CMO Liability: Protect Your Business From Additional Risk

CMO Liability: Protect Your Business From Additional Risk

Part three of a three-part series on the Contract Development and Manufacturing industry and potential products liability and manufacturers E&O risks

Medical device original equipment manufacturers (OEMs) have good reasons to outsource certain business functions to contract development and manufacturing organizations (CDMOs aka CMOs). By outsourcing, OEMs can save on product development and labor costs, streamline supply chains, and fill experiential gaps when manufacturing products at scale.

As much as OEMs have to gain, partnering with a CMO creates additional risk. With a clear understanding of liability, as well as detailed contracts, you can develop fruitful relationships with fewer legal surprises and lower your exposure to claims.

Liability Basics

CMOs can become liable under three legal theories:

• Strict liability. When the CMO is a member of the supply chain.
• Negligence. When the CMO creates a defective product or commits misconduct.
• Contract. It is common for the CMO to be bound by contract to share in the expenses of a lawsuit or a recall even if it wasn’t responsible for a product defect.

CMOs and Products Liability

Although CMOs only manufacture, sell, and/or distribute component parts of medical devices, they may still have to defend their actions in a products liability or manufacturers errors & omissions suit.

Generally, the CMO is subject to liability if:

• The component is defective, and the defect causes harm; or
• The component seller or distributor substantially participates in the integration of the       component into the design of the product; and
  • The integration of the component causes the product to be defective; and
  • The defect causes harm.1

“Defective,” for purposes of products liability claims, means the component differs in some respect from specifications provided by the OEM, and the discrepancy causes harm. It may function just fine in other respects.

When are CMOs Not Liable?

The component parts doctrine may provide a defense for CMOs in a products liability suit. If a CMO is involved in the manufacturing or distribution of a defective device, but the part they supplied was not defective, they are not responsible for any harm caused by that defective product—most of the time. The doctrine generally applies to “off the shelf” components that could work in multiple types of devices.

In products liability cases that involve multiple companies (and thus multiple defendants), the law apportions liability between these companies. In the case of a defective part, the CMO, the supplier(s), the final product manufacturer, and possibly the distributor all play roles in the defective part or product. Attributing liability fairly to each party is no easy task, and it is wise to work with an insurance company experienced in handling these types of claims so as to avoid taking on more liability than warranted.

The Importance of Contracts

To protect your business from potential liability, get signed contracts in place that detail the OEM-CMO relationship. Among many other points, specify the responsibilities of all parties in the chain of distribution. And remember, as OEMs outsource more activities to CMOs, risk increases. Protect yourself with sound contracts.

Naturally, all parties must have insurance. They should also be willing to indemnify each other and work together to achieve the most favorable outcome possible.2

Medmarc has a long history of insuring CMOs, managing their claims, and providing risk management services. To learn more about how Medmarc takes care of CMO and OEMs, call us at 1-800-356-6886.

References

1. Restatement (Third) of Torts Products Liability §5
2. Ross, Kenneth. “Component Parts and Raw Materials, Successors, and Distributor Liability.”