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How to Avoid Legal Mistakes with Your Co-Manufacturer: Expert Contract Tips for Food, Supplement & CPG Brands
In Episode 6 of the Better Batch Podcast, hosts Alex Koves and Peter Suddard sit down with Lauren Handel, founder of Handel Food Law and one of the country’s top legal advisors to emerging food, beverage, and supplement brands. Lauren specializes in helping CPG companies and co-packers structure bulletproof agreements that prevent disputes, protect intellectual property, and set the foundation for sustainable, scalable manufacturing partnerships.
Whether you’re navigating a co-manufacturer contract for the first time or have been burned by vague pricing terms, IP confusion, or lack of insurance clarity, this episode is your go-to guide. We dig deep into contract law for batch manufacturers, exploring everything from pricing models and specification writing to risk allocation, indemnification, and what to do when things go wrong.
Key Takeaways
1. Treat Your Co-Manufacturer Contract Like a Prenup
A strong contract prevents headaches down the road. Lauren recommends tackling worst-case scenarios before they happen—dispute resolution, IP ownership, and exit strategies need to be built in upfront.
2. Specifications Are the Cornerstone of Quality
The most critical part of your manufacturing agreement is what your lawyer can’t write—product specifications. Brands must own the QA language and clearly define material quality, testing methods, and safety standards.
3. Choose Transparent Pricing Models to Avoid Conflict
Opt for a tolling model + pass-through pricing (ideally with no markup) to ensure visibility and fairness in fluctuating raw material costs. This gives you control without sacrificing transparency.
4. Don’t Skip the Insurance Conversation
Contracts should require product liability, recall insurance, and errors & omissions coverage. Many brands and manufacturers overlook this, leaving dangerous gaps in risk protection.
5. Nail Down Intellectual Property Terms Early
Ambiguity around formulas, process know-how, and supplier lists can lead to IP theft or disputes. Contracts should clarify what’s shared, what’s protected, and what happens if things go south.
6. You Can’t Enforce What You Can’t See
Include audit rights, inspection rights, and requirements for shared documentation to protect your brand. Without transparency, IP clauses are just ink on paper.
7. Fee Shifting = Real Accountability
The biggest lever for motivating fair behavior? A fee-shifting clause that makes the loser pay attorney fees. This changes the game for smaller brands facing legal battles with larger manufacturers.
Actionable Steps For Food, Supplement & CPG Brands:
- Work with a lawyer before signing your co-manufacturing agreement—not after problems arise.
- Require detailed specs for every batch, and hold the manufacturer to testing protocols.
- Demand visibility into material sourcing, pricing, and insurance coverage.
- Define ownership of IP and limit how your proprietary information can be used or disclosed.
Actionable Steps for Contract Manufacturers:
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Be prepared to share pricing structures and justify increases.
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Understand your legal obligations—especially around non-conforming products and raw materials.
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Don’t demand exclusivity unless you’re also guaranteeing capacity.
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Get proper insurance, and ensure your team knows the limitations of liability in your agreements.
About the Guest
Lauren Handel is a leading attorney in the U.S. food and beverage industry, and founder of Handel Food Law, a boutique firm advising brands, manufacturers, importers, and distributors. Her expertise spans co-manufacturing contracts, labeling compliance, IP protection, and dispute resolution. Lauren is known for helping early-stage and scaling brands navigate the legal complexities of growth while avoiding litigation.
Learn more: https://www.handelfoodlaw.com
🔗 LinkedIn: Connect with Lauren
About the Hosts
Alex Koves: As the President and CEO of Mar-Kov, Alex leads the charge in delivering purpose-built software tools that simplify complex manufacturing challenges. His background in operations management fuels his passion for helping businesses optimize their processes. Connect with Alex on LinkedIn.
Peter Suddard: Peter has worked with batch process manufacturers for years, helping them scale and improve their business. He has extensive experience ensuring customer success and driving product enhancements, making him an invaluable resource for manufacturers seeking to scale. Connect with Peter on LinkedIn.
Full Transcript
Better Batch (00:05.284)
Welcome to the Better Batch podcast where batch process manufacturers learn from industry experts. I’m Peter Suttered. And I’m Alex Kovas. We’re joined today by Lauren Handel with Handel Food Law. Lauren is an expert on food law and works with contract manufacturers and brands and helps them navigate the legal landscape. Welcome, Lauren.
Lauren (01:49.518)
Thank you.
Better Batch (01:52.059)
Lauren, can you tell us a little bit about your customers and the kind of scenarios you help them work through?
Lauren (02:03.118)
Sure, well, so I have a food business law practice. All of my clients are in the food industry. Most of them are brand owners of packaged food and beverage products. Many of them use outside manufacturers.
But I also represent other kinds of businesses. I do have some contract manufacturers as clients, also some wholesalers, importers, farmers, restaurants and caterers. So it’s sort of the full spectrum of the food supply chain.
Better Batch (02:38.754)
It’s yeah from from soup to nuts maybe. So you and I had talked a little bit before about this. It feels like when everything’s running smooth nobody needs a lawyer and it’s only when things are getting a little bumpy that you that you get brought in. You’d mentioned you get brought in kind of at two main parts where brand or manufacturer is negotiating a contract with the other party and then when things.
Lauren (02:41.976)
Yeah.
Better Batch (03:07.44)
fall apart and you get into dispute resolution. On the contract side, we’re curious, what are the big things brands and manufacturers need to be thinking about during that kind of contract negotiation to get into an agreement with each other?
Lauren (03:22.904)
Yeah, well, in the best case scenario, I’m brought in before there’s any bumps, right? That, you know, if I was a family lawyer, I’d be preaching the gospel of prenuptial agreements and I sort of see the contract between a co-manufacturer and a brand as serving the same purpose largely. You want to try to anticipate…
Better Batch (03:44.102)
Sure.
Lauren (03:48.652)
what happens when things go wrong. I mean, it’s sort of inevitable in any long-term relationship that there will be some things that go wrong along the way. And at least for the most serious things, we try to make sure that there’s a well-documented agreement as to how problems should be resolved. That’s one of the main.
issues. But then also just to make sure that it’s really documented well what the expectations of the parties are. Who’s responsible for what? There’s a lot of variation in co-manufacturer brand relationships in terms of allocation and responsibility for like ingredient sourcing for example. And you what the quality parameters are. So part of what I’m doing is just making sure that we
have a well-documented, very clear-to-understand agreement about the most important things, and then also address the what if things go wrong scenarios to make sure really both sides are protected and can feel good about entering this relationship.
Better Batch (05:00.236)
Awesome and you know we want to dive deep into that before we do though I just wanted to clarify so you’re you’re specializing in food our listeners are across food but also dietary supplements pharma cosmetics personal care paints and coatings you you name it if it’s a batch process you feel like what we’re talking today is generalizable you know across all of those verticals.
Lauren (05:23.466)
I do, yeah. I so my experience is limited to food and I include supplements in that. So I am most familiar with manufacturers in that space and how those relationships work. And there are some unique things about food in terms of risk that probably don’t apply to paint, for example. I mean, we’re not worried about pathogens really, I don’t think. But…
Better Batch (05:46.214)
Yeah.
Right.
Lauren (05:52.222)
In general, the law is the same. It’s the same set of contract law that everyone learns in law school, and especially when it comes to sale of goods law under the Uniform Commercial Code. That’s the same regardless of the industry.
Better Batch (06:06.757)
Mm-hmm.
Great. Okay, so let’s at a high level, what are the big kind of pillars of this contract and agreement that should be between a brand and a co-packer? And then we’ll start to kind of dig into the different facets here.
Lauren (06:22.734)
Yeah, so the most important part really, which you might be surprised to hear me say as a lawyer, is the part that I can’t write, which is the specifications for the product, right? mean, so except when we’re talking about a private label agreement of the manufacturer’s own off-the-shelf product that we’re just going to put the brand’s branding on, this is a custom manufacturing agreement.
Better Batch (06:34.064)
Sure.
Lauren (06:50.346)
And so the specifications around quality, including raw material quality, all that needs to be really well documented and is outside my expertise. So I see enough of these. Yeah, so I will review them. I will press both sides to make sure that they are very clear. I look at it mostly from a lay person’s perspective to say.
Better Batch (07:00.902)
Right. You’re just happy to see it written down. Yeah.
Lauren (07:16.906)
If I was reading this, especially put myself in the position of if I were a judge reading this and had to decide were the specifications met, would I be able to figure that out? And are all the major sorts of issues covered? Is it detailed enough, comprehensive enough? So.
Better Batch (07:36.261)
So it’s, know, get your formulator in, get their formulator in, make sure everyone’s on the same page. Perfect, okay. Now on that, I’m curious in providing the formula and so on, but also focusing on testing and safety.
Lauren (07:42.135)
Yes.
Better Batch (07:52.217)
Is it enough to specify what or do you also have to specify how? If you know what I mean, like, is it enough to say like the quality has to be high and we have to make sure it’s safe in these ways? Or do we also want to specify how that is to be determined and that methodology?
Lauren (08:09.014)
Yeah, so sometimes I think it’s important to specify how, especially when we have allocation of responsibility for testing, for example. So in some cases, the brand is going to be responsible for sending samples off for testing. Sometimes that’s going to be the manufacturer, in which case you’re going to want to specify exactly what they need to get tested.
So yes, to some extent. And I’m saying this is part of the contract and I will tell you that it’s not always in one document, right? I mean, so sometimes it’s by reference to a quality manual that is separate from the agreement and therefore is more easy to change, to amend.
Sometimes it’s just by reference to the manufacturer’s own procedures and just making it a contractual obligation to follow the procedures that the brand has hopefully reviewed and vetted to make sure that they are up to their standards. So there’s different ways to do it. as far as the level of detail on the how, again, that’s the thing that I would defer to someone with expertise in QA and food safety.
Better Batch (09:28.4)
Perfect, so testing, quality, all that’s gotta be recorded, experts gotta figure it out, and you’re just happy to see it written down and legible for normal people like you and me reading it. What’s next?
Lauren (09:41.219)
Right.
Pricing is a huge issue, right? I such that this is an agreement that’s going on over time. It is reasonable to expect that the price isn’t going to stay the same for all time. Certainly it’s in the manufacturer’s interest to be able to pass along as much of its cost as possible to the customer. And it’s in the brand’s interest to try to get as much predictability as possible about pricing, especially given that many of the
Better Batch (09:54.47)
Sure.
Lauren (10:11.03)
Brands customers require 90 days notice of price changes. So we have to figure out a mechanism for dealing with that.
Better Batch (10:22.63)
How do we do that? That’s a big problem.
Lauren (10:25.154)
There’s variety of ways. so, you know, and again, there’s different scenarios where it could be a strictly tolling relationship. The brand supplies everything and therefore the brand is taking on all of the risk of price increases with respect to materials. It could be entirely the opposite where the manufacturer is supplying absolutely everything.
And we’ll want to pass on as much of those costs. So my preferred way because I think it’s cleanest, although I will tell you many of my clients do not prefer this way because again, they have an interest in not taking on all the risk of price increases. But my preferred way is tolling plus pass-through. Ideally from the brand’s perspective, tolling plus pass-through of material costs without markup. But…
Better Batch (11:00.322)
OK. Yeah.
Lauren (11:17.322)
Understandably, many manufacturers want to add some administrative cost to the cost of materials that they pass through. But that takes all of the risk off of the manufacturer. If the cost of materials goes up, that’s just another, it’s a line item, exactly what they paid on the invoice. I prefer it because…
It gives brands the most transparency into what it actually costs to make their products, which is valuable information to have in running a business. And the tolling part of the price shouldn’t need to change as frequently as materials costs, right? I mean, there are certainly things that can increase overhead costs, utility costs, cost of labor.
but it’s not as variable as cost of materials usually. So we could then just add in a mechanism that maybe once a year there’s a review of totaling costs or there’s maybe even an automatic increase tied to inflation or something like that.
Better Batch (12:26.519)
But brands in your experience hate that. There’s an alternative. What’s alternative?
Lauren (12:32.78)
Yeah, I won’t say they hate it. you know, there’s sometimes, I have to explain why this is a good idea more often because it sounds more appealing to just have an all-in cost, right? To just have an all-in price. Most of my clients are smaller businesses. They are relying very heavily on co-manufacturers to sort of take care of everything, which is not really a good idea, but…
Better Batch (12:36.048)
They resist it maybe.
Better Batch (12:45.606)
Sure. Yeah.
Lauren (13:01.614)
It’s appealing to have an awling price, but there’s definitely going to be a need to adjust that more frequently. And so one extreme of that is, sure, I’ll give you an awling price, and it’s only good for this purchase order.
And that gives you zero predictability from the brand’s perspective about pricing and what’s going to be the price next time. So I would not be in favor of that. having, you know, so the next step is an all in price with some amount of notice of price increases.
Better Batch (13:29.158)
Sure.
Lauren (13:43.342)
Another version could be an all-in price that’s fixed for some amount of time with set periods where we do a look back and adjust pricing not only to compensate for price increases or decreases going forward, but also to retroactively kind of even things out. So…
Better Batch (14:06.384)
Do co-packers struggle to get that kind of data on the historic cost of goods sold on a batch by batch basis?
Lauren (14:15.886)
I wouldn’t think that they would. mean, so they have better access to that, at least when they’re sourcing the materials, they have the best access to that information. I don’t know how great they all are in terms of their accounting.
Better Batch (14:26.298)
Right. Yeah.
Better Batch (14:31.878)
Yeah and and do you see manufacturers committing to lead times and volumes as well in these contracts?
Lauren (14:41.162)
Not often. Well, lead times, yes. Sort of. That’s more common.
Better Batch (14:46.244)
Mm-hmm. Mm-hmm. Well, because they can always put up their hand and say, well, the lead time got stretched because the raw material didn’t come, right? They’re going to have an argument that they shouldn’t have to commit to the lead time, I imagine. But you know.
Lauren (14:54.838)
Yeah.
Lauren (14:59.87)
Yeah, so it is more common for a manufacturer to commit to a lead time generally. least to, yes, to accepting the order, right, with the caveats that if there are things beyond their control, and that’s understandable, right? If there’s something beyond either party’s control, they shouldn’t be held responsible for it. So that’s just, you there’s something inherently unpredictable.
Better Batch (15:07.876)
Mm-hmm.
Better Batch (15:16.4)
Mm-hmm.
Lauren (15:28.674)
But committing to maintaining some level of capacity, I don’t see that as often unless there’s a reciprocal commitment by the customer to purchase on minimum volume over time.
Better Batch (15:32.378)
Mm-hmm.
Better Batch (15:43.729)
Sure, like if a brand said, well, we’re going to start off at this volume, and here’s our plans to expand, and as long as we follow that commitment, you’ll be ready for us. That would be a structure that you see, or am I making things up here? Yeah.
Lauren (15:57.484)
No, yeah, I see that. would certainly push for that. see lately, I will tell you that I’ve been seeing a lot of manufacturers, and again, I represent small businesses who don’t have a lot of options generally when it comes to finding a co-packer. And so they necessarily start out at kind of a weak bargaining position.
Better Batch (16:21.325)
Right. Yeah.
Lauren (16:22.342)
And the co-packer on the other hand has much greater strength in bargaining position and they often take advantage of that. So lately I’ve been seeing a lot of agreements asking for things like exclusivity, meaning the customer will only use this manufacturer for the product, but not promising to maintain any capacity at all to fill those orders, which just isn’t fair.
Better Batch (16:38.246)
Mm-hmm.
Better Batch (16:45.805)
No. And OK, so we have quality. We have price. What’s the what’s the next thing you and I discussed previously around allocation of risk? But educate me a little bit more on that.
Lauren (17:00.418)
Yeah.
Lauren (17:04.118)
Yeah, so one of the biggest functions from a legal standpoint in a co-manufacturing agreement is deciding how are we going to allocate risk between the parties in terms of liability when things go wrong. And it’s in both parties’ interests to do this. It might even actually be, well, I think it is more in the manufacturer’s interest to have
Provisions that limit their liability because the default rules under the law so if we did if we did not have a contract that addressed this issue the default rule under the law is basically whoever messes up is responsible and liable for it and in this relationship
Usually, something goes wrong, it’s more likely going to be because of something the manufacturer did than the brand did. The brand’s liability or its responsibility under the contract mostly is just to pay. Now, the brand takes on more responsibility when they’re sourcing and supplying materials as well.
But the default rule basically would be something goes wrong in the manufacturing process. The manufacturer is responsible for all the damages that are directly resulting from that, meaning the lost value of the goods, whatever was paid for the goods, for the materials that go into them, cost of disposing of them.
but also the non, the indirect losses that could result from that. Like the lost profits that the brand incurs because it can’t sell that product. Maybe it loses customers because it’s been out of stock for some amount of time. Someone else, know, competitor swoops in. So it’s potentially a large amount of liability that could result from maybe even a simple mess up.
Lauren (19:08.704)
So it’s in the manufacturer’s interest to limit that to some extent. And so we see provisions called limitations of liability that address this that manufacturers will often push for and which tend to be the one of the thorniest subjects in negotiations.
Better Batch (19:28.25)
Okay. that limitation of liability to it sounds like it also extends to God forbid somebody gets sick from like a barbecue sauce made at a co packer. And now those are also damages that go to the brand and then ultimately potentially the manufacturer depending on that limitation of liability clauses that is that right?
Lauren (19:50.702)
That’s right, yeah. So also there are usually indemnity clauses, So an indemnity agreement or indemnification agreement is where one party promises the other that it will pay for the liabilities that result usually just to some third party. So if a manufacturer does something that causes the brand to get sued because someone becomes sick.
The manufacturer is promising to indemnify and also usually to defend the brand in that action by a third party. And usually it goes both ways. The brand is also promising to indemnify the manufacturer if it causes the manufacturer to incur liabilities. So that’s usually in there.
The limitation of liability clause can be written to limit that liability for third party claims as well or not. I will always try to exclude indemnification liability from, because otherwise it seems meaningless to promise to indemnify but not to cover things like consequential damages, which is mostly what you’re talking about when it’s a third party claim.
So yeah, there’s a lot of different permutations and ways that you can expand or limit this clause, this limitation of liability. Sometimes it also includes a damages cap. So in addition to the idea that there are certain kinds of liability that a party will not be responsible for.
like loss profits, consequential damages, punitive damages. In addition to that, there could just be a set cap. Regardless of what sort of harm is caused, the most, usually just the manufacturer, will be responsible to pay is a million dollars or the total amount paid by the brand in the preceding 12 months.
Lauren (22:06.24)
or in preceding six months, or just this particular order that’s an issue that caused this problem. So.
Better Batch (22:12.454)
So what’s your preferred way to set up this, or an equitable way to set up this kind of agreement between manufacturer and brand?
Lauren (22:24.526)
So representing a brand, my preference is always going to be there’s no limitation of liability. We just rely on the default rules under the law. But I understand that those default rules are unfavorable to manufacturers, and particularly in an environment where there’s not a whole lot of manufacturers willing to work with small brands. It is reasonable.
Better Batch (22:30.054)
Sure.
Better Batch (22:52.869)
Mm.
Lauren (22:54.178)
to ask for some limits of liability. I still think that there’s a way to do it, recognizing that we have insurance. Insurance is a way of allocating risk. And so I like to see insurance requirements in an agreement. And at least for claims that the insurance will pay, the limits of liability shouldn’t apply. So if…
A manufacturer is able to insure against a risk or for brand is able to insure against the risk, we should rely on this insurance and not try to just avoid the liability entirely through the contract.
Better Batch (23:35.142)
And now do we get into a negotiation about how much insurance the manufacturer should carry or is there kind of some some defaults to that? How would you approach that part?
Lauren (23:47.086)
It’s a subject of discussion not nearly as much because it is fairly standard just I think because practically there’s only certain kinds of insurance that are available, you know, that’s commercially available to manufacturers and to brand owners. The dollar amounts of coverage, I mean also pretty standard and just depend on the size of the business.
Better Batch (24:03.781)
Mm-hmm.
Lauren (24:17.044)
Areas that are not as standard and worth talking about are recall liability insurance or product recall insurance, which is still not yet the norm, but a very good idea to have.
Manufacturers errors and omissions insurance is one that I routinely raise and I’m not sure how common it is for manufacturers to have that tends to raise questions.
Better Batch (24:54.488)
Is there no push around this part because it’s kind of an ignored part of the, like if I didn’t have a Lauren, I wouldn’t know to ask around this kind of insurance piece and I wouldn’t know that maybe that’s another way to do this kind of risk management that the limitation of liability is trying to assign. Is it just that?
people don’t really get to that part of that discussion until it’s well too late.
Lauren (25:27.982)
you’re asking why people don’t talk about the insurance part very much?
Better Batch (25:33.19)
Yeah, you’re saying that insurance is not very, you’re saying these, yeah, it’s not very, what am I trying to say? I’m trying to say that the insurance parts are not being used a lot as a way to resolve this mechanism. Maybe I didn’t understand that.
Lauren (25:38.072)
Controversial.
Lauren (25:53.71)
I think insurance is relied on a lot in practice when there are claims. And I think it’s pretty much expected, at least in the food industry, that everyone in the supply chain is supposed to have insurance. At least general liability and product liability insurance. These other recall insurance, errors in omissions insurance, less common, also could be really valuable and important.
Better Batch (25:57.68)
Okay.
Better Batch (26:09.626)
Mm-hmm.
Lauren (26:23.234)
But it’s basically expected, I think, and the norm, that agreements like this would require insurance. The interaction with the limitation of liability is something that I don’t think it’s discussed as much or is thought about as much. And honestly, I’ll just say that from my perspective, and I don’t…
Better Batch (26:28.986)
Right. So
Better Batch (26:40.975)
Mm-hmm.
Lauren (26:47.266)
I’m not often engaged in the direct conversations negotiating these agreements with the co-manufacturer. Unless they have a lawyer involved, I’m usually behind the scenes. And it’s only when they want to bring their lawyer in or if they have an in-house lawyer where we can all talk together where we have these conversations. And many of them don’t have in-house lawyers and they don’t want to get their lawyers involved. And so the communications that I see, you the emails that get forwarded to me,
often suggest to me that whoever is negotiating this on behalf of the manufacturer is not getting legal advice and frankly doesn’t really understand its own contract. So I think that, you know, that’s an issue. That there are lots of these agreements getting negotiated by people who don’t fully understand what they’re signing.
Better Batch (27:27.932)
no. no.
Better Batch (27:40.303)
Right. So circling back then, what do you feel are the most common points of dispute in the contract? what should both brands and manufacturers look to be negotiating on? What are the main topics that we’ve covered? The limitation on liability. We’ve talked about price. We’ve talked about quality. Is there anything else that’s a big rock that should be looked for in the contract?
fought over by the two parties before the agreement signed.
Lauren (28:12.256)
Yeah, IP issues are big. I would say they’re the most often fought over other than the language is sometimes hard to get right. So intellectual property, meaning ownership and rights to use things like the recipes, manufacturing processes, procedures, trademarks.
Better Batch (28:24.486)
Mm-hmm.
Lauren (28:42.574)
And usually I think it’s not actually controversial that the parties have a good sense of who owns what. And the problem is that the agreement doesn’t necessarily reflect that well enough. So that’s usually an area where we have, I have to look at it closely and the…
Better Batch (28:58.106)
Mm-hmm.
Lauren (29:10.37)
tension sometimes is finding the right dividing line between, especially when we’re talking about things like manufacturing procedures. So many of my clients see their formula as, I mean, I’d say all of my clients see their formulas as trade secrets, as their own intellectual property. Some of them have proprietary methods or processes
in the manufacturing process that they’ve developed. You know, it could be certain temperature parameters, the exact order of steps. There’s something unique about how they make their product that they also consider to be their intellectual property and they need to protect. Manufacturers understandably have their own ownership and trade secrets in
Better Batch (29:48.422)
Sure.
Lauren (30:05.08)
how they’ve set up their plant, how they operate their plant, the manufacturing processes that they’ve developed over time, their know-how. And so finding a way to parse those things without overstepping by either party can be a little bit tricky.
Better Batch (30:20.918)
Well, yeah, and I mean, I can imagine a situation. Maybe it’s one thing if the brand comes to the contract manufacturer with a complete formula and all the steps and exactly how it works. But I’m imagining a situation where as things start up and get rolling, the manufacturer makes recommendations. Hey, look, it’s not running as smoothly. Here’s a tweak we recommend.
and it starts to evolve and you’ve got the R &D or the formulator on the manufacturer side contributing and deeply understanding how the formula works. then so what happens, okay, great, we’ve got your mustard here now, but like we’re doing mustard for more than one brand and like.
how do I get out of my brain the know-how that I got in learning how to do this formula? And how do I not use that know-how when formulating the next one? Yeah, no, I didn’t copy it, but inspiration is there, and how do I shut it off? Did these arguments happen? How would you think about that topic?
Lauren (31:20.662)
Yeah, so I’m sure it happens all the time and never is really talked about. And the brands don’t really know that there’s some tweak that a manufacturer developed and now is using for other customers. And most of time, it probably doesn’t matter at all to the brand, right?
Better Batch (31:30.758)
You
Better Batch (31:50.502)
as long as they can’t copy my product, right? That’s what they really care about in the end, right?
Lauren (31:50.594)
What matters most, right, and as long as they’re not using that tweak for their main competitor, right? So what matters to the brand is if this relationship with the manufacturer deteriorates and the brand needs to go somewhere else, or even if they just need a backup manufacturer, that they’re able to transport
Better Batch (31:57.146)
Mm-hmm, right.
Lauren (32:15.618)
the intellectual property of how you make the product to this other manufacturer. And that the manufacturer who developed the tweak isn’t gonna say, no, you can’t do that because I contributed X and now we jointly own this recipe and you can only use it when I say it’s okay. We wanna avoid that.
Better Batch (32:37.254)
Is an NDA sufficient for this style of dispute? Because we’ll do an NDA at the start of a contract with a co-packer while we’re exploring what’s going on. Is that NDA sufficient, or do we need additional language in the contract?
Lauren (32:51.584)
It can be, if it anticipates that this will happen, most form NDAs that are used for that purpose at the beginning of the relationship or exploring whether there can even be a relationship are not written that way. So the typical NDA is written from the viewpoint of one party is going to disclose information or to the other party,
or they’re both going to disclose information to each other and it is what is disclosed that has to be kept confidential and there’s no foresight that a party would develop confidential information for the other party. So that’s usually missing and something that’s a whole lot I try to fix.
Better Batch (33:42.158)
Right. Right.
Lauren (33:47.542)
in looking at those agreements. And if it’s not fixed at that early stage, then it least needs to be addressed in the co-manufacturing agreement for the ongoing relationship. Just the recognition, and I don’t think it’s controversial, that even if the manufacturer develops something, even just compiling information, the list of all of the suppliers for all of the materials that go into this product, that could be a trade secret.
Better Batch (34:12.716)
Mm-hmm. Right.
Lauren (34:16.194)
the brand might not be disclosing that information, but it still needs to be kept confidential because if the brand’s competitor finds out, here’s the full supplier list for, and the item numbers for all the ingredients that go into this product, that’s very valuable information for a competitor.
Better Batch (34:24.72)
Well.
Better Batch (34:29.03)
Sure.
Well, and it’s interesting what you just said about, if you know, particularly we don’t want this information to get into the hands of our competitor who may also be working with the contract manufacturer. And, you know, it strikes me there’s like, there’s a real fog of war here because I, you know, I’m aware of the fact that, so in the general public, right, people.
tend to not be aware of the fact that most brands are using contract manufacturers and most brands want to kind of present this image of like, well, we’re making it ourselves. And so I, and you can tell me if I’m right here, but I believe that like one of the subjects of the confidentiality agreement is the simple fact that you’re making this for us, right? Cause we want to be able to keep this public image that we’re doing it ourselves and we don’t want you talking about this. So now it’s like a manufacturer can of course say like, well,
Lauren (35:14.391)
It can be.
Better Batch (35:23.176)
I’m not gonna tell you who else I’m working with. I can’t, right? And so you have this whole thing, well, you know, I guess what I’m coming around to, like both with this and with the formulas is like, how much protection can brands really have?
Right? In that it’s like, what is really happening in the factory is, and how would I know, how would I know if the agreement was being violated really is what it comes down, is really what my question comes down to. Are there good ways or is it really down to trust or like, what’s the situation where the dispute can actually begin because some kind of violation was discovered?
Lauren (36:02.307)
Yeah.
Yeah, no, it’s a good question because, and it’s something that I talk to my clients about all the time, the practical reality of enforcing the, you can have all the greatest IP protections and non-disclosure agreements on paper, but the practical reality of enforcing that can be quite difficult because the brand’s not there to see everything the manufacturer’s doing.
Better Batch (36:15.941)
Mm-hmm.
Lauren (36:32.834)
And because of the scenario that you brought up, people can’t erase what’s in their heads and may not even consciously use something that they learned that a brand considers to be confidential and proprietary for the benefit of another customer. So these things can happen. Audit rights, inspection rights are important also in an agreement.
Better Batch (36:38.534)
Mm-hmm.
Lauren (37:00.238)
Customers should have the right to get information to be able to enforce their agreements. But that’s not going to be enough necessarily for this type of issue. The only additional protection you can get, which most manufacturers are not going to agree to, is non-competition. So it’s sort of the belt and suspenders approach that if you can remove the opportunity,
Better Batch (37:21.404)
Mm.
Lauren (37:29.664)
for the manufacturer to use this information for the benefit of a competitor by prohibiting them from competing, then that gives added protection.
Better Batch (37:36.93)
Mm-hmm.
You have to be a pretty big brand with a pretty big paycheck. I guess to incentivize that with the.
Lauren (37:46.382)
Either big or novel, right? So I’ve had clients that have something really unique, something the manufacturer is really interested in getting involved with and hasn’t done before. And in these circumstances, there’s really…
Better Batch (37:50.776)
Unique, right? Yeah.
Better Batch (37:56.954)
Mm-hmm.
Lauren (38:08.778)
even more of a need and rationale for having a non-compete. If the brand is coming in and going to teach the manufacturer how to do something it hasn’t done before and that is unique, then you can see it being more fair and it’s also not interfering with the existing business of the manufacturer for it to not compete. It’s not doing this thing already. So that’s the kind of circumstance where I’ve seen it most often.
Better Batch (38:17.06)
Mm-hmm.
Better Batch (38:30.297)
Absolutely.
Better Batch (38:34.062)
And that actually sparks an interesting tangent, I think, where we do come in as a brand with something unique and, manufacturer, we need this $200,000 piece of equipment in order to execute the process. How does that tend to get woven into agreements if a new asset of some kind or a new capability needs to be added at the manufacturer that’s going to have this big fixed cost? How do they tend to share that cost over time?
I’m curious how you’ve seen that structured.
Lauren (39:09.134)
Yeah, well, so I think the cleanest way is the manufacturer makes the investment and the customer essentially pays it off through a commitment to purchase a certain amount over time. Possibly at a higher price for that period of time. So it’s sort of a loan, yeah, until it’s paid off or it’s, you know.
Better Batch (39:29.741)
until it’s paid off.
Better Batch (39:34.17)
Yeah.
Lauren (39:36.768)
maybe not paid off entirely, but it’s a shared cost, right? I think that’s the cleanest. I really don’t like, but I have done situations where the brand owns that equipment.
Better Batch (39:49.316)
Right.
Lauren (39:50.892)
I don’t like it because there’s just, you’re not there to operate it, to take care of it, right? And it’s also a little bit more complicated to protect if the manufacturer runs into financial difficulties and there are banks that have liens on everything that’s in the plant. can be done, but it’s more tricky.
Better Batch (39:54.17)
Yeah, did you maintain it? Yeah.
Better Batch (40:08.966)
Correct.
You
You know, speaking conversely though, in the first example where the manufacturer owns it and it’s, you know, just the brand commits to a volume over time and pays for it in that way. You know, speaking from the perspective of the brand, I would want to look at it and say like, okay, but you know, if you go out of business, I’m going to be on the hook for this. And so now I want to see your financials. I like, so now all of a sudden as the manufacturer, I need a much closer view of, you know, to gain confidence that I’m
I’m not going to lose my investment in the piece of equipment. I imagine it gets interesting in that regard around how can the manufacturer get the confidence that they’re going to finally get that money back.
Lauren (40:57.388)
Yeah, certainly they’re taking a risk. The brand’s also taking a risk. It’s a good idea for both parties to do some due diligence on each other and their resources.
Better Batch (41:03.045)
Yeah.
To get a lawyer. Yeah. Okay. So we talked about quality price allocation of risk IP audit rights. Is there anything else we should talk about before we talk about mechanisms for dispute resolution? Because that’s a good.
That’s a good one to finish on as we ask you about after the contracts have been running. other than mechanisms for dispute resolution, what else is there?
Lauren (41:37.356)
Yeah, so it’s sort of related to dispute resolution, but it’s not the dispute resolution section, usually, of the contract. There typically is a section that, you the non-conforming goods section. What happens when the finished product doesn’t meet the specifications or is later discovered to be contaminated? So…
there should be something, a section that deals with that. It’s particularly because, yeah, well, so first you have to understand what the default rules would be. So for most of these agreements, the Uniform Commercial Code applies. It’s questionable if it’s a situation where it’s strictly tolling that might just be considered a services agreement, but.
Better Batch (42:10.694)
What should be there?
Lauren (42:31.85)
Even then, courts will often look to the Uniform Commercial Code to decide how to deal with this sort of situation because it’s very nicely spelled out. But those default rules don’t necessarily work very well for this custom manufacturing scenario. The default rule would be, if there’s anything wrong,
Better Batch (42:39.919)
Okay.
Lauren (42:54.094)
even the smallest thing, there’s a requirement of perfect tender, it’s called, meaning you have to perfectly conform to the specifications and if you don’t, the buyer gets to reject the entire order, the manufacturer has to take it back, and then it owns it. So that kind of doesn’t work for either party because if my brand is on a product and it doesn’t meet my specifications,
Better Batch (43:15.813)
Right.
Lauren (43:22.762)
I don’t want the manufacturer selling it. So you can get around the default rules through contract. So you have to think of what’s reasonable. I like to see some language in there about cooperation and investigating the cause because it might be the manufacturer’s fault, it might not be. It might come down to something that was wrong with a raw material supplied by a third party.
that the manufacturer could not have discovered. And so we want to make sure that there’s, we’re going to try to figure out what happened and not just say, oh, it’s no good, pay me for it. So again, the specifications should be really clear so that we know when something is nonconforming. Right? If you don’t have clear specifications, then this is where I see a lot of disputes.
there’s something wrong with the product and it wasn’t addressed in the specifications or there are no specifications really written down. And now we’re have to have a fight about whether or not the customer has grounds to reject this product. So again, most important part of the contract that a lawyer can’t write, specifications.
Better Batch (44:40.934)
You just brought up something really interesting about the raw material though. right, like we talked about two scenarios. So in the turnkey scenario, right, the manufacturer has the contract with the raw material supplier. And so now, well…
Like as the brand, I can only blame you and it’s up to you whether to then go and fight with the raw material supplier for the money that I want from you or in the second scenario that I think you said you preferred if I’m right now the brand would hold the contract with the raw material supplier. so, or how does that all work? How does that shake out if the culprit is the raw material manufacturer?
Lauren (45:17.868)
Yeah, so what I prefer is related to pricing. I’m agnostic as to who has the contract with the raw material supplier. It often makes the most sense for the manufacturer to have that because the manufacturer often can get a better deal being able to purchase at larger volumes on behalf of multiple customers and is better set up than particularly a small brand to sort of manage those relationships.
Better Batch (45:23.942)
Mmm.
Lauren (45:46.99)
But I was just talking about how those costs flow through to the customer as just being a pass-through, just as far as how pricing is done. But this issue, so it’s an inherent risk if we’re going to rely on third parties to supply the ingredients, that there could be something wrong with them. And in the food industry,
Better Batch (45:49.157)
Mm-hmm.
Better Batch (45:53.434)
Gotcha.
Lauren (46:11.66)
that something wrong could be something that’s kind of hard to discover. If there’s something obviously wrong with raw materials and the manufacturer goes ahead and uses them anyway, well, in my view, they should be responsible for that. If you’ve got a bunch of moldy ingredients and you use them anyway, you should be at fault. But if it’s something that’s not discoverable reasonably,
Better Batch (46:15.329)
Mm-hmm.
Lauren (46:38.668)
That’s a risk that both parties are taking and which should be shared and it doesn’t necessarily come down to who contracted for it. It should come down to, you know, if both parties did what they were supposed to do and the defect in the raw material is the reason for the non-conforming goods, well, then it’s not fair to hold the manufacturer responsible for that. The problem I have is
that I see so many contracts where the manufacturer just wants to entirely absolve itself even in the situation where it didn’t do what it was supposed to do. So let’s say we have a quality manual that says you have to have these raw materials tested or you’re in your contract with the supplier you will require it to test for
Better Batch (47:29.222)
Sure.
Lauren (47:29.23)
various food safety things, you will require a certificate of analysis, you will check that the certificate of analysis actually was received and matches the lot numbers of what you received and there’s no obvious damages, right? I see a lot of contracts where the manufacturer wants to say, no, it was a raw material problem, it’s not our fault. Even if they failed to do all of those things that they were required to do. So…
Better Batch (47:52.966)
Mm-hmm.
Lauren (47:56.568)
There’s just gotta be some common sense to it.
Better Batch (47:58.607)
Yeah. Gotcha. So that’s a section of the contract around non-conformance that you got your eyes open for.
Lauren (48:07.03)
Yeah, and so it’s in the manufacturer’s interest to look at that section and make sure that it’s not taking on responsibility for more than it can actually control itself. But it’s also not fair to just absolve yourself from any issue just because it was a third party’s ingredient, right? So, yeah.
Better Batch (48:29.286)
Makes sense. Okay, let’s get into dispute negotiation or I guess resolution. In the contract, before a dispute happens, what kind of stuff do you like to see in a contract there? And then we’ll talk about an actual dispute and get into that.
Lauren (48:50.606)
Yeah, so there’s various kinds of alternative dispute resolution mechanisms that you can put in, including just a requirement that the parties informally discuss the issue, go to mediation, go to arbitration. You can deal with all those things and I don’t have really strong preferences one way or another and I think it largely comes down to the personalities of the parties. The one single thing
Better Batch (49:17.36)
Okay.
Lauren (49:20.51)
that I think is most beneficial in motivating parties to resolve disputes is what’s called a fee shifting provision, which means whoever wins the dispute gets their attorney’s fees paid.
Better Batch (49:35.567)
Lauren (49:37.614)
because that is not our rule ordinarily in the United States. And it is a huge reason why contracts get broken, right? So if, you know, and unfortunately I’ve been in this situation representing brands where manufacturers have admittedly breached their contract, refused to fill orders.
because they made the business decision that it was better for them to fill a larger buyer’s order. Or for whatever reason, they take the gamble that they don’t have to fulfill their contractual obligations. And it could go either way, it could be the brand too. Because they’re taking the gamble that the other party’s not gonna sue them.
because it costs a lot of money to sue. Right? And so the fee shifting provision, the other, having a provision that the loser pays the other party’s attorney’s fees helps to change the incentives.
Better Batch (50:31.632)
Totally.
Better Batch (50:48.176)
That makes a lot of sense. just before we, again, we get into an example of a dispute, what about international scenarios where the brand is maybe now wanting to expand into Canada and get an additional contractor there or just maybe again into a raw material supplier? What would you look for in terms of dispute resolution there?
Lauren (51:14.22)
Yeah, well, so there are international arbitration associations. The Uniform Commercial Code rules that I’ve been talking about in the US has an international counterpart that by default applies when there is a buyer and seller across borders.
So, you know, usually it’s the same sort of situation. So, I’m only a lawyer in the US, right? So if I have a client who is negotiating with a supplier or a manufacturer in another country, I will always tell them you need to have local counsel. You need to have counsel who knows, especially if the law of that foreign jurisdiction is going to apply, they need a lawyer who knows what’s enforceable in that jurisdiction.
But the general terms, the kinds of issues that get addressed in that contract are going to be basically the same as they are in the US.
Better Batch (52:13.744)
Very cool. Okay, we’ve got our contract ready. Wonderful. It’s been a few years. Now we have a conflict to resolve. You’ve talked before about the difference of what is, what maybe a brand or manufacturer is legally entitled to versus what they can get practically. Why don’t you expand a little bit on that for us?
Lauren (52:40.076)
Yeah, so, I mean, it happens to me all the time that I have clients come to me, they’re having some issue with their manufacturer or actually helping a manufacturing client right now with an issue they’re having with one of their customers. And one of the first, so we have to understand, I need to look at the contract again and say, okay, what rights do you actually have? Push comes to shove. If we need to litigate this,
How strong of a position are you in? And, but then probably more importantly, practically what is going to be the best resolution of this? Is this a relationship that the parties are interested in continuing? It’s a really important question, right? Have things broken down so much that they just don’t trust each other anymore and so we can just blow this whole thing up? Or are we trying to repair this relationship?
Better Batch (53:25.574)
Sure.
Lauren (53:38.958)
And some kinds of disputes are just, at some level you just have to expect that problems are going to happen and it doesn’t need to be the end of the relationship. We just need to get around this bump.
Better Batch (53:56.071)
How much of your job is just marriage counseling between, you know, is it?
Lauren (53:59.694)
It’s a lot of it. It’s a lot of it. It’s a lot of trying to adjust people’s expectations and get them into that mindset because look, these are all human relationships. And especially when a brand’s been working with a manufacturer for a long time, they develop relationships with the people they interact with. so feelings can be hurt in all of this, too, right? And people and also
Better Batch (54:24.23)
Totally.
Lauren (54:28.076)
with most of my clients being smaller businesses that are still founder owned, like there’s, there can be a lot of passion about it too. And possibly blowing things out of proportion that, you know, might not end up being a big deal to your business, but you know, things just didn’t work out quite the right way, you know, so yes, a lot of the counselor role of lawyers is one that I take very seriously.
But you so you have to think about, what situation are you in? You know, practically, there might be a dispute, but you need to get a product. Like, you have orders to fill. So, how do we move forward? We might need to park the dispute for a little while, but how do we move forward to just practically make sure that if we have a concern about, you know,
potential food safety issue that we can get through that to be comfortable that we can produce again to fill orders and if there’s a legal dispute to be had maybe we deal with that later. There always has to be some attention to just those practical realities but then there’s also for resolving the dispute you might have great rights but not great facts.
Figuring out fault can be very tricky in manufacturing when you, as the brand owner, don’t have perfect information. You weren’t there to watch production. You don’t know exactly what went wrong. so investigation is often needed. And like I said before, I like to have language in the contract that requires both parties to cooperate, share information, and do investigation.
But depending on the issue, it’s often necessary for the brand to hire outside consultants to help with investigation and figure out what went wrong. So, you know, and those things can take time and you have to try to deal with the immediate practical needs too of just running a business.
Better Batch (56:43.244)
Yeah, and so thinking about quality and especially if something is a safety concern and the scenario nobody wants where somebody’s hurt, you know, by a product. So we talked about.
who’s liable, right, in the event of a lawsuit here, and that comes down to the contract, but are there any responsibilities the brand holds or the manufacturer holds that like outside of that contract, right? Like from the brand side, can I say like, well look, the contract said they were responsible for the quality and that’s it? Right, yeah.
Lauren (57:13.134)
Sure.
Lauren (57:20.524)
No. Right. So when customers, when third parties are injured, the law is available to them. They don’t care what your contract was. Right. The contracts will come into play in the dispute between the manufacturer and the brand owner over who ultimately has to pay for all of that or between their insurance companies over who’s going to pay for that.
Better Batch (57:34.011)
Right.
Better Batch (57:45.126)
Mm-hmm.
Lauren (57:51.234)
But under the law, anyone in the supply chain of a defective product that ends up injuring someone is responsible and can be held strictly liable. So the brand owner, even if they didn’t supply any of the materials, even if they didn’t design the product, even if they entirely hired this manufacturer to design the product, just by virtue of having sold that product,
Better Batch (58:03.127)
Got it.
Better Batch (58:16.464)
Sure.
Lauren (58:20.878)
can be held strictly liable, meaning it doesn’t matter what their fault was. You sold a defective product, you can bear 100 % of the liability. Now you may have a right to sue upstream suppliers to indemnify you for whatever liability you end up incurring, but the injured party doesn’t need to worry about that. Yeah.
Better Batch (58:43.014)
That’s not their problem. And then kind of related question there. We talked before about damages that might be damaged to the brand image or a lost opportunity or competitor coming in. How do those get quantified? How do you actually assign a dollar amount to those? And how does the law, how does that shake out in a practical perspective?
Lauren (59:09.39)
Yeah, so this is the kind of issue that I see most often. mean, thankfully, I guess, it’s not the most common thing that we’ve got an issue that people are potentially gonna get sick or die, right? The vast majority of the problems are there’s something not quite right about the product. It doesn’t taste right.
Better Batch (59:21.734)
Yes.
Lauren (59:32.155)
and we can’t sell it because it tastes gross. But it’s not going make anybody sick and it’s not illegal to sell. So how do we deal with that?
Better Batch (59:35.142)
Right.
Better Batch (59:41.518)
And maybe we realized after some people posted on Instagram that it was gross. Yeah. Right.
Lauren (59:46.516)
Exactly, and cost and reputational harm. That’s right. Yeah. So there’s the direct damages, which can be pretty easy to quantify. It’s, what was the cost of this product? So what was paid for the materials? What was paid to the manufacturer? What was paid to store and to ship it? The cost of buying it back, if it’s already in the marketplace and you have to buy it back from distributors and retailers, what’s the cost of that?
and the cost of administratively dealing with all of that. You can put numbers on all of that. The reputational harm, lost profits in the sense of lost opportunities can be much harder to establish and really would be very hard to prove if you had to prove it at a trial.
You would basically need to be able to show that you had concrete opportunities that were missed. Purchase orders for specific dollar amounts that you could not fill, promises to place future orders that you could not meet, that kind of thing.
Better Batch (01:00:54.182)
So it ties back to the facts thing before, kind of on the other side, right? Where it’s difficult for a brand to get facts in the facility about what went wrong, and it’s difficult for them to bring facts about actual harms that they incurred if something went wrong. That’s interesting. Cool. Well, you’ve been very generous with your time. I have maybe one last question for you, which is, do you have any maybe…
Lauren (01:01:08.301)
Yes.
Lauren (01:01:15.512)
Check.
Better Batch (01:01:21.028)
concrete stories you can share. Any messy story or train wreck that we can hear about that’s going to kind of bring the discussion to life here with a specific example that we can dig into?
Lauren (01:01:34.762)
Yeah, well, so I litigated, I don’t do much litigation anymore, try to help clients avoid litigation as much as possible, but I litigated a case on behalf of a brand owner against their former manufacturer and their former distributor. It was partly about breach of contract, but it was mostly about infringement of intellectual property. But the way that all unfolded is a kind of a good…
good lesson for it. It certainly is something I think about all the time. So it was a long term relationship between the manufacturer and the brand and it was it was falling apart and the the brand was seeing quality problems increasing and rejecting product for that reason and the manufacturer was left with
a rather large inventory of products that the brand would not take. And so it did a couple things. The manufacturer went ahead and sold that product without the brand’s authorization to the brand’s former distributor. So kind of simultaneously with all this, the brand and its distributor, it had one main distributor, broke up.
Better Batch (01:02:36.742)
Sure.
Lauren (01:02:59.798)
So we had disgruntled parties, this distributor and this manufacturer who decided to team up together and cut the brand out. no, no. So they sold the same product that had been rejected. So that was discoverable. And we talked before about how do you find out when these things happen? Well,
Better Batch (01:03:09.082)
Wow. Did they change the label? Did the manufacturer change or the same label same? my God. Okay.
Lauren (01:03:26.85)
my client found their product that they recognized as product they had rejected in the market. Yeah. And then they found that their distributor had a suspiciously very similar product all of a sudden on the market under its own brand. And was able to actually get some inside information. Again, getting back to how do you find these things out.
Better Batch (01:03:33.914)
Yeah, lot numbers.
Better Batch (01:03:45.524)
my god.
Lauren (01:03:54.862)
that they were working together. And then we brought the lawsuit and through discovery found that the main product development person at the manufacturer had been directly involved in the development of the formula for the competitor product, which was in fact extremely similar. And, you know, he didn’t think he did anything wrong. And I believe that, but he had.
and that’s what the jury found. yeah, so my client won this case.
Better Batch (01:04:29.744)
Sorry, side question there. Was that formulator then held accountable from the context of the law or it’s the company only that’s the entity at stake? Okay, got it, yeah. Got it.
Lauren (01:04:38.496)
No. It was the company. Right. Yeah, he wasn’t personally liable. yeah, so the company was held liable with a judgment against both the manufacturer and the distributor for a breach of contract that actually was a non-competition provision in the contract that the jury found was violated. Breach of confidentiality also.
misappropriation of trade secrets and trademark counterfeiting.
Better Batch (01:05:12.102)
That’s a whole list. Wow. Well, congratulations, Lauren, on the well-earned victory. Lauren, thank you so
Lauren (01:05:13.463)
Yeah.
Lauren (01:05:17.25)
Thank you. But yeah, that was an unusual circumstance where there were facts available that might not otherwise have been available.
Better Batch (01:05:25.894)
Yeah, that’s that’s great the Lauren thank you so much for joining us today. It was wonderful having you I learned a lot and I’m sure everybody else did too. So thanks for being with us. Thank you, Lauren
Lauren (01:05:37.644)
Yeah, thanks for having me. Appreciate it.