Samuel B. Sterrett Jr
Published 12/18/2024
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Xinning Li, MD, FAAOS
Orthopaedic surgeons who are interested in product development should carefully assess legal considerations such as intellectual property, patents, contractual obligations, restrictive covenants, conflicts of interest, and company partnerships. In an interview for AAOS Now, Samuel (Sandy) B. Sterrett Jr, attorney and partner at Rimon, P.C., offered an overview of how orthopaedic surgeons should approach the legal and business aspects of developing their ideas into medical devices or products.
Mr. Sterrett advises business and individual clients on business, corporate, technology, and tax matters. He has advised orthopaedic surgeons for more than 20 years on their relationships with employers, hospitals, universities, and emerging and global medical device companies, including employment, consulting, product-development agreements, intellectual property, and patent transactions.
AAOS Now: How do surgeons protect their ideas about new medical devices, improvements to current devices, or new applications for current ones?
Mr. Sterrett: Initially, the surgeon should document and date the idea, whether in a laboratory notebook or a digital file, with backups in several locations. The surgeon will want to ensure that he or she can show that they developed the idea as of a specific date. If the surgeon is working on the idea over a period of time, they should document each step in its development. If the surgeon feels the idea is particularly well developed or innovative, they might want to consult a patent attorney to determine whether filing a patent application is advisable and whether a simple provisional application or a more complete application is needed. Regardless, the surgeon should avoid disclosing the idea to anyone absent a confidentiality agreement with the receiving party.
How does the patent process work once a surgeon develops an idea? Is it better to reach out to a big company or a small start-up?
In the United States, there are two types of patent applications: provisional and nonprovisional. A provisional application is an inexpensive and effective way to establish “patent pending” status. A surgeon does not have actual patent rights until a patent is issued, but a public disclosure of the idea cannot negate global patentability of the idea once the surgeon files an application.
A provisional patent application has no formal requirements but should be as detailed as reasonably possible. A surgeon, of course, is not required to start with a provisional application and can proceed directly to a nonprovisional application. A well-prepared nonprovisional application is a more involved and expensive endeavor and should involve a patent attorney. If a surgeon begins with a provisional application, the surgeon will have to file a nonprovisional application within one year of filing the provisional application. Provisional applications do not turn into issued patents. Only nonprovisional applications are examined and may result in an issued patent. The time between filing an application and issuance of a patent can be several years, involving extensive negotiations with the patent office.
What are the advantages and disadvantages of presenting your idea to a medical device company versus first filing a patent application?
There are several considerations here. The initial consideration is: How developed is the surgeon’s idea? With a fully developed potential new product or material improvement to a current product, the surgeon should probably retain a patent attorney and file an application. Another consideration is the surgeon’s financial resources and long-term commitment to develop the idea. If a surgeon has the resources and commitment, they should consult with a patent attorney and perhaps file a nonprovisional application. The surgeon should also consider working with an engineer to create product proto-types. Again, a surgeon should avoid disclosing to anyone an idea without a confidentiality agreement in place.
How does a surgeon identify a partner for developing an idea?
A surgeon should have many opportunities to meet and develop relationships with industry representatives at industry conferences and at professional society meetings. But a surgeon should also look for opportunities to meet relevant professionals in their own communities, including investors, engineers, and medical device personnel. The surgeon should also develop an understanding of where their idea fits into the broader medical device marketplace and into the product portfolios of the different device companies.
As expected, working with a global medical company or a start-up each has its advantages and disadvantages. Working with a global medical device company has pluses (proven product development, marketing, and distribution teams) and minuses (competing current products and products in development, unrelated product lines competing for resources). Similarly, working with a start-up has pluses (fewer competing product lines) and minuses (insufficient capital resources, unproven business plan, unproven management).
What, in your opinion, makes a good match for an inventor with a medical device company?
I see several levels here. First, a surgeon presumably wants to work on interesting technology with potential benefits for patients. Second, a surgeon wants to enjoy and to trust the individuals at the applicable company. Third, a surgeon wants to work with a successful medical device company, whether an emerging company or an established global business.
How should a surgeon work with a medical device company?
A surgeon should view, in substance, the relationships with medical device companies as a side business, hopefully a successful and meaningful one. A surgeon should use contact information (mailing address, email, personal cell, etc.) that is separate from any hospital, healthcare provider, or university with which the surgeon is affiliated. A surgeon should maintain records of that side business at home, not at work. A surgeon, of course, must avoid using the time, property, and other resources of any hospital, healthcare provider, or university in the side business or risk that hospital, healthcare provider, or university being entitled to any consideration or intellectual property arising from that side business.
A surgeon has multiple ways to work with a medical device company, from educating sales personnel and other surgeons on the company’s products and applicable techniques, to offering strategic advice on the medical device industry, to providing customer feedback on a company’s current and proposed products, to collaborating with in-house engineers and outside surgeons on new or improved products (design team). Regardless of the specific relationship, the company will want the surgeon to sign an agreement, in part to ensure compliance with federal and state healthcare laws. That agreement may be called a confidentiality, consulting, services, or product-development agreement.
Before signing anything, a surgeon should consult with their tax accountant and counsel, as the surgeon may want to work with a medical device company through a limited liability company, limited partnership, or subchapter S corporation. A variety of financial, income and estate tax, and liability reasons may favor, though not require, the use of a legal entity through which a surgeon works with a company. Although the administrative burdens of a legal entity may outweigh the benefits for a one-off agreement, they may be outweighed by the benefits for a surgeon who plans to engage in multiple relationships over many years.
How might a surgeon be compensated for working with medical device companies?
A surgeon may receive consideration in several forms, from reimbursement for travel and other expenses, to hourly consulting fees, to milestone and other fixed payments, to acquisition payments for patents and patent applications, to percentage-based royalties on product sales, to stock options or profits interests. Regardless of the type, a medical device company must justify, as part of its compliance procedures, the consideration as being at fair market value. A surgeon, of course, benefits as well, as any compliance failures may adversely affect them.
The biggest financial upside generally arises when a surgeon collaborates with a medical device company in the development of a successful product and receives percentage-based royalties on the sale of that product. Here, the surgeon should be careful that the applicable agreement provides what is fair and reasonable and meets expectations. Perhaps not surprisingly, the details in the royalty provisions can tremendously impact the royalties actually paid to the surgeon, from the definition of sales, exclusions for sales to surgeon affiliates, royalty-reporting obligations, and audit rights. A surgeon will need to disclose his or her affiliations to ensure that they do not receive royalties on product sales to those affiliations.
Similarly, a tremendous financial upside also arises when a surgeon is granted stock options or profits interests in an emerging company. Here, the surgeon wants to ensure that their small interest in the company is reasonably protected.
A surgeon should recognize that, while they legitimately may trust the current management of a medical device company, their financial upside from royalties or equity interests will be realized over many years, perhaps 10 or more years. What was once a positive and cooperative relationship may change drastically, to the surgeon’s detriment. Both emerging and established companies regularly engage in mergers and acquisitions, resulting in changes in ownership and management. Accordingly, a surgeon should seek adequate long-term protection to the extent possible.
How does the surgeon avoid conflicts?
Initially, the surgeon must review the policies of their employer, hospital, or university to ensure compliance. Typically, the policies will allow the surgeon to work with medical device companies, provided, however, (i) that the surgeon does not use any time, property, or other resources of the employer, hospital, or university; (ii) that the surgeon discloses the relationship and the consideration received to the employer, hospital, or university and patients; and (iii) that an employer, hospital, or university may want to review any agreement to be signed by the surgeon.
Medical device companies are required to comply with multiple federal and state healthcare laws, the AdvaMed Code of Ethics on Interactions with Health Care Professionals (advamed.org), and their own codes of conduct.
Finally, a surgeon working with more than one company must avoid conflicting obligations between companies. Potential conflicts arise from separate confidentiality, intellectual property, and noncompete obligations included in the agreements proposed by medical device companies. Learning about one company’s new or improved products has the potential to benefit another company with whom the surgeon might also be working. A confidentiality obligation prevents that misuse by the surgeon. But, while unintentionally forgetting information (i.e., birthdays, anniversaries) may be common, intentionally forgetting something is more difficult. Similarly, a surgeon working with two or more companies may become obligated to assign his or her ideas simultaneously to different companies. Although the risk may seem small, it is not if those ideas develop into or overlap (or arguably so) with a highly successful product. Trade-secret litigation is common. To reduce these risks, a medical device company might require a noncompete obligation by which a surgeon agrees not to work with a second company in an area in which the surgeon works with the first company. As might be expected, these clauses tend to be broadly drafted and simply add another obligation that a surgeon needs to consider carefully.
What else should a surgeon be concerned about?
Regardless of how beneficial a surgeon’s contributions are to a particular proposed product, a surgeon should avoid any risk from the commercialization of that product. A surgeon is not in the business of taking a product from concept to commercialization, which involves complicated financial, intellectual property, manufacturing, marketing, regulatory, technical, and other issues. Medical device companies are in that business and have the necessary expertise and resources. A surgeon accordingly should avoid making unreasonable warranties and should seek to be indemnified and insured by the medical device company. Finally, a surgeon should obtain an explicit right to end the relationship if they so desire. What begins as a manageable side business has the potential, if the surgeon is not careful, to affect their primary responsibilities to patients.
Xinning Li, MD, FAAOS, is a professor of orthopaedic surgery at the Boston University School of Medicine. He is on the editorial board of AAOS Now and specializes in both sports medicine and shoulder surgery.