Private label market brings exposures for wholesalers and retailers

By Bill Seleznoff, AVP Industry Practice Director (Wholesale, Retail), U.S. Middle Market, Zurich North America

What’s in a name? When it comes to marketing, everything. A recognized brand name can mean it’s popular and trusted. To a degree, it can also convey pricing. To most of the public, the name Rolex on a watch means a luxury item at a premium price, whereas McDonald’s is almost synonymous with inexpensive fast food. While well-known, major brands still dominate in the marketplace, private label products have increasingly become a driving force in the economy, especially as inflation has put consumers even more on the lookout for value.

Private label products are nothing new. Customers have known them for decades as “store brands,” which can be products a retailer purchases directly from a manufacturer (rather than a brand-name manufacturer/distributor) or from a wholesaler and labels with its own company name and logo. Whether supplied by a manufacturer or wholesaler, private label products are often less expensive, as they avoid costs that can come with demand for a popular brand. However, buying from wholesalers can have an advantage over buying directly from manufacturers, as the wholesale market is driven by discounts wholesale distributors get for their high-volume purchases.

With direct access to retailers and manufacturers in their supply chain, wholesalers have a unique view of where the market stands and where it may be headed. So, it makes sense that many wholesalers have seen an opportunity in developing their own, exclusive private labels, as retailers have done for so long. Here are a couple of key benefits of jumping into private label products:

• It’s a big business: The Private Label Manufacturers Association reports store brand sales increased in the U.S. by 11.3% in 2022, setting a new record of over $228 billion in total sales.¹
• It helps separate you from competitors: Per our introduction, there is power in a name and having your own label can increase recognition, convey value, or address a need not met by other competitors’ products.

However, the private label market segment doesn’t come without increased risks. Due to the increasingly complex U.S. legal system and chain-of-commerce laws, anyone venturing into private label brands faces the same product liability exposures as actual manufacturers. While neither the retailer nor the wholesaler may be actually manufacturing the products, private label sellers may be held legally liable for everything from product defects causing bodily harm or injury, to false advertising claims, copyright and patent infringement suits, and even having to address product recalls. Whether it’s a lawsuit stemming from a hazardous product or a fine from a regulatory agency for violating their requirements, these exposures can have serious financial and reputational impacts on a company selling their own private label product.

Key product liability considerations for private labels

What follows is by no means an exhaustive list of exposures for private label products, but it does summarize some of the most common risks.

• Manufacturing defects – Since a wholesaler or retailer is not directly overseeing manufacturing, they do not have a view on how closely quality and safety standards are followed. Even if those standards are contractually stipulated, what happens on the factory floor will ultimately determine if a product is faulty or not. While the manufacturer may ultimately be held responsible for defects, the private label distributor can also be held liable as quality control could be determined to be under their purview in a legal dispute.

• Raw material defects and quality – The wholesaler or retailer may not have any direct involvement in selecting raw materials used in manufacturing, but if harmful chemicals show up in those materials (or anywhere in the manufacturing process), they could be legally responsible. While many hazardous chemicals have been largely phased out of manufacturing, some like PFAS are so prevalent environmentally, they can show up in raw materials. A quick look at the latest U.S. Consumer Product Safety Commission (CPSC) recalls shows that lead continues to be present in many consumer-grade products.² And materials don’t necessarily need to be harmful to create problems for the wholesaler or retailer either. If lower-grade materials used affect product durability or are functionally different enough to affect longevity and quality, the private label distributor might be held liable should the product fail or not perform as intended. Having third-party testing, inspection and documentation of batch samples, and contractually specifying raw materials is essential.

• Warning labels, packaging and instructions – Even if the product itself has no flaws, if printed instructions on assembly and use are not accurate and improper assembly or use could result in harm to the user, the private label distributor could be liable. “Failure to warn” of potential hazards and misuse has been the crux of numerous product liability cases. Some examples include warnings for choking hazards for small parts that could be swallowed by children, and warnings for electrical shock and burn hazards with household appliances. Food is a special class of labels, which must declare food allergens and correctly label nutritional values (including serving size, fat content and calories). Other exposures include packaging or catalogs/websites that illustrate a product in a manner that does not reflect the actual look or use of that product, or packaging missing required safety symbols or colors (such as ANSI standards shown here). Make sure your company’s legal team has thoroughly reviewed labeling and packaging.

• Requirements of regulatory agencies – Most actual manufacturers have engineers, designers or product developers well-trained in the regulatory environment where their products operate. However, a firm looking to develop a private label product may not be as aware of some of the governmental agencies and authorities whose rules and regulations their products may need to comply with. While not an exhaustive list, here are some of the key agencies in the United States that a private label product could be subject to:
• The Federal Trade Commission (FTC) sets standards for many consumer-grade products, including labeling and advertising/marketing, and violations can result in serious fines. Even if your business can withstand that kind of loss, news of an FTC violation can cause major — potentially irreparable — harm to the product’s image in the collective mind of the public.
• The U.S. Consumer Product Safety Commission (CPSC) is charged with oversight on the vast majority of non-food consumer products (e.g., household items, furniture, appliances, tools and sporting goods) and has authority to issue recalls on all these types of products. The CPSC’s Regulatory Robot can help businesses determine which standards may apply to their products.
• The U.S. Department of Agriculture (USDA) oversees the standards for meat, poultry and shell eggs and can issue recalls.
• The Food and Drug Administration (FDA) oversees food not under USDA authority, including seafood, prepared packaged items and some pet food and animal feed. The FDA also oversees cosmetics, drugs and medical devices.
• The Environmental Protection Agency (EPA) can recall pesticides and rodenticides.

Recalls from any of these agencies can hurt your operations and reputation, and be used as evidence in litigation.

• Industry standards – Several organizations without regulatory power are also trusted bodies whose advisory standards could be viewed as the minimum standard by a court or jury. Beyond legal implications, a “yay or nay” from some of these organizations could factor into your product’s viability, putting your business at a disadvantage in terms of earning consumer trust or even not being carried by some retailers. Additionally, a voluntary industry standard that isn’t technically law can still be the basis for establishing legal liability in court. If the standard is fairly easily complied with and not costly, in extreme cases it could even become the basis for punitive damages. There are several notable standards organizations and certifications specific to certain industries or safety practices, and most are best known by acronyms or abbreviations, including ANSI, NSF, UL and ETL.

• Advertising statements – Whether on the actual product label or not, private label distributors may be held liable for claims regarding their products, just as manufacturers/distributors might be in certain scenarios. Advertising risks include:
• Overstating effectiveness of a product
• Claiming a product is “all-natural,” “organic” or even “healthy” if any of the ingredients or components are debatable in that regard
• “Greenwashing,” or overstating a product’s environmental benefits
• Any description or image in advertising that does not accurately describe or visually match the actual product
• Product labels, materials or marketing that closely mimics a competitor’s product (confusing the buyer)
• Packaging an age-regulated product to children (e.g., alcohol- or tobacco-related products in packaging that looks similar to soft drinks or candy)

• Copyright or patent infringement – It can be advantageous in terms of costs for wholesalers to import directly from overseas manufacturers, but sometimes a foreign supplier may knowingly sell a counterfeit (or “knockoff”) version of a well-known brand, knowing they are not likely to be subject to the U.S. tort system. This has become especially common in the internet retail era, as evidenced by Gucci’s intellectual property lawyers helping shut down four million online listings of counterfeit products, 45,000 fraudulent websites and seizing over four million counterfeit products in 2020.³ Affixing your company’s private label to a product violating a copyright or patent can lead to big losses in the courtroom and on your bottom line. A copyright or patent infringement does not have to be evident to the naked eye (like athletic wear with a logo similar to Nike or Adidas). Something in the design that may not visually stand out (like a type of closure for a suitcase or bag) could be patented. So, it’s up to the private label distributor to perform their due diligence on all rights related to the items they are purchasing.

It should be emphasized that wholesalers and retailers not distributing products under their own private label still have many product liability exposures to contend with. Directly importing products from a foreign manufacturer without U.S.-recognized product liability coverage (or working with a manufacturer that is inadequately insured overall), having knowledge of a defective product they distribute, or presenting a product for use for something other than its intended purpose are just some examples where the wholesaler or retailer could be held liable, no matter how the product is branded.

Businesses looking to capitalize on the private label opportunities will expose themselves to additional risks and, if not fully vetted, can have significant reputational and regulatory consequences that need to be weighed and strategized against the potential profit benefits (which can be considerable). As always in the competitive mercantile segments, the risk-versus-reward calculation needs to be thoughtfully considered.

Bill Seleznoff, CPCU, is AVP Industry Practice Director for the Wholesale and Retail segments for Zurich North America’s U.S. Middle Market team. He joined Zurich in 2022 and has over 25 years of experience in Property and Casualty Underwriting, specializing in Commercial Middle Market segments.

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1. “PLMA’s 2023 Private Label Report: A statistical guide to today’s store brands.” Private Label Manufacturers Association.

2. Centers for Disease Control and Prevention. “Recalls of Children’s Products, Foods, Cosmetics, and Medicines Due to Lead Hazards.” 23 June 2023.

3. Aloisi, Silvia. “Gucci, Facebook file joint lawsuit against alleged counterfeiter.” Reuters. 26 April 2021.