Co-packing gives a company room to grow its brand, but it's essential to set expectations, said Jeni Lamb Rogers, partner at PSL Law Group LLC, during an SFA webinar, Monday.
“Co-packing is a term that encompasses a wide variety of commercial relations,” she noted. "At its core, co-packing is when a manufacturer produces a branded product to the specifications set by a different company."
According to Rogers, there is no one-size-fits all approach; co-packing agreements need to take business, compliance, and intellectual property implications into account. To ensure a comprehensive agreement, companies should consider the following:
Planning for consistent, compliant production and delivery. When forecasting, Rogers suggested deciding on a binding or non-binding agreement. A binding forecast is when a company determines how much it will produce and if that quantity isn’t met, they must pay a fee. A non-binding forecast is when a company provides a projection to the manufacturer, but isn’t held to that number. It’s also important to confirm how you are sourcing and paying for raw materials, and how you will handle ingredient substitutions.
Deciding on purchase orders, payment, and fulfillment. Decide how you will communicate purchase orders, as well as pricing and payment terms. Consider if the co-packer will be storing the raw materials, products, or packaging, and how the product will get to your customer.
Creating strong, broadly-drafted confidentiality provisions. The co-packer should not use your proprietary business information except as needed in the production of your products, said Rogers. Deliberate if you’re comfortable about publicly disclosing your co-packing relationship, or how you’d feel if a co-packer produced a product competitive to yours.
Being sure of intellectual property ownership. According to Rogers, most co-packers will adjust a formula that started in a home or commercial kitchen for scale production and it's important to ensure you own the formula after alteration. In addition, confirm who owns the intellectual property rights to an innovation in processing developed while working on your product.
Agreeing on specifications and non-conforming products. Product specifications should be highly detailed, outline your recipe or formula, and define the quality parameters for the finished product, as well as the label and placement of the label. Rogers advised to define when a non-conformity must be discovered and reported, and how to handle it.
Opening communication around inspections, food safety audits, and recalls. Your agreement should require notice of a problem within 24 hours, said Rogers. “You want to have the right to handle communications with the FDA, your customers, and the press during a recall,” she said.
Being aware of the legal basics and other considerations. Is your agreement exclusive or non-exclusive? What does it take to terminate it? Other things Rogers recommended considering include: representations and warranties, certifications, insurance, limitations or liability, and assignment and subcontracting.
Related: Specialty Food Stakeholders Have Adapted to Supply Chain Issues; Panel Speaks on Co-Packing During COVID.