Contract Packaging & Co-Packer Agreements: Managing the Risks

You can’t have a “Dump and Stir” relationship with a copacker. Details really matter

Co-Packer Agreements and Contract Packaging give food businesses access to large-scale production without building their own factories. As a company gains production advantages through copacking, these partnerships also introduce significant legal, regulatory, and operational risks. Managing those risks—through a well-drafted Co-Packer Agreement—is critical to protecting your product, your intellectual property, and your business. This article outlines the key risks of Co-Packer Agreements and how to manage them effectively.

To begin with, co-packers, or contract packagers, are third-party food processors that agree to produce a product according to the recipe and requirements set by the Marketer. As a result, the Marketer remains distinct from the co-packer, who performs the actual manufacturing. In other words, this setup allows the Marketer to use advanced, inspected facilities without building one. Furthermore, co-packers often guide food businesses on scaling recipes, developing products, improving shelf life, and designing packaging. In addition, their trained teams and specialized equipment reduce production risks. Altogether, these benefits make co-packers essential partners in bringing food products to market.

Marketers that rely on co-packers need to be aware of special liabilities that can arise in contract manufacturing. Contract packaging 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). Marketers rely on co-packers to fulfill the promises they make on the package. The agreement needs to guarantee that the co-packer will put the properly formulated product into the Marketer’s bag or bottle. We do this with a clear and concise “Product Specification”, an objective description of the finished product.
• 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 the commercial risks found in any other manufacturing relationship. Problems arise when deliveries are late, the wrong goods are shipped, or orders arrive incomplete. Most often, the biggest issue in a co-packing relationship happens when the co-packer delivers a product that deviates from the Specification—whether the pretzels are too small, the juice’s pH is too high, or the jam turns out too runny. To guard against these outcomes, a crisply written specification is essential; it sets objectively clear expectations for the Marketer and serves as the basis for rejecting non-conforming goods. Beyond that, a well-drafted agreement gives the Marketer commercial resiliency if a delivery fails to meet the agreed standard. Taken together, the specification and agreement form a strong foundation to protect product quality and ensure business continuity.

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 a product label renders the product misbranded. In such cases, the product becomes vulnerable to both FDA enforcement and private lawsuits. To prevent this outcome, marketers should include a copy of the product label in the co-packing agreement. At the same time, co-packers need detailed manufacturing specifications to ensure the finished product matches the data in the Nutrition Facts Panel. In addition, the co-packer must guarantee that the contents of the package match the claims stated on the label.
• Recalls – A food product recall is an intense experience. When public health is at stake, regulators don’t have any patience. In urgent situations, they expect answers to manufacturing questions within hours—not days or weeks. Therefore, marketers must obligate their co-packers to immediately cooperate with information requests during a recall. Because recalls are expensive and not typically covered by a basic commercial liability policy, the parties must also allocate financial responsibility and determine how the costs will be paid.
• Intellectual Property – A good non-disclosure agreement can adequately protect trade secrets at the outset of the relationship. As production planning advances, product formulas often require adjustments to match the co-packer’s equipment or staffing capabilities. In many situations, the agreement can assign minor formula changes to the Marketer without issue. However, when changes become more substantial, a separate product development agreement may offer stronger legal protection. Moreover, non-compete or non-circumvention clauses can supplement these agreements and help insulate the Marketer from commercial interference.

The Food Law Firm will help you draft an air-tight contract packaging agreement that gets your product on shelves with minimal investment in equipment, capital investment, and technical knowledge. Get in touch to find out how and get a free quote. Turn around time for one of our agreements is usually 3-4 business days.

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