More on Melamine . . .
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.
Breakthrough in Detection of BSE (a.k.a. "Mad Cow Disease")
.jpg)
No food-borne illness induces consumer fear like Bovine Spongiform Encephalopathy (BSE a.k.a. "Mad Cow Disease"). The beef industry in particular has gone to great lengths to take preventative steps against the introduction of BSE into U.S. herds. A big problem in controlling BSE is that it’s difficult to detect. The only detection method currently available involves the slaughter of a suspect animal and a series of not very reliable tests.
Now comes word that researchers at Cornell University have devised a “tuning fork” method that may detect BSE at the prion level:
Harold Craighead and colleagues at Cornell University have developed nanoscale resonators, which are tiny devices that function like tuning forks by changing pitch with increased mass. When prions bind to the resonator’s silicon sensor, it changes the vibrational resonant frequency of the device. In experimental trials, the sensor detected prions at concentrations as low as two nanograms per milliliter, the smallest levels measured to date.
Though still a while away from practical application, the technology may have dramatic effects on the ability to ensure the safety of the nation’s beef supply. The BSE “tuning fork” is a good example of yet another new technology industry that the government can use to ensure food safety and consumer confidence.
Farming and safe handling practices alone cannot provide the level of assurance that consumers demand in their food supply. Tuning fork, irradiation, and better bacteria detection are all vital tools that industry, government, and consumers need to embrace.
Preparation for Melamine Issues- Updating Crisis Management Plans and Insurance Coverage
.bmp)
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.
Forest Through the Trees: Lessons from a Crisis Management Case Study
.jpg)
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].”
Anatomy of a Food-Borne Illness Claim - Part I
Recently, I’ve received several requests for resources explaining the anatomy of a food-borne illness claim. In other words, what events can be expected, and when? What can or should a company (in particular the legal department) do in response to a claim?
Part I – Notice of an Outbreak (and Possible Claims)
First off, don’t panic. Your company’s crisis management team (which has been well-rehearsed for this scenario) should convene action upon the first notice of a possible outbreak—even before verification and before claims are apparent. Food safety experts should contact the health departments that may have identified the outbreak. Together with the legal, sales and quality assurance departments, your food safety experts should be involved in a full investigation of the possible outbreak. The earlier the intervention, the greater the possibility of collecting key information that may be useful in determining whether your company is linked to the outbreak and pinpointing other possible sources of the outbreak. Public relations experts should also be consulted at the first possible moment.
Checklist for the legal department:
- Log events, actions and communications. This is critical for responding to government agencies and to claims.
- Record all reported injuries. Collecting information about potential claims early is a key to mitigating those claims and future legal costs.
- Notify insurers. Insurance companies require prompt notice; insurers may also have assets available for crisis response.
- Document the investigation. Litigation may be protracted, and a well-documented investigation may be key to the company’s defense.
- Institute a litigation “hold” on the destruction of any company documents or emails. Don’t turn a bad situation into a nightmare; spoliation claims can take on a life of their own.
- Retain product samples for future testing. This may be critical to support experts’ opinions at trial and to preserve claims against suppliers.
- Review and retain vendor/supplier documents. Recovery against suppliers could be as important as or more important than insurance recovery.
- Assess the merits of a consumer hotline. It could be helpful in disseminating accurate information to consumers (inaccurate or conflicting information can lead to litigation) and in collecting information about the pool of potential plaintiffs.
- Assess the merits of a consumer/vendor reimbursement program. Like having a consumer hotline, providing immediate reimbursement could help dampen the volume of future plaintiffs.
Stay tuned for Part II – Receipt of the Demand Letter.
New York Times on Nutraceuticals
The New York Times has a piece on nutraceuticals that caught my eye as an example of the news media’s skepticism about fortified food. The article begins:
“O[ff] the coast of Peru swim billions of sardines and anchovies: oily, smelly little fish, rich in nutritious omega-3 fatty acids. Their spot on the food chain is low; many will be caught, ground up, and fed as fishmeal to bigger animals.
“But a few have a more exalted destiny: to be transported, purified and served at North American breakfast tables in the form of Tropicana Healthy Heart orange juice and Wonder Headstart bread. These new products promise to deliver the health benefits of fish oil without the smell and the taste — without, in fact, the fish.”
But the article’s author, Julia Moskin, without citation or attribution, poses these loaded questions: “Are we really that close to a world in which food functions as a nutrient delivery system, made possible by microencapsulation and fine-spray coating? And what would this mean for food and human nutrition?”
In the end, Ms. Moskin’s piece appears full of cynicism and doubt about the industry. She writes off nutraceuticals as a cheap marketing ploy:
“[W]ith recent rising costs in raw materials, flavorings and transport, many food companies are refocusing their research and development; instead of adding expensive ingredients like sun-dried tomatoes or honey-roasted almonds to existing products, the search is on for inexpensive ‘value-added’ products that customers will pay extra for.”
Ms. Moskin does quote claims made by the industry but notes that university scientists disagree with the claims—implying that these scientists must be right because they are not employed by industry.
To me, the article demonstrates the need for the industry to invest in more independent research and verification. As the nutraceuticals industry matures and grows, claims by industry will be met with growing suspicion and, inevitably, assertions of “consumer fraud.” Consumers may believe health claims by small health food companies that they “trust.” But once those same companies (and their industries) grower larger, people by their nature become more skeptical.
"Canada is Next"
Anyone interested in trends in cross-border mass-torts litigation and the nightmare this is becoming should read a recent article in Bloomberg Law Reports entitled "Brave New World: The Dawn of Hyper-Complex Litigation"In the article, appears the following:
"The Canadian Double-Down"
"At a January 2008 products liability symposium, a well-regarded New York City plaintiffs’ attorney stood before a room of lawyers and in-house counsel. The topic of his presentation was, in part, to forecast the next direction of mass tort litigation. His message to those listening was clear. 'Canada is next.' "
The article goes on to explain that the threshold for mass tort class actions in Canada may now be lower than in the U.S.: "in certifying the class, the [Canadian] court was not troubled by the fact that class members could not prove a present physical injury or a 'foreseeable and recognizable psychiatric illness' as a result of the alleged product defect."
The bottom line advice in the Bloomberg article, as it has been in this blog, is that businesses (especially those in the food industry) need to continue to re-double efforts at risk avoidance and crisis management. As courts outside the U.S. become more open to mass tort claims, exposure for businesses selling products internationally only amplifies.
King County Menu Labeling Goes into Effect August 1, 2008--Yet Another Call for Preemption?
Effective August 1, King County, Washington, will impose the strictest menu labeling law in the nation. King County’s law imposes menu labeling requirements, on restaurant chains that have the following characteristics: 1. The same name.
2. Operating permits from Public Health—Seattle and King County.
3. Fifteen or more locations in King County or nationwide—this legislation does not affect food establishments with 14 or fewer locations.
4. Gross annual revenues of $1 million or more.
5. Standardized menu items that use standard recipes.
The county won’t start imposing fines until January 2009. Yet for small restaurants that just meet the 15-restaurant and $1 million thresholds, or for franchise owners, these requirements can be onerous, especially if the restaurant maintains a large menu or large variety of seasonal foods. Costs for nutritional testing on a variety of products can be prohibitively expensive. Will this law have the perverse effect of limiting consumer choice and use of seasonal, local products on menus?
Even for larger restaurant chains that already provide nutritional information, King County’s law will impose requirements that may increase costs because King County’s rules may be inconsistent with nationwide distribution and marketing.
Restaurants in both New York City and San Francisco faced with similar (though arguably less onerous) local regulations are challenging the laws in those cities. Among other things, there are serious First Amendment issues (though lawyers in New York City are apparently relying on the King County law to show how it could be made to comply with First Amendment speech protections).
Menu laws are also being challenged on grounds of federal preemption (even though the FDA has apparently taken the position that its laws do not preempt local menu regulations). I have written several times on this blog about the need for federal preemption. No area demands federal preemption more than regulation of chain restaurant menus.
For evidence why the federal and not local governments should be regulating nutrition, look at King County’s self-stated reasons for passing its law: “rising health care costs, our growing number of obese, diabetic and chronically ill residents, and a lack of information to inform choices that improve our health.” Are any of these reasons unique to King County? The studies relied on by King County are national and not unique to King County. The restaurants targeted are national and are generally not King County-based restaurant chains.
Only the national government has the resources to investigate the obesity epidemic—something that has baffled scientists and for which there is no proven cause or cure. Before our restaurant industry is impacted and consumer choice is further limited, shouldn’t we devote the full resources of the federal government to the problem? Do we expect the obesity epidemic be solved by an inconsistent patchwork of local county laws?
