To succeed in the growing functional beverage industry, understanding key legal issues is crucial. As new functional beverage brands continue to emerge, business owners need to consider a variety of legal issues, including (1) proper product categorization, (2) appropriate advertising and marketing claims, (3) engaging with influencers, (4) working with contract manufacturers, (5) ensuring adequate IP protections, and (6) selecting the appropriate corporate entity structure.
Product Categorization
First and foremost, proper product categorization is essential in the functional beverage business.
As previously discussed, there is no clear legal definition for a “functional beverage.” Rather the Food and Drug Administration (FDA) places functional beverages into one of four (4) categories – each of which have significantly different regulatory implications on the production and marketing of a product.”
- Conventional foods (including beverages),
- Dietary supplements,
- Drugs, and
- Medical foods.
For companies that make, distribute, or sell functional beverages, proper product categorization is critical, as it determines how a company approaches practically every other step in the product’s commercialization lifecycle, including their product’s ingredients, packaging, labeling, marketing, and advertising. Among other things, proper product categorization also impacts whether a company is required to notify the FDA or seek its approval prior to bringing the product to market.
The Art of Advertising and Marketing
Another crucial legal consideration for functional beverage businesses is ensuring that all advertising and marketing claims are truthful and backed by scientific evidence.
As we’ve previously explored, how a functional beverage product is marketed impacts the product’s categorization – oftentimes, as either a food or dietary supplement. The primary marketing method of many functional beverages is to highlight the product’s “functional” ingredients and tout their potential health benefits. However, functional beverage brands need to ensure that any such advertising and marketing claims are truthful and not misleading. These claims must also be substantiated, meaning that they are backed by solid scientific evidence.
Functional beverage companies need to be especially mindful of any health claims that may result in their product being classified as a drug by the FDA (i.e., a product cannot be marketed as able to diagnose, cure, mitigate, or treat a disease). Additionally, if a product is categorized as a dietary supplement and the product makes any claims about the role of a nutrient or dietary ingredient on the function of the human body (i.e., a “structure/function claim”), then the product must contain a standard FDA disclaimer that the product has not been evaluated by the FDA and is not intended to diagnose, treat, cure, or prevent disease.
Engaging with Influencers
In the post-covid era, influencers have become a popular avenue for functional beverage brands to market their products on social media. However, this increasing use of influencers also heightens the risk for brands if these individuals make unauthorized or improper claims about a product. Brands may be held accountable for any inappropriate statements made by influencers they engage with, as many influencer relationships are considered to be endorsements.
If a functional beverage brand desires to partner with an influencer, they can help limit potential liability by clearly delineating the statements influencers can make about a product, such as the product’s purported health benefits and how the product functions in the body. If an influencer makes an improper statement about a product, brands will have a clear record as evidence in the event of potential liability.
Inversely, claims can also directly be brought against influencers. Influencers, and their hiring party, may face legal liability if they promote products without proper disclosures, violate intellectual property laws, or make false claims or statements about a product. Influencers should be mindful to correctly analyze all product information given to them by a company and both parties should seek legal guidance prior to entering into any partnerships.
Working with Contract Manufacturers / Co-Packers / Distributors
Most functional beverage producers team up with co-packers, manufacturers, and suppliers to place their products on the shelves. At a high level, functional beverage brands should strongly consider engaging legal counsel to assist with negotiating contracts with these third parties in order to (i) help protect the brand from liability, (ii) properly allocate risks and responsibilities, and (iii) ensure all third parties safeguard their intellectual property rights. Engaging legal counsel to review third-party contracts will also help protect your brand in the event of a product recall or product defect, as a well-negotiated contract will allocate risk and responsibility for damages and recall costs.
A brand’s relationship with its co-manufacturers, co-packers, and distributors will vary, however, it is essential to ensure the terms of your commercial contract clearly address potential issues before they arise to help protect your brand from future liability.
Intellectual Property Considerations
Another key legal consideration for functional beverage brands should be protecting intellectual property. Intellectual property protection can be obtained through a variety of methods, such as (i) a patent, to protect the innovative products or processes, such as new methods of preparation, unique packaging designs, or novel ingredients, of the beverages or (ii) a trademark, to protect the producer’s and product’s name, logo, or slogan to prevent others from using similar marks that could confuse consumers.
Generally, intellectual property is classified as an asset of the company and can be a principal element in determining the appropriate corporate entity to hold your business’s IP rights. Intellectual property can also be a key asset that drives investor interest so it is important to keep these considerations top of mind.
Corporate Considerations
Lastly, choosing the right corporate structure is crucial for functional beverage brands, ideally before setting up formal intellectual property protections. As previously discussed, choosing the right corporate structure is a critical step for brand owners, as entity structure can have long-term ramifications that not only impact current corporate activities, but also the ability to raise money and sell your business in the future. Other issues that need to be addressed are the level of control owners should have on the day-to-day operations of the company, the scope of liability protections, and various tax implications and benefits of each potential entity type. Choosing the correct entity structure is a critical step in setting up a successful business.
As the functional beverage industry grows, legal considerations are just as important as the health benefits these drinks can offer. Navigating these complexities can be challenging, but with careful planning and due diligence, the Husch Blackwell team can support your business’s growth in this exciting market. Contact Megan Beebe for more information.