Exclusive Distributor Agreement

EXCLUSIVE DISTRIBUTOR AGREEMENT


This EXCLUSIVE DISTRIBUTOR AGREEMENT, including the attached Exhibits (the "Agreement"), is made and entered into as of August 21, 1997 (the "Effective Date"), by and between ArthroCare Corporation, a Delaware corporation with offices at 595 North Pastoria Avenue, Sunnyvale, California 94086 ("ArthroCare"), and Kobayashi Pharmaceutical Co., Ltd., a corporation organized under the laws of Japan with offices at 3-6, 4-Chome, Doshomachi, Chuo- Ku, Osaka, 541 Japan ("Kobayashi").


A. ArthroCare is engaged in the business of manufacturing, distributing, and selling Products (as defined below) and desires to engage a marketing and distribution partner in Japan;


B. Kobayashi desires to solicit orders for Products from customers in Japan, and desires to be ArthroCare's sole marketing and distribution partner in Japan for Products solely for use within the Field (as defined below);


C. Kobayashi desires to purchase, and ArthroCare desires to sell to Kobayashi, such Products for the purpose of resale to customers in Japan; and


D. The relationship between Kobayashi and ArthroCare is that of buyer and seller.


NOW, THEREFORE, in consideration of the mutual promises contained herein, the parties agree as follows:


1. DEFINITIONS


1.1 "Affiliate" shall mean any entity which controls, is controlled by or is under common control with Kobayashi or ArthroCare. An entity shall be regarded as in control of another entity for purposes of this definition if it owns or controls more than fifty percent (50%) of the shares of the subject entity entitled to vote in the election of directors (or, in the case of an entity that is not a corporation, for the election of the corresponding managing authority).


1.2 "Field" shall mean arthroscopic applications.


1.3 "Marketing Approval Application" shall mean any application with a governmental regulatory agency for authority to market a Product within Japan, including without limitation an import approval application ("yunyu shonin shinsei"), import license application ("yunyu kyoka shinsei"), or other similar application or filing.


1.4 "Product(s)" shall mean, collectively and individually, ArthroCare's (i) disposable, bipolar arthroscopic wand, (ii) connecting cable and, (iii) radio frequency power controller; in each case as defined in ArthroCare's 510K filed with the U.S. Food and Drug Administration prior to the Effective Date and supplements thereto, to the extent such products are specifically intended for use within the Field and with respect to modifications or improvements thereto, to the extent that ArthroCare has the right to include the same hereunder. It is understood that Products, and/or any component thereof, may be changed, substituted or added to by ArthroCare to the extent such changes do not require modifications or changes to a Market Approval Application for a Product approved by the Ministry of Health & Welfare in Japan to market and distribute such Product in Japan, upon ninety (90) days prior written notice to Kobayashi. If a change to a Product requires modifications or changes to a Market Approval Application for such Product approved by the Ministry of Health & Welfare in Japan, the parties shall consult in good faith to determine a reasonable transition period with respect to implementation of such Product change in Japan. The parties contemplate the addition of other products to the Agreement on terms substantially similar to those herein, which addition shall only be made upon the mutual agreement of the parties. ArthroCare shall be under no obligation to continue the production of any Product, except as provided herein.


2. GRANT OF DISTRIBUTION RIGHTS


2.1 Appointment. Subject to the terms and conditions of this Agreement, ArthroCare hereby grants to Kobayashi the exclusive right to market, sell and distribute Products in Japan solely for use in the Field. Kobayashi agrees not to market, promote or distribute any Product for use outside the Field or outside Japan. Notwithstanding anything herein to the contrary, Kobayashi shall market, promote, sell, and otherwise distribute Products in accordance with all applicable law and regulations. ArthroCare reserves all rights not expressly granted herein.


2.2 Exclusivity of Efforts. During the term of this Agreement, neither Kobayashi nor their Affiliates shall directly or indirectly market, sell or otherwise distribute in Japan any product lines or products which, in ArthroCare's or Kobayashi's reasonable judgment, compete with any Products.


2.3 No Rights Beyond Products. Nothing in this Agreement shall be deemed to grant to Kobayashi rights in products or technology other than the Products; nor shall any provision of this Agreement be deemed to restrict ArthroCare's right to exploit Products, or patents or any other intellectual property rights, outside the Field, outside Japan or in products other than Products.


2.4 Sale Conveys No Right to Manufacture or Copy. The Products are offered for sale and are sold by ArthroCare subject in every case to the condition that such sale does not convey any license, expressly or by implication, to manufacture, duplicate or otherwise copy or reproduce any of the Products.


3. PRICE AND PAYMENT


3.1 Prices. The transfer price paid by Kobayashi for each Product shall be as set forth in Exhibit A, and shall remain fixed from the Effective Date until the [*****] of such Effective Date. Thereafter, ArthroCare may increase the transfer prices in Exhibit A [*****] upon at least [*****] prior written notice to Kobayashi, provided that any such price increases [*****]. Price decreases on Products hereunder will be effective when declared.


3.2 Payment Terms. Kobayashi shall make payments to ArthroCare under this Agreement by wire transfer in United States dollars in immediately available funds to a bank account designated by ArthroCare. Payment for Products supplied hereunder shall be made net [*****] after the date of invoice. Any payments due hereunder which are not paid on the date such payments are due shall bear interest at the lesser of [*****] or the maximum rate permitted by California law, calculated on the numbered days such payment is delinquent. This Section 3.2 shall in no way limit any other remedies available to ArthroCare.


3.3 Taxes. Any and all amounts payable hereunder do not include any government taxes (including without limitation, withholding, sales, use, excise, and value added taxes) or duties imposed by any Japanese governmental agency that are applicable to the export, import, or purchase of the Products (other than taxes on the net income of ArthroCare), and [*****].


4. TERMS OF PURCHASE AND SALE


4.1 Terms and Conditions. All Product purchases hereunder shall be subject to the terms and conditions of this Agreement. Nothing contained in any purchase order submitted pursuant to this Agreement shall in any way modify or add any terms or conditions to said purchases, unless otherwise agreed in writing by the parties.


4.2 Initial Stocking Order. An initial stocking order placed by Kobayashi on the Effective Date is attached hereto as Exhibit B and will be processed upon notification by Kobayashi no later than ninety (90) days from receipt of regulatory approval for Products by the Ministry of Health and Welfare in Japan. Such initial stocking order will be Kobayashi's minimum performance requirement for the first calendar year following regulatory approval of Products in Japan.


4.3 Forecasts. At least [*****] prior to the first commercial sale of a Product in Japan, and thereafter, on a calendar monthly basis, by the [*****] day of each calendar month, Kobayashi shall provide to ArthroCare a good faith rolling [*****] forecast showing Kobayashi's prospective purchases of Products on a monthly basis for the next [*****], which forecasts shall commence on the first day of the calendar month following submission of the forecast to ArthroCare (the "Forecasts"). Such Forecasts are for ArthroCare's planning purposes only and shall not constitute a binding obligation upon ArthroCare or Kobayashi. In the event that Kobayashi believes, in good faith, that the information provided in any Forecast is no longer accurate, Kobayashi will promptly notify ArthroCare and provide ArthroCare with revised Forecast.


4.4 Order and Acceptance. Kobayashi shall use its commercially reasonable efforts to place its firm orders with ArthroCare for Products [*****] in advance of the requested delivery date, and ArthroCare will use its commercially reasonable efforts to fulfill purchase orders in accordance with its normal practices and lead times then in effect. Kobayashi will use its commercially reasonable efforts to submit purchase orders in a regular fashion, i.e., monthly, so as to allow for efficient scheduling of ArthroCare production and warehousing. All orders for Products submitted by Kobayashi shall be initiated by the office at Kobayashi's address for notice hereunder. All orders shall be by means of signed written purchase orders by Kobayashi to ArthroCare, sent to ArthroCare at ArthroCare's address for notice hereunder and requesting a delivery date during the term of this Agreement. Orders may initially be placed by telephone, provided that a signed confirming purchase order is received in writing (which may include telecopy transmission) by ArthroCare within five (5) business days after, a telephone order is placed. ArthroCare will notify Kobayashi within five (5) business days from receipt of a purchase order of the proposed delivery date to Kobayashi. ArthroCare agrees to accept purchase orders that do not exceed the quantities projected in the Forecasts by more than [*****]. ArthroCare will have no liability to Kobayashi with respect to purchase orders that are not accepted. No partial shipment of an order shall constitute the acceptance of the entire order, absent the written acceptance of such entire order. Kobayashi may cancel or reschedule purchase orders for Products only with ArthroCare's prior written approval.


4.5 Shipping. All Products delivered pursuant to the terms of this Agreement shall be suitably packed for shipment in ArthroCare's standard shipping cartons marked for shipment to the destination point indicated in Kobayashi's purchase order and delivered to Kobayashi at such destination points. ArthroCare shall ship Products F.C.A. ArthroCare's facility using the carrier specified in Kobayashi's purchase order provided that if Kobayashi does not provide instructions with respect to the carrier to be used, ArthroCare shall select the carrier. All freight, insurance, and other shipping expenses, as well as any special packing expenses, shall be paid by Kobayashi. Kobayashi shall also bear all applicable taxes, duties and similar charges that may be assessed against the Products after delivery to the carrier F.C.A. ArthroCare's facility location. All shipments and freight charges shall be deemed correct unless ArthroCare receives from Kobayashi, no later than [*****] after the shipping date of a given shipment, a written notice specifying the shipment, the purchase order number, and the exact nature of the discrepancy between the order and shipment or discrepancy in the freight cost, as applicable.


4.6 Product Returns. Except as set forth in Article 6 below, Kobayashi may return sterile wands and undamaged Products in saleable condition only with ArthroCare's prior written approval and only within [*****] of receipt by Kobayashi. Products returned to ArthroCare other than under Article 6 shall be returned F.O.B. the destination point designated by ArthroCare and Products returned more than [*****] after receipt by Kobayashi of such Products shall be subject to a restocking fee in an amount equal to [*****] of the transfer price paid by Kobayashi to ArthroCare for such Products.


5. ACCEPTANCE


Kobayashi shall inspect all Products promptly upon receipt thereof and may reject any Product that fails to conform to the warranties set forth in Article 6 below at the time of delivery to Kobayashi, provided that Kobayashi complies with the provisions of Section 6.2 below. Except as set forth in this Article 5 and Article 6 below, Kobayashi shall return Products to ArthroCare only with ArthroCare's prior written approval.


6. WARRANTY


6.1 Product Warranty. ArthroCare warrants to Kobayashi that at the time of delivery to Kobayashi the Products purchased by Kobayashi shall (i) conform to packaging and labeling specifications agreed upon by the parties, (ii) meet the specifications for the Products set forth in the Marketing Approval Application for such Product approved by the Ministry of Health and Welfare, (iii) be free from defects in design, materials or workmanship, (iv) be of merchantable quality and fit for the purpose for which they are intended; and (v) the manufacture of such Products will comply with all applicable laws in the place of manufacture. This warranty is contingent upon proper use of Products in the application for which they were intended as indicated in the Product label claims, and ArthroCare makes no warranty (express, implied, or statutory) for Products that are modified (except as expressly contemplated herein), or subjected to accident, misuse, neglect, unauthorized repair, or improper testing or storage.


6.2 Exclusive Remedy. In the event that any Product purchased by Kobayashi from ArthroCare fails to conform to the warranty set forth in Section 6.1 above or is recalled pursuant to Section 7.8.2, ArthroCare shall, at ArthroCare's sole election, repair or replace the Product, or component thereof, or credit Kobayashi's account for the amount actually paid for any such Product, or component thereof or direct costs of promotion actually incurred by Kobayashi as a result of such failure to conform or recall within [*****] of receipt by ArthroCare thereof, provided that (i) Kobayashi promptly notifies ArthroCare in writing that such Product failed to conform and furnishes an explanation of any reported nonconformity and requests a return material authorization number; (ii) such Product is returned to ArthroCare by Kobayashi F.O.B. the address designated by ArthroCare during the warranty period with the return material authorization number affixed prominently to the outside packaging; and (iii) the reported nonconformities actually exist and were not caused by accident, misuse, neglect, alteration, repair or improper testing or storage. If such Product fails to so conform, ArthroCare will reimburse Kobayashi for shipment charges for return of the nonconforming Product.


6.3 Exclusion of Other Warranties. EXCEPT FOR THE LIMITED WARRANTIES PROVIDED IN SECTION 6.1 ABOVE, ARTHROCARE GRANTS NO OTHER WARRANTIES OR CONDITIONS, EXPRESS OR IMPLIED, BY STATUTE, IN ANY COMMUNICATION WITH KOBAYASHI OR ITS CUSTOMERS, OR OTHERWISE, REGARDING THE PRODUCTS OR VALIDITY OF ARTHROCARE TECHNOLOGY, AND ARTHROCARE SPECIFICALLY DISCLAIMS THE IMPLIED WARRANTY OF NONINFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY RIGHTS. ARTHROCARE NEITHER ASSUMES NOR AUTHORIZES ANY OTHER PERSON TO ASSUME ANY OTHER LIABILITIES ARISING OUT OF OR IN CONNECTION WITH THE SALE OR USE OF ANY ARTHROCARE PRODUCT.


7. ADDITIONAL OBLIGATIONS OF KOBAYASHI


7.1 Marketing Approval. Kobayashi shall prepare and file all regulatory documents in ArthroCare's name with respect to Products. In addition, Kobayashi agrees to file this Agreement, if required, with the Japan Fair Trade Commission (the "JFTC"). ArthroCare shall own all regulatory filings and shall have the right to obtain copies directly from Kobayashi of, and to reference, for any purpose, any and all regulatory filings made by Kobayashi with respect to Products. If any Product clinical trials are required under the laws of Japan at any time during the term of the Agreement, then Kobayashi, at Kobayashi's expense (exclusive of Products provided by ArthroCare pursuant to Section 8.1), shall organize, conduct and support any and all preclinical and clinical trials required to obtain registrations, licenses and permits required to comply with the laws of regulations of Japan for sale and distribution of Products.


7.2 Minimum Performance Requirements. For the [*****] following regulatory approval for the Products in Japan, ArthroCare and Kobayashi will agree to minimum performance requirements and during each calendar year, Kobayashi shall purchase from ArthroCare the quantity of Products required to meet the minimum performance requirements. The minimum performance requirements shall be determined in good faith by mutual agreement of ArthroCare and Kobayashi. The parties intend that such minimums will be realistic, taking into account the numbers actually attained in the immediately preceding year, market conditions then prevailing and other relevant factors. Should the parties fail to mutually agree to the minimum performance requirements within [*****] before the beginning of each of the [*****], then they shall submit their differences to mediation to discuss and attempt to resolve the differences amicable without resort to arbitration. Any differences which have not been resolved within [*****] shall be resolved by arbitration in accordance with Article 16 of this Agreement. The minimum performance requirements shall be provided for all Products as a total, not for a specific Product. In case of failure to attain the minimum performance requirements, both parties shall in good faith consult regarding the reasons for such shortfall. Failure to meet such minimum performance requirements will constitute a breach of this Agreement. Beginning in the [*****] following regulatory approval for the Products in Japan, upon any failure of Kobayashi to meet the minimum performance requirements for [*****] Kobayashi will be on a probationary period for a period of [*****] and upon Kobayashi's subsequent failure to meet minimum performance requirements for such [*****] probationary period, ArthroCare shall have the right to terminate this Agreement, such termination to be at ArthroCare's discretion either (i) effective immediately, or (ii) effective [*****] from notice to Kobayashi of ArthroCare's intent to terminate, and in either case there will be a wind up period of [*****].


7.3 Advertising and Promotions.


Kobayashi shall:


i. list the Products in its catalogs and make such Products available to its customers;


ii. employ adequate and experienced sales personnel;


iii. dedicate sufficient product and project management, marketing and financial resources to pursue the market opportunities for the Product in Japan;


iv. advertise the Product in trade and other relevant publications;


v. participate in appropriate trade shows; and


vi. make sales calls on physicians.


7.4 Materials. ArthroCare shall provide to Kobayashi samples of ArthroCare's promotional, educational ...