PRODUCT SUPPLY & DISTRIBUTION AGREEMENT

Exhibit 10.1

 

PRODUCT SUPPLY & DISTRIBUTION AGREEMENT

 

This PRODUCT SUPPLY & DISTRIBUTION AGREEMENT (“Agreement”), made as of this 27th day of July, 2004 (“Effective Date”), by and between SCHERING-PLOUGH ANIMAL HEALTH CORPORATION (hereinafter, referred to as “Schering”), a Delaware corporation, having its principal office located at 1095 Morris Avenue, Union, New Jersey 07083, and DIGITAL ANGEL CORPORATION (hereinafter, referred to as “Digital Angel”), a Delaware corporation, having its principal office located at 490 Villaume Avenue, South St. Paul, Minnesota 55075-2445.

 

RECITALS

 

WHEREAS, on January 9, 1995, Schering entered into that Supply and Distribution Agreement (the “Original Agreement”) with Destron Fearing Corporation (“Destron”), predecessor-in-interest to Digital Angel, for Destron to supply to Schering, and Schering to purchase from Destron, certain animal electronic identification products;

 

WHEREAS, Digital Angel is now engaged in the business of developing, manufacturing, packaging, testing and selling microchips for tracking and identifying, and sensing temperature in, pets and other animals as more fully described below (the “Product”);

 

WHEREAS, Schering desires to purchase and receive the Product from Digital Angel, and the exclusive right to distribute the Product in the Territory (as hereinafter defined);

 

WHEREAS, Digital Angel agrees to sell and deliver the Product to Schering on the terms and conditions set forth in this Agreement;

 

WHEREAS, Digital Angel has the requisite experience and resources to sell and deliver the Product in a quantity required for the Territory; and

 

WHEREAS, the Parties have agreed to enter into this Agreement, which supersedes and replaces in its entirety the Original Agreement referred to above.

 

NOW, THEREFORE, in consideration of the premises and the mutual agreements and covenants set forth in this Agreement, Schering and Digital Angel hereby agree as follows:

 

ARTICLE I.  DEFINITIONS

 

For purposes of this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined):

 

1.01                            “Adverse Event” shall mean:

 

(a)                                   any expected or unexpected experience that is adverse, including what are commonly described as adverse or undesirable experiences, adverse events, adverse reactions, side effects, or death due to any cause associated with, or observed in conjunction with, the use or

 

 

following the administration of any Product, whether or not (i) considered related to or caused by the use of any Product, (ii) occurred in the course of the use of any Product, (iii) occurred when the Product was used in accordance with the approved labelling or label directions or was not used in accordance with such labelling or directions (including a different route of administration, different species, different indications, or different dosage), or (iv) associated with, or observed in conjunction with, an accidental or intentional overdose, abuse, dependency, or withdrawal from, of, or on any Products, including, without limitation, an adverse event occurring (A) in animals in the course of use of any Product by a veterinarian or livestock producer or otherwise in the course of professional practice or use by another animal owner or caretaker or (B) in humans from exposure during Manufacture, testing, handling, or use of a Product;

 

(b)                                  any failure of expected pharmacological action or clinical effect of any Products, including, without limitation, deterioration or contamination of any Products or any mistake in the labelling of any Products; or

 

(c)                                   an adverse drug experience, as that term is defined in 21 C.F.R. § 514.3.

 

1.02                            “Affiliate” shall mean any entity, directly or indirectly, controlling, controlled by, or under common control with a Party.  For purposes of this definition, “controlling” (including its cognates, “controlled by” and “under common control”) shall mean:  (a) ownership of more than fifty percent (50%) of the equity capital or other ownership interest in or of an entity; (b) the power to control or otherwise direct the affairs of an entity; (c) in the case of non-stock organizations, the power to control the distribution of profits of an entity; or (d) such other relationship as, in fact, results in actual control over the management, business, and affairs of an entity.

 

1.03                            “Agent” shall mean any officer, director, employee, agent, subcontractor, or other authorized representatives of a Party or a Person.

 

1.04                            “Applicable Laws” shall mean (a) all laws, statutes, constitutions, treaties, rules, regulations, ordinances, codes, guidance, common law, and (b) all judicial, executive, legislative, administrative or military orders, directives, decrees, injunctions, judgments, Permits, agreements, and other legal requirements of, with, or adopted or imposed by any Governmental Authority, now or hereafter in effect and, in each case, as amended from time to time, including, without limitation, any such legal requirements that relate to or govern (i) the manufacture or quality of the Product, (ii) health, safety, industrial hygiene, sanitation, or (iii) conditions on, under, about, or affecting any real property (including the Environment).

 

1.05                            “Approved Facility” shall mean Digital Angel’s facility located in 490 Villaume Street, South St. Paul, Minnesota 55075-2445.

 

1.06                            “Certificate” shall have the meaning set forth in Section 3.06(c) hereof.

 

1.07                            “Claim” shall mean any claim, suit, action, cause of action, proceeding, demand, order, directive, obligation, loss, injury, liability, damage, deficiency, assessment, fine, penalty, forfeiture, judgment, lien, diminution of value, notice of violation or non-compliance, cost, and expense, including, without limitation, attorneys’ fees and expenses, incurred to enforce this Agreement, cost of defense, and cost of settlement.

 

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1.08                            “Companion Animal Market” shall mean all domestic animals kept as pets except horses, cattle, swine and sheep.

 

1.09                            “Confidential Information” shall mean any technical, financial and business information relating to a Party’s research, development, inventions, products (including the Products), production, manufacturing, finances, marketing, customers, or business plans, including, without limitation, trade secrets, know-how, data, formulas, processes, other intellectual property, or confidential communications, that (a) is or has been disclosed to or otherwise received or obtained by a Receiving Party, whether or not in connection with or pursuant to this Agreement and (b) has been marked by the Disclosing Party as “Confidential” or, if disclosed orally, has been stated to be confidential or has been confirmed in writing by the Disclosing Party to be “Confidential” within thirty (30) days from the date of such disclosure.

 

1.10                            “Database” shall mean for the companion animal market the list of pet owners, their addresses and the serial number on the Product sold to such pet owner set forth in the centralized, computerized database developed and used by Schering in connection with the Product and the System.

 

1.11                            “Disclosing Party” shall mean the Party (a) who discloses, and owns or otherwise possesses the rights or interests to or in, Confidential Information or (b) whose Confidential Information is the subject of any process, subpoena, demand, or request.

 

1.12                            “Effective Date” shall have the meaning set forth in the introductory paragraph to this Agreement.

 

1.13                            “Enrollment Fee” shall mean the fee that a customer pays to Schering or its designated agent for tracking and identification services related to the Product.

 

1.14                            “Environment” shall mean air, land, water, the ocean, natural resources (including flora and fauna), soil, sediments, surface water, groundwater, subsurface strata, the ambient air, or any present or potential drinking water supply, including, without limitation, any of the foregoing relating to the manufacture of any Product or the processing, use, generation, handling, labelling, transportation, treatment, storage, disposal, disposition, distribution, presence, emission, discharge, release, threatened release, removal, remediation, disclosure, or notice of the actual or potential presence, release, or threatened release of any Hazardous Material.

 

1.15                            “Environmental Claim” shall mean any and all Claims (a) relating in any way to the Environment under Applicable Law or (b) made by any Person for enforcement (including, without limitation, fines, penalties, costs, damages, specific work, or relief), investigation, cleanup, mitigation, restoration, removal, response, remedial or other actions or damages (including by reason of personal injury, property damage, or death), contribution, indemnification, cost recovery, compensation, or injunctive relief pursuant to any Applicable Law or relating, directly or indirectly, to the Environment or Hazardous Material.

 

1.16                            “Governmental Authority” shall mean any federal, state, commonwealth, provincial, local or foreign governmental authority, entity, body, branch, agency, department, bureau, board, commission, officer, official, court, adjudicator, tribunal, or other entity, including

 

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any Agent thereof, exercising executive, legislative, judicial, regulatory or administrative authority over the manufacture, marketing, pricing, use, or sale of any Product, including, without limitation, any and all state, commonwealth, provincial, local and foreign equivalents.

 

1.17                            “Hazardous Material” shall mean any material, substance, or waste that, because of its presence, quantity, concentration, or character, (a) is regulated under any Applicable Law, (b) may cause or pose a risk, threat, or hazard to human health or safety or the Environment, or (c) may result in the imposition of, or form the basis for, a Claim from or by any Person under any Applicable Law, including any investigation, cleanup, removal, or remedial or other action of or concerning the Environment or any of the following:  (i) any “hazardous substance,” “pollutant,” “contaminant,” or “hazardous waste,” as commonly understood and as defined in any Applicable Law, (ii) any substance containing petroleum, or any by-product or fraction thereof, any form of natural gas, mining waste, lead, asbestos-containing material, polychlorinated biphenyls, equipment containing polychlorinated biphenyls, pesticides, defoliants, and urea formaldehyde foam insulation, (iii) any radioactive material or waste, or (iv) any other dangerous, explosive, corrosive, ignitable, flammable, hazardous, pathogenic, mutagenic, carcinogenic, teratogenic, etiologic or otherwise toxic agent, material, contaminant, substance, element, compound, mixture, solution, pollutant, or waste, including, without limitation, asbestos and radioactive substances regulated by any Applicable Law.

 

1.18                            “Improved Product” means any new, novel and useful ideas, innovations and inventions solely for use in the Companion Animal Market, whether patentable or not, which are discovered by Digital Angel or are otherwise made available to Digital Angel during, or as a result of, or occurring in connection with, or arising from, this Agreement that adds significant new functions and capabilities to the Product and/or either Reader.

 

1.19                            “Intellectual Property Rights” means, collectively, all of the following worldwide intangible legal rights, whether or not filed, perfected, registered or recorded and whether now or hereafter existing, filed, issued or acquired: (a) patents, patent disclosures, patent rights, including any and all continuations, continuations-in-part, divisionals, reissues, reexaminations, utility, model and design patents or any extensions thereof, (b) rights associated with works of authorship, including without limitation, copyrights, copyright applications and copyright registrations, (c) rights in trademarks, trademark registrations and applications therefor, trade names, service marks, service names, logos, or trade dress, (d) rights relating to the protection of trade secrets and confidential information, and (e) all other intellectual or proprietary rights anywhere in the world.

 

1.20                            “Party” shall mean Schering or Digital Angel; “Parties” shall mean Schering and Digital Angel.

 

1.21                            “Patent Rights” shall mean U.S. Patent No. 5,211,129, U.S. Patent No. 4,730,188, U.S. Patent No. 5,041,826 and U.S. Patent No. 5,166,676 and any and all patents and patent applications (including certificates of invention and applications for certificates of invention) over the Products, including any and all divisions, continuations, continuations-in-part, patents of addition, reissues, renewals, extensions, registrations, confirmations, re-examinations, any provisional applications, supplementary protection certificates, or the like of any such patents and

 

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patent applications, which during the Term are owned by Digital Angel or to which Digital Angel, through license or otherwise, has or acquires rights.

 

1.22                            “Permit” shall mean every application (including new animal drug application) permit, authorization, license, approval, registration (including health registration and drug master file), franchise, certificate, permission, exemption, consent, variance (including zoning variance approval), or equivalent decision or document of, from, or required or issued by any Governmental Authority or under any Applicable Laws.

 

1.23                            “Person” shall mean and include, without limitation, (a) any corporation, partnership, limited liability company, joint venture, joint stock company, association, trust, business trust, estate, unincorporated organization, or other business entity recognized under Applicable Laws, other than Schering or Digital Angel, (b) any Governmental Authority, or (c) any individual.

 

1.24                            “Product” shall mean Digital Angel’s animal identification package which includes the following components:

 

(a)                                   Temperature Sensing Product; or

 

(b)                                  Shelter Product; and

 

(c)           Recording forms and tags for the Database and System described herein

 

The Product shall include upgraded microchip technology necessary to meet applicable standards, including but not limited to Federation of European Companion Animal Veterinary Associations (“FECAVA”) technology standards. The term “Product” as used in this Agreement, including “Improved Product”, shall, in all cases, refer only to, and only permit use in the Companion Animal Market.

 

1.25                            “Product Cost” shall have the meaning set forth in Section 6.01 hereof.

 

1.26                            “Product Quality Complaint” shall have the meaning set forth in Section 3.07 (b) (i).

 

1.27                            “Readers” shall mean instruments that are capable of reading and displaying the identification code of Digital Angel’s transponders and other transponders using Eurosil microchips, and all other transponders meeting current and future FECAVA transponder standards to be used in the System.  Readers shall include Pocket Readers for veterinary clinics and Pocket Readers EX for shelters.

 

1.28                            “Receiving Party” shall mean the Party who (a) receives or otherwise obtains Confidential Information of the Disclosing Party or (b) is served with any process, subpoena or demand.

 

1.29                            “Shelter Product” shall mean an injectable sterile glass encapsulated radio frequency transponder with an anti-migration cap, preloaded in a sterilized needle and application used to deposit the transponder subcutaneously.

 

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1.30                            “Specifications” shall mean the written specifications for the manufacture, quality control testing, and delivery of the Product, including, without limitation, details of the finished packaging components for the Product, as set forth on Exhibit A, which is attached hereto and made a part hereof, and as may be amended from time to time.

 

1.31                            “System” shall mean the nationwide animal registry, identification, tracking and recovery system, comprised of the Product and the Database, developed and used by Schering in connection with this Agreement.

 

1.32                            “Temperature Sensing Product” shall mean an injectable sterilized glass encapsulated radio frequency transponder with an anti-migration cap, preloaded in a sterilized needle and application used to deposit the transponder subcutaneously which includes temperature sensing capabilities.

 

1.33                            “Term” shall have the meaning set forth in Section 10.01 hereof.

 

1.34                            “Territory” shall mean the United States and its possessions and territories.

 

1.35                            “Third Party” shall mean and include, without limitation, any individual, corporation, partnership, limited liability company, joint venture, joint stock company, association, trust, business trust, estate, unincorporated organization, or other business entity recognized under Applicable Laws, other than Schering or Digital Angel.

 

1.36                            “Trademarks” shall have the meaning set forth in Section 7.01 hereof.

 

ARTICLE II.  REPRESENTATIONS AND WARRANTIES

 

2.01                            Representations of Schering .  Schering hereby represents and warrants to Digital Angel that, as of the Effective Date, the following statements are and shall be true and correct in all material respects:

 

(a)                                   Organization and Good Standing .  Schering: (i) is a corporation duly organized, validly existing, and in good standing under the laws of the State of Delaware; (ii) has the corporate power and authority to conduct the business in which it presently is engaged, to enter into this Agreement, and to perform its obligations hereunder; and (iii) is qualified to do business in, and is in good standing in, each jurisdiction of the Territory where the nature of its business in such jurisdiction requires it to be so qualified.

 

(b)                                  Authorization and Binding Effect .  All institutional action on the part of Schering and its officers and directors necessary for the authorization, execution, and delivery of this Agreement and for the performance of all of Schering’s obligations hereunder has been taken, and this Agreement, when executed and delivered, shall constitute a legal, valid and binding obligation of Schering enforceable against Schering in accordance with this Agreement’s terms, except as enforceability may be limited by bankruptcy, insolvency, and other laws affecting creditors’ rights generally or by general equitable principles.

 

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(c)                                   Execution, Delivery and Performance .  The execution, delivery, and performance by Schering of this Agreement do not:  (i) violate or breach the certificate of incorporation, articles of association, bylaws, or other constituent documents of Schering; (ii) violate or conflict with any Applicable Laws; (iii) violate, breach, cause a default under, or otherwise give rise to a right of termination, cancellation, or acceleration with respect to (presently, with the giving of notice, or with the passage of time) any agreement, contract, or instrument to which Schering is a party or by which any of its assets are bound; or (iv) result in the creation or imposition of any lien, pledge, mortgage, claim, charge, or encumbrance upon any assets of Schering.

 

(d)                                  Governmental and Other Consents .  No Permit or approval of, or exemption or other action by, any Person is required in connection with Schering’s execution and delivery of this Agreement or with the performance by Schering of its obligations hereunder.

 

(e)                                   Inconsistent Obligations .  Schering has no obligation or commitment, and will not, during the Term, assume or undertake any obligation or commitment, that is inconsistent with its obligations under, or the terms and conditions of, this Agreement.

 

2.02                            Representations of Digital Angel .  Digital Angel hereby represents and warrants to Schering that, as of the Effective Date, the following statements are and shall be true and correct in all material respects:

 

(a)                                   Organization and Good Standing .  Digital Angel:  (i) is a corporation or other entity duly organized, validly existing, and in good standing under the laws of Delaware; (ii) has the corporate or institutional power and authority to conduct the business in which it presently is engaged, to enter into this Agreement, and to perform its obligations hereunder; and (iii) is qualified to do business in, and is in good standing in, each jurisdiction of the Territory where the nature of its business in such jurisdiction requires it to be so qualified.

 

(b)                                  Authorization and Binding Effect .  All institutional action on the part of Digital Angel and its officers and directors necessary for the authorization, execution, and delivery of this Agreement and for the performance of all of Digital Angel’s obligations hereunder has been taken, and this Agreement, when executed and delivered, shall constitute a legal, valid and binding obligation of Digital Angel enforceable against Digital Angel in accordance with this Agreement’s terms, except as enforceability may be limited by bankruptcy, insolvency, and other laws affecting creditors’ rights generally or by general equitable principles.

 

(c)                                   Execution, Delivery and Performance .  The execution, delivery, and performance by Digital Angel of this Agreement do not:  (i) violate or breach the certificate of incorporation, articles of association, bylaws, or other constituent documents of Digital Angel; (ii) violate or conflict with any Applicable Laws; (iii) violate, breach, cause a default under, or otherwise give rise to a right of termination, cancellation, or acceleration with respect to (presently, with the giving of notice, or with the passage of time) any agreement, contract, or instrument to which Digital Angel is a party or by which any of its assets are bound; or (iv) result in the creation or imposition of any lien, pledge, mortgage, claim, charge, or encumbrance upon any assets of Digital Angel.

 

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(d)                                  Governmental and Other Consents .  No Permit or approval of, or exemption or other action by, any Person is, or will be, required in connection with Digital Angel’s execution and delivery of this Agreement or with the performance by Digital Angel of its obligations hereunder.

 

(e)                                   Inconsistent Obligations .  Digital Angel has no obligation or commitment, and will not, during the Term, assume or undertake any obligation or commitment, that is inconsistent with its obligations under, or the terms and conditions of, this Agreement.

 

(f)                                     Ownership and Non-Infringement .  Digital Angel owns all right, title and interest in and to and/or licenses the Intellectual Property Rights contained in the Product.  The Product does not infringe, misappropriate or violate any Intellectual Property Rights of any third party.  As of the date of this Agreement, Digital Angel has no knowledge of any pending or threatened litigation or claim relating to the Product or any Intellectual Property Rights or materials contained therein.

 

(g)                                  Debarment .  Digital Angel (i) has not been debarred pursuant to Section 306 of the Federal Food, Drug, and Cosmetic Act, 21 U.S.C. § 335a, (ii) is not subject to debarment, (iii) will not use, in any capacity in connection with the services to be performed under this Agreement, any Person who has been so debarred or is the subject of a conviction described in such section, and (iv) will notify Schering immediately if (A) Digital Angel or any Person who is performing services hereunder is debarred or is the subject of a conviction described in such section or (B) any action, suit, claim, investigation, or legal or administrative proceeding is pending or, to the best of Digital Angel’s knowledge, is threatened, relating to the debarment or conviction of Digital Angel or any Person performing services hereunder.

 

ARTICLE III.  PRODUCT AND QUANTITY

 

3.01                            Scope of Agreement . During the Term, Digital Angel shall exclusively manufacture, supply, and sell to Schering, and Schering shall exclusively purchase from Digital Angel, such quantities of the Product as Schering may, from time to time, elect.  Digital Angel shall not manufacture, supply or sell the Product to any other Person in the Territory.  Digital Angel hereby grants Schering an exclusive right to use the Product in the companion animal market for sale in the Territory, using Digital Angel’s Intellectual Property Rights relating to the Product or its manufacture.  Schering shall have the right to grant sublicenses in connection with its sale of the Product in the Territory.  To the extent permitted by Applicable Law and subject to the terms of this Agreement, the term “exclusive” referred to in this Article 3 means that Digital Angel shall not itself sell, or appoint another distributor to sell, the Product in the Territory, and Schering shall not distribute products that contain the same functions and capabilities of the Product and are directly competitive with the Product in the Territory.  Subject to the provisions of this Agreement, Digital Angel also shall not create or enter into a contract to create a database that is similar to the Database.  Schering and Digital Angel shall discuss in good faith entering into supply and distribution arrangements with respect to the Product in other geographic markets in the future.

 

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3.02                            Additional Rights .

 

(a)                                   Digital Angel hereby grants exclusive distribution rights to Schering for the Products in the Companion Animal Market in the Territory.  With respect to those countries listed on Exhibit C or animal species not included in the Territory, nothing herein shall be deemed to preclude Schering from marketing products in such countries directly competitive with the Products.  Digital Angel and Schering shall discuss potential distribution, co-marketing agreements, amendments or renewals of existing distribution or co-marketing agreements with respect to the Products in international markets and companion animal species prior to executing an agreement, amendment or renewal with a competitor of either Party.

 

(b)                                  Digital Angel shall use its reasonable efforts to cause its Affiliate to grant an exclusive option to Schering or its Affiliate during the Term of this Agreement to enter into an exclusive license agreement, upon terms and conditions to be negotiated by the parties and subject to any contractual obligations in effect as of the date of this Agreement, with respect to applications of the Products in the human pharmaceutical or medical device market.

 

3.03                            Forecasts .

 

(a)                                   Schering shall, within two (2) months from the Effective Date, and not later than sixty (60) days prior to the commencement of each calendar quarter thereafter during the Term, submit to Digital Angel a written, good-faith and non-binding forecast of Schering’s requirements for the Product for each of the succeeding twelve (12) calendar months after the date of such forecast.  Schering shall have the right, not later than ninety (90) days prior to the commencement of any calendar month, to revise its forecast for such month.  All estimates shall be prepared in good faith in order to facilitate Digital Angel’s efficient manufacture and shipment of the Product in compliance with this Agreement, and except as provided in Section 3.03(b) hereof, shall not be binding upon Schering in any way.  Schering shall not be responsible for any loss, cost, or expense of Digital Angel arising from any such forecast. The Parties acknowledge and agree that any forecast shall not constitute, or be deemed to constitute, a commitment on the part of Schering to submit any purchase orders or to purchase any quantity of Products.

 

(b)                                  Schering shall submit to Digital Angel a non cancelable purchase order for the Product not less than ninety (90) days prior to the delivery date requested by Schering in such purchase order.  Each purchase order shall (i) be in an amount not greater than one hundred twenty-five percent (125%) of the latest monthly forecast submitted by Schering pursuant to Section 3.03(a) hereof and (ii) set forth the quantity of the Product, the date by which such Product is to be delivered, and the destination where such order of Product is to be delivered in the Territory.  Digital Angel shall, within ninety (90) days from the date of receipt of a purchase order (or at such later date as may be requested in such purchase order) and subject to Section 12.02 hereof, diligently complete and ship (or cause to be diligently completed and shipped) such purchase order.  The provisions of this Agreement shall apply to, and form part of, any and all purchase orders which may be submitted by Schering to Digital Angel during the Term. The terms of this Agreement shall be controlling over the terms and conditions set forth on any purchase order, any acknowledgement form of Digital Angel, invoice, or other form or document of either Party.

 

c)                                       Shering shall have the right to send written notice to Digital Angel of any reduction, suspension or hold upon any purchase order in whole or in part, and Digital Angel shall use its best efforts to reschedule such purchase orders as requested.

 

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3.04                            Purchase Targets .

 

(a)                                   During the Term of the Agreement, Schering shall, by the end of calendar year 2006, shall have purchased twenty percent (20%) more than the amount of Product purchased in calendar year 2005. Schering shall, by the end of calendar year 2005, have purchased twenty percent (20%) more than the amount of Product purchased in calendar year 2004.

 

(b)                                  On the second anniversary of the Effective Date, the Parties shall negotiate new purchase targets for the Product for calendar year 2007 through year 2008.  On the fourth anniversary of the Effective Date, the Parties shall negotiate new purchase targets for the Product for calendar year 2009 through the end of the Term.  If the Parties cannot agree upon the purchase targets, the Parties shall have a meeting with senior executives of each Party.  If the Parties still are unable to agree upon the purchase targets, the Parties shall retain a neutral third party to determine the purchase targets.  The purchase targets may be calculated annually or averaged over a two (2) year period.

 

(c)                                   If Schering is unable to meet its purchase targets for more than one (1) calendar year, Schering and Digital Angel shall meet to renegotiate purchase targets.  If Schering is unable to meet its revised purchase targets for more than two (2) consecutive calendar years, Schering shall purchase from Ditigal Angel the sufficient amount of Product set forth in the purchase targets applicable to such years and during each succeeding year.  If Schering fails to make such purchases of Product, Digital Angel may terminate the Agreement in accordance with Section 10.05(b).

 

3.05                            Delay and Failure to Supply.

 

(a)                                   If Digital Angel, at any time during the Term, has reason to believe that it will be unable to meet Schering’s requested delivery dates, then Digital Angel shall promptly notify Schering, stating the reason(s) for the delay.  Compliance by Digital Angel with this Section 3.05(a) shall not relieve, or be deemed to relieve, Digital Angel of any other obligation or liability under this Agreement.

 

(b)                                  In the event Digital Angel fails, for any reason (except any delay or failure of performance in accordance with Section 12.02 hereof), to supply at least ninety percent (90%) of any purchase order for the Product submitted in accordance with Section 3.03(b) hereof within ninety (90) days from the delivery date requested in such purchase order, Schering shall have the right, upon written notice to Digital Angel, to seek and establish a secondary source of supply for the purchase requirements pursuant to Section 3.03(b) hereof.  Further, the first time Digital Angel fails to supply at least ninety percent (90%) of a purchase order for the Product, Schering shall receive a five percent (5%) discount on the purchase price for such purchase order; the second time, Schering shall receive a ten percent (10%) discount; the third time, Schering shall receive a fifteen percent (15%) discount; the fourth time, Schering shall receive a twenty percent (20%) discount; and the fifth and any subsequent times, Schering shall receive a twenty-five percent (25%) discount.

 

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(c)                                   In the event Schering determines or believes, in good faith as to any calendar quarter, that Digital Angel, for any reason (excluding any delay or failure of performance in accordance with Section 12.02 hereof), cannot satisfy Schering’s purchase order requirements for the Product, Schering shall have the right to request that Digital Angel provide written assurance of its future performance and ability to supply Schering not less than ninety-five percent (95%) of any purchase order delivered in accordance with this Agreement.  Digital Angel shall, within ten (10) days from the date of receipt of such request, provide to Schering such assurance.  If (i) Digital Angel fails to provide such assurance within such ten (10)-day period, or (ii) Digital Angel fails to adhere to or otherwise comply with such assurance, , then Schering shall, in addition to any rights and remedies available to it under this Agreement, have the right to terminate this Agreement.

 

(d)                                  In the event Digital Angel determines that it, for any reason (excluding any delay or failure of performance in accordance with Section 12.02 hereof), will not be able to supply (i) Schering’s purchase orders for the Product or (ii) at least ninety-five percent (95%) of any purchase order for the Product submitted in accordance with Section 3.03(b) hereof on the delivery date requested in such purchase order, Digital Angel shall, within two (2) days from the date of such determination, notify Schering of such determination, and Schering shall have the right to suspend this Agreement and to seek and establish another source of supply for the purchase of the shortfall of the Products, but Schering shall have no right to grant a license to any third party to develop or manufacturer any product that is similar to or competitive with the Product.  Digital Angel shall immediately notify Schering when and if Digital Angel is able to resume supply of the Product in accordance with the terms of this Agreement, and the Parties shall meet promptly to determine the terms and conditions upon which Digital Angel shall supply the Product, including, without limitation, written assurance of its future performance and ability to supply the Product.  If Digital Angel does not meet the delivery date set forth in the purchase order and has failed to notify Schering in accordance with this Section 3.05(d), then Schering may terminate this Agreement upon written notice to Digital Angel.

 

3.06                            Quality Control .

 

(a)                                   Manufacture of the Product .  Digital Angel represents, warrants, and covenants that all Product for or sold to Schering pursuant to this Agreement shall: (i) be manufactured, packaged, and labeled in accordance with the Specifications, Applicable Laws, and the terms of this Agreement; (ii) be free of all defects and deleterious materials; (iii) not be, or deemed to be, adulterated or misbranded within the meaning of any Applicable Law. (iv) be manufactured, packaged, and tested to ensure that the Product meets the Specifications for identity, sterility, quality, and stability; (v) be manufactured in accordance with the quality control program which Digital Angel shall maintain during the Term; (vi) bear a true and accurate expiration date; (vii) have, as of the date of receipt of such Product at the facility of Schering, a remaining shelf life not less than ninety-five percent (95%) of the total stated shelf life of such Product; and (viii) may be introduced into interstate commerce pursuant to Applicable Laws.

 

(b)                                  Change in Materials .  Digital Angel shall give Schering ninety (90) days prior written notice, if reasonably possible, in the event Digital Angel changes or causes to be

 

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changed any materials, equipment, or method of production or testing relating to the Product, which directly relate to the efficacy of the Product; provided , however , that any such change shall also comply in all respects with the Specifications and Applicable Laws.  Digital Angel shall provide any additional information regarding such change as Schering shall request.

 

(c)                                   Certificate .  Digital Angel shall, prior to the loading of each shipment of the Product, (i) test and analyze or cause or to be tested and analyzed (by a laboratory approved by Schering) such shipment and (ii) deliver or cause to be delivered to Schering or any Person designated by Schering a certificate of weight and quality analysis, in a form satisfactory to Schering (“Certificate”), which Certificate shall provide that such shipment conforms to the Specifications, Applicable Laws and the purchase order.

 

(d)                                  Testing of Shipment .

 

(i)                                      Schering shall have the right, within thirty (30) days from the date of receipt of a Certificate or the delivery of a shipment of the Product relating to such Certificate at its proper destination, whichever is later, to determine (through testing or analysis approved in accordance with this Agreement) the conformity of the contents and the weight of such shipment to the warranties set forth in Section 3.06(a) hereof, including, without limitation, the Certificate and the Specifications.

 

(ii)                                   The Parties agree that the testing or analysis to determine the conformity of the contents of a shipment of the Product to the Certificate and the Specifications may be performed either by Schering or by an independent laboratory selected by Schering.  In the event the contents of any shipment of the Product do not conform to the warranties set forth in Section 3.06(a) hereof, including, without limitation, the Certificate or the Specifications as determined by such laboratory, Schering shall submit a copy of such determination to Digital Angel, and Digital Angel shall, at Digital Angel’s discretion and Digital Angel’s cost and expense, (A) replace (at no cost or expense to Schering) any shipment of the Product rejected by Schering or (B) refund to Schering any amount paid to Digital Angel by Schering for any such shipment.  Upon demand by Schering, Digital Angel shall reimburse or credit Schering for all costs and expenses incurred by Schering with respect to the non-conforming Product, which costs and expenses shall include, without limitation, all testing, analysis, transportation, insurance and holding charges incurred in connection with such Product.  Digital Angel shall maintain sufficient inventory to replace all non-conforming Product rejected by Schering. The Parties acknowledge and agree that Schering shall have no obligation to pay any invoice for any shipment of the Product rejected in accordance with this Section 3.06, unless replacement Product is provided to Schering by Digital Angel.  Conformance of the content of a shipment to the applicable Certificate and the Specifications shall be deemed to be a material obligation of this Agreement. The rights and remedies set forth in this Section 3.06(d)(ii) shall be in addition to any other rights and remedies that Schering may have hereunder or at law or equity.

 

(e)                                   Document and Reserve Sample Retention .

 

(i)                                      All documents, records and reports associated with the manufacture, holding, storage, packaging or testing of any Product shall be retained by Digital Angel for not less than five (5) years from the date of manufacture, or as otherwise directed by

 

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Schering.  All such documents, records and reports must be prepared and retained by Digital Angel in such a manner that they are (A) readily retrievable and (B) stored in an environment suitable to prevent damage or loss.