Contract Manufacturing: An Opportunity, Never an Excuse

Contract Manufacturing: An Opportunity, Never an Excuse
by Anthony L. Young

About eight years ago I participated in a trade show seminar presentationabout manufacturing practices. It was before passage of the Dietary SupplementHealth and Education Act (DSHEA) but industry trade associations were alreadydrafting manufacturing practice guidelines for their members. There were manyquestions about labels, manufacturing products at the direction of distributors,and legal responsibility if the product is determined to violate the FederalFood, Drug, and Cosmetic Act (FFDCA). One of the final questions summed up hownave some in the audience were: "Am I liable if I manufacture a productfor someone and they give me labels to apply to the product that list more anddifferent ingredients than they told me to put in the product?" The answerwas yes, and that it would be a crime under the FFDCA to apply that label and toship the product in interstate commerce.

At a seminar on product liability last year at SupplySide West, there wassurprise from some contract manufacturers when they heard that they, asmanufacturers, could be held liable in a product liability case along with thecompany they manufactured for. The common refrain was that they only do whatthey are told to do, that they do not have the capacity to determineindependently if the products they manufacture for others are reasonablyexpected to be safe and that they have no capacity to determine if the claims onthe labels they apply to finished products are truthful, not misleading andsubstantiated. And this is not surprising--one of the reasons contractmanufacturing is so competitive is that small generic and OTC drug manufacturersbid aggressively for such work to fill in when more profitable drugmanufacturing contracts are not available.

On the other side of the coin, it was not uncommon in the past to hear adistributor disclaim responsibility for subpotent product with the excuse thatthe product was manufactured by someone else who had made a mistake. Of coursethe distributor should not be held responsible--how were they to know theirmanufacturer did not know how to make the product?

As those who distribute dietary supplements seek to lower costs by usingcontract manufacturers and those who do contract manufacturing are courted byproduct distributors, there are a number of basic points to keep in mind thatshould help everyone protect and maintain their franchise.

First, under the Food and Drug Administration's (FDA) current GoodManufacturing Practice (GMP) regulations for food and under the industry draftGMPs submitted to FDA several years ago, the manufacturer is ultimatelyresponsible for the integrity of the dietary supplement it manufactures and theingredients that go into it. This is a legal concept that is not going tochange.

Second, the concept of contract packing or manufacturing has been a part offood and supplement commerce for decades. Under FDA regulations, a product thatis contract manufactured must bear the statement "Manufactured for GoodsuppInc." or "Distributed by Goodsupp Inc." It is also permitted, butnot required, that the label say "Manufactured by Manugood, Inc.,Distributed by Goodsupp Inc."

Third, the roles of the manufacturer and their customer distributor need tobe spelled out in detail, in a written contract. Who determines the formulationof the product? Who buys or specifies the raw materials? Who prepares the labelcopy? Who substantiates the label claims? Who performs product testing?

Fourth, the legal responsibility of each party needs to be spelled out in acontract under which each party agrees to indemnify and hold the other partyharmless if there is a claim related to their responsibility. Thus, if there israw material failure, the contract should have spelled out which party buys theraw materials and ascertains that they meet product specifications prior totheir use in manufacturing. That party should then indemnify and hold harmlessthe other party if a problem with raw materials is later found. Similarly, thedistributor should take all the responsibility for label claims if that entityis drafting the label claims. Even third parties can be drawn into this mix--ifboth parties rely on an outside laboratory to confirm the finished product bytesting, indemnities can be sought from that laboratory with respect to theaccuracy and reliability of their testing. Those who manufacture for otherswithout a contract and those who have others manufacture for them or performservices for them without a contract do so at their peril.

Fifth, each party to a manufacturing agreement should carry insuranceadequate to cover product liability claims. In turn, each party should requirethat the other party make them a named insured on their policy. Those in doubtabout the amount of product liability insurance to be carried should contact aninsurance person specializing in dietary supplement industry insurance.

Seventh, margins and sales in the dietary supplement industry have everyonelooking for shortcuts. Product integrity should never be a shortcut. As anindustry, manufacturers and distributors need to stop producing product that canbe tested by a local news station and found to be below label claims. There is asaying, "There are no unwilling victims." While that saying may not betrue in general, it is certainly true when you can easily control the integrityof your products.

The dietary supplement industry is incorrectly characterized as unregulated.It is more correct to say that FDA and other agencies simply are not enforcingthe good and sufficient laws and regulations that are on the books.Manufacturers and distributors in a contractual setting can and should addressthe issues discussed above to ensure that their products meet or exceed theamounts claimed on their labels. The quality of products in this industry restswith those who manufacture and distribute. There is no one else to point to. Thebuck stops with these two entities. Contract manufacturing should never be anexcuse for poor product, it should be an opportunity for two companies toproduce the best possible product.

Anthony L. Young is a partner in the Washington, D.C., office of PiperMarbury Rudnick & Wolfe, LLP. He also serves as counsel to the AmericanHerbal Products Association.