All About Exclusives

• "I asked the co-man to create the recipe based on a few descriptors.  Now they're saying they own it and I can't take it elsewhere!"
• "Our volumes were small, so we offered an exclusive contract to provide a little leverage in earlier negotiations.  Now our supply and freight costs have skyrocketed and we can't do anything to fix it."
• "They buried IP ownership in the 20 page contract! Now we're afraid if we go to another manufacturer with similar equipment to produce this product, they'll sue."

These are super painful, and in some cases they can sink a business. Let's take a look at these agreements from the co-man's perspective for a moment.  They're hearing from hundreds of brands per month, but they're taking a bet on you.  They want some assurance that once you hit it big, they get some of the upside (higher volumes almost always mean better profit margins for co-manufacturers).  Their best shot at this is by keeping you locked into using them once your negotiating leverage becomes stronger.  It's reasonable for co-mans to want an upside, and we'll outline below some more realistic things to offer instead of blanket exclusive deals..  A little prep here goes a long way, and Rescale has your back on this one -- let's get into it.

1. What are exclusives? 

Big disclaimer here: I am not a lawyer!  Anything dealing with exclusives and/or Intellectual Property ("IP") should always be reviewed by your legal team.  I have, however, seen many of the real world implications of exclusives, so speaking from my own experience, these are their most common forms:

Accidental Exclusives: When IP gets messy. This occurs when a brand comes to a manufacturer with rough ideas about their recipe, and wants to collaborate on a final product.  I've most often seen this when a restaurant is trying to commercialize one of their popular products (i.e. a bbq restaurant's signature sauce).  If the manufacturer helps collaboratively develop the recipe with you, you need to have a rock solid IP assignment agreement in place -- any work done on your recipe should be owned by you. Be sure to get this paperwork in place before working on the recipe - this can be in the form of an NDA or a separate IP assignment agreement.  Talk to your lawyer before approaching a co-man if this is your plan. Need a refresher on NDAs? Check out this blog post.

Equipment-specific Exclusives: A Sneaky Trap. This scenario is less common, but it does happen. Every co-manufacturer has unique equipment and processes, and sometimes they try to claim the way your product is made on their equipment as their own IP. This situation is rare, but it does happen.  The sure way to prevent this from happening is to get an appropriate NDA in place before trials occur. Here's an example of protective language:

"This Agreement shall not be construed as creating, conveying, transferring, granting, or conferring upon either party any rights, license, or authority in or to the information exchanged, except the limited right to use Confidential Information specified in paragraph 2. Furthermore and specifically, no license or conveyance of any intellectual property rights is granted or implied by this Agreement."

Intentional: Contract exclusives. This is by far the most common scenario - where an exclusive is specifically written into the contract.  The comanufacturer is not trying to claim any IP rights (as outlined above), they're simply looking for a commitment.  Let me be clear: an exclusive with no limits like end dates or volume limits is never a good idea. There is some middle ground on contract commitments, though.  I've outlines alternatives to offer in negotiations below.

If you have more questions about types of exclusives, drop us a note! Happy to answer in followups. (Quick plug - templatized NDAs drafted by food & bev manufacturing expert legal teams come standard in all Rescale memberships. We've also built tools to simplify building, sending, & organizing NDAs & RFPs to get brands to trial 2x faster, saving 40+ hours of tedious work. Book a demo with us here).

2. How can you avoid exclusives?

I know, these situations sound scary.  The reality is, exclusives most often come up in contract negotiations, and they're easy to identify. Here are some simple precautions to protect yourself:

• Come prepared with your own commercialized formula. This means having a detailed ingredient list (with exact weights and percentages) and clear step-by-step production instructions. If you have a fully baked formulation, you have way more leverage.
• Lock down your IP with a solid NDA. This protects anything developed during trials and prevents them from claiming ownership over your process. (Reminder: Rescale template NDAs with this language are standard for all members. Learn more here)
• Keep your options open! Don’t stop talking to other manufacturers just because you’ve found one you like. Having another option waiting in the wings gives you major negotiating power. Checkout an example project timeline from our last blog here.
• Read every contract with a lawyer. Do a quick search for the word "exclusive" and look for hidden limitations around contract length, volume commitments, or supply terms.
•  Address exclusivity upfront. If a co-manufacturer pushes for exclusivity, don’t ignore it—negotiate alternatives that give them upside without locking you in.

3. What can I offer instead of an exclusive to a co-manufacturer?

Let's say you are in negotiations with a great co-manufacturer, that nailed the samples, has great references, and they're pushing for an exclusive deal.  Negotiating is all about finding the shared benefit that everyone feels like they're winning.  Ultimately, they want upside on your growth, not to hamper your growth.  There are other, less restrictive ways, to achieve this. Here are a few ideas:

• Time or volume-bound exclusives. This is a great peace offering to show you're serious about growing with them, but you need to do so within reason. You can offer to produce this product line exclusively with them for a set time period (i.e. 12 months), or a set number of units (1M).  If you do take this path, always ensure you've put careful language around how to bypass this agreement if they fall short in material ways like product quality, production timelines, or pricing.
• First right of refusal. Give them the first opportunity to bid on new products. You can even add conditions (i.e. if they match another manufacturer's price within 3%, they get the business). This keeps them motivated while preserving your flexibility.

The final agreement is full of choices, so you'll have plenty of case-specific ideas once you reach that stage. If you ever need expert guidance to brainstorm ideas on contract negotiations, or give you a gut check on what's "normal," you know where to find us!

That's it for now - happy searching! If you have project specific questions, or blog ideas, don't hesitate to reach out via email or book a call with me