Monday, October 26, 2009

Physician Contracts? Who Cares! Distribution Contracts: Proceed With Caution!

Recently, Elizabeth Hofheinz published an excellent article in OTW about academic contracts for physicians. She cites many examples by an attorney specializing in employment law on how physicians should protect themselves by negotiating language specific provisions in an employment contract. So why is TSB commenting on this topic? Because, it has become apparent that distributors do a poor job in negotiating a "win-win" agreement between themselves and the company that they desire to represent, especially, if they intend on distributing for an early-growth stage company.

The first concern that I have always had is whether or not the distributor has thoroughly read the entire agreement. The reason that this is important is because most companies will insert language that will leave you vulnerable in the event that there is a change in ownership, management or strategic direction. Recent history tells us of the chaos and lack of transparency that existed during the Kyphon and Abbott Spine integration by Medtronic and Zimmer.

Scenario #1: You begin generating sales for an early growth stage company and are on a run rate to produce $5.3 million in revenue when there is a change in management. A new president comes in and evaluates that you are making too much money and decides that he is going to cut your commission rate in half. What legal recourse do you have if you haven't addressed this potential scenario when you negotiated your agreement? Zero!

Scenario #2: Let's say you are the same distributor, you are generating $5.3 million dollars in revenue and the company is sold, what recourse do you have if the new owners, hypothetically Medtronic, decides to terminate you as the distributor with a sixty day notice, only to use one of its own distributors? Did you or your attorney insert a "buy out"clause in the event the company is sold? What recourse do you have? Zero!

Scenario #3: Let's say you are the same distributor, and you are generating $5.3 million dollars in revenue and the company decides to terminate your agreement, only to find out that they replaced you with a scrub technician at a salary of $60 thousand per year, what recourse do you have? Did you or your attorney address and insert specific language in your termination clause? What recourse do you have? Zero!

Most companies that hire independent distributors demand quotas. It is important that you as a distributor forecast a conservative budget, especially if you have never seen the company's product used intra-operatively. How many times have you agreed to distribute a product only to find out that the instruments and implants have shortcomings in their design and utility? Does the company ever take responsibility for poor designs? Remember, most companies insert provisions that allow them to terminate your agreement if you do not meet your quotas. In addition, most early-growth stage companies have provisions requesting an annual forecast by September or October for the proceeding fiscal calendar. TSB has always been ambivalent about quotas. Retrospectively, quotas were originally used by companies that hired direct reps that had bonuses attached to their quotas. Ironically, most early-growth stage companies do not pay bonuses unless specified in a contract.

So why is this important? Based on today's environment where most company's look at you as a commodity, it could be detrimental to your health and livelihood if you do not take the time to have a legal professional evaluate the language and provisions in your contract. PS: If you think that any of the aforementioned scenarios never existed just ask one of your friends. TSB wants to know what its readers think?

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