Partner Rebecca Cross, who leads the San Francisco-based firm's regulatory and litigation risk assessment practice, told FoodNavigator-USA that she was responding to “repeated requests" from food companies struggling with everything from pre-exit due diligence to label claims.
She added: “We’ve seen companies nearly bankrupt themselves over these issues or they are not able to get financing.
"Obviously, start-ups want to spend their money on building their brands, not paying lawyers, but failure to get these things right at the beginning can ruin a company later on.
“Often you only hear from small companies when they have a problem; maybe their relationship with a co-packer has completely blown up and they are struggling to get out of the relationship, so we want to offer a preventative care practice to try and stop these things from happening in the first place.”
She added: “There are so many new players coming into the industry that really need general counsel, covering everything from formation and governance, to IP, Prop 65 advice, supply, broker, and distributor agreements, pre-exit and acquisition due diligence and labeling, marketing. There is a huge need for this in the industry.”
We have spent a lot of time trying to get brands out of distribution agreements
So what are the biggest problems smaller companies can run into?
Anything and everything, said Cross, but badly written distribution agreements can create major headaches for small companies, she said: “We have spent a lot of time trying to get brands out of distribution agreements.
"The major issue tends to be the ability to exit the arrangement when you’re ready to move on; they can often have extensive buyout provisions or clauses that require brands to pay out a certain percentage of sales going forward or back.”
Poorly negotiated supply and manufacturing agreements can also be ruinous, she added: “Often companies sign up with a co-packer and run into problems later because they don’t have as much control as they should.”
"We’ve seen companies nearly bankrupt themselves over these issues or they are not able to get financing. Obviously, start-ups want to spend their money on building their brands, not paying lawyers, but failure to get these things right at the beginning can ruin a company later on."
A piecemeal, after-the-fact, approach to IP can cause big problems later
When it comes to intellectual property (IP), meanwhile, small companies often adopt a piecemeal, after-the-fact, approach after they have gone to market, and fail to understand how important IP could be in raising money, and selling the business further down the line, she added.
“So companies often file a trademark for their main brand, but don’t file for design marks or tag lines, or they don’t enforce the trademarks they have protected. Often they don’t organize the company properly so when it comes to a sale, there are management issues and disagreements and people trying to block the sale.
“We also see companies hit problems because they don’t have tight NDAs (non disclosure agreements) in place so we’ve seen instances where an alleged whistle blower comes out of the works raising issues on the quality control side of things to try to hold up an exit – essentially acting like an extortion artist.”
“We have spent a lot of time trying to get brands out of distribution agreements. The major issue tends to be the ability to exit the arrangement when you’re ready to move on; they can often have extensive buyout provisions or clauses that require brands to pay out a certain percentage of sales going forward or back.”
Plaintiff’s lawyers are now targeting smaller and smaller companies
When it comes to labeling, meanwhile, while it used to be the case that smaller companies were not targeted by opportunistic plaintiff’s attorneys, that is beginning to change, warned Cross.
“Pretty much every large food company has been hit with labeling litigation and plaintiff’s lawyers are now hitting smaller and smaller companies; we’ve seen demand letters to very very small food companies, and that can be really damaging to a company that’s just starting out.”
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