The Food Law Firm can help draft and negotiate private label agreements from either the perspective of manufacturers or purchasers. Get in touch to find out how.
Private Label Agreements
Private label Agreements can be so much more than an opportunity to create a product. Talking about private label agreements starts a conversation about food safety, insurance exposure, quality control, commercial agreements, and intellectual property.
What Are Private Label Agreements?
Private label agreements are a type of manufacturing agreement used to produce many products, including foods, supplements, and cosmetics. In private labeling, a manufacturer agrees to produce their own recipe and formula that will be marketed under the branding and trademarks of a purchaser-customer.
In a private label agreement it is important to address issues like proper food and nutrition labeling, food safety, food recall liability, and the intellectual property issues related to product formulation.
Why Use Private Label Agreements?
From the manufacturer’s perspective, private label agreements maximize production potential without the need to build retail markets for the product. A manufacturer can get the product on lots of shelves without having to bear the expense of building a mass market.
From the Marketer’s perspective (the “Marketer” being the company that buys the products to sell them on the open market) , margins on private label goods are better, which gives Marketers more economic bargaining power with suppliers of national brands. Private label agreements give major retailers like Amazon the capability to rapidly expand product offerings with minimal investment (both capital and intellectual) in food processing and production.
Neither party will realize the true benefits of private labeling unless the manufacturing agreement is put in writing. A good private label agreement needs to identify and address the major risks of contract manufacturing of a food product.
The risks are:
- Maintaining solid control over intellectual properties like product formulas.
- Marketing a misbranded product.
- Inadequate manufacturing practices that result in sick customers or product recalls.
- The basic risks inherent in any manufacturing or supply relationship – quality of goods, timing of delivery, price, and risk of loss.
What to Include in Your Private Label Agreement
Intellectual Property. An important feature of a private label agreement is an acknowledgement that the manufacturer retains ownership of the product recipe or formulation after the conclusion of the production run. For the manufacturer, the benefits are obvious – they get to retain control of how the product is used in the marketplace. For the Marketer, the control of the manufacturer creates a liability that is not always so obvious. Private labeling creates a dependency problem for the Marketer because the product can only be purchased from a single manufacturer. The better the private label product performs for the Marketer, the more dependent the Marketer becomes on the manufacturer. Success for the Marketer creates a bargaining power disparity in the relationship. A Marketer can address the imbalance with various types of contracts, like requirements contracts, which can be discussed during a consultation with one of our attorneys.
Recalls. A private label agreement should address which party bears responsibility for product recall expenses, and how information will flow from manufacturers to Marketers to regulators.
Product Details. The manufacturer needs to provide the marketer with a Specification Sheet for the product. The information on the Specification sheet will form the basis for all product labeling and marketing. The Specification Sheet should include product nutritional information, a list of all product ingredients, a list of any of the 9 major allergens, and information on any additional claims that can be made about the product like organic certification, gluten free manufacturing, and the like. Finally, the Specification needs to contain as many objective details about the finished product as possible, such as pH, water activity, viscosity, color. All of these objective details need to be compared against the finished products, which is how the seller of the goods can indicate they meet the requirements of a purchase order. The Specification is the manufacturer’s warranty for the product and is incorporated into the Private Label Agreement as such.
Oversight. The marketer of the product should have access to the food safety records of the manufacturer that pertain to the manufacturing of the product. Total transparency is the goal. Both the manufacturer and the marketer have a duty to produce wholesome food. If a marketer has access to the food safety documentation of the manufacturer, the marketer’s own food safety and quality control professionals can check the work of the manufacturer.
The commercial features of the deal should be established by thorough and concise writing: how orders are submitted, manufacturing costs, delivery dates, and payment terms are just some of the basics that need to be addressed.
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