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Protecting Food & Beverage Recipe and Process Ownership

TASA ID: 1926

What are the appropriate steps toward protecting the recipe and process for making new food and beverage products? And what are the more likely challenge points a company may make to protect its corporate infringement claims? Since new product introductions are the lifeblood for sales growth in every company, it is imperative that proper processes and policies are implemented to protect future brand equity and sales growth potential.

In the global marketplace, only two new product categories exist, "new and unique products" and "line extension products." New innovative food and beverage products are more valued because they represent the greatest sales growth potential. New product line extensions have less marketplace business risk, and offer the potential for short term sales boosts. These products are often incorporated into LTO (Limited Time Only) marketing campaigns. Most R&D departments have the ability to create these products in a relatively short time, often months vs. years for totally unique new products. In either case, it is critical that companies take careful and calculated steps to protect both the recipes and processes for making these products.

The "Intellectual Defense Shield" Process

For most companies, the "intellectual defense shield" begins with meticulous note recording in laboratory notebooks, signed and dated by the author or scientist, and witnessed by another party. The second step is the completion of Mutual Non-Disclosure (MNDA) Agreements between a food and beverage company and any suppliers with whom they plan to do business.  A third step represents "Product Development Agreements" (PDA) that define the level of product ownership between a company and its suppliers.  The fourth step reflects the development of a product specification and a process specification. A product specification both defines the finished product and becomes the standard for purchasing the product. A process specification is used infrequently within the food and beverage industry because purchasing or supply chain management departments want greater latitude in purchasing from a broader customer base - but at the risk of intellectual property ownership.

Parsing Product Development Agreements

Product development agreements between a customer company and supplier address several key issues: 1) the definition of "similar products," 2) degree of intellectual property ownership, 3) length of supplier exclusivity, 4) future technical development partnership, and 5) potential food cost Implications.

Most product development agreements seek to define "similar (or dissimilar) products" so that both the customer and supplier can continue to grow and expand their sales of "dissimilar products." As a result, the legal sticking points are always in the wording. In most situations, agreements attempt to define sensory (flavor and texture), analytical, functional, and engineered differences. In every situation, the legal agreement will define objective differences that can be substantiated through third party-testing if necessary. The most rigid standard for measuring dissimilar food and beverage products is "Triangle Sensory Tests." The triangle test requires consumers to pick the "different" product out of three product options. The other two options are the same product. Less restrictive consumer "product preference" tests can also be written into agreements. A company will choose to use more restrictive consumer tests if they feel they have a very unique food product.  A product development agreement may also define specific analytical tests to document product dissimilarity, such as a salt analysis or liquid chromatography tests that identify specific flavor components.

Product development agreements may also define the degree of share ownership of intellectual property. For example, a supplier may make full disclosure of unique technology used in a food product in exchange for exclusive ingredient sales for a specified time period at an agreed upon price. Upon agreement termination, the agreement may also define which competitors can gain access to the previous unique technology. Agreements may also define a "Cost Plus" pricing formula with no competition or a second supplier with limited sales scope so that a second supplier is qualified to mitigate "Act of God" crises. Another successful purchasing agreement provides for an exclusive supplier agreement at a fixed profit level with an agreement to share continuous cost savings at a specified rate for a fixed time.

Product Specification

Most food and beverage product specifications contain the following information categories: food label ingredient statement, product definition, sensory characteristics (taste, texture, color, aroma), analytical specifications (moisture, salt, size, protein, and sugar contents, etc.), functional characteristics (softness vs. firmness, height, weight, etc.), microbiological specifications (for both pathogenic and nonpathogenic organisms), shelf-life limitations, inner and outer case packaging, pallet configurations, barcode information, and distribution temperature requirements. The most common failures of product specifications are accuracy, scope, and definition of "as-is" product characteristics vs. "ready-to-eat" product characteristics.

Process Specification

The process specification defines the process used to harvest, process, and package the finished product before it enters the marketplace. Most process specifications contain the following information: ingredient listing and recipe, process equipment control settings (production line speed, internal product temperatures, product appearance during each unit process, etc.), sequence of process steps (such as washing, sanitizing, sorting, cutting, cooking, packaging, and freezing, etc.), equipment specifications (like model number, size, unique processes, etc.), and unique processing steps that differentiate the process from competitors.

Patent vs. Trade Secret Intellectual Knowledge

For innovative and unique new product development, every food and beverage company is required to protect their intellectual property through a patent or trade secret. A patent represents full disclosure of intellectual property and defines a product's differences from similar or disparate products. The patent application development and approval process is long and laborsome, and is rarely completed before the new product is introduced to consumers. A company can mitigate its intellectual risk by making sure that all intellectual property is fully documented and the patent has been applied for. The downside of the patent process is full intellectual disclosure, while the upside represents protection from competitors for an extended period of time. Pharmaceutical and electronic industries use patents more extensively than food and beverage companies.

Trade secrets are used by companies that have a high degree of confidence that competitors cannot replicate their product due to their own discovery, or the replication of the product would take competitors years to decode. A trade secret protects a company from competitive sales, but generally for a shorter period of time than a patent would. Trade secrets are also used to restrict current and former employees from using the confidential information. To prevent employees from using the information, companies may ask suppliers to code the ingredients as Product A or B. To further protect trade secrets, a company will often develop and sign binding agreements with both ingredient and equipment suppliers so that they have exclusive rights to those ingredients and equipment processes. Since most ingredients contained in trade secrets are 'functional ingredients," suppliers of these ingredients are reluctant to sign binding agreements because their sales growth depends on volume sales to multiple customers.

Substantiating Consumer Labeling and Media Claims

Thorough documentation of new product intellectual property is essential to substantiating consumer labeling and media claims as required by government law. Consumer labeling claims may include "new and improved," "healthier for you," "lowers cholesterol," "improves digestion" (like Prebiotics and Probiotics), "organic," "Range Raised," "All Natural," or "Naturally Processed." Certain descriptors can only be used in accordance with Federal statutes regarding "Organic" or "Natural," etc. All claims need to have detailed information recorded in a safe location that substantiates these claims. Many times that information should include pictures and videos to support written documentation.

Media claims can range from legitimate product claims that demonstrate consumer preferences to blatant corporate attacks that challenge the size and taste of competitive products. Marketing departments may wish to state that a certain demographic customer profile prefers their product over a competitor's product. The documentation threshold for media claims is often lower than labeling claims.

Major Brand Equity and Product Liability Business Risks

Future food and beverage legal agreements need to provide additional substantiation that demonstrates that product and process specifications limit brand equity and product liability risks. For example, it is recommended that pathogenic organism testing (like E. coli testing) defines test locations within a manufacturing plant, frequency of testing, and test typing, etc. It is further recommended that Critical Control Points of HACCP programs be defined with corrective action steps. Since millions of dollars and a company's existence depend on safe food to customers, it is imperative that companies err on the side of over-documentation to protect their consumers and business equity.

New Intellectual Ownership Frontiers

There are several new frontiers of intellectual ownership in the food and beverage industry that have yet to be vetted in the United States court system. As a result, these new frontiers require extra documentation to remove as much subjectivity of differences as possible. Some examples include:

  • Organic food products, and the processes used to harvest, clean, process, package, and distribute them into the marketplace
  • Home-grown and hand-processing vs. industrialized processing
  • Animal welfare best practices
  • Sustainable replenishment best practices

Above and Beyond Best Food Safety Practices

Fortunately, some companies, like a major Canadian food company, are taking their food safety documentation above and beyond current best practices. On December 9, 2009, they formed an independent Food Safety Advisory Board that provides critical assessment of their current food safety program in three critical areas: 1) Performing ongoing critical reviews of the company's food safety strategy that will include recommendations on additions or modifications to advance their programs, 2) Providing insights on any emerging food safety risks, and 3) Providing guidance for their employee training and education programs. And still, other companies are including Six Sigma, Kaizen, Safe Quality Food (SQF) best practices. Although food safety practices have not traditionally been included in intellectual food property, they may be more important than ever in the future.

 

This article discusses issues of general interest and does not give any specific legal or business advice pertaining to any specific circumstances.  Before acting upon any of its information, you should obtain appropriate advice from a lawyer or other qualified professional.

This article may not be duplicated, altered, distributed, saved, incorporated into another document or website, or otherwise modified without the permission of TASA.

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