Neither Fish Nor Fowl

Ohio entrepreneurs Brian Pearson and Nick Costanzo saw a niche, created a product to fill it, and saw it become a success. But all was not well. They had created something that didn't fit any legal category.

It all started when Pearson's mother asked him and his friend Costanzo to stop at a grocery store to pick up some gelatin shots for his sister's 21st birthday party. They told his mother there was no such thing as pre-made gelatin shots. That gave them an idea: In 1998, the two friends formed BPNC Inc., created four flavors, arranged for manufacture and colorful packaging, and prepared to market Zippers, The Original Gelatin Shot.

Pearson checked with the chief of the Beer & Wine section of the State of Ohio's Division of Liquor Control to see if they needed a license. No, he was told, this was a food product, and no license was required to sell it. But after they began selling it, the state declared they did indeed need a license. Getting one normally takes six to eight weeks, but for them, it took 13 months.

Before long, Zippers were selling in 26 states, each with its own licensing requirements. BPNC filled out state paperwork and forwarded it to its manufacturer for signature. But the better the product sold, the more legal trouble the company faced. Ohio rescinded BPNC's license to sell alcoholic beverages and waffled on what requirements it would have to meet. In June 2002, soon after BPNC had taken over manufacturing its own products, state agents raided the company's Toledo, Ohio, facility and seized all its equipment and records. They claimed the company was selling liquor without a license. For more than a year, the company was in limbo as Pearson and Costanzo negotiated with the state, demanded clarity, and sought help from everyone they could think of.

It didn't help that watchdog groups were worried the product might be marketed to teens or might tempt children. Indeed, in its initial package, it looked a great deal like lunchbox gelatin. After considerable outcry in the press, BPNC changed the packaging to a stacked format that fit better on store liquor shelves, with the contents hidden in a cardboard sleeve designed to appeal to young adults.

In December 2002, an Ohio grand jury decided not to indict the company. BPNC has since brought back employees it laid off during the flap, introduced new flavors and enjoyed steady growth, projecting $6 million to $8 million in gross sales for 2004. But the price was two years of expensive legal maneuvering since there were no laws to govern alcoholic food.

The whole affair might serve as a lesson for entrepreneurs. Is it clear what laws regulate your product? Does the product fit clearly into a particular category governed by particular laws? If not, seek help from an attorney as early as possible to navigate the regulatory waters. Don't rely on an offhand opinion from a single bureaucrat. Get your questions answered in writing, and make sure the relevant agencies are in agreement.

Jane Easter bahls is a writer in Rock Island, Illinois, specializing in business and legal topics.