SUPPLY AND DISTRIBUTION AGREEMENT

Exhibit 10.53

 

Confidential treatment has been requested for portions of this exhibit. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as [*]. A complete version of this exhibit has been filed separately with the Securities and Exchange Commission.

 

SUPPLY AND DISTRIBUTION AGREEMENT

 

This Supply and Distribution Agreement (“Agreement”) is entered as of September 2, 2005 (“Effective Date”), by and between ArthroCare Corporation , a corporation organized under the laws of Delaware (“ArthroCare US”) and ArthroCare Corporation Cayman Islands, a corporation organized under the laws of the Cayman Islands (“ArthroCare Caymans”) (collectively hereinafter referred to as “ArthroCare”), and Smith & Nephew, Inc. , a corporation organized under the laws of Delaware (hereinafter referred to as “Smith & Nephew”).

 

Recitals

 

WHEREAS , ArthroCare US and Smith & Nephew have been involved in the cases of ArthroCare Corp. v. Smith & Nephew, Inc. , Civil Action No. 01-504-SLR (D. Del.) and Smith & Nephew, Inc. v. ArthroCare Corp., Inc. , Civil Action No. 03-2214-Ma (W. D. Tenn.) regarding the infringement or alleged infringement of certain patents by certain devices that use RF Energy (as defined below);

 

WHEREAS , ArthroCare US and Smith & Nephew are aware of the risks and expenses of further litigation, and wish to settle those lawsuits and avoid similar disputes between them in the future;

 

WHEREAS , ArthroCare has agreed to license Smith & Nephew to manufacture certain devices that use RF Energy;

 

WHEREAS , Smith & Nephew has agreed to license ArthroCare to manufacture certain devices that use RF Energy; and

 

WHEREAS , the parties desire to have ArthroCare manufacture certain devices that use RF Energy for Smith & Nephew;

 

NOW, THEREFORE, in consideration of the mutual covenants and consideration set forth herein, the parties hereto agree as follows:

 

ARTICLE 1

 

1.0 DEFINITIONS:

 

As used in this Agreement, the following defined terms shall have the meanings set out in this Article 1:

1.1 “ Active Electrode ” means a [*] .

 

1.2 “ Affiliate ” means any corporation or other entity that is directly or indirectly controlling, controlled by or under the common control with a party. For the purpose of this Agreement, “control” means (a) the direct or indirect beneficial ownership of at least fifty percent (50%) of the voting securities or any other equity interest of the subject entity entitled to vote in the election of directors (or in the election of persons performing functions similar to those performed by directors or otherwise the corresponding managing authority), or (b) at least a fifty percent (50%) interest in the net assets or profits of a partnership or other business organization without such voting securities or equity interest, or (c) the direct or indirect possession of the power to direct the management, policies and general business activities of the subject entity; in each case (a), (b) or (c), only for so long as such control exists and provided that, if local law requires a minimum percentage of local ownership, control will be established by direct or indirect beneficial ownership of one hundred percent (100%) of the maximum ownership percentage that may, under such local law, be owned by foreign interests.

 

1.3 “ ArthroCare Asserted Claims ” means claims 13, 17, and 54 of U.S. Patent No. 5,697,882 and claims 1, 3, 4, 11, 23, 26, 27, and 32 of U.S. Patent No. 6,224,592 as issued or as amended in a Certificate of Correction issued prior to the commencement of the Delaware Litigation.

 

1.4 “ ArthroCare Licensed Arthroscopy Patents ” means (a) all U.S. and foreign patents and patent applications issued or pending as of the Effective Date (b) all U.S. and foreign patent applications filed after the Effective Date, and all patents issuing thereon, that claim or derive any right of priority from any of the patents or patent applications included within subclause (a) above, but only to the extent that such patent applications and patents claim or derive such right of priority, (c) all U.S. and foreign patent applications filed after the Effective Date, and all patents issuing thereon, but only to the extent that such patents or applications cover a product or method of using a product that is also covered by a patent or patent application included within subclauses (a) and (b) above, and (d) with respect to all patents and patent applications included within subclauses (a), (b) and (c) above, only such patents and patent applications that (i) claim invention(s) having application(s) related to the Arthroscopy Field of Use or to an apparatus or method which can be used in the Arthroscopy Field of Use and (ii) are owned by ArthroCare or licensed to ArthroCare with a right to grant a sublicense to Smith & Nephew of the scope set forth in Sections 2.1 and 2.2 ,

 

[*]	Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

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as applicable, of the Settlement and License Agreement and, if applicable, Section 7.2 of the Supply and Distribution Agreement, including all divisionals, continuations, continuations-in-part, continuing prosecution applications, substitutions, reissues, reexaminations, renewals, extensions and all foreign counterparts of all of the foregoing. The ArthroCare Licensed Arthroscopy Patents specifically include all patents and patent applications listed in Exhibit A-L of the Settlement and License Agreement . ArthroCare believes that Exhibit A-L is a complete list of ArthroCare Licensed Arthroscopy Patents as of the Effective Date, and the parties agree that any omissions from Exhibit A-L will be deemed to be inadvertent and will not be deemed a material breach of this Agreement. ArthroCare agrees to correct any such omissions when discovered by appropriate amendment.

 

1.5 “ ArthroCare Manufactured Products ” means, collectively, Licensed OEM Products and Non-Licensed OEM Products.

 

1.6 “ Arthroscopy Field of Use ” means the use of RF Energy in arthroscopy, excluding [*] .

 

1.7 “ Bankruptcy Event ” with respect to a party means such party becomes insolvent, or voluntary or involuntary proceedings by or against such party are instituted in bankruptcy or under any insolvency law, or a receiver or custodian is appointed for such party, or proceedings are instituted by or against such party for corporate reorganization or the dissolution of such party, which proceedings, if involuntary, shall not have been dismissed within one hundred twenty (120) days after the date of filing, or such party makes an assignment for the benefit of its creditors, or substantially all of the assets of such party are seized or attached and not released within one hundred twenty (120) days thereafter.

 

1.8 “ Bipolar Products ” means products using RF Energy having at least one Active Electrode and one Return Electrode in the same device, wherein [*] .

 

1.9 “ Confirmed Claim ” means a claim that is confirmed as patentable within the meaning of 35 U.S.C. § 307 in the earlier of: (1) a notice of allowance issued by the USPTO allowing the claim in a form that is substantially identical to its form in the originally issued patent (or as amended in a Certificate of Correction issued prior to the commencement of the Delaware Litigation) within the meaning of 35 U.S.C. § 252; or (2) a reexamination certificate issued at the conclusion of reexamination or later upheld by the Board of Patent Appeals or the

 

[*]	Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

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Federal Circuit and which is substantially identical to a claim of the original patent (or as amended in a Certificate of Correction issued prior to the commencement of the Delaware Litigation) within the meaning of 35 U.S.C. § 252.

 

1.10 “ Delaware Litigation ” means ArthroCare Corp. v. Smith & Nephew, Inc. , Civil Action No. 01-504-SLR (D. Del.).

 

1.11 “ Delivery Date ” means a date for which delivery of any ArthroCare Manufactured Products is requested in a purchase order in accordance with this Agreement.

 

1.12 “ Distributed ” means sold, placed, given, supplied, consigned or otherwise provided to any person or entity by a party regardless of whether the party receives any monetary or other compensation for such distribution. For example, without limitation, Distributed includes, but is not limited to, the placement or sale of any Licensed Products or ArthroCare Manufactured Products to physicians, clinics, hospitals or the like for testing or clinical use, the distribution of any samples of such products to physicians, distributors, hospitals or others, and the sale of any such products in combination with other products that are not Licensed Products or ArthroCare Manufactured Products regardless of the actual invoice price of such Licensed Products.

 

1.13 “ Event of Default ” has the meaning set forth in Section 8.2 of the Supply and Distribution Agreement.

 

1.14 “Failure to Supply” has the meaning set forth in Section 7.1 of the Supply and Distribution Agreement.

 

1.15 “ FDA ” means the United States Food and Drug Administration.

 

1.16 “ Force Majeure Event ” has the meaning set forth in Section 11.1 of the Supply and Distribution Agreement.

 

1.17 “ Licensed Electromechanical Products ” means Bipolar Products that [*], for use in the Arthroscopy Field of Use the manufacture, importation, use, sale or offer for sale of which falls within the scope of a Valid Claim of an ArthroCare Licensed Arthroscopy Patent. Initially, Licensed Electromechanical Products include the products listed in Exhibit B-L of the Settlement and License Agreement attached hereto. In addition, any future modifications, improvements and variations of the products listed in Exhibit B-L would be included as Licensed Electromechanical Products.

 

[*]	Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

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1.18 “ Licensed OEM Products ” means Bipolar Products that are not Licensed Electromechanical Products for use in the Arthroscopy Field of Use the manufacture, importation, use, sale or offer for sale of which falls within the scope of a Valid Claim of an ArthroCare Licensed Arthroscopy Patent. Initially, Licensed OEM Products include the SAPHYRE Products. Any Bipolar Products developed by Smith & Nephew pursuant to Section 2.5(a) and (c) of the Supply and Distribution Agreement shall be included in Licensed OEM Products.

 

1.19 “ Licensed Products ” means, collectively, Licensed Electromechanical Products and Licensed OEM Products.

 

1.20 “ Net Sales ” means the invoice prices of Licensed Electromechanical Products and Licensed OEM Products Distributed by Smith & Nephew or any of its Affiliates to unaffiliated third parties (including sales or distribution made in connection with clinical trials unless exempt under 35 U.S.C. 271(e)(1)), less , to the extent included in such invoice price the total of : (a) ordinary and customary trade, quantity or cash discounts actually allowed; (b) credits, rebates and returns (including, but not limited to, wholesaler and retailer returns) actually given; (c) freight, postage, insurance, transportation and duties paid for and separately identified in the invoice or other documentation maintained in the ordinary course of business, and (d) sales, use, tariff and other excise taxes, other consumption taxes, customs duties and compulsory payments to governmental authorities actually paid and separately identified on the invoice or other documentation maintained in the ordinary course of business, and government mandated discounts. In addition, if a Licensed Electromechanical Product or Licensed OEM Product is Distributed in combination with or as a component of other products (“Combination Product”), then the following shall be deducted from the invoice price of such Combination Product for purposes of calculating Net Sales: the amount resulting from the invoice price for such Combination Product multiplied by the fraction A/(A+B), where “A” is the gross selling price (“Gross Selling Price”) for the other product or component contained or used in such Combination Product when sold separately, and “B” is the Gross Selling Price for such Licensed Electromechanical Product or Licensed OEM Product, as the case may be, contained or used in such Combination Product when sold separately. In the event no such separate sales of products or components contained or used in such Combination Product are made by Smith & Nephew or any of its Affiliates, Net Sales for royalty determination of such Combination Product shall be as reasonably allocated by agreement of the parties between such Licensed Electromechanical Product or Licensed OEM Product, as the case may be, and such other product or component, based upon their relative commercial importance.

 

Net Sales also includes the fair market value of all other consideration received by Smith & Nephew or any of its Affiliates for any Licensed Electromechanical Products or Licensed OEM Products Distributed to unaffiliated third parties,

 

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whether such consideration is in cash, payment in kind, exchange or any other form.

 

Net Sales shall occur on the date Smith & Nephew or its Affiliates ship Licensed Electromechanical Products or Licensed OEM Products to unaffiliated third parties.

 

1.21 “ Non-Licensed OEM Products ” means collectively Sculptor Products, and such other products that are added to this Agreement pursuant to the provisions of Sections 2.5(b) and (d) of the Supply and Distribution Agreement.

 

1.22 “ Regulatory Agency ” means the regulatory agency or other governmental body in a country that regulates the sales and use of medical devices in a similar or equivalent function as the FDA in the United States. Any reference to a rule or requirement of the FDA in this Agreement shall refer, if the circumstances make it applicable, to the equivalent rule or requirement of any relevant Regulatory Agency.

 

1.23 “ Return Electrode ” means an electrode having a [*] .

 

1.24 “ RF Energy ” means radio frequency energy operating at any frequency between [*] .

 

1.25 “ Saphyre Products ” means Smith & Nephew’s line of products known as of the Effective Date as “Saphyre” and/or listed in the injunction in the Delaware Litigation as “Saphyre,” and any changes, modifications or improvements to those products without regard to the trademark under which the products are sold or marketed. A current listing of Smith & Nephew’s Saphyre products is included as Exhibit A-S of the Supply and Distribution Agreement.

 

1.26 “ Sculptor Products ” means Smith & Nephew’s line of products known as of the Effective Date as “Sculptor” and any changes, modifications or improvements to those products without regard to the trademark under which the products are sold or marketed. A current listing of Smith & Nephew’s Sculptor products is included as Exhibit B-S of the Supply and Distribution Agreement.

 

1.27 “ Settlement and License Agreement ” means the Settlement and License Agreement between ArthroCare and Smith & Nephew, dated of even date as the Effective Date of this Agreement.

 

[*]	Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

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1.28 “ Subject ArthroCare Spine Products ” means all products (a) made, used, imported or sold by or on behalf of ArthroCare or any of its Affiliates as of the Effective Date of this Agreement (“Current ArthroCare Spine Products”) solely for use in the Spine Field of Use, and (b) made, used, imported or sold by or on behalf of ArthroCare or any of its Affiliates after the Effective Date of this Agreement solely for use in the Spine Field of Use and that are not Materially Different (as defined herein) from the Current ArthroCare Spine Products. For purposes of this Agreement, “Materially Different” means any change to a Current ArthroCare Spine Product that is [*] . The following examples are only intended to assist the Parties and any arbitrator(s) under this Agreement in assessing whether a product is Materially Different. The examples are not intended to act as a limitation on the stated definition of “Materially Different”: By way of example only and not limitation, [*] , would not be considered Materially Different. Initially, Current Subject ArthroCare Spine Products include the products listed in Exhibit C-L of the Settlement and License Agreement attached hereto.

 

1.29 “ Smith & Nephew Subject Spine Patents ” means (a) all U.S. and foreign patents and patent applications issued or pending as of the Effective Date (b) all U.S. and foreign patent applications filed after the Effective Date, and all patents issuing thereon, that claim or derive any right of priority from any of the patents or patent applications included within subclause (a) above, but only to the extent that such patent applications and patents derive such right of priority and (c) with respect to all patents and patent applications included within subclauses (a) and (b) above, only such patents and patent applications that (i) claim invention(s) having application(s) related to the Spine Field of Use or claiming an apparatus or method which can be used in the Spine Field of Use and (ii) are owned by Smith & Nephew or any of its Affiliates or licensed to Smith & Nephew or any of its Affiliates with a right to enforce, including all divisionals, continuations, continuations-in-part, continuing prosecution applications, substitutions, reissues, reexaminations, renewals, extensions and all foreign counterparts of all of the foregoing. The Smith & Nephew Subject Spine Patents specifically include all patents and patent applications listed in Exhibit D-L of the Settlement and License Agreement. Smith & Nephew believes that Exhibit D-L is a complete list of Smith & Nephew Subject Spine Patents as of the Effective Date, and the parties agree that any omissions from Exhibit D-L will be deemed to be inadvertent and will not be deemed a material breach of this Agreement. Smith & Nephew agrees to correct any such omissions when discovered by appropriate amendment.

 

1.30 “ Specifications ” has the meaning set forth in Section 2.4 hereof.

 

[*]	Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

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1.31 “ Spine Field of Use ” means the use of RF Energy for treatment of, or in the vicinity of, a disc within the spine.

 

1.32 “ Tennessee Litigation ” means Smith & Nephew, Inc. v. ArthroCare Corp., Inc. , Civil Action No. 03-2214-Ma (W. D. Tenn.).

 

1.33 “ Transition Period ” means the time period during which ArthroCare and Smith & Nephew shall cooperate to bring ArthroCare’s manufacturing facilities for ArthroCare Manufactured Products to full capacity to meet the requirements of this Agreement and during which Smith & Nephew has the right to manufacture, or have manufactured, the Saphyre and Sculptor line of products pursuant to the terms and conditions set forth in Sections 2.1(c) and 2.2(b), respectively. As of the Effective Date, the Parties anticipate that this period shall be a [*] month period after the Effective Date. This time period may be extended by mutual written agreement of the Senior Vice President of Operations of ArthroCare and the Vice President of Operations of Smith & Nephew.

 

1.34 “ Supply and Distribution Agreement ” means the Supply and Distribution Agreement between ArthroCare and Smith & Nephew, dated of even date as the Effective Date of this Agreement.

 

1. 35 “ USPTO ” means the United States Patent and Trademark Office.

 

1.36 “ Valid Claim ” shall mean any claim in an issued patent included in ArthroCare Licensed Arthroscopy Patents (a) which has not expired or been held unenforceable, unpatentable or invalid by a court of competent jurisdiction in a final judgment that is unappealable or unappealed within the time allowed for appeal, (b) which has not been admitted to be invalid or unenforceable by ArthroCare through reissue proceedings or disclaimer, and (c) which has not been determined to be unpatentable or invalid in a final decision of the USPTO or other applicable patent office in a reexamination or reissue proceeding (or similar proceeding of a foreign patent office) that is unappealable or unappealed within the time allowed for appeal.

 

[*]	Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

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ARTICLE 2

 

GENERAL SUPPLY AND PURCHASE OBLIGATIONS

 

2.1 Licensed OEM Products.

 

(a) Subject to the terms and conditions of this Agreement, Smith & Nephew agrees to exclusively purchase from ArthroCare one hundred percent (100%) of Smith & Nephew’s and its Affiliates’ requirements for the Licensed OEM Products, and ArthroCare agrees to sell to Smith & Nephew such quantities of Licensed OEM Products as Smith & Nephew may order in accordance with this Agreement.

 

(b) Smith & Nephew acknowledges and agrees that all Licensed OEM Products purchased from ArthroCare under this Agreement are subject to the license and other relevant terms and conditions set forth in the Settlement and License Agreement. Without limiting the generality of the foregoing, Smith & Nephew acknowledges and agrees that it only has the right to use, import, export, market, sell, have sold, offer for sale and distribute Licensed OEM Products solely in the Arthroscopy Field of Use and that, in addition to Smith & Nephew’s payment obligations under this Agreement, all Licensed OEM Products Distributed by Smith & Nephew and its Affiliates are subject to Smith & Nephew’s payment of Royalties (as defined in the Settlement and License Agreement) as set forth in the Settlement and License Agreement.

 

(c) Transition Period. Upon completion of the Technology Transfer in Section 2.3 hereof, ArthroCare shall commence manufacturing of Licensed OEM Products. During the Transition Period, Smith & Nephew shall be entitled to manufacture, or have manufactured, Saphyre Products to meet its requirements. In such event, Smith & Nephew shall [*] , and ArthroCare shall [*] , all Saphyre Products manufactured by Smith & Nephew during the Transition Period [*] at the [*] and Smith & Nephew shall [*] such Saphyre Products at the [*] pursuant to [*] below. Smith & Nephew may manufacture or have manufactured Saphyre Products under this Section 2.1 (c) until the end of the Transition Period, and any extensions thereof. Further, as long as Smith & Nephew is cooperating in good faith with ArthroCare and using reasonable commercial efforts to transition the manufacture of the Saphyre Products to ArthroCare, then Smith & Nephew may continue to manufacture or have manufactured Saphyre Products under this Section 2.1(c) until ArthroCare has demonstrated to Smith & Nephew’s approval (which approval shall not be unreasonably withheld or delayed) that it is able to manufacture sufficient Saphyre Products to meet the Performance Requirement under this Agreement for a continuous period of at least [*] .

 

[*]	Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

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Both parties agree that no approvals or other actions that may impact the timetable for completing the transition will be unreasonably delayed. In the event of a dispute concerning Smith & Nephew’s right to continue to manufacture or have manufactured Saphyre Products under this Section 2.1(c), then the Parties shall submit that dispute to the ADR procedure under Article 12 hereof, during which time Smith & Nephew’s right to manufacture or have manufactured Saphyre Products under this Section 2.1(c) shall continue. Submission of the dispute to ADR does not relieve either Party of its obligations to cooperate in good faith and use reasonable commercial efforts to complete the transition of manufacturing to ArthroCare. Notwithstanding anything to the contrary in this Agreement, if the Transition Period extends for longer than [*] months after the Effective Date, the Transition Transfer Price shall be temporarily increased by [*] percent for each product in which Smith & Nephew is still manufacturing, or having manufactured, until such manufacturing is ceased, unless the reason for the delay in the Transition Period is primarily the fault of ArthroCare, an Affiliate of ArthroCare, or a third party contractor, consultant, supplier or any other service, product or material provider to ArthroCare), in which case there shall be no increase in the Transition Transfer Price. For ease of administration of this Section 2.1(c), the parties agree that during the transition period, Smith & Nephew shall pay ArthroCare the difference between the applicable [*] each month under this Section 2.1(c).

 

2.2 Sculptor Products.

 

(a) Subject to the terms and conditions of this Agreement, following the conclusion of the Transition Period, Smith & Nephew agrees to exclusively purchase from ArthroCare one hundred percent (100%) of Smith & Nephew’s and its Affiliates’ requirements for Sculptor Products, and ArthroCare agrees to sell to Smith & Nephew such quantities of Sculptor Products as Smith & Nephew may order in accordance with this Agreement.

 

(b) Transition Period . Upon completion of the Technology Transfer in Section 2.3, ArthroCare shall commence manufacturing of Sculptor Products. During the Transition Period, Smith & Nephew shall be entitled to manufacture, or have manufactured, Sculptor Products; provided that, as of the Effective Date, Smith & Nephew shall [*] , and ArthroCare shall [*] , all Sculptor Products manufactured by Smith & Nephew during the Transition Period at the [*] and Smith & Nephew shall [*] such Sculptor Products at the [*] below. Smith & Nephew may manufacture or have manufactured Sculptor Products under this Section 2.2(b) until the end of the Transition Period, and any extensions thereof. Further, as long as Smith & Nephew is cooperating in good faith with ArthroCare and using reasonable commercial efforts to transition the manufacture of the Sculptor Products to ArthroCare, then Smith & Nephew may continue to manufacture or have manufactured Sculptor Products under this Section 2.2(b) until ArthroCare has demonstrated to Smith & Nephew’s approval (which approval shall not be unreasonably withheld or delayed) that it is able to manufacture

 

[*]	Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

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sufficient Sculptor Products to meet the Performance Requirement under this Agreement for a continuous period of at least [*] . Both parties agree that no approvals or other actions that may impact the timetable for completing the transition will be unreasonably delayed. In the event of a dispute concerning Smith & Nephew’s right to continue to manufacture or have manufactured Sculptor Products under this Section 2.2(b), then the Parties shall submit that dispute to the ADR procedure under Article 12 hereof, during which time Smith & Nephew’s right to manufacture or have manufactured Sculptor Products under this Section 2.2(b) shall continue. Submission of the dispute to ADR does not relieve either Party of its obligations to cooperate in good faith and use reasonable commercial efforts to complete the transition of manufacturing to ArthroCare . Notwithstanding anything to the contrary in this Agreement, if the Transition Period extends for longer than twelve [*] after the Effective Date, the Transition Transfer Price shall be temporarily increased by [*] for each product in which Smith & Nephew is still manufacturing, or having manufactured, until such manufacturing is ceased, unless the reason for the delay in the Transition Period is primarily the fault of ArthroCare, an Affiliate of ArthroCare, or a third party contractor, consultant, supplier or any other service, product or material provider to ArthroCare), in which case there shall be no increase in the Transition Transfer Price. For ease of administration of this Section 2.2(b), the parties agree that during the transition period, Smith & Nephew shall pay ArthroCare the [*] each month under this Section 2.2(b).

 

2.3 Technology Transfer. As soon as reasonably possible, but in no event later than five (5) business days after the Effective Date of this Agreement, Smith & Nephew shall begin disclosing to ArthroCare all technology and know-how necessary to manufacture each of the Licensed OEM Products listed on Exhibit A-S and each of the Sculptor Products listed on Exhibit B-S and shall provide ArthroCare with all assembly and component drawings, specifications, manufacturing process information, tooling, fixtures, molding, raw materials, and other equipment necessary to manufacture such Licensed OEM Products and Sculptor Products (the “Technology Transfer”). The Parties shall cooperate in good faith and use reasonable commercial efforts to complete the Technology Transfer in sufficient time to permit ArthroCare to manufacture the quantities of ArthroCare Manufactured Products ordered by Smith & Nephew as of the end of the Transition Period. ArthroCare shall provide Smith & Nephew an estimated budget and schedule for completion of the Technology Transfer. ArthroCare shall use commercially reasonable efforts to meet such estimated budget and schedule, provided that ArthroCare shall not be liable or be deemed in breach of this Agreement solely for failing to meet such estimated budget or schedule. The schedule shall require completion of the Technology Transfer and manufacturing commencement within [*] of the Effective Date. ArthroCare’s estimated budget for such work shall be limited to ArthroCare’s documented expenses directly and solely in connection with the Technology Transfer and shall not exceed [*] . Smith & Nephew grants (on behalf of itself and its Affiliates) to ArthroCare [*] license under Smith & Nephew’s and its

 

[*]	Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

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Affiliates’ rights in patents and other intellectual property owned or licensed to Smith & Nephew to manufacture the Licensed OEM Products and Sculptor Products solely for Smith & Nephew and its Affiliates and for no other purpose.

 

2.4 Specifications and Design Control. The initial product design specifications and definition of manufacturing process requirements are the responsibility of Smith & Nephew and ArthroCare will act as an OEM for Smith & Nephew. ArthroCare and Smith & Nephew agree that ArthroCare and Smith & Nephew shall agree in writing on the written specifications for each Licensed OEM Product and Non-Licensed OEM Product to be manufactured by ArthroCare for Smith & Nephew under this Agreement (such specifications for Licensed OEM Products and Non-Licensed OEM Products collectively referred to as “Specifications”). The Specifications shall not be supplemented, modified or amended without the written agreement of both parties. If either party desires to change any Specifications, it will notify the other party of such proposed change in writing. Within thirty (30) days following receipt of such a notice, ArthroCare shall notify Smith & Nephew of the cost of implementing such a change and the impact such a change would have on the Transfer Price. With respect to changes in Specifications requested by Smith & Nephew, Smith & Nephew will then notify ArthroCare in writing whether it wants to implement such changes taking into account the implementation costs and Transfer Price impact. Specifications for any improvements to any of the ArthroCare Manufactured Products shall be mutually agreed to by the parties no less than sixty (60) days (or such other period of time that the parties may mutually agree upon in writing) prior to the placement of the first order for each such improved ArthroCare Manufactured Product. If any change in the Specifications will impact the lead time for tooling and materials, or would require additional testing, the time for placement of orders shall be mutually agreed upon by the parties, and Smith & Nephew shall pay reasonable expenses incurred by ArthroCare for retooling and materials. If a change in the Specifications results in an increase in the cost of an ArthroCare Manufactured Product, then the increased cost shall [*] and shall be [*] for such ArthroCare Manufactured Products manufactured after the change is implemented. If a change in the Specification results in a decrease in the cost of an ArthroCare Manufactured Product, then the resulting cost savings shall be [*] of the amount of the savings. ArthroCare has the right to make changes to manufacturing processes or suppliers for ArthroCare Manufactured Products with Smith & Nephew’s approval, which shall not be unreasonably withheld or delayed, so long as such changes to manufacturing processes or suppliers do not change in any material respect the Specifications of such ArthroCare Manufactured Products. If any such change in manufacturing processes or to suppliers results in a decrease in the cost of an ArthroCare Manufactured Product, then the resulting cost savings shall be [*] by lowering the impacted Transfer Price(s) by [*] of the amount of the savings.

 

[*]	Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

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2.5 Development of Additional Products by Smith & Nephew. During the term of this Agreement, Smith & Nephew may develop additional products for use in the Arthroscopy Field of Use, including modifications and variations of Licensed OEM Products, modifications and [*] ArthroCare Licensed Arthroscopy Patents or [*] by such Patents; provided, however, that Smith & Nephew can only make, have made, use, import, export, market, sell, have sold, offer for sale and distribute such additional products consistent with, and pursuant to, the Settlement and License Agreement, where applicable.

 

(a) Modifications and Variations of Licensed OEM Products. In the event that Smith & Nephew develops modifications and/or variations of Licensed OEM Products (such as the Saphyre Products), and other than changes to the Specifications provided for in Section 2.4 hereof, then Smith & Nephew shall submit the design and written specifications for such product to ArthroCare, and upon review and approval by ArthroCare, which approval shall not be unreasonably withheld, ArthroCare shall manufacture such product for Smith & Nephew as an additional Licensed OEM Product at a Transfer Price to be agreed upon between the Parties, and for which royalties shall be due pursuant to the terms of the Settlement and License Agreement. Development of modified manufacturing processes, whether to accommodate design modifications or improvements in the basic process shall be [*] , although ArthroCare may make requests for changes and improvements from time to time. Both parties shall submit proposed process changes to the other for approval and Smith & Nephew shall determine the appropriate design control procedures to conduct. ArthroCare shall [*] any manufacturing process changes requested by ArthroCare as agreed by the Parties. Smith & Nephew shall [*] any manufacturing process changes requested by Smith & Nephew, as agreed by the Parties. If a change in a manufacturing process results in a decrease in the cost of an ArthroCare Manufactured Product, then the resulting cost savings shall be [*] by lowering the impacted Transfer Price(s) by [*] of the amount of the savings.

 

(b) Modifications and Variations of Non-Licensed OEM Products. In the event that Smith & Nephew develops modifications and/or variations of Non-Licensed OEM Products (such as Sculptor Products), and other than changes to the Specifications provided for in Section 2.4 hereof, then Smith & Nephew shall submit the design and written specifications for such product to ArthroCare, and upon review and approval by ArthroCare, which approval shall not be unreasonably withheld, ArthroCare shall manufacture such product for Smith & Nephew as an additional Non-Licensed OEM Product at a Transfer Price to be agreed upon between the Parties. Development of modified manufacturing processes, whether to accommodate design modifications or improvements in the basic process [*] , although ArthroCare may make requests for changes and improvements from time to time. Both parties shall submit proposed process changes to the other for approval and Smith & Nephew shall determine the appropriate design control procedures to conduct.

 

[*]	Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

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ArthroCare shall [*] any manufacturing process changes requested by ArthroCare as agreed by the Parties. Smith & Nephew shall [*] any manufacturing process changes requested by Smith & Nephew, as agreed by the Parties. If a change in a manufacturing process results in a decrease in the cost of an ArthroCare Manufactured Product, then the resulting cost savings shall be [*] by lowering the impacted Transfer Price(s) by [*] of the amount of the savings.

 

(c) Additional Products Covered by ArthroCare Licensed Arthroscopy Patents. In the event that Smith & Nephew develops other Bipolar Products that are not then existing Licensed OEM Products, that are covered by any of the ArthroCare Licensed Arthroscopy Patents and are for use in the Arthroscopy Field of Use, then Smith & Nephew shall submit the design and written specifications for such product to ArthroCare for evaluation and upon review and approval by ArthroCare, which approval shall not be unreasonably withheld, ArthroCare shall manufacture any such product for Smith & Nephew as an additional Licensed OEM Product which will be manufactured at a Transfer Price to be agreed upon between the Parties, and for which royalties shall be due pursuant to the terms of the Settlement and License Agreement; provided, however, that ArthroCare shall not be required to manufacture for Smith & Nephew, and Smith & Nephew shall have no rights under this Agreement to use, make, have made, import, offer to sell, or sell, any products that are designed or intended to [*] . In addition, Smith & Nephew shall pay ArthroCare its reasonable costs for implementing manufacturing as mutually agreed to by the Parties.

 

(d) Additional Products Not Covered by ArthroCare Licensed Arthroscopy Patents. In the event that Smith & Nephew develops other products that are not covered by any of the ArthroCare Licensed Arthroscopy Patents, then Smith & Nephew may submit the design and written specifications for such products to ArthroCare for evaluation ArthroCare shall have no obligation to manufacture any such product for Smith & Nephew, but if ArthroCare agrees to manufacture such product for Smith & Nephew, such product will become an additional Non-Licensed OEM Product which will be manufactured at a Transfer Price to be agreed upon between the Parties. In addition, Smith & Nephew shall pay ArthroCare its reasonable costs for implementing manufacturing as mutually agreed to by the Parties.

 

(e) Disputes. Any disputes under this Section 2.5 will be submitted to mediation and/or arbitration in accordance with the Dispute Resolution procedure of Article 12.

 

2.6 Development of Additional Products By ArthroCare. During the term of this Agreement, Smith & Nephew may request ArthroCare to develop new products for use in the Arthroscopy Field of Use based on proposed written specifications for such new products provided by Smith & Nephew to ArthroCare. ArthroCare shall provide Smith & Nephew an estimated budget and development schedule for the development of such new products. ArthroCare shall use commercially reasonable

 

[*]	Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

 

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efforts to meet such estimated budget and development schedule, provided that ArthroCare shall not be liable or be deemed in breach of this Agreement for failing to meet such estimated budget or development schedule. ArthroCare’s estimated budget for such development work shall be based on [*] . Upon completion of such development of such new products, the parties may mutually decide to add such new products to this Agreement by a written amendment executed by both parties providing for ArthroCare’s manufacture of such new products for Smith & Nephew at a transfer price to be mutually agreed upon by both parties.

 

ARTICLE 3

 

FORECASTS; SALE AND PURCHASE OF PRODUCTS

 

3.1 Forecasts.

 

(a) Within thirty (30) days after the Effective Date of this Agreement, Smith & Nephew shall deliver to ArthroCare a good faith, monthly rolling forecast of its quantity requirements and shipping dates for each category (i.e., SKU) of ArthroCare Manufactured Product for the [*] period commencing with the month of the Effective Date of this Agreement. The first [*] of such forecast shall be binding forecasts and deemed firm orders for the number of each category of ArthroCare Manufactured Product specified in such forecasts, and the forecast for the remaining [*] shall be non-binding. Thereafter, Smith & Nephew shall submit to ArthroCare at or prior to the end of each month a good faith forecast of its quantity requirements and shipping dates for each such category of ArthroCare Manufactured Product for the following [*] period, so that estimates for a rolling [*] period are always provided. Subject to Section 3.2(a), the [*] of each such [*] forecast shall be binding forecasts and deemed firm orders for the number of ArthroCare Manufactured Products specified in such forecasts, and the forecast for the remaining [*] shall be non-binding. If Smith & Nephew provides ArthroCare with a written request for a quantity increase in any firm order already submitted to ArthroCare or included in a binding forecast, ArthroCare and Smith & Nephew will discuss in good faith the additional amount, if any, that ArthroCare is willing and able to supply to Smith & Nephew consistent with ArthroCare’s other obligations, and Smith & Nephew will adjust its order accordingly. In no event is ArthroCare obligated to supply any such additional amounts of such Products, but will use its reasonable commercial efforts to do so.

 

(b) If a required forecast for a particular month is not timely submitted for a ArthroCare Manufactured Product, the immediately preceding forecast for such month shall become the new forecast for such month; if there is no preceding forecast for such month, the forecast for the next preceding month shall become the forecast for such month.

 

[*]	Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

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(c) Smith & Nephew’s forecasts and orders shall reflect its good faith expectations of customer demand and reasonable inventory and safety stock requirements, and Smith & Nephew shall act in a commercially reasonable manner to schedule orders to avoid creating over or under capacity problems for ArthroCare. ArthroCare shall fulfill Smith & Nephew’s orders, as provided in Section 3.2(a), and shall use good faith and reasonable commercial efforts to accommodate changes in Smith & Nephew’s requests for delivery dates, quantity and other supply issues relating to ArthroCare Manufactured Products.

 

(d) Safety Stock. ArthroCare shall carry minimum safety stock equal to [*] of the average of the prior [*] orders by Smith & Nephew for each category (i.e, SKU) of ArthroCare Manufactured Product in finished non-sterile form at its manufacturing facility.

 

3.2 Orders; Price Adjustments; Delivery; Incidental Charges; Recovery Plans; Supply Interruption.

 

(a) Orders and Delivery: Smith & Nephew will confirm its forecasts by submitting a written purchase order to ArthroCare as set forth in Section 3.2. ArthroCare will use commercially reasonable efforts to accommodate Smith & Nephew’s supply requirements. All orders for ArthroCare Manufactured Products shall be submitted by Smith & Nephew to ArthroCare in writing at least [*] prior to Smith & Nephew’s requested date of delivery (“Delivery Date”). ArthroCare shall accept all reasonable orders and shall promptly (within five (5) business days) notify Smith & Nephew in writing of its acceptance of each order, and shall promptly advise Smith & Nephew of any specific concerns, difficulties or outright rejections, in whole or in part, of any such order and the reasons therefor. All such ArthroCare Manufactured Products delivered to Smith & Nephew shall be F.O.B. ArthroCare’s manufacturing facility in Costa Rica (or such other manufacturing facility of which ArthroCare notifies Smith & Nephew). Subject to the terms and conditions of this Agreement, ArthroCare shall use good faith and reasonable commercial efforts to promptly fill (by full or partial shipment) and deliver to the location specified in this Section 3.2(a) by the specified Delivery Dates all of Smith & Nephew’s orders for ArthroCare Manufactured Products which are accepted by ArthroCare as follows: (i)  [*] of all ArthroCare Manufactured Products ordered conforming in all material respects to the Specifications, pursuant to Section 3.3 hereof upon delivery, (ii) delivered within [*] of the specified Delivery Date (the “Performance Requirement”). The Performance Level, as defined, is intended to be substantially the same performance that ArthroCare delivers on average to its other customers for disposable RF products similar to ArthroCare Manufactured Products as of the Effective Date. ArthroCare will make reasonable commercial efforts to maintain the Performance Level remain at substantially the same level that it delivers on average to its other customers for disposable RF products similar to ArthroCare Manufactured Products throughout the term of this Agreement.

 

[*]	Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

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(b) Performance Based Price Adjustments: (1)  At the end of each calendar year once ArthroCare has begun manufacturing all categories (i.e, SKUs) of the ArthroCare Manufactured Products listed in Exhibits A-S and B-S of the Supply and Distribution Agreement, the parties shall measure ArthroCare’s average actual performance in fulfilling Smith & Nephew’s orders for ArthroCare Manufactured Products placed and filled over the prior year by comparing for each order placed and filled how many conforming units of such products were timely delivered (i.e., within [*] of the applicable Delivery Date) to the number of units ordered (and accepted) to determine the percentage of orders that met the Performance Requirement (“Average Actual Performance”). Any order not delivered within [*] of the applicable Delivery Date will be counted as untimely. For purposes of the first year in which the parties measure the Average Actual Performance, Smith & Nephew may, at its sole option, either: (1) make such measurement at the end of the first calendar year once ArthroCare has begun manufacturing all categories of the ArthroCare Manufactured Products; or (2) make such measurement at the second anniversary of the Effective Date (the “First Average Actual Performance Measurement Date”); provided, however, that in no event shall the First Average Actual Performance Measurement Date be more than [*] after the Effective Date. Each subsequent measure of Average Actual Performance shall be made promptly after the [*] of the prior such measure and any price adjustments made under this Section 3.2(b) shall be effective [*] from the prior price adjustment under this Section. For purposes of calculating the Average Actual Performance, the parties shall only include only those categories (i.e., SKUs)of ArthroCare Manufactured Products that have been manufactured by ArthroCare for at least one (1) year such that any new products that have been added to the agreement as Licensed OEM Products or Non-Licensed OEM Products shall not be included in the calculation until such products have been manufactured by ArthroCare for at least one (1) year. The comparison of Average Actual Performance to the Performance Requirement will lead to possible adjustment of the Reference Price (and the corresponding Transfer Price) for ArthroCare Manufactured Products for the next calendar year, under the terms stated in Exhibit D-S, as follows:

 

(i) If the Average Actual Performance is at least [*] within [*] of the Delivery Date for a year, then ArthroCare may raise the Reference Price for ArthroCare Manufactured Products by up to [*] for the next calendar year, under the terms stated in Exhibit D-S.

 

(ii) If the Average Actual Performance for a year is at least [*] but less than [*] within [*] of the Delivery Date for a year, then ArthroCare may raise the Reference Price for ArthroCare Manufactured Products by up to [*] for the next calendar year, under the terms stated in Exhibit D-S.

 

[*]	Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions.

 

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(iii) If the Average Actual Performance for a year is at least [*] but less than [*] within [*] of the Delivery Date for a year, then ArthroCare may not raise the Reference Price for ArthroCare Manufactured Products the next calendar year.

 

(iv) If the Average Actual Performance for a year is less than [*] within [*] of the Delivery Date for a year, then Smith & Nephew may lower the Reference Price for ArthroCare Manufactured Products by up to [*] for the next calendar year.

 

For example, if Smith & Nephew submits and ArthroCare accepts purchase orders for [*] units of ArthroCare Manufactured Products (collectively for all categories of products) i