Another Reminder Why Indemnification and Insurance Requirements Are Important
Last month, a state judge in Minnesota awarded summary judgment to a lettuce supplier of restaurants associated with an E. coli outbreak in 2006. The restaurant supplier brought suit against its suppliers. The suit appears to have been based at least in part on an indemnification agreement between Vistar (which delivered lettuce to restaurants) and Bix (which supplied lettuce to Vistar). According to the court, the agreement required Bix to “indemnify and hold harmless the Buyer and its customers from any claim, demand, loss, damage, liability, cost and expense, directly or indirectly, arising out of, or in connection with, or resulting from, the willful or negligent acts or omissions of the seller . . . sold by the Seller . . . to the buyer.”
Vistar, according to the court, “delivered sealed packages” of lettuce to the restaurants and did not process the product. Bix “both processed the lettuce (chopped it up) and packaged the lettuce.”
The court granted summary judgment to Vistar for two reasons:
(1) Vistar was the “classic passive seller in the chain of distribution” and therefore was not a manufacturer under Minnesota law; and
(2) The language of the indemnity “is clear, inclusive, and unequivocal,” and “Vistar’s tender of the claims against it to Bix should be honored.”
As to the latter reason, the court found relevant that “Bix has $2,000,000 in direct coverage and $10,000,000 in excess coverage insurance that would cover the claims made against it.”
A couple of observations:
1. Importance of Being Named an Additional Insured – Surprisingly, it does not appear from the judge’s decision that Bix was required to name Vistar as an additional insured. Had Bix’s carrier named Vistar as an additional insured, Vistar could have recovered against Bix’s insurer directly. Requiring a supplier to provide insurance (and verifying that the supplier has named you as an additional insured without unacceptable conditions) is a relatively easy, yet important step to protect your business.
2. Liberal Reading of Indemnity Clause – The court says that the indemnity obligation, which requires “willful or negligent acts or omissions,” is “clear, inclusive and unequivocal.” Yet the court found no “willful or negligent act or omissions” on the part of Bix. In fact, commenting on Bix’s own motion for summary judgment requesting that the court rule it too is not liable as a matter of law, the court said that Bix’s “argument is not without merit.” Not all courts may interpret this indemnification clause so favorably in the absence of a supplier’s negligence. This is yet another reason to ensure that your supplier has provided adequate insurance.
More on Supply Chain Verification and Crisis Management
Food Safety Magazine’s latest issue focuses on “Industry in Crisis Mode.” The issue includes an article by Shaun Kennedy, director of the National Center for Food Protection and Defense (NCFPD). Mr. Kennedy provides a good overview of the elements of a supply chain verification program that any food seller should consider.
Mr. Kennedy acknowledges that costs for third-party audits, fixing supply chain problems, and establishing traceability can be high. To justify costs, he points to the recent experience of Maple Leaf Foods. According to Mr. Kennedy, Maple Leaf Foods incurred “direct costs to the company of over $20 million. The shareholder costs are even greater with its stock price having dropped by over 20% by the end of August since the announcement of the recall, a shift of over $200 million.” These costs do not include anything to compensate possible tort victims or to respond to inevitable products liability litigation (whether merited or not).
Court to Rule on Consumers' Expectations For Organic Cosmetics
Dr. Bronner’s Magic Soaps (“Dr. Bronner’s”) received a favorable ruling recently in its suit against competitors that it believes are misleading consumers by labeling cosmetic products as “Organic”. Part of Dr. Bronner’s claim appears to be that “Organic” standards established by the U.S. Department of Agriculture (“USDA”) set the bar for consumer expectations of "Organic" cosmetic products. The USDA’s National Organic Program (“NOP”) standards, according to the USDA, do not apply to “cosmetics, body care, or personal care products”. Dr. Bronner’s argues in its complaint that “[p]ersonal care products labeled as in compliance with ‘Organic’ or ‘Made with Organic [up to three specified ingredients]’ under the NOP criteria reflect basic organic consumer expectations . . . .” (Brackets in original.)
Last week, a California Superior Court in San Francisco overruled the demurrer of Ecocert France (SAS) and Ecocert, Inc. A demurrer is essentially a request made to a court, asking it to dismiss a lawsuit on the grounds that no legal claim is asserted.
According to Dr. Bronner’s, the “Court turned aside the defendants’ arguments that Dr. Bronner’s, in its complaint filed with the Court, had not sufficiently spelled out how actual consumers, the company and competition in the organic personal care industry have been hurt by the defendants’ deceptive practices.” The court’s ruling does not necessarily mean that Dr. Bronner’s is likely to succeed, only that it has articulated colorable claims. The court did not rule on the merits of these claims.
This case should be watched closely by those in cosmetics and food industries. Dr. Bronner’s claims turn, at least in part, on its view of “consumer expectations.” Do consumers have expectations as to what “Organic” means? Does it mean something different for cosmetic products? These are just a few of the significant questions that may be addressed in the litigation.
Salmon Labeling Probably Headed to Supreme Court
The U.S. Supreme Court signaled last week that it may review a California Supreme Court decision finding that federal law does not preempt claims for violations of state consumer protection laws concerning “selling artificially colored farmed salmon without disclosing to . . . customers the use of color additive.” Following a petition for certiorari filed in April, the Supreme Court issued an order last week inviting the Solicitor General “to file a brief in this case expressing the views of the United States.”
The Bush administration generally favors federal preemption of state consumer protection laws. Most Supreme Court watchers believe that the Court will grant certiorari if the Solicitor General advocates doing so. This case, if considered by the Supremes, is sure be significant with wide ranging implications for consumer protection claims concerning food product labeling.
The Billable Hour
A little off topic - I've been asked to speak at an upcoming CLE program at Seattle University Law School entitled "The Billable Hour: An Examination of Compensation." For those responsible for legal budgets (whether an in-house lawyer managing a budget or an outside lawyer like myself who is working within a budget), this promises to be a provocative conversation. According to the SU Law School online flyer:
"there has been a growing concern that the demands of increased billable hours [are] having unintended consequences and compromising the health and well-being of lawyers and the communities they service. At the same time, time-based billing practices can raise ethical questions and create perverse disincentives."
My own take, and I'm looking forward to what others think, is that lawyers and clients should regularly assess how they measure the value of their relationship. The billable hour is one of many available "tools" and continues to be among the most viable and ethical. Problems arise when lawyers and clients rely on the hourly billing format in a vacuum.
For example, an hourly billing arrangment without an agreed budget frequently leads to disintegration of client-lawyer relationships. Similarly, an hourly billing arrangment without agreement by the lawyer and the client about WHO is doing the billing leads to problems.
Outside lawyers and firms also shouldn't treat the hourly billing arrangement as a religon. For some clients and projects, straight hourly billing may not make sense. Other arrangments such as flat-fee billing, incentive billing, blended rates, etc. may make more sense for both the client and law firm.
Some In The Plaintiffs' Bar Favor Irradiation
As previously discussed on this blog, the FDA recently approved irradiation for iceberg lettuce and spinach. We pointed out that "irradiation may provide an added level of protection from food-borne illnesses such as salmonella and E. coli. When used in combination with other state-of-the-art food handling practices, irradiation should dramatically reduce the chances of transmitting food-borne illnesses to consumers."
Now, it appears that at least some in the plaintiffs' community agree that irradiation of fresh produce may be a good thing. Bill Marler, one of the leading plaintiffs' attorneys in the food liability area, is running a series of in-depth pieces on his blog on irradiation.
Mr. Marler's conclusion in part II of his series echoes what we've posted in this blog :"In summary, food irradiation is not a 'silver bullet' for food safety. However, the increasing problem of illnesses and deaths associated with consumption of fresh produce, including lettuce and spinach, emphasizes the need for an intervention."
Forest Through the Trees: Lessons from a Crisis Management Case Study
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There was a nice article in the Canadian legal publication Law Times about the aftermath of the Maple Leaf Foods recall. The article praises Maple Leaf Foods for taking quick steps to salvage consumer confidence in the face of a Listeria outbreak across Canada. Specifically, the article discusses how Maple Leaf Foods CEO Michael McCain “immediately took responsibility for the plant outbreak.”
McCain is quoted as saying that “[g]oing through the crisis there are two advisors I’ve paid no attention to. The first are the lawyers, and the second are the accountants . . . . It’s not about money or legal liability, this is about being accountable for providing consumers with safe food.”
Yet the author of the Law Times article interviewed a Canadian corporate communications expert who noted that “McCain likely did listen to legal counsel.” The expert said that McCain’s “statement was an acknowledgment that if limiting legal liability was the main objective of the company’s response, it would be near impossible to restore its reputation.”
“‘The whole reason that Maple Leaf has been successful, and even though the recall has cost them $20 million in product [recalls], [is that] their reputation is intact,’” the expert is quoted as saying.
Finally, the best quote from the article: “[L]awyers need to understand that legal liability isn’t the only factor to consider in a crisis. But that’s not an easy pill for many lawyers to swallow. They believe future litigation is prejudiced if a CEO makes an apology, says [the expert].”
California Menu Labeling Laws--Restaurants Beware of Asking What Your Customer Wants!
Yesterday, California became the first state in the Union to write into law menu labeling requirements. Like municipal ordinances recently enacted in New York City and Seattle, the California law requires certain “chain” restaurants to disclose nutritional information and calorie content information for certain items.
The law, to be phased in between 2009 and 2011, applies to restaurant chains with at least 20 locations that “offer for sale substantially the same menu items, or operates as a franchised outlet of a parent company . . . with the same name in the state that offer for sale substantially the same menu items.”
The new California law reads like a lawyer’s dream. Numerous exemptions are granted for certain grocery stores, “certified farmer’s markets” and others. Exemptions are also created to the exemptions. For example, “separately owned food facilities to which this section otherwise applies that are located in the grocery store” are not included in the “grocery store” exemption. To further add to the confusion, “grocery store” is defined to include convenience stores, though the law fails explain what that means. Does this mean that the law applies to a hamburger chain restaurant but not to the neighboring chain “convenience store” that sells the same hamburger but also a quart of milk? Does this make any sense? Won’t this statutue almost certainly generate significant litigation?
The labeling requirements apply to “standard menu items,” which are defined as “a food or beverage item offered for sale by a food facility through a menu, menu board, or display tag at least 180 days per calendar year . . . .” Yet a “standard menu item” does not include “a food item that is customized on a case-by-case basis in response to an unsolicited customer request.” What does "unsolicited customer request" mean? What about a sandwich shop that offers nearly infinite combinations of products? According to SUBWAY, “there are more than two million different sandwich combinations available" its menu.
Aside from being riddled with ambiguities, inconsistencies and impossible-to-interpret language, this blog has previously made the case that menu regulation should be the domain of uniform federal law and not inconsistent, piecemeal local ordinances. The California law is yet another argument in favor of federal preemption.
Section one of the California law cites national obesity statistics from the Centers for Disease Control and the federal Nutritional Labeling and Education Act of 1990. Nothing about this bill is specific to California. Because the law only applies to large restaurant chains, its impact is mostly on large national or regional companies. Ironically, the California legislature understood the problem of inconsistent regulation and chose to preempt all local and municipal regulation of restaurant menus. If menu regulation is an issue that needs regulation (and there are many good arguments why it does not), it should be taken up by Congress, the FDA and the USDA, not states or local municipalities.
