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Cell-Cultured Protein: Regulatory Considerations and Opportunities

Cell-Cultured Protein: Regulatory Considerations and Opportunities

Written By: Eve Pelonis, Natalie Rainer, and Connie Potter; Keller and Heckman, LLP

At the forefront of current food innovation and technology is the “cell-cultured protein” sector (also described as “cultured,” “cell-based,” “cultivated,” “lab-grown,” and “in vitro”). Cell-cultured protein technology essentially entails growing protein cells in a growth medium under controlled conditions. Manufacturers across the globe are rushing to culture proteins that have a taste, texture, and nutrition profile that is indistinguishable from their animal-based counterparts. With products ranging from beef to yellowtail to foie gras to lobster, the cell-cultured protein industry has the potential to revolutionize the food and agriculture industries.

While Singapore has taken an early lead in terms of regulatory approvals by becoming the first nation to approve a cell-based protein, the United States is poised to be a fertile ground for the growth of the cell-cultured protein industry. Below we discuss the future regulation of this industry in the U.S., what information will likely be required to seek regulatory approvals from the relevant regulatory agencies, and issues related to the labeling and marketing of cell-cultured proteins in the U.S.

To set the backdrop for the discussion below, we first discuss the basics of cell-based protein technology: biopsy, cell banking, growth, harvest, and food processing. After collecting a tissue sample from an animal in a biopsy, a laboratory team selects the cells with the most desirable traits and adds them to a cell bank. The selected cells are then multiplied using a bioreactor. The bioreactor uses a growth medium and controlled conditions to create an ideal environment for growing cells, which often grow attached to a scaffold or like structure that helps the cells grow in the proper pattern to create a finished product. Once a sufficient number of cells have accumulated, producers harvest the cells from the growth medium and bioreactor, either detaching the cells from the scaffold structure or removing the cells and scaffold together if the scaffold is edible. The cells are then prepared into a finished food product, often by blending the meat cells with a fat to create, for instance, a ground beef patty or meatball. With this background in mind, we discuss the regulatory framework for evaluating this technology, followed by potential labeling issues, below.

Regulatory Status of Cell-Cultured Protein Products in the United States

As the two agencies that oversee the safety of the U.S. food supply, the U.S. Food and Drug Administration (FDA) and Department of Agriculture (USDA) have both asserted regulatory authority over cell-cultured meats. Generally, USDA is responsible for oversight of meat, poultry, processed egg products, and catfish, while FDA oversees virtually all other domestic and imported foods, including all seafood products, sold in the U.S. In 2018, USDA’s Food Safety and Inspection Service (FSIS) and FDA hosted the first of several public meetings on cell-culture technology and discussed potential hazards, oversight considerations, and product labeling.

Following additional public comment periods, the agencies issued a formal interagency agreement in March 2019 that set out their respective roles in the oversight of cell-cultured meat products based on their respective strengths and expertise. Per the formal agreement, FDA will oversee the cell culturing process for meat and poultry products until the harvest stage, including cell collection and the development and maintenance of cell banks, and FDA will retain sole jurisdiction over seafood. Facilities will need to comply with FDA food safety requirements, including food facility registration, hazard analysis and risk-based preventive controls (HARPC), and current Good Manufacturing Practices (GMPs). Following harvest of cells from bioreactors, USDA assumes regulatory authority and is responsible for inspection of the meat cells and finished products derived from livestock and poultry under its authority from the Federal Meat Inspection Act and Poultry Products Inspection Act. FDA and USDA have agreed to collaborate to develop a more detailed joint framework on standard operating procedures, product labeling, and other issues. However, aside from FDA’s issuance of a Request for Information regarding the labeling of foods containing cell-cultured seafood products, as of the date of this publication, neither agency has published further details on these initiatives.

Industry is concerned by the lack of additional action on the part of FDA and USDA. In October 2020, the Alliance for Meat, Poultry, and Seafood Innovation joined the North American Meat Institute in urging FSIS to issue an Advance Notice of Proposed Rulemaking to initiate an

information collection process. The agencies have expressed a great deal of interest in collaborating with cell-cultured meat producers, but companies appear to be reluctant to participate, perhaps given the highly-confidential processes and proprietary information at stake.

Where to Go from Here?

Cell-cultured meat products could pose safety concerns unique from those in traditional meat production. In fact, the technology is so new that it remains unclear just how FDA and USDA will approach the specifics of approving cell-cultured foods. The concerns highlighted in an April 2020 report by the Government Accountability Office (GAO) included the potential use of antibiotics at the cell growth stage and potentially new safety issues unique to this new technology (e.g., residues or constituents not seen in conventional meat or other foods). We expect regulators to evaluate the safety of cell-cultured proteins from all angles: microbial contaminants, cell growth media, scaffolding ingredients, bioreactors, etc. All inputs and impurities of potential concern will be explored.

While industry’s hesitation to be among the first in line to approach regulators is understandable, stakeholders should also recognize that there is an opportunity to be among the first to drive the dialogue, to focus regulators on specific issues, and to be the first entrants into the U.S. market. The more the agencies know about the process, the better they can create a regulatory framework that will most accurately capture the way the industry operates. 

Use of the Term “Meat” and Other Labeling Concerns

Another murky legal and regulatory area facing the cell-cultured protein industry is the marketing of cell-cultured protein products and in particular the naming of such products. Some current contenders for naming cell-cultured products include terms like “clean,” which critics argue reflects a bias for or against other products and affect how they are perceived in the market.

While both USDA and FDA are aware of this labeling question, neither entity has proposed a regulatory solution. Various pieces of legislation have been introduced (but have not passed) in Congress that seek to clarify when a “meat,” “milk” or other traditional term can be used, generally restricting such term to products from traditionally-raised livestock or requiring that non-traditional products use the term “imitation” in their product identity statement. 

Perhaps because of the lack of action by Congress or federal agencies, several states—including Arkansas, Arizona, Louisiana, Mississippi, Missouri, Oklahoma, Nebraska, North Dakota, South Dakota, Texas, and Wyoming—have passed laws restricting use of the term “meat” on cell-cultured meat or plant-based meat alternative products. Many of these laws have been challenged in court by companies in the meat-alternative space that argue the laws violate the First Amendment by limiting speech and are not necessary to protect the public from potentially misleading information in addition to being overbroad and impeding competition in the marketplace. Results of the suits have varied, with some successes for the meat alternative industry. For example, while an Arkansas federal district court granted a preliminary injunction preventing enforcement of a state law that restricted the use of meat claims on plant-based products in 2019—finding that the plaintiffs were likely to prevail on their First Amendment claims, a federal district court in Oklahoma upheld a similar challenge to a state law that required a disclaimer on plant-based foods using a meat term in the product identity statement. 

* * *

Cell-cultured products will be ready to enter the market soon, and USDA and FDA will need to act quickly to create a framework that manufacturers can work with if they want to assert leadership in this space. Even if cell-cultured meat products can overcome regulatory hurdles and enter the market, several recently-published studies show consumers may not yet be willing to embrace cell-cultured meat as an alternative to traditional meat products because of concerns over taste, food safety, and lack of knowledge about the process. Manufacturers will need to focus on consumer outreach and launch education initiatives to garner an understanding of their products to be successful.

(1) Cultured Meat: Shaping the Future of Foods, Keller and Heckman LLP (Feb. 1, 2021), https://www.khlaw.com/insights/cultured-meat-shaping-future-foods. Cell-culturing technology could be an intriguing option for countries like Singapore with limited capabilities for livestock production that seek to produce more food domestically. Other countries have frameworks in place to review cell-cultured products but have not yet approved any. In the European Union, cell-cultured meat products must be assessed as a novel food by the European Food Safety Authority under Regulation (EU) 2015/2283. Australia and New Zealand’s food regulatory agency, Food Standards Australia New Zealand, has a premarket approval system in place that would similarly encompass new cell-cultured products. Cell Based Meat, Food Standards Australia New Zealand https://www.foodstandards.gov.au/consumer/generalissues/Pages/Cell-based-meat.aspx (last visited Feb. 14, 2020).

(2) U.S. Gov’t Accountability Off., GAO-20-325, Food Safety: FDA and USDA Could Strengthen Existing Efforts to Prepare for Oversight of Cell-Cultured Meat 9–11 (2020), https://www.gao.gov/assets/710/705768.pdf.

(3) Technology is still improving to create more structured meat products, such as a filet. Aleph Farms, an Israeli start-up, recently announced it had developed a ribeye steak using bioprinting technology. Aleph Farms and The Technion Reveal World’s First Cultivated Ribeye Steak, Cision PR Newswire (Feb. 9, 2021), https://www.prnewswire.com/news-releases/aleph-farms-and-the-technion-reveal-worlds-first-cultivated-ribeye-steak-301224800.html. 

(4) Recordings of each USDA-FDA Joint Public Meetings are linked at FDA’s Food Made with Cultured Animal Cells page, https://www.fda.gov/food/food-ingredients-packaging/food-made-cultured-animal-cells.

(5) Formal Agreement Between FDA and USDA Regarding Oversight of Human Food Produced Using Animal Cell Technology Derived from Cell Lines of USDA-amenable Species, FDA (March 7, 2019), https://www.fda.gov/food/domestic-interagency-agreements-food/formal-agreement-between-fda-and-usda-regarding-oversight-human-food-produced-using-animal-cell.

(6) See FDA Seeks Input on Labeling of Food Made with Cultured Seafood Cells, FDA (Oct. 6, 2020), https://www.fda.gov/food/cfsan-constituent-updates/fda-seeks-input-labeling-food-made-cultured-seafood-cells. The Senate has twice introduced bills aimed at moving the regulatory process forward by formalizing the USDA/FDA formal agreement and prescribing a timeline for the agencies to promulgate regulations. See Food Safety Modernization for Innovative Technologies Act, S. 3053, 116th Cong. (2019), https://www.congress.gov/bill/116th-congress/senate-bill/3053 (codifying the division of authority for cell-cultured products between USDA and FDA as set forth in their 2019 formal agreement, providing guidelines for inspection of cell-cultured meat production facilities, and creating labeling guidelines specific to cell-cultured meat products); Cell-Cultured Meat and Poultry Regulation Act of 2019, S. 1056, 116th Cong. (2019), https://www.congress.gov/bill/116th-congress/senate-bill/1056 (codifying the USDA/FDA 2019 formal agreement and giving the agencies eighteen months to promulgate regulations regarding inspection frequency of relevant facilities and labeling guidelines).

(7) Meat Institute and AMPS Innovation Send Joint Letter to USDA on Mandatory Labeling for Cell-Based/Cultured Meat & Poultry Products, North American Meat Institute (Oct. 19, 2020), https://www.meatinstitute.org/ht/display/ReleaseDetails/i/180624/pid/287.

(8) U.S. Gov’t Accountability Off., supra note 2, at 8.

(9) See id.

(10) The U.S. Cattlemen’s Association submitted a petition to USDA in February 2018 requesting the agency limit the term “beef” to products from traditionally-harvested livestock, and the petition received over 6000 comments, but USDA has not moved on the issue to date. See Petition for the Imposition of Beef and Meat Labeling Requirements: To Exclude Products Not Derived Directly from Animals Raised and Slaughtered from the Definition of “Beef” and “Meat”, U.S. Cattlemen’s Association (Feb. 9, 2018), https://www.fsis.usda.gov/wps/wcm/connect/e4749f95-e79a-4ba5-883b-394c8bdc97a3/18-01-Petition-US-Cattlement-Association020918.pdf?MOD=AJPERES.

(11) See, e.g., Food Safety Modernization for Innovative Technologies Act, supra note 6; Cell-Cultured Meat and Poultry Regulation Act, supra note 6; Real Marketing Edible Artificials Truthfully Act of 2019, H.R. 4881, 116th Cong., https://www.congress.gov/bill/116th-congress/house-bill/4881/all-info.

(12) Elaine Watson, ‘Highly disingenuous…’ Plant-based labeling battle heats up as more states challenge use of meat, dairy terms, Food Navigator-USA (Feb. 3, 2021), https://www.foodnavigator-usa.com/Article/2021/02/03/Highly-disingenuous-Plant-based-labeling-battle-heats-up-as-more-states-challenge-use-of-meat-dairy-terms?utm_source=newsletter_daily&utm_medium=email&utm_campaign=03-Feb-2021.

(13) Turtle Island Foods SPC v. Soman, 424 F. Supp. 3d 552, 571 (E.D. Ark. 2019) (finding a state law that prohibits plant-based meat alternative products from using terms such as “burger,” “sausage,” and “roast,” even if the product identity statement contains a disclaimer phrase such as “plant-based” or “veggie”).

(14) Upton’s Naturals Co. v. Stitt, No. CIV-20-938-F, slip op. at (W.D. Ok. Nov. 19, 2020) (finding that a law requiring disclaimer terms on plant-based meat alternatives to be at least as equally prominent in size and color as the product name was not unduly burdensome and justified in preventing consumer confusion).

(15) In study published by the University of Sydney and Curtin University, 72% of the 227 surveyed Australian customers in “Generation Z” (born between 1995 and 2010) reported perceptions of uneasiness and discomfort with cultured meat products, even if they thought the product might be a more sustainable food option than traditionally farmed meat. Diana Bogueva & Dora Marinova, Cultured Meat and Australia’s Generation Z, Frontiers in Nutrition, Sept. 2020, at 6, https://doi.org/10.3389/fnut.2020.00148. See also Jo Anderson & Chris Bryant, Messages to Overcome Naturalness Concerns in Clean Meat Acceptance: Primary Findings, Faunalytics, July 2018, Clean-Meat-Acceptance-Primary-Findings.pdf (faunalytics.org) (surveying 1,185 American adults in 2018 and finding that while the majority of those surveyed had not heard of a cell-cultured meat product before, 66% of those surveyed would be willing to try it, but using biased terminology such as “clean meat” that would have legal risk if used in the market); Nearly One in Three Consumers Willing to Eat Lab-Grown Meat, According to New Research, Surveygoo (Jan. 2018), https://surveygoo.com/portfolio/cultured-meat-survey/ (surveying 1,000 U.S. and U.K. consumers and finding 29% would be willing to eat a cell-cultured meat product described as “cultured meat”). 4839-4212-9116, v. 4

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How a Write-Up can Build-Up

How a Write-Up can Build-Up

Written by Tim Nightingale, Nightingale Resolutions

“One of the best write-up experiences I have had in a long time, and the best part was how the employee I wrote-up left the meeting in good spirits.”

Oftentimes, when we read a rule, we think about the dos and don’ts of the equation. But, there is so much more to a rule. Rules are in place for a reason; they are designed to protect us and others from harm. Well written rules, especially ones that are focused on safety, protect employees from physical harm, maintain efficiency and decrease any possible liabilities for the company all the while increasing the quality of food being produced.

Writing an employee up for not adhering to the safety rules is an important and necessary step but comes with no guarantees of changed behavior. 

Daniel shared with me about an upcoming write-up, and I invited him to use a four-step sequence designed to increase the likelihood of a behavioral change. Because of the recent supervision training that Daniel had engaged in, he was ready to grow in his supervisory role and try something different.

Step 1) Prepare a concise list of the ways this choice affects the supervisor, the employee, the other employees, and the company as a whole. When speaking with the employee begin with the following prompt:

This is the way it impacts me and others…

Step 2) Create space to listen to their story without judgment. Use the following prompt:

Can you share with me how this happened?

Step 3) After listening to the story, summarize it and invite the employee to take responsibility using this question:

As you reflect upon it is there anything you would do differently?

Step 4) Thank the employee for recognizing alternative possibilities and complete the four-step sequence with this final invitation:

Knowing how it has impacted me and others is there anything you think could or would do to correct it?

Using these four steps Daniel reported that his relationship with the employee strengthened, that the employee recognized the potential harm that could have come from his shortcuts, committed to changing his behavior, identified ways that it could be done better in the future, gladly accepted the writeup, and even generated ideas for safety practices in other areas. 

If you, or your company, is interested in further exploring the ways that the High-Performing Team Growth Cycle can invite safer, more productive, and higher quality practices with your team please reach out to me at Tim.nightingaledc@gmail.com.

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How to Work with a Food Scientist

How to Work with a Food Scientist

Written by Brian Chau, Principal Advisor at Chau Time

Hiring a food scientist or food product developer can be a daunting challenge. These are the people who transform your food idea into reality. Read more to better understand: how a food scientist within product development operates; how to use a project proposal as a tool to set expectations for your overall vision; and explore the options on how to best collaborate with a food scientist. 

Understand the Framework:

There are a lot of job titles for food scientists including: food technologist, product developer, food specialist, culinologist, culinary developer, formulator, or R&D scientist/chef. For simplicity, food scientist will imply any titles aforementioned. 

When looking for a food scientist, specify that you are looking for someone who can do product development from concept to commercialization. A food scientist with product development experience has the knowledge to help take your idea, create a prototype, and provide a formula that will be commercially viable. Some specialize in product development and not scale-up; that may be fine depending on your needs, but we will focus on a food scientist who can do both. A good food scientist should also be a good product manager, balancing different parameters that affect development from costs to scalability. Their end goal is to deliver a product formulation that is likely to be reproduced at scale while also being food safe. 

What a food scientist will help you do:

  • Make suggestions regarding how to improve the product and provide critical feedback in a very technical and structured approach
  • Tell you that a request is outside the bounds of regulations, food safety, or even scientific principles
  • Assist in the development process
  • Work with an existing manufacturing line

What a food scientist will NOT help you do:

  • Tell you how to reverse engineer intellectual property that a competitor took years to develop
  • Tell you the best flavor (as that is often very subjective and the food scientist may not fit your target audience)
  • Make the final decisions for you and your brand
  • Engineer new equipment for scaling

The first step in working with a food scientist is to co-create a project proposal to set clear expectations and understand how to go through the product development process.

The Project Proposal; Setting Expectations: 

Any good food scientist should best work within the framework you provide them. You provide the guardrails and expectations for your brand. What guides the conversation is understanding that you provide a range of values or priorities that will allow the food scientist to help you better develop the product or inform you about the issues you are to expect on the feasibility of your request. Here is a list of parameters to discuss:

Commercialization: 

Arguably one of the most crucial parameters, and is what differentiates a food scientist from a chef. How you scale up products through equipment is based on your approach and your strategy. Whether you are going to work out of a commercial kitchen or start with a contract manufacturer, a food scientist can guide you through the process. Commercialization goals should often be the first point of discussion as a food scientist will better understand how to scale the product and provide prototypes that have mimicked the commercial processes.

Product Attributes: 

Let the food scientist understand your branding by describing what kind of certifications you expect to have on your package: organic, non-GMO, Kosher, Halal, keto-friendly, high in fiber, no trans-fat, etc. What kind of ingredients do you accept or do not accept and why do you think it is important to the brand?

Packaging: 

Let the food scientist know what is your serving size, number of servings per package, and what type of package you plan to use. If you do not know these parameters, look at analogs in the market and make your best assumption.

Nutritional: 

Although this parameter overlaps with branding, the nutrition panel requires special attention. Offer a range of values for your macronutrients (ex: 8-10 grams of protein per serving size.) Based on your packaging, you can determine if you want vertical, horizontal, or linear labels. Specific nutrition claims and allergen statements will be duly noted.

Cost: 

Your cost of goods sold is important. You want to allow for a range of values here too; be specific on what you are including in your cost of goods sold by mentioning if you are referring to the case, the individual unit, or by the pallet. Look at whether you are referencing minimum order quantity or tiered pricing.

Sensory: 

Determine how many stock keeping units, what flavors, an ideal texture, and ideal look and/or color.

Shelf Life: 

Your suggestions will be an ideal range. The food scientist can tell you what to realistically expect or at least suggest a better range. Be specific on what you are looking for as there are different types of shelf-life studies between sensory, microbiological, and physical and/or chemical. 

Timeline: 

Depending on the product and what stage your business is in; you can have a quick turnaround time or anywhere between 6 and 9 months. Food scientists understand their own timelines and can either fulfill your request or tell you how reasonable or not the timeline is. 

Food scientists are not magicians. They cannot read your mind nor have a product appear out of nowhere. Product development takes time, iteration, and flexibility in making adjustments. The range of values will allow for flexibility in the development process. You don’t want to make the development so difficult that the process stalls out and your launch plans get impacted. Setting expectations allows for dialogue on what is feasible within a timely and structured manner; set priorities between parameters to make decision making easier.

When developing your project proposal, you want to understand what your needs and wants are in the negotiation table as well as the needs and wants of the prospective food scientist. You want to have an idea of how to best communicate with the food scientist and assess if there is synergy with the food scientist. Some food scientists work on a per project proposal which works out best for their project management. Others work on an hourly basis which can be valuable for quick turnaround times. Some food scientists might be open to the idea of equity and turning into a long-time partner of your organization. At the end of the day, a food scientist is a person with a particular skill set of translating science and technology of food and beverage into a commercially viable, food safe, and delicious product. Each food scientist operates under rigorous training in the sciences, but they also have their own personalities that may or may not work well with your brand. Honestly, the same principle applies to anyone you want to hire. Always be open to exploring all options before making a final decision. 

The process of working with a food scientist takes time. In building out these relationships by setting expectations and building dialogue, the path to developing your product will be less stressful. The project proposal is a tool to lay the foundation of how to work with the prospective food scientist. Remember that food scientists are people too and they cannot read your mind; they don’t understand your vision as much as you do and they have their own personalities. By understanding how they operate, you can better manage how to leverage their expertise to grow your business. You can save time in knowing you have someone who can translate the technical information for you to make a final decision. Most importantly, you managed to de-risk a critical component of your business.

Brian Chau: Food Scientist, Fungal Fanatic, and Food Systems Analyst at Chau Time. Brian is the Principal Advisor at Chau Time, his own consultation firm. He is the Co-founder of MycoKind, a food biotech company. He also sits as an advisor to food tech companies. He is working on his first book, How to Work with a Food Scientist, to help founders understand a food scientist’s capabilities and improve the understanding of how to navigate the technical world of food and beverage consumer packaged goods.

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ParityFactory

What exactly does ParityFactory do?  

ParityFactory is a food specific warehouse management (WMS) and production management system. The software is a tool for food and beverage manufacturers to manage the physical operations of their plant, and further, to automate the data management process. This is done through the use of a relatively common technology, although one that is still surprisingly underutilized in the food space: scanning and barcoding. Traditionally, food and beverage manufacturers have managed their tracing data and inventory balances with paper or spreadsheets.  

In a ParityFactory plant, raw materials are tagged with a barcode the moment they enter the facility. With just a simple barcode, the system can track the material at every step of production, whether it’s moved to storage, processed into finished goods, or shipped out. This generates a real-time view of all the inventory on hand, a comprehensive tracing chain, and makes detailed, accurate production planning possible. Customers find they have dramatically reduced inventory variances and a more efficient manufacturing process. 

History 

ParityFactory was founded in Seattle, WA over 30 years ago, but if you took a look at the company today you’d never know it. Despite its long history in food and beverage, the company has more the attitude of a new and growing software firm, and that’s because the last few years have been full of huge changes for the once tiny business. 

Decades ago, the Seattle-based company designed accounting systems for Alaskan fish processors. However, as Tyler Marshall, President at ParityFactory says, “Working in the food and beverage space for so long, we came to realize that there were plenty of companies that were doing accounting well, but very few who offered a comprehensive solution for managing inventory and tracing.” With this realization, the company pivoted towards designing solutions to manage the physical operations on the plant floor roughly 7 years ago. The result was their current offering and namesake of the organization, ParityFactory. 

Growth and Future Plans 

The company’s current CEO, Sean Clemmons, took his position in January 2019 and since then the company has accelerated its growth and added new clients across North America. That growth has brought opportunities to invest in the creation of new and exciting solutions to problems faced in the food and beverage industry. During the two years under Sean’s leadership, ParityFactory has released several extensions to its core platform.  

In 2020 alone, numerous new products have been launched under the ParityFactory brand, including a suite of tools aimed to help manufacturers who work directly with growers receive their product in bulk, automate payment calculation, and get quicker insight into grading and quality data. The company released their latest offering, the ParityFactory inventory Portal, in late 2020. Designed for those who run third-party logistics operations, the Inventory Portal allows users to provide their clients direct access into how much inventory they have stored, with data automatically pulled from the ParityFactory core platform. 

Investment into new products is slated to continue well into 2021 and beyond, as Sean Clemmons puts it, “Many of the challenges processors face are consistent across the industry, but every operation is a little different. With each new client we sign, we discover new problems to solve and new possibilities for innovation.” 
For more information on the ParityFactory platform, visit their website at www.parityfactory.com or reach out to parityfactory@paritycorp.com

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Industry Update: FDA Announces FSMA Food Traceability Proposed Rule

Written by Jon Kimble, Originally Published in Industry Updates

On September 21, 2020, the Food and Drug Administration announced the release of a draft rule for the food industry, “Requirements for Additional Traceability Records for Certain Foods” (also referred to as the Food Traceability Proposed Rule). This is one of the last remaining elements of the FDA’s Food Safety Modernization Act (FSMA), assigned to the FDA by congressional mandate. This draft rule requires that the FDA implement additional traceability expectations for the food industry based on risk.  This new rule is being billed by the FDA as part of its overall “Blueprint for the New Era of Smarter Food Safety”, which outlines several key elements, including enhanced traceability.

Our overall impression is that our customers, such as yourself, are already largely in compliance with the requirements as they’re currently written, perhaps with just a few minor gaps. The FDA has provided more information about the rule on their website. 

7 Key Takeaways Regarding This Rule:

  1. This is a draft rule. Now is the time to submit any feedback or concerns.
  2. Its scope is limited.  It pertains specifically to those who manufacture, process, pack, or hold specific types of foods on the FDA’s “Food Traceability List” (FTL).
  3. It requires tracking specific activities. The FDA refers to these as “Critical Tracking Events” (CTEs), and they include: growing, receiving, transforming, creating, and shipping.
  4. It requires tracking specific data. The FDA calls these “Key Data Elements” (KDEs), and they must be tracked for each Critical Tracking Event.  They include information such as grower location identifier; lot numbers and other traceability identifiers; business names, numbers, and points of contact; quantities and units of measure; and other key elements.
  5. It requires farms to communicate some basic information to customers. This includes location identifiers for the growing area and each location the product was processed or stored at, including business names and key contacts.
  6. The record format is flexible. Under the rule, the FDA allows either paper or electronic records.  However, it’s worth noting that, especially for finished companies who produce ready-to-eat foods, the FDA has made it clear that there is a preference for electronic records, where necessary to facilitate traceability (see the next requirement).
  7. Records must be readily available. The FDA requires that companies be able to provide a sortable electronic spreadsheet to the FDA containing any affected products, within 24 hours of any FDA request, to assist in the investigation of any outbreak or recall. 

If you’d like a member of our team to help you conduct an assessment of your company’s traceability programs, we’re ready to assist you, virtually or on-site! Reach out to us at foodsafety@safefoodalliance.com.

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DOE Revisions to Manufacturing Regulations

DOE Proposes Revisions to Enforcement Regulations for Consumer Products and Commercial and Industrial Equipment

Written by JC Walker of Keller and Heckman, LLP

Date: Sep 10, 2020

In a notice published on August 31, 2020, the U.S. Department of Energy (“DOE” or the “Department”) proposed revisions to its existing enforcement regulations for certain consumer products and commercial and industrial equipment.[1] The proposed revisions are intended to further align the regulations with the Energy Policy and Conservation Act of 1975 (“EPCA”) and provide additional clarity and transparency about DOE’s enforcement process. Manufacturers of covered products should review this proposal very carefully. While certain proposed changes may provide some reduction in administrative overhead, the practical outcome may be to increase a company’s liability exposure during enforcement investigations as we discuss below.

A. Electric Motor Enforcement Procedures

Currently, the enforcement provisions for electric motors are promulgated separately at Part 431, Subpart U. According to DOE, the enforcement process for other covered products at Part 429 is much more developed. Thus, the Department believes that harmonizing electric motor enforcement with the procedures for all other covered products should afford electric motor manufacturers greater clarity. This is by no means an administrative change as the proposal could pose significant liability implications for electric motor manufacturers.

First, enforcement testing for motors could only be conducted by a laboratory that is accredited to the International Organization for Standardization (“ISO”)/International Electrotechnical Commission (“IEC”) standard 17025:2005(E), General requirements for the competence of testing and calibration laboratories. In contrast, Part 431 currently requires testing by National Institute of Standards and Technology/National Voluntary Laboratory Accreditation Program (“NIST/NVLAP”) accredited laboratories.[2] The proposed change should not be significant as NVLAP incorporates the ISO/IEC 17025 standard.[3] As both NVLAP and ISO/IEC 17025 have moved to the most recent version of the standard ISO/IEC 17025:2017, however, it is not clear whether DOE’s prescription of ISO/IEC 17025:2005 narrows the available pool of test laboratories.

More importantly, the proposal would reduce a company’s ability to challenge DOE’s enforcement testing by eliminating 10 C.F.R. § 431.383(f), which allows electric motor manufacturers to request additional DOE testing after DOE makes a noncompliance determination. Under the proposal, it appears that DOE would conduct additional sampling only at its discretion and if a unit in the initial sample is proven to have been defective.

Moving electric motor enforcement to Part 429 will also increase the number of possible causes of action available to DOE, including: failure to test a product in accordance with the applicable test requirements; use of controls or features to circumvent the test procedure and produce test results unrepresentative of the product’s actual energy performance; and knowing misrepresentation by certifying an energy use or efficiency that is not supported by test data.[4]

B. Enforcement of Design Standards

DOE also is proposing to clarify that “design requirements” are energy conservation standards subject to DOE investigation and enforcement, as specified by the EPCA.[5] According to DOE, the evaluation of only a single test unit would be sufficient to demonstrate that basic models in the preceding categories are non-compliant:

DOE’s proposal explicitly states that a test unit of a basic model subject to a design requirement may be selected for enforcement testing or examination. In such an instance, DOE will make a determination of noncompliance for the basic model based on an examination of whether a single unit of the basic model fails to comply with the applicable design requirements, as the standard applies to a design-not the measured performance of individual units-such that one unit can demonstrate noncompliance.[6]

Based on our cursory review, the following covered products are subject to design requirements:

Water boilers                                                  Torchieres

Conventional cooking tops                        Commercial unit heaters

Conventional ovens                                   Walk-in coolers and walk-in freezers

Ceiling fans                                                    Residential boilers

Ceiling fan light kits

Manufacturers of these products would not only be subject to enforcement for noncompliance with the numerical energy performance, but also if a single unit fails to meet an applicable design standard. Examples of such failures could include failing to use a triple pane glass door with either heat-reflective treated glass or gas fill in a walk-in freezer as required by 10 C.F.R. § 431.306(b)(1).

C. Use of Third-Party or Competitor Data for Enforcement

Under its current enforcement regulations, DOE may request any relevant information from manufacturers to assist in determining whether their covered products comply with applicable energy conservation standards.[7] The Department is proposing to allow use of compliance information from other parties, including but not limited to, third-party certification programs or other manufacturers with independent test data, for enforcement purposes. According to the Department:

This proposal ensures that DOE can enforce its regulations in instances where relevant information is retained by parties other than the manufacturer. Parties other than the manufacturer often conduct independent testing to determine compliance with applicable standards. In such instances, DOE’s ability to retrieve that test information could save government testing resources, and ensure that DOE can enforce in a timely manner, which will further DOE’s goals of maintaining a level playing field for all parties and encouraging compliance.[8]

Contrary to DOE’s stated intent, the current proposal may act to chill competitor complaints to the Department. In our experience, manufacturers will often submit test data to DOE to initiate an investigation of a potentially noncompliant competing product. This information is often provided on a confidential basis to avoid commercial disputes with a competitor, because the testing was done in-house rather than by an accredited laboratory, or for a variety of other reasons. The expectation is that DOE will pursue its own testing to support any subsequent enforcement action.

It is difficult to understand, however, how DOE could bring an enforcement action based on confidential information without triggering due process concerns. Thus, any final regulations must address DOE’s procedures for “retrieving” data from third parties; how the Department intends to proceed if complainants request confidentiality; and the likelihood that it will investigate complaints in the absence of such data.

The DOE’s proposal to retrieve test data from third-party certification programs may also raise concerns. Data submitted in support of certification is compliance data and should be available to the DOE. That said, manufacturers should review the terms of their certification program agreements to understand how these organizations will handle their certification data, whether notice will be provided before release to DOE or another agency, and the protections, if any, afforded to non-certification data.

D. Other Changes

The notice proposes several other clarifications and administrative revisions, including:

Adding a process to petition for reexamination of a pending noncompliance determination.[9] As proposed, the process would require that DOE provide the manufacturer with a letter of intent at least 30 days prior to issuing a notice of noncompliance determination. The manufacturer would then have 30 days from the issuance of the letter to file a petition for reexamination that meets certain information requirements (e.g., sets out the material issue(s) with the Department’s assessment or testing, provides complete test reports demonstrating compliance with the applicable standard, etc.). Upon review, DOE may modify or leave its pending determination unchanged.

Providing more specificity and transparency when issuing test notices.[10] In addition to the basic model number, DOE proposes to include characteristics or specifications of subject model(s) (e.g., individual model numbers, serial numbers, manufacturer date ranges or locations) when issuing test notices. The revisions would also require manufacturers to inform the Department if the requested units are unavailable, along with details regarding the unavailability of the units and any similar available units. To that end, the Department proposes to add a provision reserving DOE’s ability to make a noncompliance determination based on a reduced sample size in limited circumstances (e.g., when the basic model is subject to design requirements or test units are unavailable).[11]

Allowing a finding of noncompliance based on a single assessment test where efficiency is at least 25% worse than the applicable standard.[12] According to DOE, the new process would avoid the expenditure of unnecessary resources by foregoing the typical enforcement testing process.

Eliminating the requirement to notify customers of a determination of noncompliance.[13] To reduce the burden on manufacturers, the Department proposes to eliminate the provision at 10 C.F.R. § 429.114(a)(2), which requires that immediate written notice of a determination of noncompliance be provided to all persons to whom the manufacturer has distributed units of the basic model since the last compliance determination.

Comments on the proposal will be accepted until October 30, 2020. For any questions on this notice of proposed rulemaking or energy efficiency requirements in general, please contact us.

[1] Enforcement for Consumer Products and Commercial and Industrial Equipment, 85 Fed. Reg. 53,691 (Aug. 31, 2020).

[2] Or a laboratory accreditation body with a mutual recognition arrangement with NIST/NVLAP; 10 C.F.R. § 431.18.

[3]See generally NIST Handbook 150:2020, NVLAP Procedures and General Requirements, available from https://www.nist.gov/nvlap/publications-and-forms/nvlap-handbooks-and-lab-bulletins.

[4] 85 Fed. Reg. 53,694.

[5] See 42 U.S.C. § 6291(6).

[6] 85 Fed. Reg. 53,694.

[7]10 C.F.R. § 429.106(b). This includes covered products or equipment that are imported into the United States, which are also subject to the applicable provisions of 40 C.F.R. Part 429, 430, and 431. 10 C.F.R. § 429.5.

[8] 85 Fed. Reg. 53,694.

[9]Id. at 53,696.

[10] Id. at 53,694.

[11] See Id. at 53,705 (proposed as 10 C.F.R. § 429.111(a)(8)).

[12] Id. at 53,696.

[13] Id.

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California Manufacturing Technology Consulting (CMTC) California

Written by: Craig Scharton, CMTC Solutions

The first two questions that I am often asked are:

1) What is CMTC?

CMTC is a 501(c)3 nonprofit organization. We are primarily funded through the U.S. Department of Commerce and the State of California. We are part of a national network of organizations (Manufacturing Extension Partnership) that is focused on helping manufacturers. CMTC is the entity that is focused on connecting California’s manufacturers to resources.
President Reagan and Senator Hollings helped to create this network because they found that there were many programs to help the manufacturing sector, but few knew that these programs existed. Just as there are extension agents in agriculture, we are client advisors for small to medium-sized manufacturers.

2) What is a manufacturer?

People often imagine big industrial buildings with welders and conveyor belts. But really, a manufacturer is a business that makes a product. Wineries and breweries are manufacturers. An almond farmer who packages her own seasoned nuts is a manufacturer. We have clients who make a product in their garage or kitchen and we have clients who make parts for fighter jets. Sometimes we even have clients who didn’t know that they were a manufacturer like a restaurant that makes salsa or salad dressing as a side business.
The first thing that I recommend to any manufacturer is to set up an Assessment and a Plan of Action with one of our two incredible, local experts. The assessment takes 1-2 hours of the business’ time and is free. One of our resources has a financial background and the other has an operational background. The manufacturer can choose whichever they think would be the most helpful. Our financial expert is a C.P.A who is also a Chief Financial Officer for several companies. The Operations expert has run manufacturing plants around the world and is a mechanical engineer, with an M.B.A. in Management and is a Black Belt in Lean manufacturing. We are very fortunate to have this level of expertise available to help our local manufacturers.

Regions of Service

My region is the Central Valley, from Tulare County up to San Joaquin County, and over to the Nevada state line. I have experienced colleagues that can help if you are in another part of the state, I’m always happy to make the introduction. It’s a great group of people who, like me, really enjoy helping our businesses.

Beyond the 60+ people who work for CMTC, we also have over 150 trainers and consultants who also help our manufacturing clients. We’ve added quite a few in the Central Valley so that we can pair local professionals with our local businesses. As I look up at my dry erase board, I see local companies who will be using local consultants and trainers to help with: ISO 9001 certification, High Performing Teams training, English as a Second Language, Lean Manufacturing, SQF/HACCP for food safety and audits, SolidWorks training, and forklift safety. Those are just the ones on my current To Do list!

In Fresno County, I work very closely with the Fresno Regional Workforce Development Board (FRWDB). The FRWDB has prioritized training for manufacturing businesses. This business-focused organization works closely with our clients to help their businesses to grow by helping to underwrite the cost of improving the skills of their employees. This is a huge win for our community because the businesses are stronger, and their employees have more skills that can help them to grow in their careers.

CMTC also has formal partnerships with two outstanding local organizations, the San Joaquin Valley Manufacturing Alliance and the Water, Energy, Technology (WET) Center at Fresno State. The SJVMA and WET Center provide many great resources for their respective (and often overlapping) members. We work with many other agencies from EDCs to community colleges, the SBDC and city and county economic development departments.

While I like to find resources to pay for some or all of the training or consulting costs for a client (depending on the business location, size and sector) I often provide other services to help our businesses. I helped one client to find a lender to help them to buy their building. I’ve helped others by connecting them to a consultant to help them get a Research and Development Tax Credit. Often I help by connecting two local manufacturers who can help each other meet supply chain needs locally.

Many manufacturers also use our services as a neutral, third party provider. We can analyze a business’ cyber security needs or which types of technology will help them to become more automated. We often evaluate which type of ERP system a manufacturer needs. Because we aren’t selling a product or software, we can assess a company’s needs and make recommendations and present options.

Love of Local


Hopefully, you can read my enthusiasm for helping our local businesses. It’s been a passion of mine for over three decades. Many of the problems that we face in our region are the result of the disconnection between the resources and the need. Businesses don’t have the time to start calling government agencies to find out which programs might be helpful to them. The programs are often buried deep inside a division within an agency within a department. Even if the business owner managed to find the programs, they wouldn’t know how to find out which was the right one for their needs. This is where I come in. I learn about the resources so a business can find out which programs fit their needs.

Business leaders are often the type of people who like to forge ahead and solve every problem on their own. They often forget to look around to see how many resources there are to help them, their business, and their employees. But it is important to use every resource to help your business to grow. There are many forces making it difficult to operate a business, so it is imperative to take advantage of the programs and services that are here to help. These resources come and go, so stay informed so that you can use them while they are available and find out what the next opportunities are on the horizon.

Finally, local businesses should be supporting other local businesses, if we want our economy to grow. Consider using a local bank. Look around to see if you could source parts or materials in our region. Use a local web designer or mechanical engineer (we have both). Attend some local trade meetings to find out what other manufacturers are doing, so maybe you could connect them to a customer, too. Find local wine or chocolate to give as gifts to your clients. I believe that we have all of the resources that we need, it’s up to us to figure out how to make them work for us effectively.


I’m happy to schedule a zoom meeting with any manufacturers in our region to see if CMTC can be helpful. Please send an email to me at cscharton@cmtc.com

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Managing the Coming Clash Between Solar Development and Environmental Protection

Written by Robert Selna, Selna Partners, LLP

Solar panels continue to drop in price, generate power more efficiently, and attract private developers who consider solar a good investment and pro-environment. As a result, it appears likely that the State of California will reach its goal of generating sixty percent of its electricity with renewable energy sources by 2030. 

It is also clear that large solar projects that generate the most power at the lowest price, require large amounts of flat, undeveloped property proximate to power substations. In California, the property meeting this criteria tends to be agricultural.  This reality sets the stage for conflicts between groups that share similar goals: on one hand are renewable energy proponents hoping to reduce the state’s reliance on greenhouse gas-emitting energy sources; the other is environmentalists and open space advocates, including those concerned about the state’s declining acreage of farmland and the native wildlife habitats and species that live and around it. 

The Nature Conservancy estimates that California will need between 1.6 and 3.1 million acres of solar and wind facilities by 2050 to decarbonize the electricity system and support a complete transition to green energy. The Nature Conservancy has noted that “with so much development on the horizon, it’s imperative that energy planners incorporate impacts to nature when making decisions about a clean energy future.”

Some of California’s local jurisdictions that feature large swaths of agricultural land and open space have started to address the inevitable clash between renewable energy development and nature conservation. They have identified areas for solar development where there is “least conflict” with productive farmland and imperiled plants, animals and natural habitats. For example, Santa Clara and Contra Costa Counites have conducted studies and UC Berkeley completed a similar analysis focused on the San Joaquin Valley. 

The counties that are not working to address the coming conflicts associated with the expected boost in solar development are doing so at their own peril and, instead, may see such disputes resolved by the courts, potentially at a high cost to taxpayers. 

There are a few common sense actions that county governments can take to help avoid clashes, but local government agencies and elected officials must give the actions priority to get them done in a timely fashion, as the demand for solar land rapidly expands. Examples include 1) completing solar mapping studies to understand least conflict areas; 2) executing general plan and zoning code amendments and related environmental reviews to provide solar developers and the public with more certainty about where large solar installations may be sited; and 3) educating agencies and the public about renewable energy, the state’s goals and the best approaches to achieving such aspirations. 

I have seen firsthand how the failure to prepare for the inevitable tension between solar development and land preservation can lead to bad results. My law firm currently represents an association of 250 property owners, cattle ranchers, environmentalist and proponents of good government called Save North Livermore Valley (“SNLV”). 

For more than six months, SNLV has been at odds Alameda County over the County’s decision to process solar development permit in eastern Alameda County. The developer proposes to place approximately 460 acres of ground-mounted solar panel facilities and storage batteries in North Livermore Valley, situated between the City of Livermore and the Altamont Pass. 

Alameda County features hundreds of thousands of agriculture acres on its east side and provides an example of a jurisdiction that has publicly committed to the laudable goal of providing more renewable energy for residents and contributing to the state’s renewable energy goals. Unfortunately, the County essentially ignored the coming battles that pit solar developers against farmers and environmentalists. The county is a cautionary tale for counties that fail to address the tension that occurs when solar companies set their sites on developing ag land and open spaces. 

One County’s Commitment to Renewable Energy 

The tension could have been avoided. A decade ago, Alameda County started down a path to provide clear guidance to solar developers and conservationists, but never completed the work. Now, the 460-acre project, called, Aramis, is causing the very tension the County sought to once avoid. That’s because the project is proposed for North Livermore Valley, which has long been the site of ranchland and is subject to a voter initiative intended to protect agricultural land, wildlife habitats, watersheds, “and the beautiful open space of Alameda County from excessive, badly located and harmful development.” 

The County’s support for solar originated in 2009. That’s when Alameda County Supervisor Scott Haggerty spearheaded the start of East Bay Community Energy (“EBCE”), a non-profit that contracts with clean energy projects to provide more renewable power for residents of the East Bay. Haggerty represents East County, which includes Livermore and is, by far, the County’s most agricultural area. According to County staff reports, “EBCE has brought greater levels of renewable energy at competitive prices to residents of Alameda County….A major goal of the EBCE is to encourage and invest in renewable energy, including solar at the local level.” (citation?)

In East Alameda County between 2008-2012, developers proposed two utility-scale solar projects on land historically used for cattle grazing before the County completed studies on the best locations to site large solar facilities in east county. In 2012, the Supervisors instructed to the County’s planning staff to complete the studies and a general plan amendment before any new large-scale solar projects were approved in east county. Unfortunately, that direction appears to have been ignored. 

Common Sense Steps Can Avoid Conflict

A general plan is county’s most fundamental planning document. In Alameda County, a general plan amendment could have clarified locations where solar installations were allowed and provided a map to reflect the locations. For instance, a general plan might have permitted large solar installations in East County except for in areas identified as scenic routes, or where wineries concentrated vineyard land. 

Zoning divides counties into districts and applies different regulations in each district. Within the districts, zoning dictates the specific uses that are allowed and dictates the scale and scope of those uses. Zoning also includes the uses that are permitted as of right, or conditionally permitted – meaning permitted if they meet certain conditions. In Alameda County, a zoning amendment regarding large-scale solar installations might have limited the contiguous acreage of solar facilities so that they did not occupy a disproportionate amount of land. An amendment also could have dictated that solar projects compensate for any land they occupy by preserving an equal amount of rangeland elsewhere. 

Under the California Environmental Quality Act, general plan and zoning amendments require an environmental impact report (“EIR”). An EIR is intended to help understand the ecological implications of the proposed amendments.  As an example, if a proposed zoning amendment allowed utility-scale solar in an area known for migrating species, the EIR would alert the county and the county might modify the locations to avoid the conflict. 

Mapping studies indicating solar installation locations least likely to impacts the environment have helped counties amend their general plans and zoning districts. In one example, UC Berkeley completed a mapping study throughout the San Joaquin Valley using four mapping components:  1)  Areas that allow for the movement of species; 2) Occupied or potential rare species and communities; 3) Conservation lands that already prevent or restrict development such as dedicated conservation lands and federally-designated critical habitat; and  4) Expertly-identified conservation priority areas.

Finally, given the State of California’s necessary efforts to transition to renewable energy and a corresponding interest from developers to install solar facilities on California ag land, governmental agencies’ decisions must be well-informed. It is not enough for a county agency to know that more solar is needed. A more nuanced understanding is required to evaluate circumstances in which renewable energy development goals conflict with other environmental priorities. 

The Transition to Renewable Energy 

Currently California is transitioning from fossil fuel power sources to renewables including solar, but the transition cannot happen overnight. To be a truly reliable source of energy, solar requires battery storage, otherwise the state’s power grid loses its renewable power at night. Battery storage technology needs more work to work effectively for the grid, but advances are being made. 

Since 2015, California’s solar generation has increased by 350% and accounts for fifty percent of all green energy sources in the state. In recent years, California has actually produced too much solar power during the day and has had to “curtail” the solar power by off-loading it to other states. 

State statistics show that more solar is on the way. According to the California Energy Commission, 9,460 solar facility projects have obtained permits but have not yet completed construction. Many of those are expected to come online in the next five years. As a result, the nascent clash between solar developers and those advocating to preserve agriculture land and open space is only expected to increase. 

County governments can better manage and possibly avoid some of these disputes with timely least-conflict studies and mapping, land use amendments and education. They should not delay!

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Why Safety Should be Proactive Instead of Reactive

James Boretti, CSP, President / CEO of Boretti, Inc.

In today’s COVID-19 environment, people may think this isn’t a great statement to make: having safety makes sense. In the safety profession, the following question has always been a challenge: “Why safety?”

There are many reasons why organizations embrace safety, such as complying with OSHA regulations, minimizing the impact of insurance rates, reducing injuries, or minimizing risk exposures. And on the surface, it appears that most companies pay attention to safety to avoid something: recurrence of a recent serious injury; OSHA penalties; high insurance rates. While all of these are good reasons, these actions are reactions: in each case safety isn’t planned, it’s a reaction to something that happens.

In the past, the assumed answer is “because it’s required;” however, today we see safety is all about creating confidence: confidence that our food supply is safe, confidence that our workplaces are safe to work in, and confidence that it’s safe for customers to return. And that confidence comes with success. A safe environment allows customers to feel confident to visit and buy from you, talent to seek employment at your organization and remain, and stability for the organization. Over 30 years of experience has shown that to build this confidence, businesses must follow five steps to embrace safety.

5 Basic Steps to Embrace Safety

  1. Assess

Ask yourself “What is of risk to the organization, and how can I possibly control it?” You’d be amazed at all the wasted effort you’ll find if you spend a little time asking these questions. Knowing these risks helps you know how to address them.

OSHA lists absenteeism, change in commerce patterns, and interrupted supply chain are potential risks to businesses from the COVID-19 pandemic. And, if we are to assess for risk, OSHA’s assessment for risk fall into three major categories:

  • Job duties involving close (within 6 feet), frequent contact with the public, customers or workers, especially contact with infected people or other sources of the virus.
  • Social conditions in the population area have ongoing transmission.
  • Traveling to areas that are highly affected by COVID-19.

Considerations would be given to proximity (closeness to others); frequently touched surfaces that may be found in a common area such as a lobby, customer waiting room, breakrooms, restrooms, and time clocks; and layouts such as open spaced work areas and airflow.

  1. Process –

Once you know risks you need to address, you can know how you’re going to control them, and you’ll want to put them into a written process. OSHA has outlined a process to reduce exposure risk for employees by addressing both workplace-specific and non-occupational risk factors to determine the best prevention measures for your operation. As always, ensure you are following federal, state, local, tribal and/or territorial recommendations

Applying this to the COVID-19 situation, capturing the efforts you make into a plan ensures your efforts are on track and documented, and that they are working well. The key is to ensure everyone knows who is going to do what by when. Elements of a process would include the following:

ElementsExpectations, Better Practices, Application
Responsibilities / RolesLists who is responsible for what by when
AccessWho can access the facility / job-site /  when (i.e., employees, contractors, visitors), working from home, screenings, PPE and distancing expectations, etc.
CleaningHow is this done, frequency, what surfaces (hard vs. porous), post-COVID suspected or confirmed, etc.
PrecautionsSocial distancing, PPE, washing / sanitizing, staggered shifts and breaks, etc.
TravelIf necessary / approved, precautions to take, etc.
Carpooling / Vanpooling / RidesharingIf necessary, cleaning and disinfecting after each ride, self-screening, barriers / PPE, ventilation
ResourcesItems the company will provide to employees, customers (within its ability)
CommunicationFor confidence on cleaning, following suspected / confirmed COVID cases, etc.
  1. Educate –

Educating and including your people in the process, including the risks being controlled and why, will help them engage and contribute to the success, making it more valuable.

Applying this to the COVID-19 situation, education would cover the following elements at a minimum: 

  • What COVID is and How it Transmits: this provides the “why” we are doing what we’re doing.
  • What to do:
    • Cover coughs and sneezes
    • Wash hands
    • Wear face coverings
    • Frequent cleaning
    • Stay home if sick / exposure
    • What’s changed in the workplace
    • Your program / what’s expected
  1. Implement –

Implement the process and watch it take off. For the current COVID-19 pandemic, the Centers for Disease Control (CDC) and OSHA suggest implementing frequent handwashing and shifting policies or practices to include more flexible worksites and work hours. Workplace changes such as workstation distancing or use of barriers, and one single point for entry and a separate single point for exit are also some ideas to consider COVID prevention.

  1. Investigate –

Not everything will be perfect the first time: if something goes wrong, investigate to find out why, then make a change to improve the process.

OSHA uses the following investigation technique for a COVID situation to determine if it is possibly work related or not.

  • COVID-19 case is likely work-related if:
    • Several cases develop among workers who work closely together
    • Contracted shortly after lengthy, close exposure to customer or coworker who has a confirmed case of COVID-19
    • Job duties include frequent, close exposure to the general public in a locality with ongoing community transmission
  • COVID-19 case is likely NOT work-related if:
    • The person is the only worker to contract COVID-19 in vicinity and job duties do not include having frequent contact with the general public, regardless of the rate of community spread.
    • Outside the workplace, the worker closely and frequently associates with someone who (1) has COVID-19; (2) is not a coworker, and (3) exposes the employee during period in which the individual is likely infectious

The answers to the investigation would trigger immediate actions to do with regard to communication, quarantining and cleaning, and how the process can be improved, if needed.

For additional resources regarding COVID, visit the following links:

OSHA Risk & Hazard Recognition: https://www.osha.gov/SLTC/covid-19/hazardrecognition.html#low_risk

OSHA Return to Work Document: https://www.osha.gov/Publications/OSHA4045.pdf

Centers for Disease Control (CDC): https://www.cdc.gov/coronavirus/2019-nCoV/index.html

American Society of Safety Professionals: https://www.assp.org/resources/covid-19/latest-resources

These five simple steps will create the confidence needed for success. Contact a safety professional to provide you guidance and support.

About the Author: James Boretti is the President and founder of Boretti, Inc. James has over thirty years of environmental, health and safety management and consultation experience. He is a Certified Safety Professional, a prestigious designation he has held for over 25 years. You can contact him at (559) 372-7545 or james@borettiinc.com.

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The Complexities of Enforcing Cannabis Contracts in Federal Court

By Robert Selna, 
Selna Partners, LLP

Since California legalized commercial cannabis in 2018, the expected “green rush” has fallen short of expectations. Forecasts of enormous profits have given way to the reality that the state’s cannabis industry is confronted by unique challenges, which have curtailed revenue and caused many businesses to close. A well-documented short list of industry hurdles includes disproportionately high taxes, a shortage of local business permits, competition from a thriving black market, and commercial banking limitations.

A lesser known, but equally important hurdle is the difficulty of enforcing cannabis industry contracts in federal court. As an alternative to state court, federal court is attractive for many reasons, including generally faster case resolutions, judges who never face election, and more exacting expert evidence standards. The federal court option took on new relevance in March when state courts began to close due to COVID-19. Superior courts recently began to hear cases remotely, but the courts’ backlog is enormous and is expected to stay that way for some time. 

For the cannabis industry, enforcing a cannabis industry contract in federal court – even when a defendant contractor has clearly violated an agreement – is not simple. Instead, it is nuanced, and depending on the specifics of the subject matter in dispute, may not succeed, even though the party seeking to enforce the contract may be in the right. 

The well-established California cannabis industry hurdles noted above, and challenges associated with enforcing cannabis contracts in federal court, have collided in a single case that our law firm, Selna Partners LLP, filed in the San Francisco-based federal Northern District court. 

California Cannabis Industry Hurdles

We represent a large, vertically-integrated California cannabis company that cultivates and distributes cannabis, and sells products at retail outlets in several cities. The company, which started its operations in 2010 under non-profit medical regulations in the existence at the time, is now fully-licensed and compliant under California law. As such, it has been hit hard by regulations and taxes. The company pays a city gross receipts tax, and state excise, sale and cultivation taxes, making the company’s effective tax rate approximately 40 percent. In addition, the company’s ability to expand has been limited by the fact that only one-third of California’s 540 cities and counties permit commercial cannabis (state law dictates that personal use is legal everywhere). An added dilemma is competition from the black market, which is estimated to sell eighty-percent (80%) of the cannabis cultivated in California. 

Adding to the companies’ woes is the absence of standardized commercial banking for the California cannabis industry. Despite our client’s compliance with all state and local laws, and a business model that has had more success than many, through 2019, the company had not been able to maintain a banking relationship with a traditional bank or credit union. This forced our client to hold revenues in a steel vault and deliver cash tax payments to government agencies in armored cars, among other workarounds. The company also often paid vendors and employees in cash. 

Cannabis Industry Banking is in Short Supply

The reason for the traditional banking shortage is straightforward:  marijuana (the federal government’s term for cannabis) is listed as a controlled substance, and is therefore, illegal to grow, import, possess, use, or distribute in the U.S., despite the fact that 43 states have legalized medical and/or adult-use cannabis. Meanwhile, the vast majority of banks and credit unions are regulated by the federal government.

Recognizing the expansion of state-legal cannabis, the U.S. Treasury Department, has issued guidance for banks that want to serve cannabis companies while avoiding prosecution. The guidance directs banks to provide on-going “suspicious activity” reports to the Treasury Department regarding the practices of their cannabis clients and whether they appear to comply with state laws, or instead, are illegal operators. The number of banks and credit unions willing to take on these responsibilities is incrementally increasing, but the conventional wisdom is that there still are only 300-400 such institutions in the U.S. 

In 2019, our client sought a solution and was introduced to a payment processor in Seattle, Washington, where, similar to California, commercial cannabis is regulated. A contract was signed for executing payments to vendors, employees and the State of California taxing authority and our client deposited approximately $8 million with the Seattle-based payment processor. 

Things went as planned for several months, but then the payment processor began delaying payments or failing to make them altogether. Lacking a viable alternative, the cannabis company stuck with the payment processor despite its poor service. The company hit a tipping point when the processor claimed to have made a $1.2 million tax payment to the California Department of Tax and Fee Administration (CDTFA), which the CDTFA documented that it never received. 

Confronted with proof from the CDTFA that the $1.2 million never arrived, the processor vowed to clear up the problem, but failed to do so. Our client finally demanded its remaining $3 million (including the $1.2 million returned). The processor stopped making payments and returning phone calls altogether. 

The processor’s refusal to return the $3 million left our clients with few options for getting their money back or paying the state and vendors. State court justice has been slow in most jurisdictions for decades. COVID-19 has only made that situation worse. Also, filing a lawsuit in state court against an out-of-state operator made the case vulnerable to the Seattle-based defendant’s motion to remove the case to Washington. 

Reporting the issue to law enforcement was an alternative, but when recouping funds is the top goal, a California company asking the Seattle police department to investigate what could be described as a contract dispute, did not appear to be the most efficient solution. 

Cannabis-Related Contract Claims and the “Illegality Defense”

In the end, our firm and our client believed that the best bet for getting the $3 million back efficiently was to file a breach of contract and fraud case in federal court. But while federal court was the top choice available, we knew it would not be easy. 

It is hard to argue that the processor did not breach the payment processing contract. It had our client’s money and failed to make payments that it agreed to make. But the analysis does not end there, because the processor, like defendants to cannabis contract disputes before it, is relying on the so-called “illegality defense.” In short, the defense is that, because cannabis is illegal under federal law, a federal court cannot enforce a contract that involves a cannabis company. In essence, the argument is as follows: “the merits of the case do not matter because the parties contracted to do something illegal and a federal court cannot review a case involving an illegal contract.” 

If the illegality defense were iron clad, our client’s case would have been dead on arrival. Fortunately, the reality is far more subtle. While there are older federal cases standing for the principal that federal courts cannot enforce “illegal contracts,” judges interpreting those cases have inserted a key exception to that baseline rule. The now well-established exception is that a federal court may enforce an illegal contract (or parts of an illegal contract) if, in doing so, the court fashion a legal remedy that does not compel future unlawful conduct. 

At first blush, it may seem hard to imagine how it would be possible to enforce a contract that involves an “illegal” company and not compel future illegal conduct. But, as it turns out, such circumstances are common in the cannabis industry, in which cannabis companies are paying vendors and individuals to perform services that are not inherently unlawful. Our case provides examples of potential orders that would not compel unlawful conduct:  a requirement to pay the CDTFA taxes that are required under the state’s cannabis laws and payments vendors such as PG&E. Returning  a company’s so that it can make such payments also would seem to pass the test. 

So, what are the key issues that courts consider when deciding whether to enforce an illegal contract? Based on California federal cases, it appears that the court’s top consideration is whether the court’s order would further a specific violation of federal law. In the case of cannabis, the law in central law at issue is the Controlled Substances Act (CSA) and its prohibition on manufacture, importation, possession, use, and distribution of marijuana. Other relevant laws include money-laundering statutes, which prohibit transactions in which the funds involved in the transactions are derived from illegal activity. The definition of “transaction” is key to this crime and would require a much longer explanation than is appropriate for this article. 

Given the context, in cannabis breach of contract cases, where defendants have raised the illegality defense, courts have mulled whether they can order a remedy that makes the plaintiff whole, such as restitution, for example, but is neither derived from – nor results in – the manufacture, importation, possession, use or distribution of marijuana. 

A few examples where the court found that it could not enforce a contract involving cannabis are as follows: Tracy v. USAA, where the court ruled it could not require an insurance company to pay for the replacement of the plaintiff’s marijuana plants; J. Lilly v. Clearspan, in which the court determined that awarding lost profits from a marijuana cultivation operation would further violate the law; and Hemphill v. Liberty Mutual, in which the court ruled it could not require Liberty Mutual to pay for the future use of medical marijuana expenses, because doing so would violate the Controlled Substances Act.

In contrast, federal courts have enforced cannabis-related contracts (or parts of them) where the result would not violate the CSA or other federal statutes. In Bart Street III, a case that involved financial transactions, the court said it could enforce parts of two promissory notes between a lender and a cannabis cultivation company because each note included provisions that directed defendants to use the loaned funds for solely legal acts (paying off prior lenders and purchasing property).

A court used a similar analysis in Ginsburg v. ICC Holdings There the court stated, “[E]ven if a contract is illegal, it is not automatically unenforceable. Under federal law, the illegality of contract defense involves a balancing of the ‘pros and cons of enforcement,’ taking into account the benefits of enforcement ‘that lie in creating stability in contract relations and preserving reasonable expectations’ and the ‘costs in foregoing the additional deterrence of behavior forbidden by the statute.’”

Ginsburg appeared to be influenced by a line of cases starting with Bassidji v. Goe. Bassidji, did not involve marijuana, but its analysis was followed by a Northern District case, Mann v. Gullickson, which involved a contract between two companies that served the cannabis industry. Both courts opined that “[A] court only needs to dismiss a claim for breach of contract when the contract is “illegal” if the lone remedy available would, itself be illegal.

The case between our client, the vertically integrated California cannabis company, and the Seattle-based payment processor is on-going. Central to our argument is that a court order, in which our clients’ funds were returned,  or which compelled payments to the State of California and legal vendors, such as PG&E would not violate the CSA or federal statutes. 

The story of our case is to be continued, but any California cannabis company which is considering suing for breach of contract should give serious consideration to the pros and cons of both state and federal court. Filing a case in federal court, while likely more complex, may still be the best choice. 

Robert Selna is a founding partner of Selna Partners, LLP. The law firm serves clients across California combining specialized practices in the real estate and cannabis/hemp industries with decades of experience handling complex commercial litigation, class actions and product liability litigation.  Rob has built upon his real estate work and experience with local and state government to represent clients in the real estate and cannabis industries. He advises developers on zoning, environmental and subdivision laws and the many other legal details that complicate nearly all projects. His transactional work includes leases and purchase and sale agreements. Rob specifically advises cannabis clients on licensing, regulatory matters and legislation, entity formation, contracts, real estate transactions, litigation and taxes. He can be reached at robert@selnapartners.com, (415) 601-5385.