Expert’s Opinion

How CDMOs Can Leverage Contract Terms to Facilitate Payment

Approaches to consider include IP strategies, patent license, not ownership, and mitigation strategies.

Even well-meaning customers are sometimes unable to pay their bills on time (or at all). Contract Development and Manufacturing Organizations (CDMOs) can strategically leverage contract terms to facilitate payment in several ways. Below are some approaches to consider:  

IP Strategies
Developed IP is owned by the CDMO until the Customer makes full payment for the services
Often, IP developed by a CDMO is owned by the customer under the terms of the manufacturing and development agreement (“Agreement”) between the parties.  To help ensure timely payment, the parties frequently agree that developed IP is owned by the CDMO until the Customer makes full payment for the services.  Only upon full payment would the CDMO be contractually obligated to assign the developed IP to the customer. 

Condition CDMO cooperation in securing IP on payment
Delaying assignment until payment is made may be fruitless if initial payments are made, the developed IP assigned, and then the customer fails to pay subsequent bills.  In such situations, it may be helpful to include additional Agreement terms that require CDMO cooperation later in the developed IP lifecycle to also be conditioned on payment.  For example, the Agreement may stipulate that the CDMO’s cooperation in executing documents that the customer deems reasonably necessary for the customer to obtain patent protection is contingent on payment.

File a conditional patent assignment
If the CDMO will not own the developed IP, the parties could agree to file a conditional patent assignment with the patent office for non-paying customers. A conditional patent assignment will stay in effect until the performance of certain acts or events, such as the payment of money or the fulfillment of another condition.  A conditional patent assignment recorded in the patent office is regarded as an absolute assignment for patent office purposes until cancelled with the written consent of all parties or by the decree of a court of competent jurisdiction. Therefore, having a conditional patent assignment filed with the patent office eliminates the need for the CDMO to chase down a non-paying customer to assign developed IP.  Having a conditional patent assignment filed with the patent office also reduces the likelihood that the conveyance can be avoided in a bankruptcy case should the non-paying customer eventually file for bankruptcy.

Patent license, not ownership
As a further protection for customers that pose an increased risk of non-payment or have become non-credit worthy, the Agreement could include a provision that the developed IP is owned by the CDMO, and the customer is given a revokable license – which license is revoked upon customer’s non-payment of amounts due. 
 
Title Retention and Retake possession of goods
For Agreements that cover the sale of a product (as opposed to development services), such Agreement can include retention of title clauses such that the CDMO retains ownership of the manufactured products until full payment is received.

Additionally, Agreement terms can allow the CDMO to retake possession of the products upon any non-payment.  Such clauses can include an authorization for the CDMO to enter the Customer’s premises to retake and allow the CDMO to resell the product to third parties (regardless of confidentiality restrictions) in order to recover amounts due. Such reclamation and resale rights can help mitigate the risk of non-payment or default.

Mitigation Strategies 
Agreement terms can account for situations where a customer has not been paying by allowing the CDMO to mitigate its damages by canceling and/or suspending future deliveries; refusing to sell to Customer until overdue accounts are paid in full, and/or requiring prepayment, a letter of credit, or other payment assurance(s). These instruments can provide an additional layer of security, particularly for long-term contracts or large-scale projects.  

Become a Secured Creditor on Personal Property
Damage caused by an unpaying customer can be mitigated by becoming a secure creditor.  If the CDMO is selling a product to the customer, the parties can include Agreement terms stating that the CDMO retains a security interest in Products sold to Customer to secure Customer’s payment obligations.  Such Agreement terms should specifically grant a security interest in the product (including expressly permitting UCC filings) and reasonably describe the secured collateral (including “proceeds” of the collateral). There is no specific requirement that the security agreement be a standalone document.  In order to become a secured creditor, the CDMO will also need to perfect the security interest. Generally, to perfect a security interest, a CDMO should file a UCC financing statement at the state level where the debtor lives, where the debtor is formed, and/or where the collateral is located.

Costs of Collection
The Agreement can provide that the Customer agrees to pay all costs of collections efforts, including court costs, reasonable attorneys’ fees, and fees for repossession, repair, storage, and resale of the products incurred by the CDMO upon nonpayment by the customer. 

The Agreement can also include provisions for arbitration or alternative dispute resolution mechanisms to address payment-related conflicts and help expedite payment resolution.

Payment Timelines
While it may sound obvious, shorter payment cycles or requesting full or partial upfront payments to mitigate the risk of non-payment or delayed payments.  Milestone-based payments can also ensure progress and incentivize timely payments by customers and serve as a basis for the CDMO to stop work if payment of the milestone is not made. 

Termination 
While CDMO’s often avoid disengaging a customer, in some cases, it is the best outcome for a non-paying client.  Agreements can include the right for CDMO termination for convenience or, at a minimum, allow for CDMO termination for customer’s non-payment.   

The Agreement might require that a CDMO give “reasonable assistance” to transfer part or all of the manufacturing process, know-how, and analytical testing methodology for the developed IP upon termination of the Agreement.  Conditioning such assistance on payment in full can be advantageous.  

Conclusion
Strategically leveraging Agreement terms may be valuable for CDMOs to mitigate non-payment and delayed payment risks.  

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