top of page

    Manufacturing (Agreements – Contract Manufacturing)

 

  • A contract manufacturing agreement (CMA) (also known as "private label manufacturing") is a type of outsourcing agreement that defines the relationship between an individual or legal entity which has developed a particular product and a manufacturing enterprise legal entity that will then produce the developer entity's particular product in bulk for distribution, either by the developer entity (either directly or through another outsourcing agreement with a distribution entity) or by the manufacturing entity as specified in the CMA.

 

  • Due to the greater complexity of a CMA, at a minimum a CMA should include provisions such as: a statement of purpose (a general statement defining the respective parties – the developer entity and the manufacturing entity – and indicating something to the effect that the manufacturing entity will produce the developer entity's particular item to the exact specifications provided by the developer entity); all the contact information for the respective parties; all the relevant definitions for important terms used in the agreement (in particular, for any technical terms that may be necessary to understand the parts and operation of the particular item to be manufactured); attachments (exhibits of all the technical documents required to produce the developer entity's item) and a statement that all exhibits are physically attached to the agreement and are also incorporated by reference therein; an extremely-detailed description of the manufacturing methodology and services to be provided by the manufacturing entity, including the location of the production facility, quality assurance/quality control (QA/QC) methodology, testing of random samples, tolerances of individual parts, forecasted production schedule numbers, audits, applicable manufacturing standards, exclusivity (meaning whether the manufacturing entity will devote all of its production facilities exclusively to the production of the developing entity's item during the entire term of the agreement, or whether the manufacturing entity can dedicate on some percentage or some number of facilities to the production of the developer entity's item, while the remainder of the manufacturing entity's facilities can be used to produce other items for other clients), labeling and packaging, maintenance expectations for the manufacturing equipment, customer service, distribution, shippingand the like; a general description of what the manufacturing entity will not do, including an affirmative representation by the developer entity that it will not explicitly or implicitly expect the manufacturing entity to perform any such services; a detailed description of what the developer entity is expected to provide to the manufacturing entity as a condition precedent for the manufacturing entity to complete the required work; a change management clause outlining the protocol for how any required changes to the manufacturing specifications (for example, in a non-discretionary situation, caused by the Food and Drug Administration – FDA – were to alter the requirements for the production of a certain drug during the term of the agreement, that might materially increase production costs, or in a discretionary situation, where the developer entity just wanted, for no particular reason, to change the colors and logo that would be displayed on the product packaging) might be handled; a detailed milestone payments schedule; disclaimer of damages (such as consequential, incidental, lost profits, special or the like); indemnification; insurance; limitation of liability; term (commencement date, effective date, execution date and the particular end date, or at least the number of calendar days that the agreement will remain in effect); termination (whether for cause or without cause, and outlining all the predicate events of breach and default); any provisions regarding price changes (whether of materials used in production, or distribution or transportation costs; provisions regarding acceptance or return of items by the developer entity (or by distribution outlets, in the event the agreement allocates the responsibility for delivery to directly from the manufacturing entity to the distribution outlets); a detailed description of intellectual property (IP) ownership and rights between the parties; licensing of IP for processes of design and manufacture, if applicable; compliance with specified manufacturing standards, such as those of the International Standards Organization (ISO); compliance with all applicable domestic and international laws; confidentiality; non-compete; non-disclosure; non-solicitation; change in ownership (whether of the developer entity or the manufacturing entity); consequences of ;governing law; governing language; dispute resolution protocol; dispute resolution venue; independent contractor status statement; no assignment without prior consent; order of precedence for attachments and exhibits; full contact information for notices; UCC title considerations at different times and situations during the term of the agreement; financing provisions, if applicable; any warranty that the agreement may require the manufacturer entity to provide to the developer entity.

 

  • Depending on the complexity of the manufacturing process contemplated in a CMA, the parties may also decide to enter into a related service level agreement (SLA), which provides amplified detail regarding many aspects about the anticipated manufacturing process, and which should then be attached to, and incorporated by reference into, the related CMA.

 

  • The manufacturing entity's bid to perform the manufacturing should be extremely detailed, including information such as; an itemization of each part to be produced, including the developer entity's designated part number and detailed production drawings of each part (provided by the developer entity); an estimated required part life (specified by the developer entity); the manufacturing entity's estimated unit price per part, along with any volume discounts allowed by the manufacturing entity; the effect of changed exchange rates (assuming some materials may have to be imported from foreign countries); the manufacturing entity's list of assumptions and calculations for each part; a list of any value-added items to be included in the manufacturing process; a detailed matrix of applicable labor rates and costs, with assumed escalations; a matrix of lead times for each part; the manufacturing entity's proposed production schedule, including allowances for testing; and perhaps most importantly, a representation by the developer entity that the item as designed by the developer entity, using the parts as specified by the development entity, shall work as intended (assuming the manufacturing entity assembles the item based on the design and specifications of the developer entity).

 

  • The manufacturing entity may consider attaching all the derivative supply chain agreements (SCAs) upon which it may rely in order to achieve the requirements of the CMA to the CMA as exhibits, which would then be incorporated by reference into to CMA, and then include language in the CMA that the manufacturer entity's price is contingent upon all such SCAs remaining in full force and effect throughout the term of the CMA (thus giving the manufacturer a possible reliance argument for justifying increased production costs from the developer entity, in the event of any disruption in the manufacturing entity's supply chain).

 

  • Any IP ownership provision in a CMA should be careful to address the circumstances under which IP rights might arise, such as those situations involving clear ownership (such as IP granted to the developer entity thorough a patent issued prior to the CMA) or perhaps joint ownership (in the event some new process that must be developed jointly by the developer entity and the manufacturing entity at some point during the term of the agreement).

 

  • In the alternative, if the manufacturing entity wishes to have more control over its supply chain for the project, the manufacturing entity may prefer to enter into toll manufacturing agreements (TMAs) with its suppliers directly, rather than have an extended chain of third-party suppliers and sub-suppliers, in which the suppliers guarantee to provide the manufacturing entity all their own required materials directly (assuming that the material suppliers have the resources to do so).

 

  • The FDA has published guidance, urging pharmaceutical companies to employ CMAs (called "Quality Agreements" in the guidance) with reliable contract manufacturing organizations (CMOs) whenever possible, as a contracting methodology to ensure current good manufacturing practices (cGMPs) related to drug efficacy, quality and safety.

 

  • If it is necessary to have a CMA with a manufacturing entity in a foreign country, it is still possible to have the governing law and venue for dispute resolution protocol specified the CMA in United States (US) jurisdiction, and still have confidence that any judgment gained in such US jurisdiction may actually be enforced against the foreign manufacturer entity, in such foreign manufacturing entity's home country, as long as the home country of such foreign manufacturing entity is one of the signatories to the United Nations (UN) Convention on the Recognition and Enforcement of Foreign Arbitral Awards (generally known as the New York Convention on Foreign Arbitral Awards).

 

    Last updated 201019_1945

bottom of page