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December 1, 2015
Yesterday, I began my exploration into why new supplement manufacturers need to keep an attorney on retainer. Here is part two, where I discuss the value of having an attorney handy to advise on contracts and compliance issues.
Contracts. When a supplement company is starting out and deciding what suppliers, manufacturers, and distributors to work with, there will be many discussions regarding various business terms. Obviously, these terms should be put into writing to memorialize the parties’ agreement.
Often deals are done on a handshake and when the business relationship starts to decline and ultimately winds up in the courtroom, parties often “forget” critical pieces of information and without a written contract, it is very difficult to piece together the story.
I know a company dealing with this very situation right now with a contract manufacturer that is essentially holding their product hostage and refusing to deliver their product. This obviously creates a hardship: the company has no product to sell. If the parties decide to take it to Court, it will be a game of he said/she said and the judge and/or jury will decide who is being honest—all because the supplement company did not spend a little money upfront to review or draft a manufacturing agreement.
The total cost for such a service? Around $2,500.
Sometimes an even bigger problem is signing an agreement without having an experienced attorney review it first. I had a client once sign an agreement with a contract manufacturer that included a waiver of consequential damages and a requirement that the supplement company had to object to “bad” product within 15 days in writing. In this case, the manufacturer sold the supplement company bad product. The supplement company forgot what it had signed and did not object within the 15 days in writing. It ultimately lost their positions in the big retailers and lost profits, but because of the contract, it couldn’t seek these lost profits and had to pay the manufacturer for the bad product per the contract (plus attorney’s fees in defending the case).
Instead of spending hundreds of thousands of dollars, the client could have spent a few thousand upfront and avoided most of this headache. That’s an expensive lesson to learn.
FDA/FTC Compliance. In conjunction with the adoption of a product name (trademark) and formula, the supplement company will have to create labels and advertising copy. To that end, the labels must comply with FDA (Food and Drug Administration) and FTC (Federal Trade Commission) laws. The product will likely be a dietary supplement and will have to comply with the Dietary Supplement Health and Education Act of 1994 (DSHEA) and related labeling laws.
DSHEA allows a company to make structure/function claims, but does not allow “drug” claims. The distinction between the two is often a blurry line and an experienced (with dietary supplements, of course) compliance attorney should be consulted. If a company makes a “drug” claim, not only can the FDA issue a warning letter or take other action, these types of violations are often used in class action lawsuits. In this instance, the company will need to engage experienced counsel (and spend money in attorney’s fees), but it also may have a black eye–a warning letter issued by the FDA is public record.
In addition to labels, the advertising copy should be reviewed for compliance with FTC and FDA laws. There is the possibility of defending against an investigation or proceeding brought by the FTC or NAD (National Advertising Division), but a competitor could take issue with the advertisement and initiate an NAD proceeding or a lawsuit in federal court under the Lanham Act for false advertising, not to mention the class action lawsuits.
It goes without saying that label or advertising copy review on the front end may cost a few thousand dollars, which is much less than several thousand or hundreds of thousands of dollars. It is worth mentioning that both the FDA and the FTC review websites and other social media like Facebook. Plus, their employees attend industry trade shows and review the items and advertising available there.
When having advertising copy reviewed, include all advertising.
And, more importantly, don’t wait for a legal issue to hire your attorney. Do it now, so you can protect your company—and save yourself from sleepless nights.
Erica W. Stump is an intellectual property (IP) and dietary supplement regulatory compliance attorney. Her practice focuses on the legal challenges that face dietary supplement and food companies, including trademark and trade dress infringement, false advertising, counterfeiting, unfair competition and patent infringement.
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