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Device Companies and Contracts: Don't Overlook the Regulatory Implications

Medical Device & Diagnostic Industry Magazine
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An MD&DI August 1999 Column

Manufacturers are certainly aware of the importance of FDA issues during the product approval process. However, according to a device attorney, companies often fail to consider regulatory factors when preparing routine commercial contracts.

Medical device manufacturers routinely enter into contracts. These contracts can take a wide variety of forms, covering areas such as contract manufacturing, clinical investigations, monitoring clinical studies, product development, or product distribution. When these contracts are drafted, the focus is generally on the commercial terms—for example, price, specifications, indemnification, duration of the agreement, termination, confidentiality, and other economically or legally significant elements. All of these factors are important and require careful attention.

DEFINING THE TERMS

Yet many contracts overlook—or at least give insufficient consideration to—another commercially significant aspect: terms relating to FDA. In fact, FDA issues often have sufficient commercial importance that they should be explicitly addressed in the contract. Indeed, under some circumstances, such as the shipment of devices for repackaging at another company's facility, FDA regulations require that there be an agreement addressing specified issues (21 CFR 801.150). Many companies, however, are not attentive enough to FDA-related issues when drafting contracts.

For example, many manufacturing contracts have a clause requiring the outside manufacturer to "comply with the quality system regulation (QSR)." However, contracts are less likely to address a related and important regulatory issue: the ability of the contract manufacturer to make product modifications. Under what circumstances, if any, can the manufacturer make a change in the product without the written approval of the purchaser? What about changes in component vendors or standard operating procedures, or the replacement of equipment?

Inappropriate changes can give rise to significant regulatory risks to the purchaser. Some changes could trigger the need for a PMA supplement or new 510(k) notice. Other changes could result in distributing a product that is adulterated for violating the requirements of the QSR. Even more worrisome, some changes could have adverse effects on the product, putting patients at risk. And yet, unnecessarily requiring prior written approval by the buyer, or imposing overly restrictive limitations, can unduly inhibit minor manufacturing changes or improvements.

There is no set solution to these problems. While there can be a regulatory need to prevent certain types of changes from being made without prior written consent, there are many contractual variations on this theme. For one thing, the degree of latitude given a manufacturer should be very different for a device approved through the PMA process as opposed to a Class I device that is largely exempt from the QSR. A contract to manufacture a QSR-exempt device can afford the manufacturer far more flexibility than a contract for a life-sustaining PMA device. A device purchaser must consider how its own needs should be addressed in this setting, and negotiate the terms accordingly.

CONTRACTING FOR COMPLIANCE

Even the familiar requirement that basically says the manufacturer "shall comply with all QSR requirements" should not be inserted blindly. From the manufacturer's perspective, this phrase is unrealistic. Complete compliance with the QSR may be the Holy Grail, but it is virtually unattainable: with enough searching, some QSR deviations can be found in any facility. However, the deviations can vary greatly in significance, from a calibration test performed a week late to an unvalidated manufacturing process.

The phrase "shall comply with QSR requirements" draws no distinction or gradations. The parties to a supply agreement should decide whether the standard phrase embodies their intent, or whether the commitment should be more qualified—for example, "substantial compliance" or "material compliance," or an explicit statement that a timely correction of any material deficiency will not result in breach of contract.

Moreover, even this modified language can be undercut by other contractual terms. For example, it is not uncommon for a contract manufacturer to warrant that the devices "are not adulterated within the meaning of the Federal Food, Drug, and Cosmetic Act." However, a device that does not conform to the QSR is technically adulterated, even if the nonconformance is trivial. Therefore, a promise to avoid adulteration, when combined with a commitment to be in "material compliance" with the QSR, creates, at a minimum, ambiguity as to what level of compliance is contractually mandated. Thus, if an agreement contains a "material compliance with QSR" clause, manufacturers should omit language warranting that no devices will be adulterated.

The lesson is simple. Even the most seemingly routine FDA-related clause—the commitment to comply—requires careful attention.

COMMON CONCERNS

Device companies may encounter a wide variety of contractual issues that involve regulatory implications. The following is a very truncated list of other FDA-related questions that may arise in commercial settings:

  • If there is an FDA audit of the contract manufacturer (or clinical investigator), will the other party (the purchaser or sponsor) automatically be notified? What if the audit results in the issuance of an FD-483? Does the second party have any opportunity to review the FD-483 response before it is sent back to FDA?
  • Companies frequently need to decide whether to initiate a recall or other corrective action. In the context of a distribution or manufacturing agreement, it may be helpful to address potential recall-related issues in the contract. For example, are the parties obligated to consult before initiating corrective action? Who decides whether to proceed in the event of a disagreement? Who has responsibility for conducting the recall? And who pays the recall-related costs?
  • Recently, FDA adopted a regulation relating to electronic records and electronic signatures, 21 CFR Part 11. It is a complicated, confusing regulation with which many companies are not yet in full compliance. Should a purchase agreement include an explicit commitment by the contract manufacturer that it will comply with the regulation? Part 11 issues can also occur in a variety of other commercial contexts, such as clinical data management or the generation of laboratory test records.
  • Many device companies have record retention/record destruction policies. Experience has shown that keeping old records tends to be more harmful than helpful; draft documents, interim reports, e-mails, and other informal documents are particularly likely to be problematic in any future litigation. However, the fact that a company has a record-destruction policy and conscientiously destroys certain documents will be of little help if the other party to a contract indefinitely retains copies of the same documents. The problems are compounded by the extraordinary ability of electronic records—once created—to defy complete annihilation. Thus, device companies may want to include record retention/destruction clauses in their agreements with companies with whom they share information.
  • Clinical study agreements need their own set of FDA-related contractual clauses. For example, a prudent sponsor will want a representation and warranty that the investigators have not been disqualified and are not facing disqualification. The sponsor may also want to be assured that the investigators have not received any warning letters. The agreement should also include clear audit rights.

FDA has issued a new regulation requiring financial information from clinical investigators. For perfectly understandable reasons, investigators may be reluctant to provide this information. Nevertheless, it is a regulatory requirement, and one that should be explicitly addressed in the clinical research agreement, regardless of whether the sponsor is contracting directly with the clinical investigator or through a third party.

CONCLUSION

There are innumerable permutations in contracts entered into by device manufacturers. Before signing these agreements, companies should take into account not only the standard types of commercial factors, but FDA considerations as well. The failure to do so could have an adverse regulatory effect and also result in surprisingly unpleasant financial consequences.

Jeffrey N. Gibbs is a partner in the law firm of Hyman, Phelps & McNamara, P.C. (Washington, DC). He was formerly associate chief counsel of enforcement for FDA.


Copyright ©1999 Medical Device & Diagnostic Industry
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