The Medtech OEM's Guide to Contracting for Services

It's important to ensure you have the correct terms in contracts for services before you sign on the dotted line.

It's important to ensure you have the correct terms in contracts for services before you sign on the dotted line.

Henry Kopf and Amish Patel

Companies across the globe in all sectors are reducing fixed costs as a means to increase corporate profitability. To reduce fixed costs, companies often shift work previously done by internal resources to outsourced service providers. Additionally, small and midsized companies face the issue of needing particular skill sets or technical resources to complete critical projects but not having the financial resources or critical mass to acquire those resources internally. Regardless of whether your company is using or providing outsourced services, it is critical that the parties enter into a complete and well-defined contract for the services that are to be provided. Having the correct terms in contracts for services is of even greater importance to companies regulated by FDA, such as those in medtech, than for those in unregulated industries. Therefore, it is paramount for medical device companies to ensure that contracts for services address key requirements, legal terms, and specifications.

Contracts for services are governed by common law principles, as opposed to the purchase and supply of goods which are governed by Article 2 of the Uniform Commercial Code. More information on the purchase and supply of goods can be found in a companion article. Common law contracts generally have a higher legal standard to establish the formation of a contract because of the mirror image rule. Unlike UCC Article 2, the common law mirror image rule requires an offer and acceptance of the offer to be mirror images of each other. In a contract for services, there generally is one document that is signed by both parties, which defines the specific terms under which the parties agree governs the terms of their service relationship.

Contracts for services can be easily misconstrued, vague, or unclear because of the intangible nature of services. Therefore, it is especially critical to have contracts for services carefully drafted. In the event of a contract dispute, a well-drafted and comprehensive contract will include provisions to facilitate resolution without the judicial process. Delay of deliverables, inferior service quality, payment disputes, and other anticipated issues should also be addressed within a well-drafted services contract. The exercise of formally memorializing the terms of a contract in writing will also assist the company in reviewing and verifying the specific details of the project. Consequently, the process of drafting a well-defined and granular contract will help to not only avoid potential future legal disputes, but also improve the chance of successful business execution of the overall project.

Service contracts should always include, at minimum, basic contract provisions that address confidential information and intellectual property (IP). Depending on the nature and type of service provided, these provisions can range from short clauses stating the basic requirements of each party to extensive contract sections addressing confidential information and IP in great detail. Properly drafted IP clauses will address the ownership of newly created IP, confirm ownership of existing IP, and ensure the proper transfer of any IP created during the service to the intended party in the event the IP vested in the unintended party by accident or matter of law. For example, absent specific contract provisions, the transfer of all the IP rights associated with outsourced custom software to the purchaser is not guaranteed by just paying for the development of the custom software.

Engineering and product design services are a common area that medical device companies enter into service contracts. Contracts for these types of engineering services need to clearly define the specification and requirements the product will be designed to meet. Additionally, any and all applicable third-party standards the designed product is to meet should be specifically addressed. The parties should identify the countries the ultimate product is planned to be marketed in as the standards for regulatory approval vary by country. In the United States, FDA maintains a database of consensus standards. These types of standards undergo revisions regularly and will differ for Canada and the EU. Once the engineering firm completes the design process, contractual provisions should be in place to require the engineering firm to provide the contract manufacturer with the documentation, assembly instructions, design files, drawings, part numbers, and specifications needed to properly manufacture the medical device. These provisions often get overlooked but are critical to avoid future business disruptions that may occur once the product is transferred to manufacturing.

In contracts for testing services, whether sterility testing, analytical testing, or mechanical testing, the parties need to include the specific testing methods and protocols that will be used during the process. In the case of a first-to-market revolutionary medical device, new test methods and protocols may also need to be developed. As a result, the analytical methods used to validate the new test methods and protocols need to be soundly defined in the testing services contract as well. Furthermore, the data output and reporting requirements from the testing facility should be well defined such that the results of the testing can be easily used by the sponsor going forward.

Many sponsors will contract with a contract research organization (CRO) to assist with validation or help navigate the FDA submission process as it can be lengthy and filled with regulatory hurdles. Whether submitting a 510(k) application or a PMA, supporting documentation and certifications are required by FDA. The coordination and oversight of these requirements necessitate careful forethought and the responsibility should be contractually delegated to the appropriate parties. Sponsors should ensure the contract defines the parties responsible for providing the supporting documentation for submission in the device application. If the sponsor plans to rely on certain documentation or certificates provided by the engineering firm or contract manufacturer, contractual provisions requiring timely compliance should be included.

In addition to the points discussed above specifically for the medical device industry, a well-drafted contract for services will also answer fundamental questions such as the following:

  • What specific services are provided?
  • What is the acceptable level of service quality?
  • How are defects and service interruptions corrected?
  • What are the milestones, deliverables, and timelines of the service?
  • Are there progress payments due under the contract? Ideally, any progress payments should be linked to a tangible contract milestone.
  • What are the payment terms and how are payment disputes addressed?
  • Are the overall services provided on a regular basis? Is there a need for separate project-based scope of work agreements? Which contractual provisions control between the master and scope of work agreement?

Contracting for medical device services can bring unique challenges simply due to the nature of the services and the highly regulated environment. Contracting for services in the medical device industry often requires thorough review, careful drafting, and strategic negotiations by your expert legal counsel. Engineering firms, contract manufacturers, and sponsors should spend time upfront to ensure that the scope of services is clearly defined and that adequate safeguards are in place to provide a resolution should a dispute arise.

Meet medtech contract manufacturers at the BIOMEDevice San Jose expo, December 2-3, 2015, at the San Jose Convention Center.

Henry Kopf is an attorney at Revolution Law. Reach him at [email protected].

Amish Patel is an attorney at Revolution Law. Reach them at [email protected].

The information contained in this article, and in material referenced within, is intended for informational and educational purposes only, and does not constitute legal, financial, accounting, medical or other professional advice.

[image courtesy of PHASINPHOTO/FREEDIGITALPHOTOS.NET]

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