What are co-packers?
Co-packers are third-party food processors that agree to produce a product according to the recipe and requirements of a food business. For food businesses of any size, utilizing a co-packer is an effective way to get a product to market with minimal investment in equipment and technical knowledge.
Why use co-packers?
Co-packers offer food manufacturers a way to get into the market without the need to make the technical and capital investment in a production facility. Manufacturers can rely on the co-packer’s experience, personnel, and capital to access sophisticated production within inspected facilities. Co-packers also commonly offer professional guidance on things like scaling-up recipes, product development, shelf stability, and product packaging.
What are the legal implications?
Relying on co-packers creates special liabilities for businesses that use them. Food business are primarily liable for virtually all of the risks associated with marketing a product, even if the defects were caused by the acts or omissions of the co-packer. The nature of the co-packer relationship requires a food business to disclose trade secrets of production, which are of significant economic value to both parties.
Lots of popular products are made by third-party producers, and several have incurred a liability for the errors made by their co-packers:
- In March, 2016, Bumble Bee Tuna issued a voluntary recall of tuna products that were negligently manufactured by their co-packer.
- In March, 2016, Applegate Naturals recalled 4,530 pounds of chicken nuggets after consumers discovered small chunks of plastic within them. The plastic was introduced into the product due to the negligence of a co-packer, in this case Purdue Foods LLC.
In each of these cases, the co-packer introduced a product defect, for which the food business is always primarily liable. Putting a co-packer in charge of your production is literally putting the fate of your business into the hands of another commercial enterprise. It is done routinely in our food system, but it needs to be done thoughtfully and carefully.
What to include in your co-packer agreement
All of the risks created by utilizing a co-packer can be addressed in a comprehensive production agreement. You may want to consider including the following items in your co-packer agreement:
- A basic description of the product, whether it is frozen scones weighing 4 ounces, or individually-wrapped, gluten-free brownies. Establishing criteria for the product allows the buyer to reject goods that do not meet the description.
- Recall Expenses, either for conducting recalls or paying recall insurance premiums.
- Responsibilities during recall implementation.
- Indemnification for misbranding, recalls, or food-borne illness liabilities.
- Allocation of responsibility for supplier verification.
- A non-disclosure agreement that adequately protects your trade secrets
- A non-compete agreement which will deter your co-packer from producing your product for a competitor or distributor.
Some food businesses often do not have the bargaining power to draft or negotiate favorable terms for their co-packer agreements. For food businesses that accept “take it or leave it” deals with their processors, we can perform a desk audit of the agreement to identify the critical liabilities assumed by the food business, then develop a risk mitigation strategy that meets the resource capabilities of the food business.
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