarantee that they will not be brought into any product liability claim, but no device firm can stop a plaintiff from suing. If an injured plaintiff wants to file a shotgun lawsuit naming many defendants, little can be done to prevent it—and such lawsuits are common in medical device product liability litigation.

However, to help allay suppliers' concerns, medical device companies can enter into a hold-harmless and indemnification agreement with the raw material supplier. A hold-harmless agreement is a standard risk-management tool, a written agreement between two parties who desire to shift the cost of liability from one party to another. Most raw material suppliers will want an agreement that says something to the effect of, "If the raw material supplier is sued for product liability because it provided the raw material for the implant, the implant maker will defend, indemnify, and hold harmless the raw material supplier."

Liability Insurance. Another option medical device manufacturers can consider is adding the raw material supplier as an additional insured to their existing product liability insurance coverage. Some insurance companies call this a "raw materials supplier endorsement." If the raw material supplier is sued because of an alleged defect in the manufacturer's product, the supplier will be defended by the manufacturer's insurance company and claims may be paid—up to the policy limit—by that insurer. Companies should contact their insurance agent or broker for details.

These agreements can be complicated if the raw material supplier wants higher insurance policy limits than the manufacturer deems prudent or balks at the insurance policy's deductible or a self-insured retention. In addition, most policies give the insurance company—not the insured—the right to choose attorneys, decide to defend or settle, and in general control the defense of the claim. Such an arrangement may not be acceptable to the raw material supplier.

Contractual Agreements. In addition to a hold-harmless agreement, manufacturers can contractually agree that they will not pull the raw material supplier into any product liability litigation. This is particularly pertinent when the product liability suit involves biocompatibility issues, such as allegations that an implant triggered an autoimmune response or a major body foreign cell reaction. These types of claims have been made against silicone implants, and burgeoning latex litigation may include claims pertaining to users' hypersensitivity to latex in nonimplant products.

Alternative Dispute Resolution. In conjunction with the preceding suggestion, medical device manufacturers may propose establishing a mediation/ arbitration provision with the raw material supplier regarding any proportion or percentage of claim responsibility that results after a bodily injury claim is settled. Disputes between the raw material supplier and the device manufacturer may relate to the quality of the raw material used, whose specifications were used in processing the raw material, whether the raw material supplier was aware of the medical uses to which the device company was putting the raw material, and notice or knowledge of biocompatibility problems and concerns.

Sniping between the raw material supplier and the device manufacturer while a case is in court will only benefit the plaintiff and his attorney. Suppliers and device companies should stipulate in advance that they will avoid disputes during a product liability claim and settle their disagreements later through alternative dispute resolution proceedings.

Expert Technical Support. Device companies want to avoid defending raw material suppliers without their assistance. Thus, as a condition of any agreement with a raw material supplier, device manufacturers should persuade the supplier to agree to provide technical support and expertise in the event of product litigation. Such assistance may include serving as a consultant during case defense, providing an employee who can serve as an expert witness, producing key documents regarding the raw material, identifying potential defense witnesses in the industry, and identifying resources on issues such as biocompatibility. Manufacturers should stress that in exchange for insurance coverage or indemnification, the raw material supplier must cooperate with the device company in the investigation and defense of any claim.

Alternative Suppliers. Diversifying the company's sources for raw materials makes device manufacturers less vulnerable to any one large supplier dictating onerous terms, even in the absence of product liability concerns. In addition, when depending on a sole source for a key raw material, device companies put themselves in a very vulnerable position from a risk-management standpoint.

Professional risk managers call this contingent business interruption exposure. A manufacturer's operations are vulnerable to interruption not only from the hazards to which its own plant is exposed but also to those that affect its key customers or suppliers. For example, a fire or natural disaster at the raw material supplier's facilities can shut down or interrupt the device company's operations, as can strikes or other labor problems.

Relying on one source for raw materials also gives the raw material supplier great bargaining leverage. For this reason, device companies should periodically reassess their range of choices for raw material suppliers.

Of course, diversifying can also cause problems. A single large supplier may provide materials at the best price or quality, making it financially inefficient to use more than one supplier. Furthermore, dealing with multiple sources of raw materials can be a time-consuming distraction. The trend these days is to reduce—not multiply—the number of vendors and suppliers a business uses. Finally, a device company that uses several suppliers may find its buying power and leverage diluted. This is not to say that diversification is a bad idea, only that what makes sense from a risk-management standpoint is not without pitfalls of its own.

THE BIOMATERIALS ACT

The proposed Biomaterials Access Assurance Act would do much to eliminate the main reason raw material suppliers threaten to withdraw the availability of key components and raw materials. The act would insulate biomaterial suppliers from product liability claims when their only connection to the case was supplying a raw material that met all specifications. By limiting liability, the act would also assure millions of U.S. citizens who depend on life-saving or life-enhancing implantable medical devices that the devices will still be available in the future.

Executives and employees of medical device companies can support the Biomaterials Access Assurance Act by writing to their congressional representatives to urge favorable consideration of the legislation. In addition, medical device companies can support lobby groups, such as the Health Industry Manufacturers Association and Medical Device Manufacturers Association, that are working to pass this legislation.

CONCLUSION

There are no quick and easy solutions to the potentially increasing shortage of materials for medical device implant manufacturers. Barring sweeping reform of the liability landscape, device companies will need to pursue multiple strategies ranging from how they choose suppliers to the types of contractual arrangements they enter. While some of the solutions offered in this article make good business sense regardless of what legislative changes may occur, manufacturers would be wise to strongly advocate legislation that may help solve the raw materials problem for the long term.

REFERENCE

1. Voboril EF, "Managing a Small Company through Big Changes," Med Dev Diag Indust, 19(10):38—46, 1997.

Kevin M. Quinley is senior vice president of risk services for MEDMARC Insurance Co. (Fairfax, VA). He is a chartered property and casualty underwriter.

Illustration by Sarah Whitehead

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