Canada’s massive food and agriculture industry is becoming more complicated with the increase of regulation and expanded licensing requirements
If the high-profile $12.5-billion merger of Tim Hortons and Burger King in December 2014 proved one thing, it’s that the food and beverage industry is no longer under the radar of the business and legal communities’ corporate law and mergers and acquisitions consciousness.
But although the deal pretty well confirms what Anthony Davis told Lexpert readers in his April 2013 article entitled “From Dirt to Big Capital” – that the food sector was headed for the M&A big time – it does little to reveal the extent to which the regulatory aspects of the industry have invaded the portals of corporate Canada and engaged its lawyers.
“Public health has become a huge area for regulators and lawyers are increasingly involved because of the potential liability that arises from this focus,” says Peter Kirby of Fasken Martineau DuMoulin LLP in Montréal. “The food and agriculture sector is massive in terms of the number of people it affects, and it’s becoming more and more sophisticated.”
Why the food and beverage sector was ever under the radar is a bit of a mystery: after all, according to 2011 statistics from the Conference Board of Canada, more than 9 per cent of the country’s GDP originated with the food sector, about twice as much as mining and oil and gas combined. The sector also employed some 13 per cent of Canadians and its influence on both GDP and employment was surging upward.
From all appearances, however, Canada’s major law firms hadn’t as yet caught on.
“[L]ook at the websites of most medium to major Canadian corporate law firms and try finding those who list agriculture or agribusiness as a practice area,” Davis wrote. “It’s like looking for a pin in a haystack.”
To be sure, the number of law firms that list “food and beverage” or “agribusiness” as “practice areas” remains underwhelming.
“I’ve been practising in this area for 20 years, and I can tell you that Canada’s major law firms had not even identified agribusiness and food and beverage as practice areas as recently as 15 years ago,” says Wendy Baker of Miller Thomson LLP in Vancouver, a firm whose national Agribusiness and Food Group of some 50 lawyers, formally established about 10 years ago, has been a leader in providing services for these industries for much longer than that.
According to Baker’s partner Jeff Grubb in Regina, what he calls the “agrifood” practice continues to grow. “Our firm has seen that practice grow exponentially in terms of its profile within the firm and in terms of the volume and significance of the work,” he says.
Indeed, more and more of the major firms are taking notice. “I didn’t see many large firms in the agrifood space until two or three years ago,” he says. “They might have been doing some financial services work or M&A in the sector, but they certainly weren’t advertising their industry expertise. That’s changing, and we’re starting to see law firms focus more and more on this sector as specific and unique.”
So look a little deeper today – just two-and-a-half years after the 2013 Lexpert article – and you’ll see much more frequently “food and beverage” or “agribusiness” or some combination or variation of the two under the “industry expertise” or similar sections of the websites.
“The large law firms have started to realize that there’s a lot going on behind all those products on the grocery store shelves,” Baker says.
An indication of the scope of the legal issues arising from the food sector can be found on McCarthy Tétrault LLP’s site, which cross-references the firm’s “agribusiness” expertise with its “food and beverage” and “consumer products and retail” expertise. Blake, Cassels & Graydon LLP lists “Food, Beverage & Agribusiness” as a single sector in the firm’s website compilation of the industries it serves.
“There is heavy regulation through the entire food supply chain and we deal with all of it,” says Laura Weinrib of Blakes in Toronto. “It’s not just a question of slapping on the French labels in Québec.”
The significant role regulatory due diligence plays in the sector’s M&A environment is one indication of the impact regulation has in the food supply chain in a general way.
“The regulatory component is a huge part of the due diligence,” Weinrib says. “Quite apart from the obvious stuff like licence requirements for manufacturers, inspection reports have to be reviewed and some firms even add value by looking at the target company’s products, labelling and advertising, and making the acquirer aware of whether and to what extent the target has been taking a high-risk approach in these areas.”
In its Food Report 2015, edited by Michael Stevenson of Toronto and Arash Amouzgar of Vancouver, Blakes notes that lawyers in the firm’s Food, Beverage and Agribusiness group advise on such diverse matters as “corporate/commercial, technology, intellectual property, financial services, labour and employment, pension and employee benefits, class action defence, consumer product safety, administrative and regulatory processes, and real estate.”
Even that broad description has more to it than meets the eye. “Some of what we do extends to every ingredient you can feed to animals, which is regulated by the [Canadian Food Inspection Agency], as well as pest control, additives and veterinary drugs, which are regulated by Health Canada,” Weinrib says.
As it turns out, Blakes’ list isn’t exhaustive. At other firms, the food and beverage practice can engage expertise that is quite esoteric, like immigration law.
“There are large numbers of migrant workers employed on Canada’s farms and we’re regularly engaged to advise as to the rules for hiring and paying them,” Wendy Baker says.
At Sotos LLP in Toronto, franchise law enters the food space. “Some 42 per cent of the people looking to buy franchises want to get into the food sector,” says Allan Dick, a partner at the firm. “And over one million employees are directly or indirectly related to that market.”
The prospective buyers, however, may not know what they’re getting themselves into. After all, their destination lies just short of the end user in the food supply chain, meaning that liability for someone’s screw-up anywhere along that chain is a going concern.
By way of example, take Ontario’s Making Healthier Choices Act, 2015. The law, which will come into force on January 1, 2017, means restaurants and other food service outlets with 20 or more locations operating under the same name in Ontario will need to change their menus and displays regarding food and drink items. The most significant change requires the display of calories in standardized portions. “The difficulty is that not all franchisees buy all their products from the same suppliers,” Dick notes.
The upshot is that individual franchisees purchasing pre-packaged and labelled goods are dependent on the due diligence of others all the way up the chain.
But it’s not just franchisees who are affected by the legislation. “The Act will have broad application, applying not only to quick service restaurants, but also convenience stores, grocery stores, movie theatres or other businesses that prepare meals for immediate consumption, either on the premises or elsewhere,” says an Osler, Hoskin & Harcourt LLP Update authored by Christine Jackson, Nicole Kutlesa and Lindsay Rauccio.
The same could be said of the federal government’s expected overhaul of food labelling requirements, which, according to Kelly Harris of Toronto, writing on Miller Thomson’s Agribusiness and Food Group Blog, The Food Web, “is closing in on a conclusion to a years-long consultation process.”
The overhaul, which contemplates a five-year transition period, focuses on the layout and content of food ingredient and nutrition facts on packaged foods. “If passed, ingredients lists will soon be revised with mandatory titles, as well as a standardized format and style, including bulleted ingredients, borders, and punctuation,” Harris writes on the blog.
Changes of this magnitude to labelling and advertising, she adds, “… do not come without significant costs” and “could also necessitate product re-formulation.”
More than 10 years ago, Donald Buckingham, then a professor at the University of Ottawa’s Faculty of Law and now Chairperson and CEO of the Canada Agricultural Review Tribunal, recognized the ubiquitous impact of food regulation when he described what he called “Canadian Agriculture and Food Law” in a summary he wrote for the Canadian Law website. As is evident from the description following, he might as well have called it “Food Supply Chain” law.
“Agriculture and food law in Canada covers a vast array of legal issues that impacts every Canadian,” Buckingham wrote. “It includes laws enacted at both the federal and the provincial levels and affects every stage of agriculture and food production from animal breeding and seed development right through to the labelling of processed food in supermarkets.”
Agriculture law, as Buckingham saw it, embraced regulation that affected the production and marketing of agricultural products, including farm property and implements law, animal pedigree and health law, crop protection and fertilizer regulation. It also embraced laws governing the sale of farm products and regulating the right to produce and market these products, including the establishment of marketing boards.
“I often work on issues arising out of Canada’s supply management system, including the identification of products subject to quota rules and the quota allocation rules themselves,” Kirby says. “It’s even gone so far as representing the California Strawberry Commission in an inquiry by the Farm Products Council of Canada into the establishment of a national marketing agency for strawberries.”
The laws governing the financing of agricultural operations fall within this sphere as well.
“Special provisions exist with general federal and provincial laws that have specific application to agricultural operations, such as exist in the Income Tax Act, the Bankruptcy and Insolvency Act, the Bank Act and countless other federal and provincial laws,” Buckingham wrote. “Finally, several laws exist that apply only to agriculture, such as those that entitle agricultural producers to financial compensation as well as laws that impose special obligations on agricultural operations for environmental or commercial reasons.”
Food law, then, goes beyond agricultural producers to consumers, retailers, processers, packagers and labellers of food products. It includes standards and inspection rules to protect consumers found in statutes like the Food and Drugs Act, Consumer Packaging and Labelling Act, Meat Inspection Act and Canada Agricultural Products Act, and most recently the Safe Food for Canadians Act.
Indeed, the very breadth of the food and beverage industry may explain why it’s so difficult to carve it out as a practice area. “This is not an area that’s easily defined,” says Kirby, whose firm does not list either “agribusiness” or “food and beverage” as separate components in its “Practices” or “Industries” website listings. “It’s more like a patchwork quilt of different and multi-faceted areas of expertise.”
The primary regulator in the arena is the Canadian Food Inspection Agency (CFIA), which establishes the requirements and provides the guidance for labelling practices and claims made for products, and also deals with recalls. For its part, Health Canada deals with the overarching safety of food, more specifically regarding novel food products or products with special health claims.
Food and beverage law is also becoming increasingly technical, which is why the doctorate in molecular biology held by Kirby’s Toronto partner Ingrid VanderElst is considered so valuable to Fasken’s practice.
“The rules about what can and can’t be added to foods have become so complex that companies are starting to get gun-shy about what their labels say,” Kirby says. “So they might refrain from calling a product ‘all natural’ because that’s proven to be a magnet for class actions.”
And the rules are constantly changing. Chinese herbal tea, for example, used to fall within the category of natural health products but is now found in a more distinct category.
According to Kirby, scientific advances have been significant drivers behind the growth in regulation and its increasing complexity. “We can detect things we couldn’t detect before,” he says. “Our ability to test, for example, has moved from a parts-per-million standard to a parts-per-billion standard, which means that it’s much more likely that we’ll find contamination in food products.”
No surprise, then, that food safety, product recall, packaging, environmental standards and advertising boundaries are just some of the arenas in which enforcement seems to be ramping up constantly.
“The kinds of things I do include assisting with product recalls, interfacing with facilities that might be having compliance problems with the CFIA, and label reviews,” Kirby says. “And there’s always ongoing work regarding food items that are breaking traditional boundaries and want to make claims about their ingredients or production methods.”
As technical expertise becomes more and more essential, in-house departments are also growing. “The more regulation you have and the more technical that regulation becomes, the more incentive companies have to hire their own lawyers and other experts to deal with it,” Kirby says.
The agricultural end is not bereft of issues either. Scott Exner of MacPherson, Leslie & Tyerman LLP says that providing legal services to the agribusiness sector, which his firm has been doing for almost 50 years, continues to be a growth area.
“There are issues relating to grain handling, hog production, lending and the restructuring in the sector, which attracts a lot more foreign investment from all over the world than we saw 20 years ago,” Exner explains from Calgary. “On the regulatory end, we’ve had issues with grain not moving fast enough and having to force the railways to move it faster.”
Protecting intellectual property in this arena is an important part of the practice.
“The farm end of things involves a lot of technological advances that are innovative and inventive and promote precision agriculture,” says Adrienne Blanchard of Norton Rose Fulbright Canada LLP in Montréal. “We assist at that level.”
And this being Canada, supply management matters are a steady source of business for lawyers. “There are always issues with quotas, quota allocation and determining what exactly is subject to quotas,” Kirby says.
Supply-managed dairy products, for example, can be broken into their constituent parts for quota purposes. “A US supplier can take the water out of a dairy product, ship the powder across the border, and it won’t be classified as dairy — even when they put the water back in once the powder is in Canada,” Kirby says.
Exporters to Canada also have to deal with quotas. When Agro-Farma Inc., the US company that started the Greek yogurt craze in the US with its Chobani product, sought to enter the Canadian market some years ago, it found itself in Federal Court, where large Canadian dairy processors were trying to prevent the product’s importation on the grounds that it contravened federal dairy industry supply-management regulations. Agro-Farma won the court case, but things became so complicated that the company eventually abandoned its plans for Canada.
“The food and beverage industry engages some very complex and technical issues on the export-import, tariff control and subsidies front,” Stevenson says.
Indeed, international trade disputes, particularly those involving country-of-origin labelling, are often disguised as food safety disputes.
“Not only is there increased regulation that applies to foods once they have crossed the border, but there are ongoing efforts in both Canada and the US to regulate food before it gets to the border by way of third-party inspection or labelling criteria,” Grubb says.
Amidst all this, the industry and its legal advisors are bracing for the day the Safe Food for Canadians Act (SFCA) comes into force.
“The SFCA will dramatically change things,” says Blanchard, who says her practice in the food and beverage end of the industry is really “all about crisis management for food.”
The legislation passed in 2012 and was expected to come into force at the beginning of 2015. Just when that will actually happen, however, is unclear.
“We’re still awaiting all kinds of regulations,” Weinrib says. “But the SFCA has been the subject of extensive consultations and publications, and both Health Canada and the Canada Food Inspection Agency have action plans at the ready.”
From all appearances, then, the SFCA’s day will come. And when it does, its impact will be significant, consolidating the Meat Inspection Act, Fish Inspection Act, Canada Agricultural Products Act and the food-related provisions of the Consumer Packaging and Labelling Act.
“I’m not sure the SFCA represents a major overhaul for my practice, but it means that an area that is already heavily regulated will become even more so,” Weinrib says. “We’re talking about a modern statute that has the potential to require licensing for every person involved in the food chain, a beefed-up inspection regime, a consolidation of licensing and inspection functions under the CFIA, and significant increases in the penalties for breaches, including unlimited fines for certain offences and fines of up to $5 million for others.”
The licensing requirements alone could vastly expand the ambit of food regulation practice. “Currently, licensing is required for meat and fish producers and a few others, but not for producing cookies or other pre-packaged processed products or for importing many products,” Weinrib says. “That’s going to change because the plan is for everyone in the food chain to have a more direct accountability.”
Weinrib concedes that the expanded licensing regime will represent a “sea change” but she’s also confident that it’s not the government’s plan “to make it impossible for food companies to survive.”
What is becoming increasingly apparent, however, is that their profitable survival will increasingly involve resort to lawyers with the industry-specific regulatory expertise that the sector now demands.