Lessons from Toxic Rice and Chinese Dairies - Threats From Bioterrorism and Supplier Fraud
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Manufacturer fraud and bioterrorism should be on the radar screen for any food producer. Apart from the meltdown in the U.S. financial markets and presidential politics, the big news this week is toxic rice from Southeast Asia and melamine-tainted dairy products from China. Both crises were caused by intentional contamination of food products by raw-materials suppliers with the apparent motivation to defraud food manufacturers and sellers.
Both (especially melamine-tainted dairy products) are causing a worldwide health scare and crisis in consumer confidence. Consumers outside of China may not be at serious risk, because the melamine-tainted dairy products are not sold as pure dairy products. Outside of China, Chinese dairy products are used only in small quantities as ingredients in products such as candy and coffee. U.S. and European Union consumers are at risk only when consuming unusually large quantities of these “nondairy” products.
Yet the consumer crisis inside and outside of China could have ameliorated dramatically but for failures in crisis management. Even the presumably government-controlled Chinese press understands this: “Crisis management is closely related to the brand and credibility of an enterprise, but many Chinese enterprises have not developed the capability to react properly when a crisis emerges . . . .”
Consistent with Western principles of crisis management, Chinese experts, according to the Chinese press, opine that “one principle of crisis management is to take a responsible attitude immediately and in a sincere manner, which is of great help for enterprises to rebuild their credibility.”
The press in China points to a company named Sanlu and concludes that “Sanlu, the center of the scandal, provided a bad example of crisis management. When it was first exposed, Sanlu refused to take the blame and passed the buck to innocent dairy farmers, which ignited great anger nationwide. . . . Sanlu didn’t openly admit its products were toxic until Sept. 11. It eventually recalled baby formula manufactured on and before Aug. 6. The scandal led to the fall of chairwoman Tian and the disappearance of all dairy products bearing the brand of Sanlu.”
Anatomy of a Food-Borne Illness Claim - Part I
Recently, I’ve received several requests for resources explaining the anatomy of a food-borne illness claim. In other words, what events can be expected, and when? What can or should a company (in particular the legal department) do in response to a claim?
Part I – Notice of an Outbreak (and Possible Claims)
First off, don’t panic. Your company’s crisis management team (which has been well-rehearsed for this scenario) should convene action upon the first notice of a possible outbreak—even before verification and before claims are apparent. Food safety experts should contact the health departments that may have identified the outbreak. Together with the legal, sales and quality assurance departments, your food safety experts should be involved in a full investigation of the possible outbreak. The earlier the intervention, the greater the possibility of collecting key information that may be useful in determining whether your company is linked to the outbreak and pinpointing other possible sources of the outbreak. Public relations experts should also be consulted at the first possible moment.
Checklist for the legal department:
- Log events, actions and communications. This is critical for responding to government agencies and to claims.
- Record all reported injuries. Collecting information about potential claims early is a key to mitigating those claims and future legal costs.
- Notify insurers. Insurance companies require prompt notice; insurers may also have assets available for crisis response.
- Document the investigation. Litigation may be protracted, and a well-documented investigation may be key to the company’s defense.
- Institute a litigation “hold” on the destruction of any company documents or emails. Don’t turn a bad situation into a nightmare; spoliation claims can take on a life of their own.
- Retain product samples for future testing. This may be critical to support experts’ opinions at trial and to preserve claims against suppliers.
- Review and retain vendor/supplier documents. Recovery against suppliers could be as important as or more important than insurance recovery.
- Assess the merits of a consumer hotline. It could be helpful in disseminating accurate information to consumers (inaccurate or conflicting information can lead to litigation) and in collecting information about the pool of potential plaintiffs.
- Assess the merits of a consumer/vendor reimbursement program. Like having a consumer hotline, providing immediate reimbursement could help dampen the volume of future plaintiffs.
Stay tuned for Part II – Receipt of the Demand Letter.
New York Times on Nutraceuticals
The New York Times has a piece on nutraceuticals that caught my eye as an example of the news media’s skepticism about fortified food. The article begins:
“O[ff] the coast of Peru swim billions of sardines and anchovies: oily, smelly little fish, rich in nutritious omega-3 fatty acids. Their spot on the food chain is low; many will be caught, ground up, and fed as fishmeal to bigger animals.
“But a few have a more exalted destiny: to be transported, purified and served at North American breakfast tables in the form of Tropicana Healthy Heart orange juice and Wonder Headstart bread. These new products promise to deliver the health benefits of fish oil without the smell and the taste — without, in fact, the fish.”
But the article’s author, Julia Moskin, without citation or attribution, poses these loaded questions: “Are we really that close to a world in which food functions as a nutrient delivery system, made possible by microencapsulation and fine-spray coating? And what would this mean for food and human nutrition?”
In the end, Ms. Moskin’s piece appears full of cynicism and doubt about the industry. She writes off nutraceuticals as a cheap marketing ploy:
“[W]ith recent rising costs in raw materials, flavorings and transport, many food companies are refocusing their research and development; instead of adding expensive ingredients like sun-dried tomatoes or honey-roasted almonds to existing products, the search is on for inexpensive ‘value-added’ products that customers will pay extra for.”
Ms. Moskin does quote claims made by the industry but notes that university scientists disagree with the claims—implying that these scientists must be right because they are not employed by industry.
To me, the article demonstrates the need for the industry to invest in more independent research and verification. As the nutraceuticals industry matures and grows, claims by industry will be met with growing suspicion and, inevitably, assertions of “consumer fraud.” Consumers may believe health claims by small health food companies that they “trust.” But once those same companies (and their industries) grower larger, people by their nature become more skeptical.
"Organic Pathogens Exclusion"
Insurers are making efforts to exclude food-borne illness claims from coverage under comprehensive general liability (“CGL”) policies. The "Organic Pathogens Exclusion" is a good example.
While a claim for food-borne illness may normally be covered by a CGL policy, if you have an organic pathogens exclusion, your insurer will not provide a defense and will not cover your losses if your business is sued as a result of a food-borne illness.
Organic pathogens exclusions can take multiple forms. Some policies include an endorsement that excludes any “loss” for “any actual, alleged or threatened exposure to, existence of, presence of, ingestion of, inhalation of or contact with any biological agents.” “Biological agents” are usually defined to include things like bacteria, viruses or other pathogens (whether or not a microorganism).
Other policies simply include an endorsement providing that “this policy does not insure any loss, damage, claim, cost, expense, fine, penalty or other sum either directly or indirectly arising out of, relating to or caused by an “organic pathogen.” These policies generally define “organic pathogen” to mean “any organic irritant or contaminant, including but not limited to fungus, bacteria, virus, or other microorganism of any type, including but not limited to their byproducts such as spores or mycotoxin, or any hazardous substance as classified by the EPA.”
Any business involved in food production should take notice. Insurers are actively marketing policies with organic pathogen exclusions to food businesses whose greatest liability exposure may be food-borne illness. Careful and regular review of insurance policies and coverages is essential.
Dos and Don'ts for Executives Managing a Crisis
As discussed frequently in this blog, management of an outbreak at its inception determines the course of the crisis (and, in some cases, the fate of the company).
The Globe and Mail, in its ongoing coverage of the Maple Leaf Foods Listeria outbreak, today published a helpful punch list of 15 dos and don’ts for corporate executives managing a food-borne outbreak.
The last two items on the list may be the least obvious but are among the most important:
“14. Do make a list of the five questions you would least like to be asked and be prepared to answer them, since somebody will undoubtedly ask them.
“15. Do set up a rumour control hotline or website if rampant speculation could fuel the crisis.”
A hotline for collecting consumer information and complaints can be valuable. It allows the company not only to get control over and manage misinformation (the point being made in the Globe and Mail), but also to gather information about how many people the outbreak affects and who has fallen ill. Even more important, a hotline may enable the company to direct ill people to appropriate medical treatment, minimizing or even eliminating litigation.
Tuna's Not Just for Breakfast Anymore - Third Circuit Refuses FDA's Pleas for Federal Preemption
By Guest Blogger Amena Jefferson (Stoel Rives Summer Associate and UW law student)
Federal preemption is on the table once again. The U.S. Court of Appeals for the Third Circuit recently decided Fellner v. Tri-Union Seafoods, No. 07-1238, 2008 WL 3842925 (3d Cir. Aug. 19, 2008). In this case, the plaintiff allegedly fell ill from mercury poisoning after consuming canned tuna “almost exclusively” for five years (1999-2004). The plaintiff sought recovery under the New Jersey Product Liability Act for Tri-Union’s failure to warn of the risks posed by methylmercury in its canned tuna.
The FDA previously issued a consumer advisory and a backgrounder about the risk of mercury in tuna. In 2004, while a similar lawsuit was pending in California (People v. Tri-Union Seafoods), the FDA sent a letter to the attorney general of California noting that state warning claims are preempted because the “existence of the lawsuit would ‘frustrate the FDA’s carefully considered federal approach’” to methylmercury content in tuna. A California court determined, based on the FDA’s action, that claims under California Proposition 65 were preempted by federal law.
The Third Circuit disagreed. It reversed the district court’s ruling that the state claims are preempted, and instead concluded that no preemption exists because FDA advisories on tuna and methylmercury are not “law.” The appellate court concluded that the FDA letter merits “a particularly low level of deference” because it is not “the product of an agency proceeding.” Yet, the the Third Circuit never indicated how a warning could have been issued without running afoul of the FDA and federal law, other than to say that a warning “could have specified that the risks become material only with frequent tuna consumption, and that moderate fish consumption offers positive health benefits.”
So how does this make sense? On the one hand, the FDA specifically said it intended to preempt state law; on the other, the court said it didn’t. The decision opens the door for even more confusing and conflicting local and state labeling requirements. Can this kind of confusion and conflict promote customer safety? Why is the Third Circuit going out of its way to disagree with the FDA and side with a person choosing a canned-tuna-only diet? Are state tort laws really meant to protect someone who makes this kind of extreme dietary choice?
