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Exclusive Use: Before Adding Coffee to the Menu Check Your Lease

Posted on by Patrick Morin

RESTAURANT LEASING: Part 3 of 5

Restaurants are constantly adding and subtracting menu items to meet customer demand. Whether it’s adding healthy options for calorie conscious consumers, like salads and wraps, or craft cocktails and beers, rarely will a restauranteur review its lease prior to changing menu items. However, it’s important to know whether your lease is subject to an “exclusive use” provision granted to another tenant by the landlord. Violating this provision can be costly to wary restaurant owner.

For example, I recently spoke with a business owner who was sued by a neighboring tenant over the right to sell pizza. The business owner sold thin-crust artisanal pizzas as an appetizer, even though its neighboring tenant had an exclusivity clause in its lease to sell “traditional pizzas.” What qualifies as “traditional pizzas” is at the center of the dispute, but regardless of the outcome litigation is expensive and can be potentially avoided if an exclusive use provision is carefully crafted.

As a tenant, including an exclusivity clause in your lease may be key to maintain a competitive advantage over other tenants. While most large chain restaurants will require an exclusive use provision, it is just as (if not more) important for mom-and-pop restaurants to also insist on exclusivity in order to eliminate the competition within the tenant’s own backyard and help ensure a steady stream of potential customers. On the other hand, each time a landlord grants an exclusivity to one tenant it narrows the pool of potential tenants from which the landlord may lease space. No landlord wants to make it harder than it has to be to fill vacant space, or have to turn down a request from an existing tenant to change its use.

Tenants should seek an exclusivity clause that is a broad as possible that accurately captures the types of uses and businesses from which the tenant seeks to be insulated. While a tenant may want an exclusivity clause prohibiting any other restaurant use, this is probably an unrealistic and unnecessary request. Landlords will try to narrow the scope of the exclusivity in order to maintain flexibility in future leasing activities. As such, the tenant’s permitted and/or actual use may not be precisely the same as the tenant’s exclusive use. For example, a local coffee shop may seek the exclusive right not only to coffee sales, but also to the sale of tea. If the coffee shop also sells sandwiches, muffins and bagels, but those sales only make up a small portion of overall sales, the owner may not be as concerned about extending the exclusivity to full-service diners that serve breakfast. Conversely, a diner’s exclusivity clause may prohibit only businesses that derive more than a small percentage of their total sales from breakfast food items, such that the coffee shop and the diner could coexist within the same shopping center, as could a quick service sandwich shop. Further, the exclusive use clause could be crafted to prevent a national coffee chain from moving into the center, but might permit the diner and the sandwich shop to sell coffee.

But how is a tenant supposed to know whether their use will violate another tenant’s exclusivity clause or if a current use in the shopping center would violate the tenant’s exclusivity clause? Tenants can seek assurances in the lease from the landlord in the form of representations and warranties, but some landlords may object to such representations and instead agree to provide the tenant with all existing exclusives for the tenant to review on their own. Landlords may also carve out preexisting tenants from the scope of the exclusivity, so tenants should make sure to perform their own due diligence on the existing tenants. The parties may agree to add as a compromise that the landlord cannot agree to a change in the use given to a preexisting tenant if such change would violate the tenant’s exclusivity clause.

Exclusivity clauses may also extend within a certain proximity of the restaurant, which such restriction can apply to both landlords and tenants. Landlords may want to prohibit tenants from operating another restaurant in close proximity to its current restaurant, especially when the lease includes percentage rent, because this could lead to declining sales receipts. In order to prevent this from occurring, landlords may insist on a clause that prohibits a tenant from operating another restaurant with the same primary use within a certain radius of the existing restaurant. On the other hand, Tenants may seek to prevent the landlord or any affiliates of landlord from permitting a violation of the exclusivity within a certain radius of the shopping center. While landlord may resist including such a provision because it could affect the marketability of the shopping center, a reasonable compromise may be to carve out any existing tenants within the specified radius.

Another important consideration for restaurant tenants is the practical effectiveness of exclusivity clauses.  Often tenants focus on obtaining the exclusivity language but neglect to address how to actually enforce this language in the event of a violation. Given the catastrophic effect a competing use may have on tenant’s business, a tenant will want extensive remedies for a violation of the exclusivity clause. Tenants should push for language discouraging landlords from ignoring the exclusivity restrictions and also requiring them to take action in the instance of “renegade” or “rogue” tenants who disregard the protected exclusive use. A tenant may negotiate the right to abate a portion of the rent during the period their exclusive use protection is compromised or permit the tenant to seek injunctive relief. In addition, tenants may seek to include a termination right in the event the violation continues for a certain period of time. Some landlords may permit a tenant to terminate the lease only if the violation is caused by a rogue tenant, the violation continues beyond a specified period and the violation has a material impact on the tenant’s business. After a specified waiting period, a landlord may well require the tenant to either exercise the termination right or start paying full rent again.

Exclusive use provisions in restaurant leases provide critical protection to a tenant’s business. A tenant’s ability to obtain acceptable exclusivity protection is often proportionate to their bargaining power with respect to the landlord and other tenants, and is also related to how the desired protective language relates to the overall negotiation of the lease. In the event a tenant is able to successfully negotiate exclusivity, such clause should be included in a Memorandum of Lease and the memorandum should be recorded with the appropriate recorder’s office in order to put other parties on notice of the existence of such exclusivity.

If you have questions about your restaurant lease, please contact our attorneys at Morsel Law.

What Do You Mean I Can’t Change My Restaurant?

Posted on by Patrick Morin

RESTAURANT LEASING: Part 2 of 5

You have a great idea for a restaurant concept in an emerging area of the city, let’s say fast-casual barbecue, focusing on pork using your grandfather’s secret rub to give the meat an out of this world flavor. Six months after opening, sales are less than stellar. You’ve received rave reviews from local food critics, but unbeknownst to you when you signed the lease, the immediately surrounding neighborhood is comprised middle eastern families who abhor pork. Realizing the concept is probably best used elsewhere, you inform the landlord that you’re reinventing yourself as a Mediterranean grill, refocusing your barbecue skills on grilling kebabs and meats (other than pork of course). The landlord is sympathetic to your unfortunate situation, but informs you the lease only permits a barbecue restaurant and any other use violates the lease. What is a food entrepreneur to do?

This scenario is quite common; however, the risk can be minimized by proper planning. Restaurants by nature require periodic re-imaging. Whether it’s a complete change of concept or some minor updates and sprucing up, tenants should make sure the lease provides flexibility and an exit plan. This is important in order for restaurants to remain profitable and adaptable to continually shifting market trends. If the restaurant is part of a franchise it will be subject to a variety of image and use requirements imposed by the franchisor and franchise agreement, so these factors must be taken into consideration during lease negotiations.

To protect its flexibility, tenants should attempt to negotiate a broad use clause to permit a “restaurant or any lawful use.” Similar concepts should be addressed in the alterations and signage provisions of the lease in order to permit tenant to reimage or rebrand as necessary. Since the lease term for restaurants are generally longer than most other retail businesses, such broad use clauses will protect a tenant from future changes in the market.

Landlords may not be willing to provide such flexibility out of fear that a restaurant may become a nightclub, bar or coffee shop. Some landlords may not be flexible at all and may insist upon attaching a menu as an exhibit to the lease to establish the parameters of a potential tenant’s use. However, having an agreed menu can limit innovation, even when a tenant is not looking to drastically change its use of the premises. It is important to point out that many landlords are concerned with maintaining a mix of tenants at the property in order not to duplicate certain cuisines or themes. To further protect this tenant mix, landlords may include language in the lease that requires approval or recapture rights for a change of use.

While initially in the lease negotiations parties may appear to be at an impasse when it comes to defining permitted use, there is still room to reach a mutually acceptable compromise. If the landlord rejects including a general restaurant use provision, the tenant may suggest an expanded use clause. This would permit the tenant to modify its use of the premises after operating for a period of time under the initial permitted use, so long as not in conflict with any prohibited or exclusive uses granted by the landlord. Another option is to limit the percentage of sales or square footage of the premises which are devoted to the new use. If the landlord is unwilling to consider any of the suggestions above to provide tenant with sufficient flexibility in the use clause, tenant may try to include a right to terminate the lease if the restaurant does not generate a certain amount of sales.

When negotiating a restaurant lease for a franchise particular attention should be paid to the requirements under the franchise agreement. Too often tenants overlook the terms and conditions of the franchise agreement in regards to reimaging and rebranding, which may conflict with the permitted use provision in the lease. In such event, the tenant may be in a position of having to choose between defaulting under the lease or franchise agreement, neither of which results in a desirable outcome. In order to prevent this from happening, the parties may want to include a provision that permits the tenant to change the use and/or name of the business under which tenant is operating if the change is made across the franchisor’s franchise system. Usually, if the qualification is that such changes are done in the majority of the franchisor’s locations, the landlord will permit this.

If you have questions about your restaurant lease, please contact our attorney’s at Morsel Law.

Landlords May Have the Right to Keep Your Restaurant Equipment

Posted on by Patrick Morin

RESTAURANT LEASING: Part 1 of 5

When a restaurant lease expires it is fairly common for disputes to occur between landlords and tenants over what is the landlord’s property and what belongs to the tenant. Disputes may also occur upon a tenant default, where the landlord sues to terminate the lease and recover possession of the premises. However, what constitutes the “premises” is not always clear. For tenants, who spend significant amounts of money on equipment and trade fixtures to build out a space, this can be a major issue.

Property is divided into two distinct classes: real property and personal property. Real property consists of the land and building, whereas personal property is removable and includes the furniture, fixtures and equipment (FF&E) the tenant uses to operate its business. FF&E is usually defined as a “trade fixture,” which means the tenant may remove it at the end of the lease. Examples of common restaurant trade fixtures include coffee makers, soda machines, tables and chairs, and certain kitchen equipment.

However, certain fixtures that are affixed to walls that cannot be removed without causing damage or injury to the premises or building are not considered trade fixtures and therefore remain with the premises at the end term, regardless if they were paid for by the tenant. Items that may be considered “affixed” to the property include stoves, ovens, walk-in coolers and exhaust vents. During the lease negotiation period tenants should take steps to identify the equipment considered “trade fixtures” in order to avoid costly lease end disputes with landlords.

So what can tenants do to protect themselves? The following are some suggestions to include in restaurant leases:

  • Listing FF&E in the Lease.  Tenants may want to identify their trade fixtures at the execution of the lease in an attached schedule, including items that may be installed at a later date. During the term of the lease tenants may replace items that are not considered FF&E, but could be considered affixed to the premises and therefore landlord’s property. The lease should address who owns the replaced item and whether tenant has the right (or obligation) to remove it at the expiration of the lease. For example, if a tenant is operating an upscale restaurant and intends to install expensive fixtures in the restrooms or lighting in the dinning area, the lease should include language that permits removal of these fixtures. These fixtures are considered leasehold improvements that remain landlord’s property, but the landlord may agree to their removal so long as they are replaced with lesser quality fixtures.
  • Improvements and Alterations.  Leases typically provide for landlord’s prior consent to the installation of fixtures and trade fixtures on the premises. While tenants may want unlimited rights to install equipment and improve the premises, including such language in the lease may not be in their best interest. Even if the lease provides tenant with substantial discretion to alter the premises, the landlord should get notice of tenant’s work in order to establish a paper trail of what was installed. At the expiration of the lease the parties can rely on such documentation to determine ownership should a dispute arise. Alternatively, if the landlord won’t agree to provide a tenant with broad alteration rights, the tenant may try to negotiate the right to remove all improvements at any time.
  • Catch-All Provision.  Regardless of how FF&E is defined in the lease, it is important to include a provision that protects a tenant from breaching its other legal obligations.  For example, restaurants frequently lease major equipment used in the kitchen from third-party lessors.  If, at the expiration of the lease, the tenant is prohibited from removing equipment affixed to the premises (e.g., stove, dishwasher, refrigerator), then tenant would be in breach of the equipment lease by conveying ownership to the landlord.  The risk of this occurring can be reduced by including language that permits removal of any equipment leased to the tenant by third parties.

Restaurant leases are unique and contain provisions specific to the industry. Although there are obvious similarities between many lease transactions, each transaction is different and accordingly so is each lease. There is no “standard form” lease that is appropriate for all situations. Having a lawyer who is familiar with the restaurant leasing process, lease documents and their hidden traps is the best way of ensuring that your transaction will go as smoothly as possible and that the lease accurately represents your understanding and expectations, and protects your interests.

If you have questions about your restaurant lease, please contact our attorney’s at Morsel Law.

President Signs Mandatory GMO Labeling Law: What You Need to Know

Posted on by Patrick Morin

Last week President Obama signed the National Bioengineered Food Disclosure Standard into federal law. The law mandates disclosure of genetically modified organisms (“GMO”) on food labels. The law directs the U.S. Department of Agriculture (“USDA”) to establish, within two years, a nationwide mandatory disclosure standard for bioengineered foods and the labeling procedures. This means that the law itself does not define the standard, but instead gives the USDA significant discretion to define and implement the required disclosure.

Below are some things manufacturers should know about the law:

  • Preemption of State Laws. The new law specifically preempts all state and local labeling requirements applicable to genetically engineered (“GE”) foods that do not mirror the language in the law. This would even apply to state laws already passed, including Vermont where mandatory GMO labeling went into effect in July.
  • Defining Bioengineered Food. The law defines bioengineered food as food that contains genetic material “that has been modified through in vitro recombinant deoxyribonucleic acid (DNA) techniques” and “for which the modification could not otherwise be obtained through conventional breeding or found in nature.” This definition could be interpreted as quite restrictive, so it will be important to watch the rule-making process to see how the law is interpreted.
  • Labeling Requirements. The law does not specify GMO labeling standards, this is left up to the USDA to determine. However, the law does state the methods to disclose GMOs in food, such as text on the packaging, a USDA-created symbol, or an electronic or digital link (such as a QR code) selected by the manufacturer. Small food manufacturers are provided the additional flexibility to disclose GMO ingredients either by listing a toll free number or link to website containing the disclosure on their labels. The purpose of the law was to disclose GMO ingredients on food labels so consumers searching grocery store aisles could make informed decisions, but law effectively fails to achieve its purpose because “disclosure” can be a link to somewhere else, not on the label itself.
  • You Aren’t What You Eat. Meat from animals that consume bioengineered food are exempt from disclosure. Specifically, the law prohibits the USDA from considering any food primarily derived from an animal because “the animal consumed feed produced from, containing, or consisting of a bioengineered substance.” So, for example, you go into a store to buy some beef for a family barbecue and, because of your concern about the safety of GE foods, you want to purchase a GMO free product. You’re aware that most cows slated for consumption are fed a diet containing mostly corn, a majority of which is bioengineered. The label doesn’t disclose GMO ingredients, so you think you’re safe. Think again. Even if the cow eats nothing else but bioengineered corn its entire life, the meat is not considered GE under the new law. Thus, Congress is betting that consumers will be uniformed about the provisions in the law and think their meat is non-GMO, even if its arguably not.

Food Recalls: Does Your Insurance Policy Cover “Reasonable Probability” of Contamination?

Posted on by Patrick Morin

Many food businesses, after conducting a risk assessment, will purchase some form of recall insurance (commonly referred to as product contamination insurance). These recall policies typically provide coverage for “actual” contamination, meaning for coverage to kick in the consumption or use of the product must have resulted in bodily injury and/or property damage. To date, recalls were voluntary and initiated by the company. However, earlier this year the final rules were issued under the Food Safety Modernization Act (FSMA), which provide FDA with the authority to mandate recalls for food products if there is a “reasonable probability” that the food product is adulterated or misbranded and the use and/or exposure to the product would cause serious health consequences or death.

The FDA’s mandatory recall authority under FSMA may put food businesses at risk because many insurance policies don’t provide coverage for government recalls without an “actual” contamination. The direct and indirect costs associated with these recalls can be substantial. It is important to know if your damages are covered by your policy and, if so, to what extent.

While many insurers have yet to address FSMA, some insurers have altered their basic form or issue an endorsement for “government recall”.  However, not all “government recall” clauses are created equal, so careful attention should be spent when reviewing or negotiating the policy to ensure proper coverage, especially since every business is different and are faced with different risks.

In order to better understand their insurance requirements, businesses should perform a comprehensive risk analysis. The risk analysis should not only include the business’s products and operations, but also the operations of their suppliers’ and an analysis of the quality of the ingredients included in the business’s final products. Often overlooked in the analysis process is the risks assumed in purchase and sale agreements and vendor contracts. Businesses should review these agreements to identify and determine which risks can and/or should be insured. Many contracts in the food industry are written in favor of the buyer, so in the event of a recall, the seller (policyholder) is responsible for associated costs. The effects of a recall to a seller without proper coverage could be devastating.

When discussing recall coverage with your broker, the following are a list ofitems you may want to address:

  • Direct Product Damage – Many policies cover the contaminated product in the field or warehouse, but some only cover product in the field.
  • Publicity – Publicity coverage is not always included in a basic policy, but when it is the most important feature of this coverage is that it can result from “an actual or alleged contamination, where the Named Insured’s Product(s) and the Named Insured must be specifically named.” If a business supplies an ingredient used by a buyer in a finished product and the buyer’s product is recalled (in most cases only the finished product is identified in the recall), then is this scenario the policy won’t provide coverage.
  • Lost Gross Profit/Extra Expense (LGP) – If the policyholder loses an account due to a recall event, this pays for a year or more of LGP. For many food businesses, a large account could represent a significant portion of their total revenue. Extra Expenses may arise when it is necessary to engage another processor and new processing costs exceed the businesses normal processing costs.
  • Rehabilitation Expenses – This coverage pays for the rehabilitation of the brand in the marketplace. Many businesses overlook the importance of obtaining this coverage because one food safety incident can destroy a brand that a business has spent years building.
  • Crisis Response/Consultant Expenses – Coverage for these expenses can be very important and largely address the costs involving specialized attorneys and public relations/crisis response specialists.

If you have questions about coverage under your insurance policy, please contact our attorneys at Morsel Law.

Entrepreneurs Beware: Violating Food Safety Laws Can Land You in Jail

Posted on by Patrick Morin

I frequently receive calls from food startups who want to know the best way to protect their business from their competition. Specifically they’re concerned about theft of their recipes, intellectual property and key employees. After listening to their concerns, I then pose a question to them: what steps have you taken to protect your business from a food safety incident? More often than not there is silence on the other end of the phone. What I attempt to explain to them is that, regardless of all their other legal concerns, without a comprehensive food safety program in place their business will be worthless. Some listen, others don’t. But many of these entrepreneurs don’t realize is that, while they may think they’re in the food business, they’re actually in the food safety business.

The food industry is unlike any other. When a software company’s product is defective or a financial services company provides poor advice the worst thing that may happen is customers lose money. But unlike these industries, when a food business introduces an adulterated product into commerce consumers may become seriously ill, possibly resulting in death. Now I get many startups are “bootstrapping” their business and capital is tight, so careful decisions must be made where to spend and where to cut corners. While you may want everyone of your witty and artfully crafted slogans trademarked, if by doing so you’re foregoing having your product labels reviewed for FDA compliance or engaging a food safety professional to assist in designing and implementing good manufacturing principals, then you’re setting yourself up for failure.

If you don’t believe me, let’s take a look at a few recent examples. A licensed maple syrup producer decided to expand his business by using the apples picked from his farm to make and sell cider. This all seemed harmless until the cider was linked to an E.coli outbreak that sickened four people, including two children. The court found that the owner failed to follow good manufacturing processes and he was convicted of selling adulterated food, sentencing him to 14 to 48 months in prison.

In another incident, a woman plead no-contest to charges that she sold adulterated and misbranded food at several Michigan farmers markets. She sold various pickled products directly to consumers, which under Michigan law requires certain processes to take place during the production cycle to prevent the risk of botulism. Additionally, under federal law all food processors who make low acid and acidified foods must register their establishment. Here, the woman produced the products out of her home kitchen, not a registered facility, and she apparently didn’t even know there are laws regarding the manufacturing of food products which are intended to protect consumer health. These mistakes cost her not only $3,100 in fines and 11 months of probation, but her business.

For food startup businesses, making sure your products and food safety procedures are in compliance up front will save you countless headaches, and potentially money, down the road.  If there is on piece of parting advice I can give food entrepreneurs out there it’s this: you will make many mistakes running your business, but most likely the business will continue to survive and you’ll learn from these mistakes; however, it only takes one food safety incident to destroy a business. If you don’t believe me, take a look at Blue Bell ice cream and Chipotle. Whether their businesses will survive these outbreaks or not remains unclear.

Salad Grown Locally: Investment Opportunity or False Hope

Posted on by Patrick Morin

All food is local…that is unless you live in Chicago and want a salad in the middle of January. In this case the lettuce in your salad (and the majority of the other ingredients) is most likely grown in Mexico or California and shipped to your local grocery store. However, a few entrepreneurs are trying to change the produce supply chain by growing green, leafy vegetables on a commercial scale in some unlikely places.

As reported in articles last week by Wall Street Journal and Eater.com, rooftop greenhouse facilities have sprouted up in cities across the United States, including New York City and Chicago. These businesses seek to provide consumers with fresh produce that is available in stores within a few hours of harvest, reducing the amount of waste due to spoilage. They also aim to price their products comparably to existing brands since their transportation costs are significantly less as shipping is usually only a short trip across town. Reducing transportation use would also result in a positive environmental impact, which is another one of their goals.

Some urban farms have caught the attention of investors who have contributed millions of dollars in hope of success. But apparently, not all urban farms are created equal.  Some, including BrightFarms Inc. and FarmedHere LLC, have cancelled plans to open farms or shut down operations after only a few months in business. However others, like Gotham Greens Farms LLC (which has raised $30 million from investors) and AeroFarms LLC (which has raised $70 million in corporate and project financing), appear to be on track for success.

While it is not clear whether these business models will prove to be long-term successes, potential investors should be familiar with the potential roadblocks that can make or break urban farming businesses. First (and foremost) is cost. Rooftop greenhouses are extremely expensive, upwards of 20% more than a traditional greenhouse. Also, permitting times will increase because “farming” is normally not a permitted use in urban centers and would require a zoning variance. In addition to local laws, growers may be subject to the recently published Produce Safety rule promulgated under the Food Safety Modernization Act, which establishes science-based minimum standards for the safe growing, harvesting, packing and holding of fruits and vegetables. It is important businesses prepare for the implementation of, and the steps required for their business to comply with, the Produce Safety rule.

Investing in agriculture, just as with any other type of investment, requires competent and thorough due diligence. While the investment may look good on paper, investors should remember the saying made famous by President Ronald Reagan: “trust, but verify.”

Are Your Beer Ingredients Exempt from TTB Formula Approval?

Posted on by Patrick Morin

Craft brewers continue to experiment with a wide variety of non-traditional ingredients to concoct new and exciting beers. For example, Fulton’s HefeWheaties (a Wheaties-themed Hefeweizen), Oxbow Brewing’s Sasion Dell’Aragosta (brewed with live Maine lobsters and sea salt), Porterhouse Brewing Company’s Oyster Stout (you guessed it…made with live oysters!), and Short’s Key Lime Pie (made with fresh limes, milk sugar, graham crackers and marshmallow fluff). From these limited examples you can only imagine where brewers will go from here.

The use of new and novel ingredients in beer is not prohibited by the Alcohol and Tobacco Tax and Trade Bureau (“TTB”). However, if a brewer intends to use an ingredient in a beer that is not on the TTB exemption list, then the brewer is required to obtain formula approval (or a pre-import approval for imported beer) from the TTB.

In December 2015, the TTB issued Ruling 2015-1, which re-states and supersedes Ruling 2014-4, by adding more than 50 new ingredients exempt from the formula requirements, including ingredients such as tea, jasmine, rosemary, grapes and figs (a complete list of exempt ingredients is listed here). Although this new ruling has exempted many flavoring materials added to beer, including several fruits and spices, sugars, chocolate, tea and coffee, it does not (and cannot due to existing regulations) exempt flavorings and extracts, which continue to require formula approval prior to use. For example, while a brewer can add watermelon, strawberry juice, strawberry puree or strawberry concentrate to a beer without obtaining formula approval, adding a strawberry flavor still requires formula approval.

Ruling 2015-1 was issued by the TTB in response to a petition filed by the Brewers Association requesting to expand the list of exempt ingredients. Although the TTB did not exempt all the ingredients requested by the Brewers Association, the TTB remains open to future petitions regarding additional ingredients. A procedure for such a petition is located at 27 C.F.R. § 25.55(f).

If you have any questions about beer regulations or formula requirements please contact our attorneys at Morsel Law.

Food Importers Required to Verify Foreign Suppliers

Posted on by Patrick Morin

As I’m sure those of you in the food import business are aware, FDA finalized its rule on Foreign Supplier Verification Programs (“FSVP”) for Importers of Food for Humans and Animals. The rule requires that importers implement a FSVP to verify that their foreign suppliers are producing food in a manner that provides the same level of public health protection as the preventive controls or produce safety regulations, and to ensure that the supplier’s food is not adulterated and not misbranded with respect to allergen labeling.

If you import food into the U.S. you must comply with the requirements under the rule or face regulatory action. The following is an overview of rule and what your business can do to comply its requirements.

What Importers Are Affected:  The rule applies to all importers of food into the U.S. An “importer” is the U.S. owner or consignee of food that is being offered for import or, if there is no such owner or consignee, the U.S. representative or agent of the foreign owner or consignee at the time of entry.

What Food Is Covered: The FSVP Rule applies to all food that is imported or offered for import into the United States. Certain foods are not covered by FSVP, including (1) juice and fish that complies with FDA’s Hazard Analysis and Critical Control Point (“HACCP”) regulations; (2) food for research or evaluation; (3) food for personal consumption; (4) alcoholic beverages; (5) food that is imported for processes and future export; (6) low-acid canned foods; and (7) certain meat, poultry, and egg products that are regulated by the U.S. Department of Agriculture at the time of import. The rule also sets forth modified requirements for importers of dietary supplements and dietary supplement components, very small importers, and importers of food from certain small foreign suppliers.

Importer Requirements Under Rule: Each importer must develop an FSVP that ensures “foreign suppliers” are producing food in a way that provides the same level of protection as what is required under the Preventive Controls Rules and the Produce Safety Rule (if applicable) and ensure that the supplier’s food is not adulterated and is not misbranded with respect to allergen labeling. A “foreign supplier” is an entity that manufactures, processes or grows food, or raises animals that are exported to the U.S. without further manufacturing or processing.

What Must Be Included:  An FSVP must be developed by a “qualified individual” who must perform the various activities and be able to read and understand the language of any records that must be reviewed. In developing an FSVP, an importer is required to conduct and document the following activities:

  • Hazard Analysis: An importer must complete a written hazard analysis that identifies potential hazards for each food and each supplier, including biological, chemical (including radiological) and physical hazards.
  • Risk Evaluation: An importer must evaluate the risk posed by a food, based on the hazard analysis, and the foreign supplier’s performance. Factors that importer’s must consider in the evaluation can include the foreign supplier’s procedures, processes and practices related to food safety, and any information that FDA may have regarding the foreign supplier’s compliance. The importer can also rely on another entity to perform the risk evaluation under certain circumstances.
  • Verification Activities: Based upon the evaluation of risk conducted, the importer must establish and follow written procedures to ensure that it only imports from approved foreign suppliers. Appropriate supplier verification activities may include annual on-site audits of the supplier’s facility, sampling and testing, or a review of the supplier’s relevant food safety records. The importer can also rely on another entity to determine and perform appropriate supplier verification activities under certain circumstances.
  • Supply Chains: The final rule also adds flexibility and recognizes the reality of modern distribution chains by not requiring an importer to conduct supplier verification (or evaluate the risk posed by a food and the foreign supplier’s performance) when the hazard requiring a control in a food will be controlled by a subsequent entity in the distribution chain in the United States. For example, if an importer’s customer will control the hazard, the importer can rely on its customer to provide written assurance that the food will be processed for food safety and must disclose that the food has not been processed to control the identified hazard. If the hazard will be controlled by a subsequent entity in the distribution chain, the rule requires disclosure that the food has not been processed to control the identified hazard as well as a series of written assurances starting with assurances from the customer to the importer and continuing the obligation to provide written assurance of processing for food safety throughout the distribution chain. The rule provides flexibility for an importer to establish, document and implement an alternative system that ensures adequate control, at a later distribution step, of the hazards in a food product distributed by a manufacturing/processing facility.
  • Conduct Corrective Actions: If something goes wrong and an importer determines that its foreign supplier has not used safe processes and procedures, the importer must take immediate corrective action. The appropriate action will depend on the circumstances, but can include discontinuing use of the foreign supplier until the cause of noncompliance, adulteration or misbranding has been adequately addressed.

The risks evaluated as part of an FSVP must be promptly reevaluated upon the discovery of new information. Additionally, an FSVP must be reassessed for each food and each foreign supplier at least once every three years. Based on the results of any such FSVP reassessment, an importer must promptly adjust its supplier verification activities if necessary.

What is the Deadline to Comply:  Importers must comply with the rule by the latest of the following dates:

  • 18 months after publication of the final rule;
  • For the importation of food from a supplier that is subject to the preventive controls or produce safety rules, six months after the foreign supplier is required to meet the relevant regulations;
  • For an importer that is itself a manufacturer or processor subject to the supply-chain program provisions in the preventive controls regulations, the date by which it has to comply with those provisions.

It is important for companies to determine whether they are subject to FSVP requirements, and, if so, to begin taking steps to ensure compliance. If you are unsure of whether your company is subject to, or if you need assistance complying with, the FSVP rule please contact our attorneys at Morsel Law.

KIND Petitions FDA: Should Investors Lose Confidence in General Counsel?

Posted on by Patrick Morin

In a previous article I discussed how important it is for food businesses to conduct an in-depth label review prior to launching new products. Specifically, I addressed the FDA Warning Letter issued to KIND LLC and pointed out how costly labeling mistakes can be, especially when the risk could have easily been mitigated. In their response to FDA, KIND agreed to correct most of the technical errors noted in the letter; however, when it comes to changing their view of what foods are allowed to label themselves as “healthy” they don’t agree with what they refer to as “outdated” regulations.

In a citizen petition letter (“Petition Letter”) sent to FDA last week, KIND’s general counsel, Justin Mervis, notes that under current regulations “whether or not a food can be labeled “healthy” is based on specific nutrient levels in the food rather than its overall nutrition quality.” KIND then goes on to claim that new scientific evidence no longer supports this view and that, accordingly, FDA amend 21 C.F.R. 101.65(d)(2) in regards to nutritional content claims so that manufacturers may use the term “healthy” without regard to the total fat or saturated fat, if the source of such fat comes from fruits, vegetables, nuts, seeds, legumes, whole grains or seafood, provided that “such foods are used in their whole form or have been processed in such a way that did not materially degrade their nutritional value.”

While the Petition Letter makes several other recommendations, the majority of the Petition Letter is devoted to the argument that there is a disconnect between the Dietary Guidelines and what claims manufacturers are permitted to state on their labels. KIND argues that manufacturers should be permitted to make claims on their products labels (e.g., “nuts are part of a healthy diet”) that are consistent with federal dietary recommendations and current scientific evidence. As such, KIND goes on to request the FDA “undertake rulemaking to define a “dietary guidance statement” as a statement in food labeling about the usefulness of a food, or a category of foods, in maintaining healthy dietary practices.” The requested rule would permit claims on food labels to communicate that certain foods are useful in creating a diet that is consistent with current dietary recommendations, so long as those claims are not misleading.

While it isn’t a secret that food regulations, in some part, have become “outdated”, what makes KIND’s petition interesting is it comes after being caught violating the same regulations they are petitioning to amend. The real question is whether KIND knew their product labels were non-compliant when released into the marketplace or did they make a business decision to move forward with non-compliant labels in order to promote their “healthy” marketing campaign. While the saying “it’s better to ask for forgiveness then to ask for permission” may apply in certain situations, it’s probably not the best strategy when it comes to breaking federal law.

The role of the general counsel is to advise executive leaders on the state of the law, how certain laws affect their business and to provide pertinent information and/or legal advice to such leaders so they have the ability to make informed decisions. The general counsel is not required to be an expert in the industry in which their client operates (although it certainly helps); however, they should know the limits of their expertise and, when appropriate, bring in outside assistance with such expertise. If they don’t know their limits, or can’t identify potential legal issues outside their expertise, then their departure should be swift. After all what good is legal counsel if leaders are not able to rely on their advice?

It isn’t clear whether KIND made the decision to market their products with non-compliant labels, but if they did the general counsel shouldn’t take the blame. However, it took KIND six months to file their Petition Letter which leads me to believe the labeling violations occurred not because of a strategic business decision, but due to the lack of regulatory expertise and oversight from the general counsel’s office. If my presumption is correct, investors should demand answers and push for changes in the executive suite. These violations have resulted in significant expense revising labels, advertising and websites, in addition to substantial legal fees incurred responding to the Warning Letter and submitting the Petition Letter, and most recently defending consumer lawsuits. While attorneys play a significant role in advising businesses, legal fees cannot be entirely avoided; however, they can be efficiently managed. It is up to KIND’s investors to decide whether their capital in this situation was well-spent.