How to Prepare Foolproof Supplier Agreements

By Sangita Viswanathan

Requiring clear supplier agreements can force some tough conversations. Acme Monaco’s Lucas Karabin, and Hogan Lovells attorney Jodi Scott, discuss the importance for such agreements, and what they should ideally cover.

Acme Monaco, is a manufacturer of custom guidewires, and medical wireforms. The company also makes springs, orthodontic hardware, stampings, and non-sterile medical assemblies. All parts are custom made to customer’s specifications, and sold to the original equipment manufacturers (OEMs) and distributors, with no products being sold directly to end users, such as doctors or hospitals, describes Executive Vice President Lucas Karabin.

Karabin is naturally concerned about how to clearly define the roles and responsibilities of his company and their customers. For instance, if something goes wrong due to a design issue in their product, who’s responsible – Acme Monaco or the OEM?

So Karabin connected with Jodi Scott, attorney at Hogan Lovells, to discuss how best to work with their customers and suppliers to ensure that such ambiguity is removed, and customer agreements have more clarity. For Karabin, it was important that he considered all the steps that he could take to put in place corrective actions, and revisit existing agreements with customers, and identify what his company has in writing with those customers. “We need to think about fool-proofing our existing customer agreements, and move beyond just dollar terms, to incorporate the necessary quality and regulatory compliance language,” says Karabin.

Scott focuses her practice on assisting the medical device industry in achieving U.S. marketing authorization and maintaining compliance to FDA’s quality system and other post-market regulatory requirements. She has also spent considerable time developing and implementing strategies to manage FDA-initiated enforcement actions, such as the issuance of FDA Form 483s, untitled letters, Warning Letters, and consent degrees of permanent injunction.

“According to FDA, a device company is responsible for the quality of every single component in its device, and in a time when every device has a lot of critical components, this can be very challenging. Embarking on a partnership with your supplier can get difficult when things go wrong. That’s were supplier agreements play an important role. Have clearly defined supplier agreements is a way to ensure that things go smoothly from an FDA standpoint,” explains Scott.

What are some of the aspects that a supplier agreement can help clarify? “These can include: how do you define the relationship? What does the agreement cover? What are some concerns that it can help address? Are the obligations as specified in the contract being fulfilled,” lists Scott.

In today’s scenario, Karabin says that often many components and services are being purchased via purchase orders with little obligations specified, while a supplier quality agreement can help go into greater detail on roles and responsibilities. Who has the ultimate responsibility for the product should cover not merely IP issues, but regulatory compliance, points out Scott, and that question can be clearly answered by the supplier agreement. This becomes especially critical when there’s an adverse event, or if there are changes made to the product.

“Little changes can become a big change in FDA’s mind, so it’s important to clearly note in the supplier agreement who is the person ultimately responsible for any changes made to the product, and who signs off on these changes,” she explains. Scott points to the disconnect between the component manufacturer and the finished device company in that the former is looking at maximizing process efficiencies, while the OEMs are handling customer complaints, investigation reports etc. And these are not communicated to each other. So a supplier agreement can incorporate business considerations that you want to know about, such as product efficiency, how it is made, issues with production, manufacturer having sufficient raw material production etc.

Karabin adds that the supplier agreement should also describe who is responsible for the device and design once it’s in the field. In one instance, “we found that we were responsible for our product, but we were in an unfair position since we did not know who the product was sold to. Thus, the agreement should include traceability, covering details such as who’s receiving the product.” Companies need to have better clarity and understanding on how their product is used in the market, and more importantly, how it’s misused. The further you are away from the customer, it’s harder to understand that, says Scott. So, supplier agreements can help define who has ultimate design responsibility. When FDA finds a contract manufacturer, who plays a supporting role, responsible for this in the field, it creates a difficult compliance situation.

Do suppliers, or OEMs welcome such thorough, agreements? Scott says that there is less pushback from companies that make critical components for a particular company. But when it comes to companies that are buying off the shelf products, for making medical products that constitute a small portion of their overall business, then there is more pushback.

Going forward, Karabin says that Acme Monaco will work with detailed supplier agreements, where there’s nothing left to chance. “We will create clear customer agreements, with design control and corrective actions in place,” he says.

Requiring such clear supplier agreements will force some tough conversations, as it would deal with some touchy issues, says Scott. “The upside is that it allows you to react and respond to any concerns before you talk about the next issue,” she adds.

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