Perishable Agricultural Commodities Act In addition, businesses dealing in produce should use sales contracts and invoices to take advantage of the special protections afforded by the Perishable Agricultural Commodities Act (PACA). The Act sets forth prompt pay terms (e.g., 10 days after acceptance) which tend to be very favorable to sellers.
Additionally, PACA licensees can include the specific language cited in the U.S. Department of Agriculture’s PACA regulations on invoices to preserve trust rights, which allow produce suppliers to be paid before other creditors if a buyer goes bankrupt. If a seller does not notify the buyer of its intent to preserve its trust rights under PACA, this protection can be lost.
BUSINESS STRUCTURING FOR THE FOOD SAFETY MODERNIZATION ACT Food businesses and the produce growers who supply them will be significantly impacted by U.S. Food and Drug Admin-istration (FDA) regulations recently promulgated under the Food Safety Modernization Act (FSMA). In particular, the rules relating to produce safety impose extensive requirements for growers with regard to water quality, sanitation of equipment, worker hygiene, and other food safety issues.
The Act’s rules for hazard analysis and preventive controls impose new requirements for food processors and handlers to identify hazards in their products and processes and to implement controls to prevent the hazards from occurring.
The administrative burdens and costs of complying with these rules will be substantial. For smaller businesses, it makes good sense to consider whether the business or operations can be structured in a way to qualify for the exemptions provided in FSMA’s rules.
Under both the preventive controls and produce rule, businesses will be exempt from most requirements if annual food sales are below a certain dollar amount. Both rules provide a qualified exemption (“qualified” in that it can be taken away in certain circumstances) from most of the requirements if the business or farm’s average annual food sales are less than $500,000 and if the majority of its sales are direct to consumers or to local retailers or restaurants.
Under the preventive controls rule, “very small” businesses, meaning those with annual food sales of less than $1 million, may also be eligible for the qualified exemption. In addition, if a farm’s produce sales do not exceed $25,000 annually, it is completely exempt from the produce rule. The produce rules also do not apply to certain commodities (listed in the regulations), those that are not generally consumed raw.
Which food sales count toward the exemption limits differ under the two rules. For the preventive controls rule, all food sales of affiliated companies count. In other words, all food sales of separate food processing or handling facilities under common ownership or control will be counted toward the exemption limit.
In contrast, for purposes of the produce rule exemptions, the relevant sales are those of a “farm,” which is defined as an operation in a physical place under one management. Thus, a grower with multiple farms in different locations might qualify for an exemption on one farm but not another, depending on the relative sales from each location. Also, within one location, operations under different management would be treated as separate “farms.”
Given these exemptions, small food and farming businesses should consider whether they can structure their businesses or operations to avoid taking on more of a regulatory burden than necessary. It may be possible for a food enterprise to keep parts of its operation under separate ownership and control so the total food sales will not be aggregated for purposes of determining whether any one facility is eligible for the qualified exemption under the preventive controls rule.
There are many legal tools that are potentially useful for food businesses. This article focuses on three issues of particular relevance: (1) intellectual property; (2) contracts; and (3) business planning to minimize upcoming regulatory burdens associated with the Food Safety Modernization Act.
INTELLECTUAL PROPERTY Every business should have a strategy for identifying, protecting, and leveraging its intellectual property (IP). Food businesses are no different; trade secrets, copyrights, and trademarks are valuable assets. But, if these assets are not carefully protected, they will be lost. The first step in protecting IP is to identify assets, such as patents or patentable inventions, copyrighted works, trade secrets or other confidential business information, and trademarks. Once a company has an inventory of its intellectual property, it should ensure that these assets are adequately protected with government registration (if applicable), internal policies, and contractual agreements.
A patent is a property right conferred by the U.S. Patent and Trademark Office (USPTO) allowing the owner to exclude other people from making, using, selling, or importing an invention. Although some aspects of food products and processes may be novel enough to obtain patent protection, most food recipes are not patentable. In general, recipes may be protected only as trade secrets.
A trade secret is a property right in some piece of information or know-how—such as a proprietary recipe, formula, customer list, or pricing information—that gives the owner a competitive advantage precisely because it is not generally known. A trade secret is protected under the law only if it is kept secret. Thus, if a company with trade secrets does not take steps to maintain confidentiality, it loses the ability to protect those secrets legally, and competitors will be free to use the information.
Companies with valuable trade secrets should have internal policies in place to maintain confidentiality, and nondisclosure agreements with employees and outsiders to whom trade secret information is disclosed.
A copyright prevents others from copying, displaying, distributing, or creating a derivative work from an “original work of authorship.” The focus of copyright protection is on originality in expression, not the substance of what is being expressed. Food businesses may own copyrights in written materials (such as their website content) or graphic designs, and they exist as soon as the words or design are created in a tangible form.
Copyrighted works may be registered with the Library of Congress Copyright Office, but registration is not required to obtain copyrights. Because the “author” (creator) of a work generally owns the copyrights in that work, it is important for a food business that contracts for copywriting or design services to ensure that the company will own the copyrights in the deliverables. When a company hires a designer as an independent contractor to create a website or marketing materials, the company and the designer should enter into a work-for-hire agreement and assignment of copyright to the company.
A trademark is a symbol, logo, words, or anything that distinguishes goods or services as coming from a particular source (i.e., the manufacturer or service provider). The owner of a trademark has rights to prevent other people from using the same or a similar trademark in a way that likely would confuse consumers about the source of the goods or services. Trademarks are especially important to food businesses because they distinguish products in an often crowded marketplace.
Trademark rights are derived from the use of a mark in connection with the sale of goods or services in commerce; no registration is required to have trademark rights. A trademark owner who does not continue to use its mark, or freely allows other people to use the mark or similar marks, will be deemed to have abandoned its rights. Therefore, whenever a company allows someone else to use its trademark, it should have a written licensing agreement controlling the use of the mark. Without such control, the trademark owner risks abandoning its rights.
Even though the owner of a trademark has legal rights without registering the mark with the USPTO, registration is usually a very good idea. Without federal registration, a trademark owner’s rights extend only to the geographic area where the mark is used in commerce. This means a trademark owner has no right to block a competitor in another state from using the same or a similar mark. In contrast, national registration on the Trademark Principal Register confers nationwide rights to block trademark infringement. Federal registration provides other benefits as well, such as a presumption that the mark is valid and, after five years, comes “incontestability” status, which makes it much harder for anyone to attack the mark in court.
A particular challenge for food businesses is to choose a brand name that can be protected under trademark law. For example, a local food business might use a brand that includes the name of a geographic place (for example, “Pleasantville Foods”). Such a brand name is descriptive and, therefore, would not qualify for full trademark protection. Because trademarks are meant to distinguish the source of goods or services, the less distinctive the mark or name, the less likely it is to be protected.
If a mark is descriptive, one option is to register it on the Supplemental Register. Although such registration does not confer the full set of rights that comes with registration on the Principal Register, it can deter and block others from using similar wording or symbols likely to confuse consumers.
Through continuous use and marketing, a descriptive brand or mark can acquire so-called “secondary meaning”—that is, it comes to be associated with the owner of the mark, rather than being merely descriptive of the goods or services—and then it can be registered on the Principal Register. After five years of continuous use, a descriptive trademark is presumed to have acquired secondary meaning, making it much easier to register on the Principal Register.
CONTRACTS Contracts, in particular supply and sales agreements, can be tools for risk management and to take advantage of the special protections afforded to produce sellers. They are critically important for businesses dealing in food.
Supply contracts can be especially important for a specialized local, artisanal, sustainable (pick your adjective) food business that cannot rely on the spot market to meet its needs for ingredients meeting specific criteria.
First, it’s necessary to dispel a few mis-conceptions about contracts. Many smaller, values-based businesses seem to feel contracts are a hostile act; but legal contracts are not inherently antagonistic, unfair, or devoid of values. To the contrary, a contract should be the foundation for a cooperative, mutually beneficial relationship.
And a contract can be instilled with the parties’ values—for example, by requiring suppliers use sustainable practices or pay workers fairly. Parties to a contract have enormous flexibility to define the terms of their relationships and transactions. However, if they do not spell out their agreements in a contract, the law will apply default rules, which may not be consistent with either party’s intent.
Risk Management and Food Safety Contracts are an essential part of an overall risk management strategy. Food can be a risky business and every seller in the supply chain—from the grower or processor to the distributor and retailer—is potentially on the hook if a consumer gets sick from tainted food. Therefore, anyone selling food handled or produced by someone else should use supply contracts to ensure producers and processors use safe practices; that the buyer will be indemnified for harm it did not cause; and that suppliers have sufficient insurance coverage.
With regard to insurance, buyers should require that suppliers name them as additionally insured on their general liability policy, which must include product liability coverage. Contracts also can address what will happen in the event of a product recall by defining each party’s role (for example, who will handle customer communications) and responsibilities for the costs of the recall.
Perishable Agricultural Commodities Act In addition, businesses dealing in produce should use sales contracts and invoices to take advantage of the special protections afforded by the Perishable Agricultural Commodities Act (PACA). The Act sets forth prompt pay terms (e.g., 10 days after acceptance) which tend to be very favorable to sellers.
Additionally, PACA licensees can include the specific language cited in the U.S. Department of Agriculture’s PACA regulations on invoices to preserve trust rights, which allow produce suppliers to be paid before other creditors if a buyer goes bankrupt. If a seller does not notify the buyer of its intent to preserve its trust rights under PACA, this protection can be lost.
BUSINESS STRUCTURING FOR THE FOOD SAFETY MODERNIZATION ACT Food businesses and the produce growers who supply them will be significantly impacted by U.S. Food and Drug Admin-istration (FDA) regulations recently promulgated under the Food Safety Modernization Act (FSMA). In particular, the rules relating to produce safety impose extensive requirements for growers with regard to water quality, sanitation of equipment, worker hygiene, and other food safety issues.
The Act’s rules for hazard analysis and preventive controls impose new requirements for food processors and handlers to identify hazards in their products and processes and to implement controls to prevent the hazards from occurring.
The administrative burdens and costs of complying with these rules will be substantial. For smaller businesses, it makes good sense to consider whether the business or operations can be structured in a way to qualify for the exemptions provided in FSMA’s rules.
Under both the preventive controls and produce rule, businesses will be exempt from most requirements if annual food sales are below a certain dollar amount. Both rules provide a qualified exemption (“qualified” in that it can be taken away in certain circumstances) from most of the requirements if the business or farm’s average annual food sales are less than $500,000 and if the majority of its sales are direct to consumers or to local retailers or restaurants.
Under the preventive controls rule, “very small” businesses, meaning those with annual food sales of less than $1 million, may also be eligible for the qualified exemption. In addition, if a farm’s produce sales do not exceed $25,000 annually, it is completely exempt from the produce rule. The produce rules also do not apply to certain commodities (listed in the regulations), those that are not generally consumed raw.
Which food sales count toward the exemption limits differ under the two rules. For the preventive controls rule, all food sales of affiliated companies count. In other words, all food sales of separate food processing or handling facilities under common ownership or control will be counted toward the exemption limit.
In contrast, for purposes of the produce rule exemptions, the relevant sales are those of a “farm,” which is defined as an operation in a physical place under one management. Thus, a grower with multiple farms in different locations might qualify for an exemption on one farm but not another, depending on the relative sales from each location. Also, within one location, operations under different management would be treated as separate “farms.”
Given these exemptions, small food and farming businesses should consider whether they can structure their businesses or operations to avoid taking on more of a regulatory burden than necessary. It may be possible for a food enterprise to keep parts of its operation under separate ownership and control so the total food sales will not be aggregated for purposes of determining whether any one facility is eligible for the qualified exemption under the preventive controls rule.
Similarly, a grower with more than one location should consider the exemption criteria when planning which crops to plant on each property. Or, if a farm business has different types of crops in one general place—for example, grains (which are not covered by the produce rule) and vegetables for farmers’ market sales (which might be covered by the produce rule)—then it may be able to use separate management structures so its operations fit within the produce rule’s qualified exemption. Of course, such considerations will have to be weighed against business needs and practical concerns.
This article has been condensed and modified from a three-part series titled “Legal Tools for Food Hubs” written and published by Lauren Handel; for access to these articles and other food-related blogs, visit the Foscolo & Handel PLLC website at www.foodlawfirm.com.
