Co-packer Agreements

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.

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. (Check out our infographic on how to have a successful co-packer relationship.)

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.

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:

• Vagueness is never a good thing in business agreements. One of the best methods of defense is having a co-packing agreement lawyer help create a comprehensive co-packer agreement that details the specific terms, obligations, and requirements for each party involved. Clear, concise legal writing should fundamentally cover the product basics, whether you are producing frozen scones weighing 4 ounces, or individually-wrapped, gluten-free brownies. Establishing crisp criteria for the product allows the buyer to reject goods that do not meet the description.

• Mislabeling Products – As we’ve covered on our food labeling page, incorrect, false, or misleading information on product labeling can create a world of problems. Misbranded foods can expose a business to a wide array of Food and Drug Administration sanctions. There is always room to market your brand strategically but labeling compliance is critical and must come first to avoid legal issues. Your co-packer is your partner – it is important for them to know what promises you are making on your labeling about your product so that the co-packer does not inadvertantly corrupt your careful marketing.

• Undeclared Allergens – Food allergies have never been more rampant in the United States. Undeclared allergens are also the leading cause of product recalls in the United States. These allergens are usually introduced by accident, when a manufacturer changes an ingedient supplier and neglects to think-through the labeling implications. Co-packer agreements need to address which party in the relationship can change ingredient suppliers and what needs to be done if ingredient substitutions need to be made.

• Recalls – A food product recall is an intensive procedure no matter how you look at it. And this is exactly why you need to be prepared for one. In all cases, there are two aspects to a product recall – paying for it, and conducting it. Both o these risks need to be addressed in the co-packer agreement. Paying or a recall might require special insurance policies. Conducting a recall effectively requires close coordination between the food business and the co-packer. Allocating the responsibility for each of these is a fundamental component to a co-packer agreement.

• Intellectual Property – Partnering with a co-packer means you are enlisting the resources of another party to make your unique product. This can be a great resource but can be overwhelming to many when faced with the idea of sharing your intellectual properties like product formulations. A good non-disclosure agreement can adequately protects your trade secrets, and a non-compete agreement can prohibit 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 co-packer 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.

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.

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.

Clients realize the greatest value out of our services when they stack them together comprehensively. Our subscription-based service plans enable our clients to weave our services into the fabric of their businesses at affordable and predictable rates.