Contract Packaging & Co-Packer Agreements

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Co-packers, or contract packagers, are third-party food processors that agree to produce a product according to the recipe and requirements of a food business. We refer to these food businesses as “marketers” of the food product. 

Marketers are distinguishable from the co-packers that manufacture the product  and can rely on the co-packer’s experience, personnel, and equipment, meaning they get access to sophisticated production within inspected, compliant facilities. Co-packers also commonly offer professional guidance on things like scaling-up recipes, product development, shelf stability, and product packaging.

Marketers that rely on co-packers need to be aware of special liabilities that can arise in contract manufacturing. Co-packing creates four distinct buckets of risk for the marketer:

• Regulatory. Food product marketing is governed by labeling regulations, and manufacturing is governed by federal Good Manufacturing Practices (GMPs). Unless there is tight coordination between the marketer and the manufacturer, the product is bound to be misbranded or adulterated.
• Theft of Intellectual Property. Marketers need to share their product formulas with co-packers. Recipes are trade secrets, and sharing them needs to be done carefully. From the start of the relationship with a co-packer, the marketer needs to clearly identify its intellectual property. A co-packer’s rights to the trade secrets must terminate after the conclusion of the manufacturing relationship.
• Food Safety. Marketers are entirely responsible to their customers when it comes to product safety, whether or not they operate the machines that make the food. Marketers need to have crystal clear oversight of all food safety documentation related to their products. They also need a trained in-house quality control staff that can independently verify the manufacturer’s compliance with food safety protocols.
• Commercial. Food manufacturing shares many of the commercial risks of any other manufacturing relationship. Deliveries are late. The wrong goods are shipped. Orders are incomplete. Marketers need to contemplate the legal remedies available to them and put them into the agreement.

Marketers can address these risks in a comprehensive manufacturing agreement. Marketers may want to consider including the following items in copacker agreements:

• Set the Commercial Expectation. In co-packing, marketers need to focus on details. Details set the commercial expectation for the copacker, and details provide the consumer with a consistent sensory experience. Clear, concise legal writing should describe the product in as much detail as possible. In addition to common sense details like cookie size and scone weight, we routinely describe products by color, pH, salinity, Brix, and even viscosity. It is incredibly important to be thorough. Establishing crisp, objective criteria for the product allows the marketer to reject goods that do not meet the terms in the Agreement. Good descriptions also help you to meet the consumer’s expectations.
• Coordination Between Labeling and Manufacturing. As we’ve covered on our food labeling page, any false or misleading information on product labeling means that the product is misbranded. Misbranded foods are subject to Food and Drug Administration sanctions as well as lawsuits by customers. Marketers must incorporate a copy of their label into the agreement. Co-packers need comprehensive manufacturing specifications to guarantee that the final product matches the data in the Nutrition Facts Panel of the product label. Co-packers also need to guarantee that what they put in the package will match what the marketer said on the label.
• Undeclared Allergens. Undeclared allergens are the leading cause of product recalls in the United States. These allergens are usually introduced by accident, like when a manufacturer changes an ingredient supplier and neglects to think-through the labeling implications. A thorough product specification will require a co-packer to use only the ingredients specified in the agreement, and no substitutes can be unilaterally made.
• Recalls – A food product recall is an intense experience.  When public health is at stake, regulators don’t have any patience. They expect answers to manufacturing questions within hours, not days or weeks. Marketers must obligate their co-packers to immediately cooperate with information requests during a recall. Recalls are expensive and are not generally covered by a basic commercial liability policy, so parties need to allocate the financial risk of the recall and determine how it will be paid for.
• Intellectual Property – A good non-disclosure agreement can adequately protect your trade secrets at the outset of the relationship. Prior to manufacturing, it is not uncommon for product formulas to undergo modification to meet the copacker’s equipment and staffing. Formula changes can be “assigned” to the marketer in a co-packer agreement if they are minor. If the formula changes are more substantial, it might be advisable to enter into a product development agreement prior to the co-packer agreement. Non-compete clauses or non-circumvention clauses can supplement these agreements to further insulate the marketer from commercial interference.

Talking about co-packer agreements with clients is a great professional introduction to our broader legal services. It starts a conversation about food safety, insurance exposure, quality control, commercial agreements, and intellectual property. We can address these issues comprehensively with our service plans. Clients realize the greatest value out of our services when they address their needs comprehensively. Our subscription-based service plans enable our clients to weave our services into the fabric of their businesses at affordable and predictable rates.