The FDA asserts in its inspection manual its right to photograph in your plant. Yet the FDA does not have statutory authority to photograph. The manual cites the following cases as authority for its right to photograph the inside of a plant: Dow Chem. Co. v. United States, 476 U.S. 227 (1986), and United States v. Acri Wholesale Grocery Co., 409 F. Supp. 529 (S.D. Iowa 1976). But these cases rely on the theory of implied consent or a minimal expectation of privacy. These cases do not hold that FDA has the right to photograph the interior of a food facility when the facility has a strict policy against photography and does not consent to the photography.
So, should you resist FDA's request to photograph?
The first thing you need to do is to ask yourself the following two questions:
- Do you have a policy against photography in your plant?
- If you do, is the policy strictly enforced?
If the answer to either question is no, then you're on shaky footing in resisting the FDA's request. By not having a policy or by not strictly enforcing the policy, FDA's legal authority based on implied consent is that much stronger.
Assuming your plant does have a no-photography policy that is strictly enforced, you need to assess whether the photography is worth the fight. It may be. Resisting the request for photos may be worthwhile to protect potential disclosure of trade secrets and to prevent out-of-context photographs from being used adversely by FDA. The problem is that the harder you push against FDA, the more likely that it will seek more information and the more likely that it will seek enforcement action.
In a future entry, we'll explore what legal remedies might be available to prevent the FDA from photographing the inside of your plant.
The Food Safety Modernization Act ("FSMA") significantly expands the FDA's ability to access a food company’s records.
The expanded authority is found in three places in the statute:
- FSMA § 101 amends 31 USC § 350c(a) and allows the FDA to obtain records related not only to a product that the FDA believes "will cause serious adverse health consequences or death to humans or animals" but also those related to "any other article of food" that the FDA believes is "likely to be affected in a similar manner."
This statute may allow FDA to "access and copy" all records in any format and at any location of products that are not known to be contaminated but that might share similar ingredients or be produced in a shared facility or that could otherwise be affected in a "similar manner" as products thought to be contaminated.
Section 101 was effective immediately on FSMA becoming law in January 2011.
- FSMA § 103 requires that FDA facilities (with certain exceptions) implement "Hazard Analysis and Risk-Based Preventative Controls." As part of this section, Congress requires the affected FDA facilities to keep "records documenting the monitoring of the preventative controls" and to keep a "written plan that documents and describes the procedures used by the facility to comply with the requirements of this section." Congress requires that these records "be made promptly available" to the FDA upon "oral or written request." The statute also requires that records be kept for at least two years.
Note that unlike in section 101, Congress did not use the term "copy" in section 103. This section instead says that records must "be made promptly available."
The question remains open whether the FDA interprets "be made promptly available" to mean copy and whether such a broad interpretation will be held up by the courts. Section 103 is effective in July 2012.
- FSMA § 202 requires the FDA by January 2013 to create a "program for the testing of food by accredited laboratories." By July 2013, section 202 will require testing by an "owner or consignee (i) in response to a specific testing requirement under this Act or implementing regulations, when applied to address an identified or suspected food safety problem; and (ii) as required by the Secretary, as the Secretary deems appropriate, to address an identified or suspected food safety problem.“
Test results from the FDA-accredited lab "shall be sent directly to the [FDA]" unless exempted by regulation.
The big questions under section 202 are whether:
a. Routine product and environmental testing accomplished for the purpose of a food safety plan under section 103 will be considered "in response to a specific testing requirement . . . when applied to address an identified or suspected food safety problem" and
b. The FDA will exempt certain testing records under this provision.
So, what should you do to prepare for the FDA's considerable expansion of its ability to access your records?
Here are five things that a food company should consider:
- Understand what records the FDA does not have the right to access (recipes, financial, pricing, research, personnel or certain sales data), and maintain these separate from records the FDA can access.
- Create and enforce a document destruction policy that conforms with FSMA.
- Create a standard FOIA letter to present to the FDA when it requests letters explaining that it considers information provided to be trade secrets, confidential and proprietary.
- Create and train employees on a confidential FDA inspection policy that involves legal counsel and therefore can be cloaked in the attorney-client privilege.
- Understand what finished product and environmental testing is needed and not needed for a section 103 food safety plan.
Food Companies Should Revisit Insurance Program and Other Risk Management in Light of Emerging Massive European Union E. coli Outbreak
The E. coli outbreak unraveling now in the European Union, centered primarily in Germany, is setting new records for both the number of affected persons and the number of persons diagnosed with Hemolytic Uremic Syndrome (HUS), a serious complication from E. coli infection (HUS can lead to kidney failure, brain damage and death). As of the writing of this blog, the latest news can be read here and here. To date, 17 people are believed to have died, 470 people have been diagnosed with HUS, and 1,534 people have been infected with E. coli.
The strain of E. coli is reported to be E. coli O104:H4, a previously rare strain of shiga toxin producing E. coli. The source is still a mystery, but many believe it to be associated with fresh produce.
How is this relevant for U.S. food businesses? At the very least, the European Union outbreak changes the equation for liability exposure. Previously, most food safety experts would opine that about 10% of those infected with a shiga toxin producing E. coli would be expected to develop HUS. In the European Union outbreak, the percentage of HUS cases now exceeds 30%. In even a small outbreak, a 30% HUS rate could increase exposure threefold.
Now is the time to:
- Convene your coverage team (brokers, risk management and legal) to reevaluate and audit coverage,
- Reevaluate your suppliers and food processing procedures,
- Revise and clarify your supply chain/co-packing agreements, and
- Rehearse your recall, RFR and crisis management plans.
Thank you to Parker Smith & Feek for inviting me to speak to about FSMA and how it’s changing the status quo. My slide-deck can be viewed here.
Following my talk, Marty Bask from Parker Smith & Feek led a very interesting discussion about the pros and cons of product recall and contamination coverage. A link to our recent discussion on this blog on what to ask when purchasing this kind of coverage is here.
I authored the following article that appeared in the April 29, 2011 issue of Food Chemical News:
As the clock ticks on the FDA’s 24-hour deadline to report to the FDA’s Reportable Food Registry, a food retailer, manufacturer or supplier is forced to make snap decisions that can profoundly impact business and litigation.
Once a report is submitted, the FDA promptly alerts customers and suppliers of the "reasonable probability" that the product will result in "adverse health consequences or death." Even if a recall has not yet been issued, an RFR report often has the consequences of a Class I recall. While RFR reports can be amended or withdrawn based on new information, in the world of food products, the bell almost never can be unrung, food companies are now painfully aware.
But some burning questions regarding FDA’s RFR remain for the food industry, including if and how the agency will:
(1) use the RFR as an enforcement tool;
(2) move toward the concept of "control" and away from "possession" in interpreting one of the key exceptions to the RFR;
(3) address what it perceives as "out of control" undeclared allergen problems; and
(4) use the information obtained through the RFR to shape coming regulations on required preventive controls.
Let’s take a stab at answering some of these questions and a few others.
Will FDA Use RFR as an Enforcement Tool?
The RFR was created by Congress as part of the Food and Drug Administration Amendments Act of 2007 and is codified at 21 U.S.C. §350f. The RFR requires that "as soon as practicable, but in no case later than 24 hours after a responsible party determines that an article of food is a reportable food, the responsible party shall  (A) submit a report to [FDA] ... and (B) investigate the cause of the adulteration if the adulteration of the article of food may have originated with the responsible party." 21 U.S.C. §350f(d)(1).
The reporting includes a "one step up and one step back" requirement. Food companies must identify their suppliers and customers to FDA through the web portal.
The FDA Food Safety Modernization Act (FSMA) tweaks the RFR and requires the FDA to promulgate new regulations requiring submission of "consumer-orientated information," including a description, product ID codes, contact information and anything else FDA deems necessary to enable consumers to accurately identify whether they are in possession of the reportable food.
The congressional intent behind the RFR is to provide the FDA with a mechanism to track patterns of adulterated product, essentially as an information gathering tool. Many in the industry fear that the FDA also will use the RFR as an enforcement tool. Even an unintentional failure to report in compliance with 21 U.S.C. §350f constitutes a criminal violation of the Food, Drug, and Cosmetic Act (FD&C Act).
It’s not clear if the FDA has initiated any enforcement action based on the RFR yet, but this should be monitored closely by the food industry.
Can You Take Advantage of Intra-Company Transfer Exception to Reporting Obligation?
21 U.S.C. § 350f(d)(2) provides an exception to the reporting obligation if:
The challenge with interpreting this exception centers on the term "transfer." The FDA's current draft guidance says: "A transfer to another person occurs when the responsible person releases the food to another person. 'Person' is defined in section 201(e) of the FD&C Act as including individuals, partnerships, corporations and associations. FDA does not consider an intra-company transfer in a vertically integrated company to be a 'transfer to another person,' where the company maintains continuous possession of the article of food."
The rub is that if the product is shipped to a third-party warehouse, but the responsible party maintains ownership and direct control over distribution, the product is reportable. The FDA’s draft guidance rationalizes that "'[p]erson is defined in section 201(e) of the FD&C Act (21 U.S.C. 321(e)) as including individuals, partnerships, corporations, and associations," and a "warehouse operator is a distinct legal person."
Another scenario under the 21 U.S.C. § 350f(d)(2) exception that is not addressed by the FDA's draft guidance arises if the product is subject to an intra-company transfer but the company uses a common carrier to transport the product. Under the FDA's rationale that use of a third-party warehouse takes a company out of the exception, a common carrier also could be considered a "distinct legal person" to which the product is transferred, eliminating the exception and requiring the company to report.
Many believe that the FDA (and the statute) could not intend that an otherwise unreportable food under 21 U.S.C. §350f(d)(2) become reportable for no reason other than that a company uses a third-party trucking company in an intra-company transfer. Many also question whether the FDA's current position on third-party warehouses is correct if the food company retains complete control over the product.
Neither of these policies reflects the reality of how many food companies operate. From a food safety policy perspective, many believe that food companies should not be forced into the business of trucking and warehousing.
Some believe that the FDA might be moving away from interpreting "transfer" through the lens of possession and broadening its view toward an interpretation based on issues of control. Control might reflect more accurately the reality of food production and promote more effectively food safety and the intent of the RFR. Whether the FDA will move toward a notion of control should be revealed in the FDA's expected amendments to its draft guidance and should be monitored closely by the industry.
In January 2011, the FDA issued its first annual report on the RFR, which provides statistics on the first full year of the RFR (2,240 entries, 229 "primary reports," a breakdown by hazards, etc.) (see FCN Jan. 28, Page 8). Beyond the statistics, companies should take particular note of the FDA’s focus on both allergen controls and creation of food safety plans.
The FDA reported that undeclared allergens/intolerances accounted for 34.9% of its primary reports. Industry experts assert that the FDA believes that the industry does not have good control over the issue of undeclared allergens. These experts believe that the FDA will give special attention to this issue in promulgating regulations under the FSMA's requirements for hazard analysis and preventive controls. In anticipation, manufacturers should consider now how they can change manufacturing processes to address the undeclared allergen issue.
Do You Have A Food Safety Plan? If So, Will It Be Sufficient Under FSMA?
In FDA’s report on its RFR results , FDA Deputy Commissioner for Foods Michael Taylor says “[s]everal key U.S. industries are already re-evaluating their hazard and preventive controls, core principles of the Food Safety Modernization Act recently passed by Congress. We also anticipate improved reporting as we continue our vigorous outreach to food facilities through federal, state, local and foreign agencies, to help us expand the positive effect of the RFR on the safety of the U.S. food supply.”
The RFR will be a guide for the FDA in risk assessment and writing regulations for preventive controls and what companies must include in their food safety plans. The new hazard analysis and preventive controls requirements in FSMA are not required to go into effect until July 4, 2012, 18 months from the date of enactment.
Deputy Commissioner Taylor's comments suggest that industry standards already might be moving in the same direction. To mitigate the risk of FDA enforcement actions, product liability claims, supply chain contract claims and recalls, food manufacturers should anticipate the FDA's eventual rule making, and update or create food safety plans that address the hazard analysis and preventive controls prescribed by the FSMA. One way to anticipate FDA's direction is to mine the information FDA has collected (and continues to collect) as part of the RFR.
(A) the adulteration originated with the responsible party;
(B) the responsible party detected the adulteration prior to any transfer to another person of such article of food; and
(C) the responsible party –
(i) corrected such adulteration; or
(ii) destroyed or caused the destruction of such article of food.
On February 24, 2011, Lee Smith and I presented "How Regulatory Changes Affect Litigation Risks" to the Grocery Manufacturers Association's food litigation conference. A link to the slide-deck can be found here.
We discussed ways that the Reportable Food Registry (RFR) and the Food Safety Modernization Act (FSMA) are affecting litigation now and can be expected to affect litigation in the near term.
In particular, we discussed:
- Ongoing and pending changes to the RFR
- FSMA’s grant of records access to FDA
- Mandatory recall authority and how this may delay certain recalls
- Suspension of FDA registration
- Hazard analysis and preventative controls: What are they? How do they differ from HAACP? How they will be effective with or without FDA rulemaking
- Regulation of chemicals under FSMA (and under proposed changes to TSCA and Proposition 65 in California)
- Specific things that food sellers should consider now to reduce risk
Let me know if your business is interested in an in-house, customized presentation or training on the RFR and FSMA.
Last week, the FDA issued its first annual report on the Reportable Food Registry (RFR). The report provides statistics on the first year of the RFR (2240 entries, 229 "primary reports," a breakdown of the report by hazards, etc.).
Beyond the statistics, the FDA report should be noted by food companies for two reasons:
- Food Safety Plans
FDA Deputy Commissioner for Foods Michael Taylor says that “[s]everal key U.S. industries are already re-evaluating their hazard and preventive controls, core principles of the Food Safety Modernization Act recently passed by Congress. We also anticipate improved reporting as we continue our vigorous outreach to food facilities through federal, state, local and foreign agencies, to help us expand the positive effect of the RFR on the safety of the U.S. food supply.”
The new hazard analysis and preventative controls requirements in the Food Safety Modernization Act (FSMA) are not effective for 18 months following passage. Deputy Commissioner Taylor's comments suggest that industry standards may already be moving in that direction . To mitigate exposure and risk, FDA enforcement actions, product liability claims, supply chain contract claims and recalls, food manufacturers may want to consider updating and/or creating food safety plans that address the hazard analysis and preventative controls prescribed by the FSMA.
- Allergen Controls
The FDA reports undeclared allergens/intolerances accounted for 34.9 percent of the primary reports. Industry experts assert that the FDA believes that the industry does not in general have good control over the issue of undeclared allergens. These experts believe that the FDA will give special attention to the issue of undeclared allergens/intolerances in promulgating regulations under the FSMA's requirements for hazard analysis and preventative controls (see point 1 above). In anticipation of the FDA's concern, manufacturers should consider now how they can change manufacturing processes to address the undeclared allergen issue.
President Obama signed into law today the Food Safety Modernization Act (FSMA).
Companies with facilities subject to FDA jurisdiction should take immediate steps to review and, where necessary, modify SOPs, policies and procedures.
For example, given the FDA's expanded access to business records, companies should set SOPs that anticipate (before a crisis occurs) what records they may have to turn over and what they may not. Food companies should take steps to protect confidential and proprietary information.
Companies also should anticipate now how they need to change their policies and approaches to mandatory recalls and whistleblower protections.
These parts of the legislation take effect today:
- Stronger records access authority by FDA (FSMA § 101)
- When FDA determines a "reasonable probability" of "serious adverse health consequences"
- FDA can access records of other food affected in a similar manner
- But FDA must show proper credentials and provide written notice
- Mandatory recall authority (FSMA § 206)
- FDA can order a recall if it finds a "reasonable probability" that
- food is adulterated or misbranded; and
- there may be serious adverse health consequences
- FDA has to provide an opportunity for a voluntary recall
- FDA will provide an informal hearing within two days of the order’s issuance
- FDA can order a recall if it finds a "reasonable probability" that
- Increased frequency of inspections (FSMA § 201)
- FDA will immediately increase the frequency of inspections
- FDA will apply a risk-based approach to determine priorities
- Whistleblower protection (FSMA § 402)
- Protects employees who:
- Provide information re violation of FDC Act ,
- Testify, assist or participate in a proceeding re a violation, and/or
- Object to "activity, policy, practice or assigned task" they "reasonably believe to be a violation"
- Protects employees who:
- Refused admission of imports if foreign facility refuses inspection (FSMA § 306)
- Foreign establishments must allow entry to U.S. inspectors within 24 hours of requesting entry
- Or imported food will be refused admission.
Future blog entries will discuss compliance with other provisions of the FSMA scheduled to be phased-in. If you are interested in a more detailed in-house discussion of the FSMA and its effect on your company, please let us know.
For years, a debate has raged on the merits of vesting the FDA with mandatory recall powers. Mandatory recall is part of the food safety legislation that may or may not pass in this Congress, so it’s worth discussing. At present, the FDA lacks any power to order a recall. Its only legal authority is administrative detention and seizure.
Many, including some regulators, have argued against mandatory recall because it will result in less and less timely recalls. The argument that mandatory recalls may result in less timely recalls goes as follows:
- Under the current system (where FDA lacks mandatory recall authority), the onus is on the food seller to initiate the recall. If it doesn't issue a recall in the face of an FDA request to issue a recall, the food seller faces the dire consequences of FDA's bully pulpit (press releases from FDA explaining why the food is unsafe) and possibly a seizure order. In the event of foodborne illnesses, ignoring an FDA request may also be grounds for punitive damages under the laws of some states;
- Because the onus under the current system is on the food seller (and not the FDA), the FDA frequently defers to the food seller's judgment when the facts surrounding a potential recall remain murky and uncertain. The FDA is not required to make a judgment about a recall and, for political reasons, often refrains from or delays making a decision as to whether to request a recall;
- Mandatory recall may reverse the dynamic and remove much of the onus from the food seller and put it on FDA. Mandatory recall may give the food seller cover if it chooses to delay or not issue a recall. If a food seller believes that its product is unlikely to be a threat to human or animal health, it might choose to wait until the FDA orders a recall. Under the current system, most food sellers will err on the side of caution when deciding whether or not to issue a recall. If the facts surrounding a recall are murky or uncertain, a mandatory recall regime may make it more prudent for a seller to wait for the FDA to decide. If the FDA is worried about being too trigger happy or quick to order recalls, a recall that may have been issued routinely under the current system may (ironically) never happen if FDA is vested with mandatory recall authority.
Mandatory recall authority, as its currently written in S. 510, may also change the threshold of when recalls are initiated. The threshold for a recall under sec. 206 of S.510 is described as when "there is a reasonable probability that an article of food . . . is adulterated . . . or misbranded . . . and the use of or exposure to such article will cause serious adverse health consequences or death to humans or animals."
The language of the statute closely follows what the FDA currently defines as a class I recall. But what about situations defined under the current scheme as class II or class III recalls? FDA's definition of a Class II recall is "a situation in which use of or exposure to a violative product may cause temporary or medically reversible adverse health consequences or where the probability of serious adverse health consequences is remote." A Class III recall is "a situation in which use of or exposure to a violative product is not likely to cause adverse health consequences." Query whether the statute lets foodd sellers off the hook for issuing recalls in Class II or Class III situations?
Note that FDA appears to retain some power even if there is not "reasonable probability" that the product will "cause serious adverse health consequences or death." S. 510 appears to lower the threshold for administrative detention by FDA by removing the condition that the food presents a risk of serious adverse health consequences. And, under S. 510, FDA would continue to have seizure power. The standard for seizure is simply if the food is adulterated or misbranded. One has to wonder whether FDA would use its limited resources on a seizure action in a class II or class III food recall where the chances of serious adverse health consequences are remote or not likely.
Ken posted an entry with the title: “Can Business Lawyers Afford to Practice ‘Defensively.’” I’ve been a business lawyer for almost 30 years, so I think I have at least some perspective on that issue and I thought I’d contribute to the discussion with some historical observations. I apologize in advance if I sound like I’m suggesting that someone get off my lawn.
There are significant differences between legal practice today and when I began. You know longer hear the clack of typewriters at the secretaries' desks and I can communicate with a client in a foreign country as easily and quickly as I can one next door. We see our clients in the office less frequently and are less frequently physically on their premises. Yet we can watch a webcam of the construction of a project we’ve worked on, even though it’s thousands of miles away, 24/7 in real time.
But the difference I’d like to highlight is the slicing and dicing of legal work among firms. To be clear, I am not complaining about this. I get my share of clients who hire me for exactly my kind of expertise, whether in banking, agricultural, food law, Native American law or commercial law. I appreciate their business and would not recommend they use someone with less expertise somewhere else.
But there is a cost, and the cost can show up in exactly the situations Ken was describing in his blog entry.
When I first started out, the firm did all the legal work for four major clients, and everyone in the firm was indoctrinated into the ins and outs of dealing with these clients, from the CEO to the general counsel’s office and managers we would work with all the time. You quickly learned their risk profiles, which one wanted no stone left unturned and which ones didn’t want you to sweat the small stuff. It did not take long before it was second nature to translate for one client the question of “should we do this?” to “should we do this where we might have no risk of loss?” and for another as “should we do this so long as our chances of success are better than 50/50?”
All four of those clients are gone, one way or another: merged or retreated from the market or having chosen to send their legal business elsewhere. We still do have clients like that, although the firm is so large and diverse it is less certain that everyone will work for those clients. And it is hard to overstate how much easier it is to answer the kind of questions Ken is talking about for such clients.
When I do get hired on a one-time basis, I try as best I can to determine what the company’s risk profile is before I ever give any advice. There are many obstacles to this: my initial contact might be another outside counsel who is barely more clued in than I am, or it might be an inside counsel who hasn’t been with the company long, or the real decision maker is three steps up from my contact, and isn’t telling.
In terms of today’s jargon, the more transparency, the better the legal advice will match the client’s risk profile. The more opacity, the more likely I am to practice defensively.
Amidst rising incidences of hospitalizations in college and teenage drinkers linked to consumption of alcoholic energy drinks, the Washington State Liquor Control Board banned their sale effective tomorrow, November 18, 2010. The move came on the heels of a request by Washington Governor Christine Gregoire, whose office stated in a November 10 press release that they were “…particularly concerned that these drinks tend to target young people.”
The Liquor Control Board placed the ban in an emergency ruling which will last for 120 days. During that time, the Liquor Control Board will move to make the ban permanent. Liquor Control Board Chairperson Sharon Foster stated, “[t]he Board is acting in the public safety…the Board is acting now to ensure these products do not contribute to a tragedy before the Food and Drug Administration or Legislature can act.” Earlier this year, the Liquor Control Board had lobbied for State legislative action to ban the sale of caffeinated malt beverages in Washington but those efforts were unsuccessful. A list of particular products affected by the Liquor Control Board’s ruling can be seen here.
Washington’s ban is merely the most recent action in an ever increasing movement by states to control the sale of caffeinated alcoholic beverages. The Oregon Liquor Control Commission Chairman stated in an October press release that, “…alcoholic energy drinks should be removed from the market until further research isdone.” The OLCC also stated that it is currently looking into possible regulatory efforts with the state legislature and is reaching out to community organizations to warn them of the dangers of the beverages.
While California’s Department of Alcoholic Beverage Control has not yet made a statement regarding the drinks, Connecticut announced Monday that it had reached agreements with state distributors to voluntarily stop shipments of caffeinated alcoholic beverages starting December 10, 2010. Michigan has banned one particular brand of caffeinated alcoholic beverage, Four Loko. New York has reached an agreement with Phusion Projects LLC, the manufacturer of Four Loko, to stop sales in the state until “…emerging science, regulatory developments or other relevant changes in circumstances arise." Utah and Oklahoma have followed Washington’s lead in banning the sale of any brands altogether. Massachusetts’ Alcoholic Beverage Control Commission stated that it will file an emergency ruling, similar to Washington’s, on Monday, November 22, 2010.
At the federal level, the Food and Drug Administration (“FDA”) is currently reviewing whether caffeine is a safe additive to alcoholic beverages. A negative finding would essentially ban the sale of caffeinated alcoholic beverages nationwide. It is widely assumed the FDA will, in fact, reach a negative finding. NY Senator Chuck Schumer, who has been lobbying for a ban on the drinks, stated that the FDA decision “…should be the nail in the coffin of these dangerous and toxic drinks.” The FDA decision is expected within the week.
Here's a link to an article that appeared recently in Inside Washington's FDA Week concerning the issue of front-of-package labeling (FOP). The article takes aim at the debate about state vs. federal regulation of FOP labeling. Here's a link to a recent post in this blog on the FOP issue.
Cheesemakers have endured a string of bad publicity recently over food safety. Cheesemakers, especially raw milk cheesemakers, are in the cross hairs of the FDA, the media, retailers and plaintiffs’ lawyers such as Bill Marler. I was interviewed last week on FDA seizure issues by the Pacific Northwest Cheese Project. Click here for the PowerPoint slides from my presentation to the American Cheese Society's annual meeting last August entitled "Product Liability - Protect Yourself and Protect Your Business."
I appreciate why lawyers practice defensively. We are risk adverse as a profession. But is this what our clients want from us? After all, our clients are usually in a risk-taking position when they seek our advice in the first place. In today's business climate, competition in almost ever sector is fierce to say the least. Our business clients are often in the position where they need to innovate, stay ahead of the competition or go extinct. For them, a "blue ocean" strategy is often the only pathway for survival.
Here's a common scenario in the practice of business law: client asks a question or poses a problem to his lawyer. Lawyer responds with a menu of options to solve problem. Lawyer goes through pros and cons of each but backs away from making a strong recommendation (or recommends the most risk-adverse solution). Lawyer feels that it’s the client's choice (which it is) and also wants to avoid blame if the recommendation is wrong (lawyer will be blamed anyway). Client feels dissatisfied because:
a. Client may not share the expertise/experience of his lawyer and wants a stronger recommendation; or
b. Client feels that lawyer may not be interested in really understanding the problem and/or the client's business; or
c. Client feels that lawyer is unwilling to put "skin in the game" and share the risk with the client; or
d. All of the above.
In litigation, defensive practice of law often comes in the form of "scorched earth" discovery and unnecessary motion practice. Attorneys tell their clients that they can't leave a stone unturned to prepare the case for trial (though they might not have a clue as to their trial strategy). Lawyers tell their clients that they can forgo the deposition but it's "risky." Although the lawyer advises the client that failure to conduct expensive discovery practice is "risky," the lawyer may be reluctant to help quantify the risk for the client. And if the lawyer is paid hourly, little incentive exists for the lawyer to make hard decisions in litigation as to what's necessary to try the case and what may not be. So the end result may be bloated fees and a disgruntled client (and often a bad result).
As outside counsel, we need to ask why clients hire us. Do they hire us to prescribe multiple choice solutions without a real recommendation or a path of scorched-earth litigation? Or do our clients hire us because (1) we have expertise, creativity and time that the client may not have in house and (2) the client expects us to solve its problem? With the legal monopoly threatened (look no further than the dramatic changes in professional rules in Great Britain), don't we have to provide clients the service they want? Your comments and thoughts are most welcome.
The FDA recently took the relatively unusual step of obtaining a court-issued warrant to seize all cheese products at Estrella Family Creamery, a small, family-owned artisan cheese maker in Washington State. According to the United States Attorney's Office for the Western District of Washington, "the FDA asked Estrella to recall all cheese products. The company refused." The FDA requested the recall after both products and the manufacturing environment at Estrella tested positive for Listeria. A copy of the FDA form 483 report immediately pre-dating the recall request is here.
As the Estrella situation illustrates, the FDA is not just focused on large-scale manufacturing. As the FDA and USDA move to more risk-based allocation of resources, they are increasingly concerned about smaller operations and retail. Below are issues any food manufacturer must tackle when it comes to Listeria (much of this also applies to other food-borne pathogens).
What is Listeria?
Listeria monocytogenes is a bacterium that causes listeriosis, which primarily affects persons of advanced age, pregnant women, newborns, and adults with weakened immune systems. Though it affects only a small portion of the population, Listeria is the most deadly food-borne pathogen in the United States, killing 20-30% of all those who become seriously ill.
What should you do if your product tests positive for Listeria?
Assemble your well-rehearsed crisis management team immediately if a product tests positive (or if a regulator believes that your product may be contaminated). Members of the crisis management team; food safety personnel; company executives; and representatives from accounting, legal, supply chain, sales and customer service all are essential in the decision making process below.
Can you trace back and isolate contamination?
Quality assurance and food safety personnel need to answer trace-back issues as soon as possible. Can you determine the source of the contamination? Is it limited to one lot or a single day of production? How often are production facilities sanitized? How often are production surfaces swabbed for Listeria? Does the production facility re-use contaminated product from shift to shift?
Will you have to issue a recall?
Both the FDA and USDA lack mandatory recall authority. Though, as Estrella learned, the agencies do have the bully pulpit and the ability to get a court order to seize products. Because of the high mortality rate, regulators (federal and state) take any positive Listeria test result in food products extremely seriously.
If the food is considered a ready-to-eat product (RTE), a positive Listeria test will almost invariably lead to the FDA or USDA requesting a class I recall.
Even for a non-RTE food, a positive Listeria test will lead to a requested recall. If the agencies believe that the cooking instructions are clear, are easily followed by consumers and, if followed, will kill the bacterium, then the recall may be considered class II.
A primary difference between class I and II is that the class I recall will result in much greater publicity. For FDA-regulated facilities, a class I recall also triggers reporting and notification requirements under the Reportable Food Registry (RFR).
What does the Reportable Food Registry require?
RFR requires FDA-registered facilities to report to the FDA portal within 24 hours when there is a "reasonable probability that an article of food will cause serious adverse health consequences." As part of the report, information must be submitted "one step back and one step forward" in the supply chain. Once a report is submitted, the FDA will promptly alert your customers of the "reasonable probability" that your product will result in "adverse health consequences or death." If suppliers and customers are also FDA facilities, the FDA will also pressure those companies to report to the portal.
The ticking of the RFR's 24-hour reporting deadline forces a company to make snap decisions that might affect its entire business. While RFR reports can be amended or withdrawn based on new information, in the world of food products, the bell can almost never be unrung. A more lengthy discussion of the RFR can be found here.
How do you marshal your case with the regulators?
Assuming that you have information showing that contamination is limited (or non-existent), how do you convince the regulators? The FDA and USDA’s concern is public health (and politics). The regulators’ concern is not for your business.
Providing information to the regulators in a manner they perceive as credible, prompt and transparent is critical. Once the regulators lose confidence in your company's credibility and competence, the game may be over. In most cases, the most effective way to marshal your evidence is a well-prepared and credentialed crisis management team (e.g., food safety, quality assurance, supply chain, accounting, sales, legal, media, etc.).
There is a niche market out there for celebrity-endorsed food products that benefit charities. PLB Sports out of Pittsburgh appears to be a market leader in this niche, labeling products ranging from beef jerky to salsa to mustard with images and slogans relating to both individual sports figures and teams. Probably the most famous of these were Flutie Flakes, a breakfast cereal that supported an autism charity founded by Doug and Laurie Flutie in honor of their son. Usually, the product’s appeal—and its distribution—will be limited to the area where the team or athlete performs; Wayne Chrebet’s fans outside the New York area would have had to buy through PLB’s website.
Chad Ochocinco sponsored “OchocincO’s”, a honey nut toasted oat cereal, to benefit Feed the Children. Mr. Ochocinco, né Chad Johnson, is a flamboyant wide receiver for the Cincinnati Bengals, as renowned for his Twitter feed as his receiving prowess. His personal website will allow you to buy a t-shirt with the slogan, “That ain’t my baby.” He has 1.3 million followers on Twitter and 800,000 people “like” his Facebook page, which can garner over a thousand responses to him asking “what are y’all eating for lunch?” He does not lead a quiet life.
So in some ways it comes as no surprise that there was not just a misprint on the label of “OchocincO’s.” The problem apparently was a wrong toll-free prefix, which isn’t surprising since there are so many of them. Clearly someone, and not Mr. Ochocinco, failed to proof the copy on the box sufficiently before it was printed, the kind of mistake that happens every day. But this particular misprint would lead one, rather than to a number for more information about his selected charity, instead to a phone sex line. And the market for such cereals is of course young fans.
The boxes have been withdrawn from stores and the PLB website states that new boxes with the correct toll-free number will be printed. Presumably, PLB and the printer will settle whose fault the mistake was.
One imagines, though, that sales of OchcincO’s will soar because of the publicity from the mistake, greatly benefiting his charity. And somehow this just doesn’t seem like it would have happened with Flutie Flakes or David Eckstein’s Ecks’O’s.
This article was first published on August 27, 2010 in Food Chemical News as part of its "On the Front Burner" series.
In its first year, the FDA’s Reportable Food Registry has proven itself to be a high-stakes game changer. The ticking of the RFR's 24-hour reporting deadline forces a company to make snap decisions that might affect its entire business (not to mention the health of its customers). Once a report is submitted, FDA will promptly alert your customers of the "reasonable probability" that your product will result in "adverse health consequences or death." While RFR reports can be amended or withdrawn based on new information, in the world of food products, the bell can almost never be unrung.
On the other hand, the civil and criminal consequences of failing to report when obligated to do so can be devastating. Companies that fail to comply with RFR requirements (even without intention not to comply) can be charged with felonies, and subject to fines and jail time for their executives. Those violating the RFR with intent are subject to greater penalties.
Assuming your company is a "responsible party" (meaning an "owner, operator, or agent in charge of a domestic or foreign facility" required to register under 415(a) of the FD&C Act) and already follows a HACCP plan, a GMP, GAPs, etc., what else can it do to prepare for and, if possible, prevent an RFR report? The answer is a lot. At minimum, here's what should be in any food company's RFR toolkit/standard operating procedures (SOPs):Continue Reading...
The quote, "Watch what we do, not what we say," is attributed to John Mitchell, Nixon's first attorney general. It can apply, however, to the behavior of consumers with respect to shrimp from the Gulf of Mexico, and that will be watched carefully everyone from shrimp fishers to the owners of your local fish market. The FDA says flatly, about Gulf shrimp, "the public should not be concerned about the safety of seafood in stores at this time." Not surprisingly, a coalition led by the Natural Resources Defense Council, while not going so far as to advise anyone not to eat Gulf shrimp, thinks higher standards and more testing is appropriate, and has so advised both the FDA and NOAA.
Shrimpers themselves are of course worried about the backlash if any tainted shrimp are consumed. Similar to the dialogue I had with Jim Prevor a few months ago, there is often a difference between what we might think of as rational behavior and how consumers in fact react. Every year, a certain percentage of shrimp turn bad for reasons unrelated to oil spills; in 2010, it's likely a consumer who gets a bad shrimp will first blame it on the oil spill.
According to an AP article reprinted in today's Wall Street Journal, however, the reality on the ground in fish stores is less grim. It quotes the supplier to Hapuku Fish Shop, an upscale store in the Rockridge District of Oakland, as saying, "the shrimp has been nothing less than spectacular lately." The shop itself is selling about as much of the shrimp as it did before the spill.
President Obama also has put his stomach where his mouth is, serving Gulf shrimp at his birthday party.
As with any seafood, consumers of Gulf shrimp should handle it properly and apply their own smell test before cooking and before eating.
This is the title of a presentation I'll be giving at the American Cheese Society's (ACS) annual meeting in Seattle. I'll be speaking along with Marc Baker and Jill Perucca from the Elliott, Powell, Baden & Baker insurance agency at 3:30 p.m. on August 27. The slide deck I intend to use can be found here.
Michael Pollan and Laurie Demeritt keynote the ACS event that unites the nation's cheese makers in the Emerald City for four days (August 25-28).
Equally as compelling as the keynotes (and our presentation on product liability avoidance) will be presentations by other Stoel Rives lawyers:
Anne Glazer on Trademarks: The Legal Perspective on the Care and Feeding of Your Brand (1:30 p.m. on August 27); and
Peter Serrurier and Ryan Steen on Water, Water, Waste Water Everywhere (10 a.m. on August 27)
If you are at the ACS conference and can pull yourself away from the concurrent presentations on various cheese making topics, stop by and meet the best food business lawyers in the Pacific Northwest.
FDA recently released updates to its Draft Industry Guidance for the Reportable Food Registry (“RFR”). The RFR, not rolled out until the fall of 2009, is still new to many companies. FDA, overwhelmed by the information coming through the RFR, is still trying to determine how to use the information submitted to the RFR and how to advise industry.
Among the more interesting clarifications in the May updates is the importance FDA puts on the possession of reportable food as a trigger for obligations under the RFR. For example, if produce is still in the field (contracted but not owned by a food seller) and tests positive for a pathogen, no reporting obligation accrues.
[F]ood facility that contracted with the farmer and tested the produce in the field is not required to submit a reportable food report, provided that the facility did not manufacture, process, pack, or hold the produce and therefore never became a responsible party with respect to the produce. However, if the field had been harvested and the contaminated produce had been moved to the food facility, the facility would have become a responsible party because it “held” the food and would be required to submit a reportable food report.
On the other hand, if the same contaminated produce is received on a company’s premises, stays in the trailer, tests positive and is rejected, a reporting obligation is triggered (even though the company did not take ownership of the product).
FDA’s description of this scenario in a Q and A format:
Q: Our manufacturing facility receives bulk trailer shipments of ingredients from our suppliers. A truck driver brings a trailer full of bulk ingredients onto our property, drops off the trailer, and drives away. However, as company policy, we do not off-load the trailers that are delivered to our facility or take ownership of the food in the trailers until after we test a sample of the food and determine that the food is acceptable. If we “reject” a shipment, i.e., return the food to the supplier, because the sample results indicate that the food is a reportable food, are we required to submit a reportable food report?
A: Yes, provided that you are a facility required to register with FDA under section 415(a) of the FD&C Act, you must submit a report for the food you determined to be a reportable food, even though you returned the food to your supplier. FDA considers that your facility “held” the reportable food because the trailers were no longer in transit once they were dropped off on your property. Thus, you are a responsible party with regard to the reportable food. Provided that the adulteration did not originate with you, you do not meet the criteria for the exemption from reporting in section 417(d)(2) (see Question E.3).
TAKE AWAY: If a company can set up a system to do its micro-biological testing before the product arrives on its premises or at its warehouse (public or private), it should. If faced with a reportable event, the reporting requires notification to FDA of one step forward and one step back in the supply chain even if the product is never distributed. Once a report is submitted to the RFR, a company should expect that the FDA will notify the company’s customers of the reportable event despite the fact that the customer never received product. FDA notification means the customer will be told that its vendor had contaminated product that rises to the level of class I recall though this may not actually be true. Food sellers and manufacturers, therefore, would be wise to take steps to avoid being “stuck” with RFR obligations for contaminated product it does not own.
I'll be moderating and speaking on a panel at the upcoming ACI's Advanced Summit on Food Safety Regulatory Compliance in Chicago, June 28-29. Scott Rickman from Del Monte, public relations professionals and I will be presenting on "Effectively Responding to Negative Media Coverage: How to Avoid the Backlash" (If you plan to attend, register soon and contact me for a conference discount).
In my practice, I abide by two principles when involved with a case that has potential for negative media coverage:
1. Preservation of the Brand May Trump the Litigation: Even the most serious food-borne illness or consumer fraud claims may not be as significant as preservation of the client's brand. And what may seem like a smart litigation strategy may not be in the best interest of the brand.
For example, ownership of a crisis may be the best way out for a company faced with a widespread food-borne illness outbreak. The 2008 Maple Leaf foods outbreak is a prime example. Maple Leaf foods is one of the largest food companies in Canada and was faced with a deadly nationwide listeria outbreak linked to deli meat processed at one of its plants. Its CEO, Michael McCain, famously took immediate ownership of the crisis, which lead to restoration of both the brand's name and its stock value. Mr. McCain was quoted post mortem as saying:
“Going 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.”
In other cases, a strategy that "sacrifices" a single product line or a single restaurant for the good of the chain or other product lines may be the right strategy.
Though right for the client, either strategy might be uncomfortable for the litigation team as it constitutes something close to an admission of liability. As one communications expert has said:
“[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 . . . .”
Which leads me to my second principle:
2. Call the Communications/Public Relations Experts: Lawyers are multi-talented. However, lawyers are not experts in public relations. As illustrated above, the right strategy for a branded food business may prioritize a public relations strategy. The only way to formulate the best strategy for the client is to involve and listen to the entire crisis response team, including the communications/public relations experts.
Cleaning Up the Docket - Northern District of California Dismisses Lanham Act Claim Alleging Mislabeling of Personal Care Products
As we have blogged about, litigation regarding product labeling has been a hot topic within the food and beverage industry. A recent decision from the Northern District of California could hold interesting implications for Lanham Act claims centering on the labeling of products as “organic.” While the case, One God Faith, Inc. v. Hain Celestial Group, Inc., involved personal care products rather than agricultural products, the rationale used by the court in reaching its decision to dismiss the claims of the plaintiff is illustrative for the general category of “organic”-labeled products.
In One God Faith, plaintiff, a manufacturer of personal care and cosmetic products, including soap labeled as United States Department of Agriculture (“USDA”) certified “organic” or “Made with Organic” oils in compliance with USDA National Organic Program (“NOP”) standards, sued multiple defendants under § 43(a) of the Lanham Act alleging defendants falsely, misleadingly, and confusingly labeled and advertised similar products as “organic” even though they did not meet NOP standards for the designation, resulting in a loss of sales for plaintiff.
As we blogged about in our discussion of the POM v. Ocean Spray decision, pursuing a false advertising claim under the Lanham Act can be a difficult task for plaintiffs. When Congress enacted the Organic Food Products Act (“OFPA”) in 1990, the legislation that authorized the USDA to implement the NOP, it expressly declined to create a private right of action to enforce the statute or any of its implementing regulations. The plaintiff in One God Faith argued that the OFPA by its statutory language applies only to “agricultural products,” and the USDA has made clear that its comprehensive regulatory scheme governing the use of the term “organic” does not apply to personal care products, the category of products at issue in the case.
However, the court in One God Faith was not persuaded by this argument. While the court did find that it was undisputed that the USDA has declined expressly to impose the NOP standards on personal care products, this was not sufficient to justify the exercise of subject-matter jurisdiction by the Northern District. The court noted that the issue of amending existing regulations to include “organic” claims with respect to personal care products has generated significant recent discussion and that the USDA has asserted its authority over personal care products in other significant ways, including allowing producers and handlers of such products (including the plaintiff) to seek USDA certification under the NOP. As stated by the court, the mere fact that the USDA has not to date expressly imposed the NOP standards does not excuse plaintiff from exhausting available remedies under the USDA’s administrative appeal procedure. Consequently, the court held that granting the plaintiff its requested injunctive relief would negate the legislative bar on private actions and effectively enforce the NOP standards against defendants. As such, plaintiff’s complaint was dismissed for lack of subject-matter jurisdiction.
Take-Aways from November 3 Webinar: Making Good Marketing Claims: Product Labeling Pitfalls, Third-Party Certification and "Green Washing"
Tuesday, November 3, we held our second webinar in a three-part series on bringing sustainable food products to market. Thanks again to our presenters and attendees. The recorded webcast was archived and is accessible at this link. Click here to access a PDF copy of the presentation slides.
Take-aways from the second webinar include:
• With the exception of the FDA’s policy on “natural” claims, it has been silent on “green claims.”
• “Natural” could be hottest claim on the market but is becoming controversial. Food companies should continually monitor the marketplace to see which claims are drawing challenges.
• Food companies should pay attention to consumers union findings regarding eco-label credibility.
• While third-party certification may not help every food business, certification is a tool that supports your brand and your marketing/sales strategy.
• Retail leaders in sustainability, such as Burgerville, aspire for continuity of sustainability in each link in its supply chain.
• To understand the FTC green guidelines companies need to appreciate three key points: substantiation, specificity and qualification.
• To avoid “green washing” issues, food companies need to understand the complex matrix of federal, state, local and foreign statutes, regulations and guidelines governing “green” advertising.
I hope you can join me, Steve Marinkovich from Propel Insurance, my colleague at Stoel Rives, Anne Glazer, and Peter Truitt from Truitt Bros., Inc. on November 17, at 9 am PST, noon EST, (live Twitter feed at #sustainlaw) for the last webinar in the series as we discuss the following:
• Preventing and Dealing with Consumer Fraud, Unfair Trade and False Advertising Claims from Consumers and Competitors
• Real-Life Businesses Approaches to Sustainability, Product Labeling and Marketing
• Coping with Increased Risks of Food-Borne Illness from Local or Small Farm Products
• Insurance Coverage You Need, Think You May Have but Don’t Have or Think You May Want but Shouldn’t GetContinue Reading...
Melinda Beck has a terrific article in today's Wall Street Journal about home remedies for the H1N1 virus and (as we have previously blogged) the FDA's efforts to reign in those making unsupported marketing claims for their remedies.
One remedy sweeping the blogosphere like wildfire is the use of onions to soak up flu bugs. I did a Google search on the topic "onion flu remedy" and while a couple of articles came up debunking the idea (including Ms. Beck's), far more were articles claiming that the home remedy was in fact effective.
I turned then to Snopes.com, the great arbiter of urban legends, and it's verdict was unequivocal: false. The article did a nice job of tracing the history of onion/flu fetishism well into the nineteenth century, though I suspect one can go further, perhaps to ancient Rome and Greece.
Unlike most quack claims made for flu remedies, the onion cure at least has the advantage of being inexpensive and, particuiarly if you're using raw, unpeeled onion, completely benign.
Ms. Beck was, however, quite positive on my own family's way of dealing with any form of illness, chicken soup. Her article even includes a chicken soup recipe, which is not too far from the recipe my family has used for generations (although the key to ours is a kosher chicken). Chicken soup may not cure anything (though the title of an abstract listed at the bottom of recipe suggests it might), but it sure feels good on a sore throat.
Marketing Missive: FDA Issues Warning Letter to Procter and Gamble for Unlawfully Marketing Cold and Flu Medications Containing Vitamin C
By Guest Blogger Tyler Anderson
On October 29, 2009, the FDA issued a warning letter to Procter and Gamble notifying the company that its “Vicks DayQuil Plus Vitamin C” and “Vicks NyQuil Plus Vitamin C” are illegally marketed combinations of drug ingredients and a dietary ingredient. Both of the over-the-counter (OTC) medicines, which contain Vitamin C in addition to several drug ingredients, are marketed as treatments for cold and flu symptoms. The FDA issued the warning letter (1) to clarify that these single dosage form combinations of drug ingredients and dietary ingredients cannot legally be marketed because they have not been proven safe and effective, and (2) because the agency has previously determined that there is not sufficient data to show that Vitamin C is safe and effective in preventing or treating the common cold.
Under its OTC monograph system, the FDA allows some OTC drugs to be marketed without agency approval. The FDA found the two Vicks products did not comply with the applicable FDA monograph, and therefore the products must first be evaluated and approved under the agency’s new drug approval process before they can be legally marketed.
American Conference Institute (ACI) recently held its latest conference on food-borne illness litigation. The conference has been a fairly intimate gathering of the nation’s lawyers, insurers and experts involved with food-borne illness litigation.
This year, I had the privilege of moderating an in-house counsel “think tank.” The panel was composed of lawyers from a nice cross-section of food businesses: Yum Brands, Hormel, Fresh Express and SUPERVALU (though for each, food-borne illness litigation is a rare event) A slide-deck from the panel can be found here.
Also among the presenters at this year’s conference were Center for Disease Control’s (CDC) Dr. Arthur Liang and USDA/FSIS representative Dr. Dan Engeljohn. Both presentations provided fascinating insight into changes afoot in food safety enforcement and policy at the federal level. Here are some of the take-aways:
• “Outbreaks Waiting to Be Discovered” – Dr. Liang opined that, based on surveilled illnesses, most food-borne illness outbreaks are not presently discovered. He believes that recent data shows that there are perhaps 2-3 times more outbreaks nationally than what’s been uncovered over the last few years.
• Food Safety Progress Being Undone by Retail Deli Operations – FSIS says there has been a “steady increase in risky behavior at the retail level.” According to Dr. Engeljohn, budget authority is being sought to intervene with retailers, particularly smaller supermarket deli operations.
• Negative Tested Product Can Be Considered Adulterated - FSIS will be issuing a policy soon that for the first time will consider a “negative tested product to be determined adulterated” under circumstances where an associated product tested positive for pathogens.
• Non-0157 STECs - FSIS will be finalizing methodology to detect non-0157 Shiga Toxin-Producing Escherichia coli (STEC).
FDA has a short video "anatomy of a recall" about the investigation of the Salmonella outbreak and recalls associated with Peanut Corporation of America (PCA). Anyone interested in learning how the federal government (with the help of Minnesota's "Team Diarrhea") goes about a food borne illness investigation and recall should take a look.
When a food-borne illness outbreak happens, few food companies (especially those whose brand is at stake) want an unfamiliar defense lawyer who has little knowledge about food-borne illness responding to claims asserted against them. Unless a food company maintains a high, self-insured retention or has the lawyer of its choosing preselected, its insurer might appoint on the food company’s behalf low-cost defense counsel ill-equipped to respond to the claims and protect the brand.
Commercial General Liability insurance and Products liability insurance commonly maintained by food companies to protect them from the risks of food-borne illness outbreak usually will not cover the damage an outbreak can have on a company’s brand, stock value or sales. Lawyers appointed by insurers may have little understanding of the insured’s business or the impact the outbreak can have on its brand. Unlike in other areas, such as securities litigation, insurers are not as likely to have a panel or preapproved list of experienced food liability lawyers ready to deploy.
What a food company should consider before a food-borne illness outbreak happens:
1. Identify lawyers who are:
A. Familiar with (or will pledge on their dime to learn) the food company's business and brands;
B. Experienced in responding to consumer claims and food-borne illness; and
C. Knowledgeable about potential expert witnesses (about both those that the company will hire and those that plaintiffs will hire).
For companies with active crisis management plans , these lawyers likely have already been identified and included on the crisis management team.
2. Work with your broker, insurance coverage lawyer and preselected defense lawyer(s) to get preapproval of your chosen lawyers and agreement on their fees
For the sake of the business relationship (and self-interest), many insurers may agree to preapproval. Consider seeking preapproval at the time of renewal when a commercial insured may have the most leverage with an insurer.
For those with preapproved defense counsel, please consider sharing your experiences and insights. Comment or email.
Council to Improve Foodborne Outbreak Response (“CIFOR”) has published new guidelines designed to help local, state and federal agencies to improve their response to outbreaks. I became aware of this (again) through Ricardo Carvajal, who was a reviewer for the guidelines, and his firm’s FDA Law Blog. I agree with Ricardo that while the guidelines are designed for public agencies they have value for food businesses.
According to CIFOR, “[t]he guidelines are intended to give all agencies a common foundation from which to work and to provide examples of the key activities that should occur during the response to outbreaks of foodborne disease.”
Anticipating how the public health agency will behave will not only assist in crisis management, but it may also prevent the crisis. As discussed previously in this blog, one of the benefits of good crisis management is the ability to reach out and offer assistance to the investigating public health agencies. Keeping current on protocols that we can expect agencies to follow is a good practice.
The guidelines are also of some value to litigators. In the face of an outbreak investigation, they provide tools to assess the merits of the agency investigation. While it is always difficult to challenge a public health agency’s findings (no matter how flawed), the guidelines may help.
Preventing "Piercing of The Veil" - Practical Tips For Food Companies - What to Do and What to Avoid (part III of III)
By guest blogger Jerry Chiang
The following list will help you preserve your liability shield and protect yourself from the liabilities of your corporation or limited liability company (“LLC”). This is not intended to be an exhaustive list but rather an illustrative list of activities that will either preserve one’s liability shield or undermine it.
• Properly capitalize the corporation/LLC, or in the alternative, obtain sufficient insurance to cover potential liabilities.
• Keep personal and business entity funds separate by creating a bank account for business entity funds and transactions.
• Hold oneself out as an officer or employee of the corporation/LLC.
• In transacting with third parties, make it clear that they are transacting with a corporation or LLC and not an individual.
• As a corporation, observe all formalities listed in your state’s corporation statute and the corporation’s bylaws. To learn more about Washington corporate formalities, visit the Washington Business Corporation Act.
• As an LLC, observe all formalities listed in your state’s LLC statute and the LLC’s operating agreement. To learn more about Washington LLC formalities, visit the Washington Limited Liability Company Act.
• Avoid paying excessive dividends or distributions.
• Avoid below-market sale of assets to a shareholder, member or a third party.
• Avoid using business entity assets for personal purposes and vice versa.
Preventing "Piercing of The Veil" - Practical Tips For Food Companies - Factors Courts Review for Veil Piercing (part II of III)
By guest blogger Jerry Chiang
When courts decide whether to pierce the corporate veil, their analysis is typically a three-step process: (1) whether the defendant-owner exerts sufficient control over the business entity, (2) whether there has been an abuse of corporate form, and (3) whether there is an injury to a third party.
There is no exact percentage of control or ownership that courts require for liability. This is a threshold question the plaintiffs have to answer satisfactorily before courts will consider the abuse of corporate form question.
Abuse of corporate form can come in many shapes, but the following are some of the common examples. Although some of these descriptions are based on corporations, the concepts apply equally to limited liability companies.
• Undercapitalization – This refers to a defendant-owner’s failure to endow the corporation or limited liability company, typically in the beginning stages, with sufficient, unencumbered capital to meet foreseeable business liabilities.
• Milking - Common practices of milking include paying excessive dividends, selling company assets to shareholders or third parties at reduced prices, paying unreasonable management fees, and diverting corporate funds to personal use.
• Commingling - Commingling typically occurs where the shareholder keeps one bank account for both personal and corporate funds. It is also typical to see a shareholder using the corporation’s assets for the shareholder’s personal purposes and other businesses without proper documentation.
• Misrepresentation/Holding Out – This describes a shareholder who represents to third parties that they are dealing with an individual, rather than a corporation.
• Failure to Observe Corporate Formalities – Examples of failing to observe corporate formalities include failure to (1) appoint the required number of officers, (2) issue stock, (3) file tax returns, (4) hold annual shareholders and board of directors meetings, (5) keep a minute book, (6) act through resolutions and (7) create a corporate bank account. Here is a useful discussion of LLC formalities.
If a defendant-owner has committed one or more of the above, a court is likely to find abuse of corporate form.
Once the first two prongs are met, courts determine whether the corporate form should be disregarded in order to prevent fraud or injury to a third party. In other words, there must be a causal relationship between the abuse of corporate form by the defendant-owner and the injury of the plaintiff seeking to pierce the corporate veil.
Preventing "Piercing of The Veil" - Practical Tips For Food Companies - Introduction (part I of III)
By guest blogger Jerry Chiang
In starting any business enterprise, especially in the food industry, incorporating the business as a corporation or limited liability company is as important as having a good product or solid business plan. Incorporation is essential because it shields owners from the liabilities of their business. A lawsuit against the business will not impact the personal assets of the business owners because the law recognizes the corporation or limited liability company as a distinct and separate entity.
Incorporation by itself, however, is not enough. In order for the liability shield to remain in place, or for the law to continue to recognize the corporation or limited liability company as a separate entity, the entity’s owners need to observe certain formalities. If the owners are not careful, the law may treat the entity and the owners as one and the same and disregard the corporate entity. This is commonly referred to as “piercing the corporate veil.”
Over the next few days, this blog will give you an overview of what the courts look at when they decide whether to disregard a business entity and find its owners liable. We’ll also provide a list of dos and don’ts to help you avoid losing your liability shield.
University of Nebraska has posted video on its website from the entire three days of the 2009 Governor’s Conference on Ensuring Food Safety. You can view my presentation on Defending Liability in Foodborne Illness Outbreaks. More important, you view the presentations of Dr. Andrew Benson and the other scientists who offer fascinating insights into the latest developments driving the science of food safety.
An important study was released this month by the Institute of Food Technologists addressing the challenge of responding to food contamination with limited scientific information. Ricardo Carvajal at Hyman, Phelps & McNamara wrote about this on the FDALawBlog last week. You can read the summary by Rosetta L. Newsome here.
Ms. Newsome summarizes the three main sections of the study as follows:
“details the U.S. legal framework that provides the foundation for U.S. food safety policy,
describes international considerations (e.g., Codex standards) that impact foods in international commerce, and addresses European Union law and standards.”
“briefly addresses structure activity relationships, surrogate compounds and metabolites,
predictions based on physical/chemical data, toxicological evaluation, use of animal studies, statistical considerations, and other aspects of risk assessment.”
“addresses why a new approach is needed to conduct a risk-based evaluation of the potential exposure, hazard, and toxicity of low levels of unwanted chemical substances in foods and how information on risk can be used to make appropriately conservative and balanced decisions[;] . . . also calls attention to the importance of evaluating benefits of the food(s) in which the component is found as well as risks.”
For lawyers and insurance adjustors, compartmentalizing food-borne illness claims is easy. They often see their jobs solely as minimizing the tort liability and legal fees. In my experience, attorneys and adjustors often fail to appreciate how outbreaks can affect a client’s (or even a whole industry’s) business going forward. Often, the long-term business losses of a food-borne illness outbreak, recall, or government alert are not insured.
There is no better example of how a nationally reported food-borne illness outbreak can affect an entire industry (or even an entire category of food products) than the 2006 E. coli spinach outbreak. Two new studies published by the Agriculture & Applied Economics Association (AAEA) in its Choices magazine analyze consumer information and studies in the wake of the spinach outbreak.
Among the highlights from the first study, “Public Response to Large-Scale Produce Contamination” by Carra Cuite and William K. Hallman, were findings that Americans were more aware of advisories beginning than ending. For example, 87% of spinach consumers knew about the outbreak, but more than six weeks after the FDA had lifted its spinach warnings “almost half (45%) of people who were aware of the spinach recall were not confident that the recall had ended.”
A second study entitled “E. coli Outbreaks Affect Demand for Salad Vegetables” was authored by Faysal Fahs, Ron C. Mittelhammer, and Jill J. McCluskey. It examines the cumulative effects that sequential outbreaks can have on consumer demand and concludes that “the empirical results suggest that the subsequent outbreaks had a greater impact on the consumption of salad vegetables than the first.”
For food companies the lesson is this:
A lawyer’s role in responding to a food product crisis is important. But the roles of others, such as public relations experts, may be as important or more important in preserving the business. Make sure your lawyer (and your insurer) understands that the world may not revolve around simply resolving the tort claims as economically as possible.
USDA’s Be Food Safe Twitter Feed circulated its Fact Sheet titled “Beef . . . from Farm to Table.” First published a few years ago, this might be of interest to businesses involved in the sale, marketing, labeling, and/or packaging of beef. The article is a helpful primer on the history of beef, current industry practices, USDA’s role in inspection, consumer trends, cooking times, storage times, and food-borne illnesses associated with beef.
For food sellers interested in promoting a “sustainable” brand and inspiring food safety confidence in their consumers, meet Food Alliance. Food Alliance “is a nonprofit organization that certifies farms, ranches and food handlers for sustainable agricultural and facility management practices.” It bills itself as “the most comprehensive certification program for sustainably produced food in North America.”
I’ve recently joined the Food Alliance Board of Directors (in fact, I’m headed to Portland today for a board meeting). My hope is to assist Food Alliance in becoming more widely accepted and mainstream. Credible third-party certification, such as Food Alliance provides, offers a transparent pathway to sustainability of our food supply and consumer confidence in food safety.
Food Alliance takes a holistic approach that is broader and more dynamic than organic certification, which does nothing to address food contamination from pathogens such as Salmonella, E. coli, and Listeria (in fact, many experts believe that organically grown food may be more likely to be contaminated by these pathogens). By way of example, Food Alliance certification standards, among other things, address “soil and water quality,” “ensure the health and humane treatment of animals,” “conserve energy and water,” and “ensure quality control and food handling safety.”
For more on why a holistic, independent third-party certification correlates with food safety (and accompanying consumer confidence), I’d suggest reading this op-ed piece co-authored by Food Alliance Executive Director Scott Exo, which was written earlier this year in the wake of the PCA peanut recall.
Ken's blog post about taking the time to figure out what insurance limits are right for you resonated with me as I was reading about the plea agreement in the melamine pet food debacle. This was the likely last act in a tawdry story of greed and fraud that led to the deaths of thousands of cats and dogs and placed nearly every pet owner in fear. Stephen S. Miller and Sally Qing Miller, owners of ChemNutra, Inc., pled guilty to two misdemeanors in federal district court on June 16, and the prosecutors have recommended two years of probation and fines of $5000 for each of the Millers and a $25,000 fine for the company. The Chinese companies indicted at the same time remain outside the reach of the U.S. justice system.
Pet food companies had previously settled with pet owners for $24 million. That settlement was presumably funded by insurance, and according to one news report, ChemNutra contributed to the settlement in some way (more contemporary news accounts differ). Menu Foods, the pet food supplier in the eye of the storm, sued ChemNutra and acording to a news report at the time:
Menu Foods, which is based in Canada, acknowledged that it has been using wheat gluten from two suppliers in the United States and Europe for many years, but had not experienced any problems until it also started buying the ingredient from ChemNutra.
"Last fall, (Menu Foods) added a third supplier, ChemNutra, and the issues we have experienced date to that time," the spokesman said.
I have been unable to find more about Menu Foods' lawsuit, but it is unlikely Menu Foods was made whole for all of its damages.
What has been alleged is a scheme by the indicted but unpunished Chinese companies, Xuzhou Anying Biologic Technology Development Co. and Suzhou Textiles, Silk, Light Industrial Products Arts and Crafts I/E Co., to use melamine to fraudulently increase the apparent protein level of wheat gluten. This in turn led to pet deaths.
- Review and Revise Supply Chain Agreements,
- Reassess Suppliers; and
- Increase Scrutiny Against Fraudulent Imports
This is of course excellent advice. I would simply add another one:
- Recognize the Legal System Can Only Do So Much
By all accounts, the Chinese suppliers were fooling everybody: Chinese authorities, U.S. authorities, the importers and everyone who bought from them. ChemNutra may have had a great contract with them, placing on them the duty to comply with all laws and the duty to indemnify ChemNutra if anything went wrong. Menu Foods, in suing ChemNutra, which was a new supplier for it, indicated it had the same provisions in its contract. The other pet food manufacturers, distributors and retailers in the chain down to the ultimate pet owners--as well as owners of animals raised for food who had to destroy poultry and livestock that may have ingested melamine, to keep it out of the food chain--all may have had great contracts, too.
They were all, however, left holding the bag for the wrongs of people who were beyond the reach of the law. The Millers' guilty plea indicated that they continued to deny any intentional wrongdoing and the government apparently didn't believe it could prove otherwise. The lesson, then, is, as Ken suggested at the end of last year, know your supplier, know their supplier, visit plants, check out food safety programs, and avoid doing business with people you can't check out.
We’ve explained previously in this blog why increased surveillance by state and federal agencies will lead to detection of more outbreaks (and, therefore, more legal exposure). Others seem to agree.
Law360 published a nice interview with Jim Neale at McGuire Woods, another lawyer experienced in the food liability arena ( a Law360 subscription is needed to access the full article). Jim is quoted in the article as saying, “when, despite the best efforts of all concerned, outbreaks do occur, improved surveillance allows them to be caught and, most often, quickly tracked to the source.” And, as federal money increases to the state health departments (the front line in detecting most of the nation’s outbreaks), rates of detection will accelerate.
Nestlé is voluntarily recalling all its refrigerated and frozen chocolate chip cookie dough. The FDA and CDC warn of the risk of contamination with E. coli O157:H7. In its release, Nestle says the following:
The CDC has a podcast telling kids the same thing: don't eat raw cookie dough.
We have complimented Nestle for its food safety program in the past. As their release says, "The safety and quality of its products is a non-negotiable priority for Nestlé, and the company apologizes for any inconvenience cause by this voluntary recall. "
But there is good news: the recall doesn't affect any chocolate chips, or any baked cookies.
This week the Obama administration announced the launch of a new website for the recently formed food safety working group. Obama announced the formation of this group in March in the wake of the high-profile food safety issues surrounding PCA peanut products.
This website will assist in tracking the efforts of the working group. As discussed previously on this blog, this group is expected to make recommendations aimed at detection, awareness and government reorganization. Possible examples include increasing funding to states to monitor food-borne illness, combining FDA and USDA food safety efforts, reexamining mandatory recall authority, increasing retail enforcement and implementing more aggressive consumer warnings.
What is not clear is whether the working group will look beyond just detection, awareness and reorganization to bolder initiatives that may result in less consumer illness and less legal exposure for food sellers. Bolder initiatives could include funding for irradiation, consumer food safety education, and fast-track development and implementation of technology that can sample food products for whole colonies of microorganisms.
The U.S. Food and Drug Administration is taking issue with claims that Cheerios cereal can lower cholesterol.
In a letter to General Mills, the FDA says that statements made on Cheerios packaging like the claim that the cereal is “clinically proven to help lower cholesterol” make the product a drug under federal law. The agency suggests that General Mills should file a new drug application with the FDA if it wants to keep making these claims on Cheerios boxes. The FDA also noted concerns with statements made on a General Mills-sponsored website regarding the benefits of eating whole grains.
The Wall Street Journal is reporting that a General Mills spokesperson said the company will work with the FDA to reach a resolution regarding Cheerios labeling.
When the peanut butter recall hit, the American Peanut Butter Council issued a list of the items that were not affected by the recall, which was isolated to the products of now-defunct Peanut Corporation of America.
The similar, though less-publicized, pistachio recall has also been isolated to pistachios from a single company, Setton Farms. And the Western Pistachio Association has developed a website, pistachiorecall.org, dedicated to listing products unaffected by the recall. According to the FAQ on the site, the products listed on the unaffected products list are those that producers and distributors indicated on a signed affidavit did not include pistachios from Setton Farms.
Setton Farms International Inc. and Setton Pistachio of Terra Bella, Inc. did finally put the news of the recall on their website, along with messages to their wholesale customers. The differences between the pistachio and peanut outbreaks come down to two things, which bode well for Setton Farms' future. First, there have not only been no reported deaths from pistachios, there have been no cases of salmonellosis. Second, an inspection of Setton Farms' other plant, in Commack, New York, by New York State authorities, indicated no presence of salmonella.
Finally, the FDA has a pistachio widget, too.
When the news of salmonella in something as American as peanut butter needs to get out, spreading the word is fairly routine. What happens when salmonella rissen is found in white pepper distributed mainly to Chinese and other Asian restaurants on the west coast?
Union Internatonal Food Company of Union City, California has voluntarily recalled dry spices after 42 cases of salmonella rissen have been reported in California, Oregon, Washington and Nevada. White and black pepper are particularly suspect. The company's products were marketed almost entirely to restaurants in those states and Arizona.
But it is likely that many of the people most likely to using the products do not have English as their first language. Accordingly, the FDA and Union International itself issued some of their material in Chinese, including this complete notice.
Pork producers are feeling the effects of the swine flu as the number of reported cases of the virus increases. Stock prices for Virginia-based Smithfield Foods, the world’s largest pork processor, and Arkansas-based Tyson Foods, fell 12 percent and 9 percent today, respectively. The Wall Street Journal reports that the prices of hogs, corn, and soybeans also dropped today. About 16 percent of U.S. pork exports have been shipped to Mexico over the past year – a country where so far 149 people have died from the swine flu.
The Centers for Disease Control and Prevention and other health officials have emphasized that swine flu viruses are not transmitted by food and people cannot contract the virus by eating pork or pork products. That fact alone does not seem to be enough to quell consumers’ fears. MarketWatch earlier today quoted a pork industry analyst as saying the industry wants to avoid a slip of exports and prices akin to the 2003 avian flu outbreak in Asia. Analyst Heather Jones said she believes the pork industry “needs to undertake an aggressive and widespread informational marketing campaign.”
Meanwhile, the Associated Press is reporting that Seattle-based Starbucks Corp. announced today that it is closing 10 of its Mexico City cafes in response to the swine flu outbreak and pursuant to instructions from the Mexican government.
A Michigan maker of frozen pasta products has issued a recall for products that were distributed to seven states. Canton, Mich.-based Mucci Food Products is recalling an undetermined amount of frozen meat and poultry pasta products because the food was prepared without federal inspection.
The products were produced from May 1, 2008 to April 24, 2009 and distributed to California, Florida, Georgia, Illinois, Michigan, Missouri, and Ohio. The recalled products bear the establishment number “19177” or “P-19177” inside the USDA mark of inspection and the dates “1218” to “1149” located at the bottom of the product box.
The U.S. Department of Agriculture’s Food Safety and Inspection Service has complete details of the products subject to the recall, including images of the product labels. The USDA has not received any reports of illness as a result of consumption of the products.
Ivar Haglund was a Seattle legend. In these parts, he was known only by his first name, the way you can refer to "Michael" when you're discussing basketball and people know you mean Michael Jordan. His food is at Sea-Tac Airport, Safeco Field and Qwest Field. From 1964 until it was discontinued for this year, he sponsored one of the largest fireworks displays in Seattle on the Fourth of July, which was called Fourth of Jul-Ivar's. Every city, I imagine, has someone like Ivar, but he was ours.
Ivar's is known for seafood. The original restaurant was called Acres of Clams, right on the waterfront. His landmark Salmon House is on Lake Union next to Dale Chihuly's house and studio; you can sometimes see Chihuly with his trademark patch walking past Ivar's.
I had no idea Ivar's made turkey soup until it was recalled.
You couldn't buy Ivar's turkey soup, more particularly "turkey-flavored egg noodle soup with turkey meat", even before it was recalled. It is only sold to institutions. I imagine it is a way of increasing revenue from by-products that might otherwise have to be thrown out or recycled.
So what was wrong with the soup?
Absolutely nothing. Bring it by and I'll happily consume it (though not expecting it to be a high-end product, given the market).
Ordinarily, I might note also that vegans don't ingest milk products either, so the mislabeling might cause an issue with them. And of course Jewish dietary laws prohibit the mixing of milk with poultry. So in both cases, there might have been mislabeling issues unrelated to milk's status as an allergen. However, vegans don't eat turkey anyway, and observant Jews only eat turkey that has been properly ritually slaughtered, as would be evidenced by a rabbi's stamp on the package, which I somehow doubt Ivar's had. Incidentally, the rabbinical kosher stamp here in Seattle incorporates a Space Needle into the K.
The Food and Drug Administration has announced an effort to explore the intentional adulteration of products to increase a producer’s bottom line. So-called “economically motivated adulteration,” or EMA, is the topic of an FDA-sponsored public meeting to be held on May 1 in College Park, Maryland.
The meeting follows last year’s concerns about products tainted with melamine and other incidents of concern to public health. For purposes of the meeting, the FDA proposes to define EMA as “the fraudulent, intentional substitution or addition of a substance in a product for the purpose of increasing the apparent value of the product or reducing the cost of its production, i.e., for economic gain.” The FDA hopes to raise awareness about EMA and receive input regarding how industry and regulators can predict, prevent, and address EMA.
Full details regarding the meeting can be found in the Federal Register.
Article 2 of The Uniform Commercial Code. The Uniform Commercial Code ("UCC") is my Bible. So, when I read about the pain caused to businesses and charities by the peanut butter recall, I look first to the UCC to see what might be available to help.
Article 2 of the UCC covers transactions in goods. It expressly does not repeal laws on sales to consumers, nor does it change tort law. But my focus here is not on torts, it is on contract law. When a wholesaler buys tainted peanut butter paste from a factory, when a manufacturer buys that same paste from a wholesaler, when a grocer buys the products of that manufacturer directly or from another wholesaler, and when a consumer buys those products from a grocer, there is a simple contract for the sale of goods involved, and that contract is governed by Article 2. When someone is made sick from the tainted product, there is a lot of law you can refer to; Ken has blogged on it a lot and will again. But what happens in the case of a recall to parties who are, fortunately, unharmed by the tainted goods except in an economic way?
To begin with, to apply Article 2, there needs to be a sale. Sale is defined in Article 1 of the UCC (the definition is applicable to Article 2 and the whole UCC) and requires the passing of title for a price. Thus, a food bank that receives donated goods will not have any direct rights under Article 2.
A contract for sales over $500 generally requires a writing. This can be as simple as a purchase order or sales order or as elaborate as a 100-page contract for the sale of an airplane. Even an exchange of e-mails can be sufficient.
Generally, the more elaborate the contract, the more likely it is to protect sellers, not buyers. This is because Article 2 protects sellers by default. Article 2 contains what are called "gap filler" terms, which govern in the absence of express agreement otherwise. Some of the most critical of these protect buyers from exactly the kind of issues that a food recall might generate.
Express and Implied Warranties. Among the gap filler provisions are implied warranties. The UCC implied warranties include:
- A warranty of title
- A warranty against infringement (which is only given by merchants)
- A warranty of merchantability (also only given by merchants)
- A warranty of fitness for a particular purpose
In addition, sellers can give (or be deemed to have given) express warranties.
On Thursday, March 19, the Oversight and Investigations Subcommittee of the House Energy and Commerce Committee held another hearing on Peanut Corporation of America and the Salmonella outbreak. A focus of the hearing was the different choices made by Nestle USA, which had refused to buy PCA peanuts, and the companies testifying at the hearing, including Kellogg and King Nut, which had.
Nestle, when considering buying peanuts from PCA, had sent its own inspectors to PCA's plants. They found, according to a report of the hearing in the Washington Post, some rather damaging items:
rat droppings, live beetles, dead insects and the potential for microbial contamination
Nestle, not surprisingly, declined to buy from PCA.
At the hearing, witnesses from Kellogg and King Nut were questioned as to why they had not done their own inspections, instead relying on inspections by AIB, the American Institute of Baking, which were paid for by PCA, and which apparently tipped PCA about when it was coming.
The question nobody seemed to ask--and no one from Nestle was at the hearing--was why Nestle could not have made the results of its inspection public at the time? If there are "rodent droppings in the break room cabinets", and the company is selling peanuts to other members of the general public, just not through Nestle, isn't this something that should be made known to someone?
One answer lies in the fear of the various torts that come under the heading of "trade libel." Nestle is a big company, and even though it presumably trusts its inspectors (and makes important business decisions based on their reports), it must recognize that it is a potential "deep pocket" for lawsuits. Thus, to report publicly what its inspectors found, or even to make that information avaiable to others in the food industry, is to risk a major lawsuit.
The flip side should also be considered. If you are PCA, and someone broadcasts to the world that you have rat droppings in your break room cabinets, you are likely to experience significant losses, regardless of whether the report is true, and whether the presence of rat droppings in your cabinets affects the actual safety of your food. What we do know is that in 2008 PCA began shipping peanuts that killed people. The rat droppings found in the 2002 Nestle inspection presumably had nothing to do with those deaths, nor are we aware of any deaths or illnesses from PCA peanuts in the interim. Finally, we do not of course know whether there are other suppliers Nestle or others who conducted their own inspections rejected, and what they did with the news of rejection. Nestle, for instance, didn't write off PCA when it rejected it in 2002; it checked out another PCA facility in 2006 (and came to similar conclusions).
Then there is the question of what contractual rights and obligations existed between PCA and Nestle. Did PCA require Nestle to sign a non-disclosure agreement when it allowed it into the plants? Any well-advised company would require such an agreement at the very least to protect proprietary technology. Thus, Nestle may have been contractually bound not to reveal the results of its inspections.
As food safety legislation is being considered, the issue of tort liability and the right to use contracts to silence someone who knows about your dirty facility should be faced. It is not as simple as "all inspections should be public", but it is also unlikely to remain as business as usual. We publicize the results of government restaurant inspections without putting all restaurants that fail to pass inspection out of business.
A blog called Birdchick reports that many other bird feed companies were able to confirm that they did not include PCA peanut meal in their suet. It also contains a recipe for suet that uses peanut meal you can make at home.
According to the bankruptcy filing, PCA claims to have debts of only between $1 and $10 million, and between 100 and 199 creditors. My colleagues in our Business Finance and Insolvency group tell me there is little penalty for any inaccuracies in these particular boxes on the cover sheet to a bankruptcy filing.
The other point comes from a box checked on the cover sheet. It reads, "Debtor estimates that, after any exempt property is excluded and administrative expenses paid, there will be no funds available for distribution to unsecured creditors."
Tort clamants, i.e., the victims and families of victims, are unsecured creditors within the meaning of the Bankruptcy Code. In essence, PCA's assets, such as they are, are being turned over to its banks, and except to the extent of any insurance that may be available, the victims will have no recovery from PCA.
I particularly liked the quote at the bottom of the article from Barry Glassner, author of "The Gospel of Food: Everything You Think You Know About Food is Wrong":
It's very reasonable to take peanut butter off the menu until we knew what was going on, but then it's not anymore.
When I went to find the link to Glassner's book the cover looked very familiar so I checked; it is indeed the book my wife has been captivated by the last few nights.
Stewart Parnell, President and owner of Peanut Corporation of America, appeared before a subcommittee of the House Committee on Oversight and Government Reform today. The hearing did without his testimony, howevver, as he pleaded the Fifth Amendment.
As we try to follow the breaking news (including, sadly, a ninth death linked to the salmonella in PCA peanuts), small things tend to stand out. One of them is that the PCA website, which we have linked to before, contains nothing but press releases, links to outbreak-related websites, and the address of PCA's registered agent for service of process: Ct Corporation System
1201 Peachtree St Ne # 1240, Atlanta, GA 30361
This article in today's Seattle Post-Intelligencer is, of course, pretty much self-explanatory. That I've left this side of the tragedy to Part Three is because it's been so hard to face. The article did a great job of handling it, and is a reason I'm going to miss the P-I if, as it is expected to, it folds next month.
According to a Bloomberg report, over 100 companies, including Kellogg Company., The Kroger Co., and Unilever plc expect to post losses as a result of the Peanut Company of America debacle. Although it is not specified in the article, I presume these are mainly public companies who have statutory obligations to post information about their expected losses. A CNN report suggests, however, that the real cost may be far greater.
What CNN's story indicates is that even though there is no evidence to suggest that there is anything wrong with peanuts, peanut butter or peanut butter-based products sourced from anywhere other than PCA's facility, consumers are becoming extra cautious and in many cases avoiding peanut butter altogether. It quotes Dr. Douglas Powell, an associate professor at Kansas State University and the creator of the International Food Safety Network as well as the less formal but more memorably named Barfblog. Dr. Powell sympathized with the consumers who aren't buying peanut butter.
If you're a parent packing a lunch and you have all the hectic things going on in the morning, is it really realistic to say, hey, before you put that peanut snack cracker individually wrapped item into your kid's lunch, you're going to go onto the Internet and check a Web site? I think that's a bit much. I think it's prudent to avoid this stuff until we see where this is going.
I expressed similar sentiments in a recent blog entry, so I am not disagreeing with Dr. Powell. Certainly, no one should eat, or give to anyone else to eat, anything that about which they have reason to be concerned as to its safety.
The question is: what should responsible people be saying? The CNN report quotes from spokespeople for ConAgra Foods, the makers of Peter Pan peanut butter, and J.M. Smucker, the makers of Jif peanut butter, in each case describing how their peanut butter products do not and have not used products from PCA. As USA Today reports that PCA's Plainview, Texas plant is shut down after inspectors found salmonella there, and amidst reports we have already blogged about indicating that PCA's actions were exactly the sort that lead to criminal prosecutions, what is the responsible course for dealing with this crisis?
The 100 public companies Bloomberg referred are, I would ask you to remember, the mere tip of the iceberg. Peanut butter products are sold at every mom and pop grocery store, every convenience store, nearly anywhere that sells food. Kellogg's, I dare say, can absorb its losses. In these days when thousands are losing their jobs daily where there is no highly-publicized recall adding to the current economic woes, how many more will be thrown out of work because of lost sales of peanut butter products that are not subject to suspicion?
In subsequent entries, we will be exploring some of the legal consequences of product recalls, as affected buyers try to recover their losses up the distribution chain.
By Guest Blogger Per Ramfjord
In my February 3, 2009 blog entry, I briefly discussed the steps a company should take to avoid criminal prosecution under the Federal Food Drug and Cosmetic Act. The FDA’s criminal investigation of Peanut Corporation of America continues to provide lessons on this subject—in particular, on what not to do.
The enormous public harm caused by the company’s actions, coupled with its seemingly cavalier attitude to contamination already created a high risk of prosecution. But that risk was heightened still further on February 5, 2009, when the FDA issued an amended investigatory report indicating that company management did not initially provide complete and accurate information regarding the testing of contaminated products.
This report and other information disclosed by the FDA shows that PCA management initially told the FDA that the company had shipped products that had tested positive for salmonella only after the products had been retested and it did not appear that they were contaminated. But this information was apparently inconsistent with company records, which, according to the report, showed that the company sometimes shipped products before it even received the positive test results and that, when it did so, it did not always even bother to do re-testing to find out if the positive results were false. This type of inconsistency between management statements and company records is precisely the type of misstep that companies should seek to avoid in a criminal investigation.
The Department of Justice has published its Principles of Federal Prosecution of Business Organizations. According to those Principles, one of the key factors that the government looks to in deciding whether to charge a company criminally is the “corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation.” Any statements that are inconsistent with company records or the statements of other company employees are likely to be viewed as a failure to “come clean” under this standard. Indeed, should the government conclude that there was an active effort to conceal negative information, it is likely to go a step further and add charges against company management for false statements or obstruction of justice to the other charges in the underlying case.
Again, this underscores the need to engage in a prompt, thorough and complete investigation as soon as possible when a potential problem arises. Equally important, it shows the need to exercise caution in verifying any statements that are provided to the government, particularly early in an investigation when there is a great deal of pressure—both from the government and the public—to provide an explanation of what happened. Putting too positive a “spin” on the events is virtually certain to backfire, as it appears to have done with PCA management.
Update by Richard Goldfarb
As though to show the truth of what Per wrote, the FBI just announced that it would participate in the investigation of PCA, while the FDA's Office of Criminal Investigations would remain the lead investigative agency.
The headline in last Friday's Seattle Post-Intelligencer read, "Local Food Banks Go Peanut-Free." A main supplier to food banks in the Puget Sound region, Food Lifeline, has decided to quarantine all peanut products "rather than try to keep up with the flood of U.S. Department of Agriculture or Food and Drug Administration recall alerts."
In a similar story, the Detroit Free Press reports confusion at a Meijer store in Royal Oak, Michigan, where a reporter sought to buy a product containing peanut butter, but the cashier couldn't ring it up. The cashier told the reporter, "Oh, the computer said this one's recalled. It's got that peanut butter in it. I don't know why it's still on the shelf -- shouldn't be, but the computer won't let those through."
As we have previously reported, the FDA has provided some great tools, including a web-widget, and both a list of recalled peanut products and the American Peanut Council has a list of products unaffected by the recall. What the reports out of Seattle and Detroit indicate, however, is that even in a world where information can move at web-speed, there is still wisdom in the old Mark Twain quote, "A lie can travel halfway round the world while the truth is putting on its shoes." When we're talking about what parents are putting in their kids' lunchboxes, the level of certainty required feels very different from any legal standard.
On February 5, Dr. Stephen Sundlof, director of the Center for Food Safety and Applied Nutrition of the FDA, testified before the Senate Agriculture Commmittee. His advice for consumers was cautious in the extreme.
Consumers are urged to check this web page to determine which products have been recalled and to become aware of new recalls as they are announced. Any product that is on the recall list should be disposed of in a safe manner. Consumers are also urged to wash their hands after handling potentially contaminated products. If consumers are unsure whether a peanut-containing product is potentially contaminated, they should avoid consuming it until they obtain more information about the product. Persons who think they may have become ill from eating peanut products are advised to consult their health care providers
(emphasis supplied). When the man in charge of food safety is sending the message to consumers that they should be watching out for themselves, it will be hard for any food bank volunteer or grocery store clerk to do more than what we have seen Food Lifeline and Meijer do.
On a personal note, my wife was a volunteer at the Fremont Public Association food bank (now Solid Ground) for many years. She taught me that peanut butter has always been a critical staple for food banks, providing a good source of protein, particularly to the many food bank customers who don't have cooking facilities, as well as to vegetarians and vegans. There isn't much I can do personally to deal with the problems caused by this crisis, but what I am doing is writing a nice check to Solid Ground.
By guest blogger Per Ramfjord
The FDA’s recent announcement that it is pursuing a criminal investigation of Peanut Corporation of America, arising out of the Salmonella-driven peanut product recall, is sure to raise concerns with executives in food product companies throughout the country. White House Press Secretary Robert Gibbs’s comment that the Obama administration intends to put in place a “stricter regulatory structure” to prevent breakdowns in food safety only heightens that concern.
And looking at the law, there are reasons to be concerned. The Federal Food, Drug, and Cosmetic Act criminalizes under sections 331 and 333 more than two dozen practices, including a host of activities associated with the manufacture or sale of contaminated food products. The potential punishment for such offenses includes corporate fines and the possible imprisonment of executives for up to one year for misdemeanor offenses or up to three years for felony violations. The burden of proof to establish such crimes against corporate executives is very low. For misdemeanor offenses, the government needs to prove only that the violation occurred under the executive’s watch; it need not show that the executive had any actual criminal intent or personal involvement in the violation. For felony violations, the government can prove the required intent simply by showing that a defendant consciously avoided knowledge of the violation or was involved in a prior violation.
So, the question arises, what should companies do to avoid prosecution if they become aware of potential criminal violations? The obvious first step is to stop the offending practice as quickly as possible and to identify and take any available remedial action, up to and potentially including a recall. Although there may be concern that the remedial action or recall may itself draw attention to the problem, the benefits of acting in a manner that the government deems responsible will pay off down the road. The second step is to investigate the violation immediately, with counsel, to develop facts that can help steer the case away from criminal enforcement. The FDA will almost always hold a “Section 305” meeting to allow a company to tell its side of the story before initiating a criminal prosecution. The decision about whether to prosecute will be based on factors such as the nature and seriousness of the offense, the potential deterrent effects of prosecution, and the company’s or individual’s culpability, criminal history, and willingness to cooperate. Uncovering evidence to show that the event in question was isolated in nature, due to unique and excusable circumstances, and not part of a pattern of misconduct or noncompliance is critical to making such a meeting a success and to the company’s overall defense going forward. Finally, an important third step is avoiding pitfalls during the investigation itself that could contribute to the government’s decision to prosecute. The current enforcement atmosphere is one in which the “cover-up” is often deemed worse (and more likely to spark prosecution) than the “crime.” Avoiding any false statements, document destruction, or other actions that the government could construe as constituting obstruction of justice is therefore of vital importance.
In sum, obviously the best way to avoid prosecution is to avoid violations, particularly through adopting policies and procedures that minimize risk. But once a potential violation has been discovered, it is vital to respond quickly and with the benefit of counsel who know and understand the system. While any enforcement proceedings are unfortunate, the prospect of criminal proceedings, with their potential of adverse publicity to the company and incarceration of executives, poses unique problems that require a rapid and focused response.
UPDATE to "Avoiding the Panic" - The American Peanut Butter Council has a website that lists products it knows are UNAFFECTED by the peanut butter recall associated with the current Salmonella outbreak. The list of unaffected products is lengthy and growing. Lets hope the media is successful at assisting consumers avoid the panic by providing them with the information to consume safely the products they enjoy.
Marler Blog and some of the press have been sounding the alarm on all peanut butter products. True the FDA and CDC have been investigating a multi-state Salmonella outbreak and that there may be a connection with certain peanut butter products. But does this mean that consumers, restaurants and food sellers should avoid all peanut butter products? The answer is NO.
For example. the CDC has stated that:
Preliminary analysis of an epidemiologic study conducted by CDC and public health officials in multiple states comparing foods eaten by ill and well persons has suggested peanut butter as a likely source of the bacteria causing the infections. To date, no association has been found with major national brand name jars of peanut butter sold in grocery stores.
One thing that any restaurant or food seller can do is to educate their customers about the safety of their products. CNN has a great article up today in their Consumer Tips section. Based on information available to date, the article provides the following guidance for the consumer:
1. Is it safe to make my child a peanut butter sandwich? The FDA says as of Sunday there is no indication that brand name peanut butter sold in grocery stores is linked to the outbreak.
2. What about the peanut butter served at schools? The peanut butter found to contain salmonella bacteria was made by the Peanut Corporation of America. They make peanut butter for institutional use in places like prisons, schools and nursing homes. As a precaution, the Peanut Corporation of America has recalled all peanut butter and peanut paste made in its Blakely, Georgia, plant. That means institutions should no longer be serving it.
3. What about other food made with peanut butter? Officials say for right now, hold off on eating foods that contain peanut butter or peanut paste. Peanut paste is found in commercially made cakes, candies, crackers, cookies and ice cream. The Kellog Co. announced a voluntary recall of 16 products, including Keebler and Famous Amos peanut butter cookies, because they contain peanut butter that could be connected to the Peanut Corporation of America.
4. How do I know if I have been infected by salmonella? According to the Centers for Disease Control, most people infected by salmonella bacteria develop diarrhea, fever and abdominal cramps 12 to 72 hours after the infection. Most people recover without treatment. However, in some cases salmonellosis, as the infection is called, can be deadly. The infection may spread from the intestines to the blood stream and on to other body parts. Antibiotics need to be administered immediately. The elderly, infants and people with impaired immune systems are more likely to get seriously sick. If you think you may have infected with salmonella, go to the doctor immediately. The doctor can perform lab tests to determine if you have it.
To keep current on the list of products recalled as a result of the recall, sign-up for FDA email alerts and keep in close communication with suppliers.
This week brought news of yet another nationwide Salmonella outbreak from a source not yet identified by government regulators. The last time we had a nationwide Salmonella outbreak for an extended period of time without identification of a definitive source the federal government initially singled out tomatoes imported from Mexico (a huge array of products). In that case, the government was wrong and wreaked financial havoc on many farmers and businesses.
So far, in the current outbreak, nothing more specific than “poultry, eggs and cheese” have been identified as possible sources. Last year’s outbreak involved Salmonella Saintpaul whereas the current outbreak is Salmonella Typhimurium, which is more commonly associated with poultry, eggs and cheese, but could come from almost anything.
That a source has yet to be identified to the media doesn’t mean that state and federal officials aren’t zeroing in on possible sources. Restaurant owners, retailers and food manufacturers should be ready for the regulators when they come knocking.
In the past, I’ve had clients who were worked over aggressively by regulators (especially federal officials) who were investigating a large, nationwide outbreak with an uncertain cause. These officials face enormous pressure from those in Washington and from the public. Federal officials can make demands that threaten an entire business. They can demand credit card receipts, contact information for customers, personal employee information, shutdown of the business and more. Noncompliance might mean the officials will go to the press and advertise that the business is a target of the investigation. Unlike local health officials, who are usually vested in the well-being of local food producers under their jurisdiction, federal officials may care only about the investigation and nothing else.
Any food business should implement its crisis response team the minute it suspects it could be targeted in an investigation like the one that is currently ongoing. Specialists in food safety and foodborne illness investigations, genetic microbiologists, public relations experts, accountants, quality assurance personnel, purchasing personnel and lawyers should be lined up and ready to go. Events may unfold quickly for your business (over the course of a day or even a morning). Everything needs to be done at that moment to assist a business in navigating what may appear to be an impossible crisis.
Unfortunately, 2009 does not promise to be any easier than 2008 in protecting your business against food liability claims. Many argue that threats will only increase in the new year. Here are five things you can do to reduce exposure in the coming year:
1. Review Insurance Coverage and Limits Carefully – Both the variety and size of claims are escalating fast. For example, just a couple of years ago consumer claims from non-O157 E. coli, melamine, diacetyl or organic labeling seemed far-fetched, but all are now a grave reality. Federal, state and local governments will continue improving detection techniques since the rash of large, national food-borne illness outbreaks in 2006-08. The Obama administration will likely make increased funding in this area a priority. The odds that your company will be targeted in a nationwide outbreak resulting in claims in the hundreds of millions of dollars are increasing. Because of the exposure, insurance companies now more than ever will be looking for ways to reduce their coverage.
2. Review and Revise Supply Chain Agreements – Aside from insurance, one of the most effective ways to reduce, spread and mitigate risk is to ensure that those in your supply chain provide adequate insurance and indemnity for problems related to their products. But just because your supply agreement happens to mention insurance and indemnity does not necessarily mean those clauses will help when you need them. The only way to ensure that they will be honored and enforced is to ensure that your legal team (experienced in litigating these clauses) drafts these carefully.
3. Reassess Suppliers – Your choice of suppliers may be key to avoiding or reducing risk. Even if you demand sufficient insurance and indemnity from a supplier, a supplier of sufficient size may not be able to access insurance or have assets available to satisfy indemnity obligations. As important as your food safety, HAACP and other programs may be, they are really only as strong as your suppliers’ programs. Careful audit and assessment of your suppliers’ food safety programs is important.
4. Increase Scrutiny Against Fraudulent Imports – Melamine, tainted rice and now “laundered honey” are all good examples of how fraud in the global food chain can dramatically affect unsuspecting U.S. food sellers. [add more advice here?]
5. Review, Update and Rehearse Crisis Management Plans – How your company is prepared to respond to a crisis is a good predictor of how your company will weather the crisis. With the stakes increasing, you need to be prepared to face the worst. Continual review, updating and rehearsal of your crisis management plan is key. Everybody on the crisis management team needs to understand his or her role and be ready for different scenarios.
Last week’s ACI conference included a great session on crisis management. David Hermann from the GMA gave a presentation on “Effective Crisis Leadership: 5 Basic Rules You Learned as a Kid.” His presentation reflected a proactive approach and showed ways to build an effective crisis-management plan. Mr. Hermann’s points were as follows:
1. Clean up your mess.
- Take action and assume control of the situation.
- Mitigate your damages.
- Hire independent investigators if needed.
- Respond to the emotional needs of the public.
- Get the facts out before the rumors start.
- Cooperate with regulatory authorities.
3. Tell the truth.
-Honesty is not just the BEST policy, it’s the ONLY policy.
- Accept responsibility.
- An apology is not necessarily synonymous with liability.
5. Keep your hands to yourself.
- Resist the urge to “hit back.”
- Blaming others is not conducive to crisis closure.
Who should lead a crisis-management team was another interesting part of the discussion. Several in-house lawyers thought that the CEO should not take the helm. They believed that the team should be headed by another executive, such as the VP, because the CEO may not be as fully immersed and familiar with the product and also has other ongoing responsibilities that will reduce his or her focus on the crisis.
I was interviewed recently by Food Innovation Weekly on “Melamine, Recalls and Crisis Management.” This question-and-answer article discusses how the waves of melamine issues circling the globe affect the way a company should think about crisis management. I suspect that we’re not done hearing about melamine contamination and that the scope of fraud has yet to be fully uncovered. Some of the more interesting issues are safe dosage levels, product testing and what companies should or should not disclose to consumers.
While largely under the radar in the American press due to the compelling election cycle and historical meltdown in the financial markets, the news out of China concerning melamine has gone from bad to worse. Concern about Chinese dairies has morphed into a global crisis affecting what seems like an infinite number of products tainted with melamine.
Melamine has been intentionally introduced into animal feed, dairy products, pet food and other products because it can make diluted or poor-quality products appear to be higher in protein by elevating the total nitrogen content detected by some simple protein tests. Already, the FDA has identified a wide variety of products affected in the first wave of concerns about Chinese dairy products.
How should a food manufacturer or retailer prepare for a melamine issue? Any food company that imports any food ingredient or product from Asian markets should be concerned, and its first steps should be to update its crisis management plan and rehearse a melamine recall.
Food companies should also review with coverage counsel and their brokers whether they have—or can obtain—insurance coverage for financial exposure from melamine tainted products. Financially, a food company will be affected by a melamine issue in at least three ways: recall costs, loss of business and personal injury/consumer fraud claims. Standard comprehensive general liability (“CGL”) insurance may not cover any of these exposures. Most CGL policies do not cover recall costs. While recall and property insurance policies are available, the coverages offered by these policies also may be problematic.
Even personal injury or consumer fraud claims might be denied by CGL insurers. For example, many CGL policies will only provide coverage for occurances that arise out of events that are “accidental.” “Accident” is commonly defined as “a sudden, unforeseen or unintended event.” Even though a food company may have no knowledge of an upstream supplier’s fraudulent acts, some insurers are sure to argue that claims arising from products intentionally tainted by melamine are not covered.
The insurer's argument denying coverage is not a slam dunk and may not prevail. But, the key is to avoid (or minimize) the dispute with the insurer. To the extent possible, when placing insurance, a food company should obtain a representation or endorsement from its insurer that coverage will be extended to claims arising from melamine-tainted food.
The Obama administration has promised sweeping changes in all corners of the federal government. We can expect the new President to push an ambitious legislative and administrative law agenda in 2009. What does this mean for food regulation? A partial answer may be gleaned by looking at the Improving Food-borne Illness Surveillance and Response Act of 2008, a bill Obama introduced last summer after he become the presumptive Democratic nominee.
Some things of note:
1. The bill appears targeted in large part on increasing the government’s “capacity” for detection of food-borne illness—both by increasing cooperation between local, state and federal agencies and by enhancing detection capability through proliferation of cutting-edge technology. The bill proposes $25 million in block grants to state and local agencies. As we've said before in this space, better detection capacity correlates to more detected outbreaks. More detected outbreaks translates to more food-borne illness claims and affects everyone in the food industry (especially restaurants and those selling fresh produce).
2. One of the five goals of the bill is to “Strengthen oversight of food safety at the retail level.” I’m unclear on exactly what is meant by this goal. Does this mean, for example, that Obama might be interested in granting FSIS the jurisdiction to inspect supermarket delis or butchers?
3. Also of interest is what does not seem to be included in the bill. Specifically, the two most talked about (and controversial) federal food safety reform ideas: (1) mandatory recall authority and (2) merger of FSIS and FDA food safety programs. Should we read into the bill that President-Elect Obama does not support these reforms? Time will tell. All that is certain is that change is coming . . .
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).
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].”
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.”
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.
An upcoming panel discussion at the Nutritional Law Symposium in Utah and a call from a reporter about the Maple Leaf Foods issue in Canada have me thinking a lot about crisis management. How a business responds at the outset of an alleged food-borne outbreak determines its fate in many ways.
Implementing a strategy from the start is a must to minimize the impact of a crisis. Yet the million- or billion-dollar question is, how do you develop the right save-the-business strategy when events are overwhelming and occurring at light speed? You need to bring together quality assurance, legal and food safety personnel (epidemiologists, microbiologists and other food safety experts) who can respond immediately to find the source of the outbreak and work with public health officials. A business must ascertain at the earliest possible moment the source and scope of the crisis. Once a business understands whether an outbreak is limited to a particular outlet or product line, and how many people might be affected, it can formulate a public relations, recall and legal strategy to limit exposure.
The key is execution. Everyone on the crisis management team must work in sync and understand their roles. And the secret to execution is preparation. Long before a crisis, a team (usually a combination of personnel from outside and inside the business) should be in place, rehearsed and ready. History is full of lessons: Some businesses executed crisis management well and emerged from dire crises stronger than before; others were unprepared, and their brands have long been forgotten.
By Guest Blogger Richard Goldfarb
Sunday, at a local restaurant, I saw a sign saying that there would be no fresh sliced tomatoes on my burger. Although it is quite clear that there are safe tomatoes available, the FDA has encouraged restaurants simply to cease selling them. This makes a lot of sense: rumors fly so rapidly and irresponsibly. Though, individual restaurants may take different steps; those that pride themselves on knowing the source of their heirloom tomatoes should be advertising that fact.
The problem is salmonella, in particular a strain called “saintpaul.” The FDA identified salmonella in tomatoes as a significant risk a year ago. Thus, they had the infrastructure in place to monitor and deal with the significant number of reported outbreaks this year. So far, no one knows the source of the problem, and all the FDA can do at this point is to list those tomatoes that have not been associated with the outbreaks:
• Cherry tomatoes
• Grape tomatoes
• Tomatoes sold with the stems on
• Homegrown tomatoes
In addition, the FDA lists those tomato-growing areas that have been ruled out in the outbreaks. This doesn’t mean that tomatoes grown in those areas will always be safe, but that they have not been linked to this outbreak. The FDA also reiterates its advice on the safe handling of fresh tomatoes and other fresh fruits, both in restaurants and at home. The CDC website provided a nice summary:
• Refrigerate within 2 hours or discard cut, peeled, or cooked tomatoes.
• Avoid purchasing bruised or damaged tomatoes and discard any that appear spoiled.
• Thoroughly wash all tomatoes under running water.
• Keep tomatoes that will be consumed raw separate from raw meats, raw seafood, and raw produce items.
• Wash cutting boards, dishes, utensils, and counter tops with hot water and soap when switching between types of food products.
The problem isn’t limited to the United States; New Zealand tomatoes have been implicated as well, and banned in Hong Kong. It was nice to know that the tomatoes we had with dinner last night were doubly safe: they were hothouse tomatoes sold with the stems on, and they were from British Columbia, one of the locales ruled out by the FDA.
Although there is no way to eliminate risk, grocers, restaurants, and produce suppliers should conduct ongoing reviews of their food safety, audit, supplier, and insurance programs to ensure that everything that can be done is being done to mitigate or shift risk.
Given the limited resources of most state and local health departments, I have always believed there is little to lose by offering the assistance of credible and known epidemiologists, microbiologists, etc. Additional resources in an outbreak investigation (and, therefore, additional investigation) can mean the difference between the health department pointing at your client and the health department pointing at another source. Several other defense lawyers, and, surprisingly, state health department officials, agreed. Examples of successful early intervention were elicited.
Last week, a supermarket chain, Wegmans, learned that an employee working in the produce department contracted Hepatitis A. Like many supermarket chains, Wegmans, based in Rochester, New York, maintains a customer loyalty card system. According to the Buffalo News, , “the store plans an outreach to its customers they know purchased potentially affected produce by using Shoppers Club data to contact them via automated telephone calls.”
Loyalty cards were not designed to assist grocers in providing recall and food safety information. Many companies, in fact, face hardware and software problems in using their loyalty card databases to notify customers about issues with products purchased with the card. Many grocers do not require complete or accurate contact information. Privacy concerns are also a factor. A grocer does not know when it contacts a customer whether it is speaking to the customer or to someone else in the household. It is not hard to imagine a situation in which a household member does not want purchases (e.g., birth control, alcohol, or tobacco) or health conditions known to others in the household.
On the other hand, some believe that customers expect grocers to use their loyalty card databases for just this purpose. Traditional means of recall notice--press releases, signage in the stores, etc.--may not be as rapid as a phone call or email. Timing can make the difference between recalled food being consumed or not.
No matter whether grocers follow Wegmans’ policy of personal notification, a good business practice (and litigation avoidance tactic) may be for a grocer to disclose clearly to customers its policy about using the loyalty card information to provide notice of product safety issues. For grocers who use the database to phone or email consumers, a clear policy will avoid the golden rule that “no good deed goes unpunished.” For grocers for whom personal recall or safety notices are impractical or constitute privacy violations, a clear policy will create clear expectations and may mitigate against litigation.