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Manufacturer’s Corner: Apple Revisited

Remember when I wrote a glowing column about a Master Development and Supply Agreement Apple and its lawyers drafted?  It was one of the most-read posts I’ve written, so I bet a good number of you do.  Since the post was so popular, and since there have been some, well, we’ll say “unanticipated consequences” for Apple, I thought it warranted some follow up.

You may recall that the article linked in the original post referred to the contract as being “by most reasonable standards, terrible.”  As it turns out, Apple’s counterparty, GT Advanced Technologies, agreed.  In its bankruptcy arguments, GTAT said all sorts of nasty things about the contract.  It was all set out in boring legalese, but GTAT’s argument basically boiled down to “this contract is so burdensome and one-sided that we don’t think we need to abide by it, and we’re going to convince the bankruptcy court of that position.”

And now, GTAT and Apple have agreed to settle their dispute.  I didn’t look very hard for the motion to approve the settlement, but a press release from GTAT says the settlement releases GTAT from its exclusivity obligations to Apple and allows for repayment of the debt over time and solely from one source.

I’m not convinced of GTAT’s position, but I nevertheless want to return to my contention that “[t]his, my friends, is how you draft a supply agreement when you have big bargaining power.”  A couple of things make me want to return to that issue.

First, shortly after writing my original post, I received a note from a former co-worker.  He agreed the contract was well-drafted, but observed a business risk in imposing such onerous contract terms: good suppliers may not want to work under such terms, and therefore decline to bid for the project.  That, of course, leaves the buyer deciding among less desirable suppliers – those who may need the work so badly that they will agree to any terms you impose.

It’s a good point, and one that shouldn’t be overlooked.  When evaluating whether you have the bargaining power to impose contract terms like these, consider it from the supply-side too: can you impose them without alienating the best suppliers?  If not, is it worth it?

Second, after GTAT filed its bankruptcy petition, Apple released a statement: “We’re going to continue evaluating GTAT’s progress on larger sapphire boule development, as well as consider other options for the facility [constructed with money loaned from Apple].  We remain committed to the city and we’re going to work with Mesa and Maricopa County to help the GT Advanced employees who will be impacted by this find jobs.”

I don’t think you have to squint at that statement too hard to see that Apple may have perceived serious public relations problems if it stood on its contract rights.  This too is something you ought to consider when drafting your supply agreement: if you have bargaining power, will you alienate the public and your consumer base if you exercise that bargaining power to its full extent?

A thing I like to harp on in this column is that your manufacturing business is your manufacturing business and nobody else’s, so what works for others may not work for you.  Instead, you need to consider the totality of your circumstances.  Let this stand as a reminder for that general principle.