Ken has previously blogged about liability issues relating to H1N1 flu, also known as swine flu. Today, the FDA has issued a widget to allow employers, consumers and others to browse and search fraudulent H1N1 influenza products and report suspected fraud. The widget can be copied onto any other Web site or blog. The FDA had previously issued a similar widget for the peanut butter recall. Additional information can be obtained from the FDA's swine flu page or flu.gov.
This is the widget:
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.
What are these warranties like and how do they work in the context of food recalls?
The warranty of title is just what you think it is, a warranty that the person selling the goods has the power to sell them to you. This is not exactly the same thing as saying the seller has full title to the goods; under certain circumstances, a buyer in the ordinary course of business can obtain better title than the seller itself has.
The warranty against infringement relates to claims about intellectual property. Food itself can be patented in some circumstances. Infringement may be a topic for another day, though, no one is likely to be claiming intellectual property rights in tainted food.
It is the last three warranties that can be critical to the question of a food recall.
As we'll see in a bit, if these warranties are made, the buyer has some powerful tools in the case of a recall. If these warranties aren't made, then the seller faces a far more favorable legal landscape.
The Warranty of Merchantability. First, the warranty of merchantability requires that goods do all of the following:
- pass without objection in the trade under the contract description; and
- in the case of fungible goods, are of fair average quality within the description; and
- are fit for the ordinary purposes for which such goods are used; and
- run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved; and
- are adequately contained, packaged, and labeled as the agreement may require; and
- conform to the promise or affirmations of fact made on the container or label if any.
If you're a buyer of food, you immediately want all these warranties, don't you? If you buy apples, they should be apples as described by the seller, be of fair average quality, be fit for the ordinary purpose for which apples are used (cooking, eating), be of even kind, quality and quantity, be adequately packaged and labeled and conform to promises on the label (e.g., "Washington Extra Fancy").
If you're a seller of food, you're thinking, "now, wait a minute."
Apples are perishable, they can rot when they're not stored properly, they get worms in them, they get bruised, they get pushed around or dropped in transit, a certain percentage of them aren't perfect. The seller is thinking, I took all those things into consideration in setting the price of these apples, and what I don't want is the buyer to be able to come back to me and say, three apples are bad, pay up. Or worse, three apples are bad, I'm rejecting the whole batch.
So the seller says he doesn't want to make the warranty of merchantability.
The Warranty of Fitness for a Particular Purpose. What about the warranty of fitness for a particular purpose?
What it says is this:
Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose.
We go through the same dance again. Imagine that you're looking to add some peanuts to a cookie dough. You call in a bunch of peanut sellers and tell them your requirements: quality, color, fat content, moisture content, etc. The peanut seller says, have I got the peanuts for you! And again the buyer is thinking, "I sure like this implied warranty of fitness for a particular purpose," while the seller is saying "I don't want to be liable if the peanuts don't make great cookies, I'm not a cookie baker."
Express Warranties. Finally, express warranties.
Here's how they come into being:
- Any affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the affirmation or promise.
- Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.
- Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.
You won't be surprised to see that sellers and buyers make the same arguments about these warranties as well.
Disclaiming Warranties. Sellers argue for, and often obtain, provisions in contracts like this:
SELLER MAKES NO WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
The language is specific because the UCC requires that the word "merchantability" appear (unless some other phrases approved in the UCC such as "with all faults" is used), and it is in all caps and bold because the UCC requires the disclaimers to be conspicuous.
The Battle of the Forms. Section 2-207 of the UCC, the so-called "Battle of the Forms" section, is the single most litigated section of the UCC. Its revision was a central part of the abortive attempt to revise Article 2, which was not adopted in any state and was the subject of major controversy. The current version has its own problems.
What the battle of the forms covers, or tries to cover, is the situation that arises so often in commercial transactions when two parties act like they have a contract, but there is no one definitive expression of that contract. The buyer sends out a purchase order with a lot of fine print on the back; the seller sends out a sales confirmation with a lot of fine print, too. No one signs anything but the seller ships goods and the buyer pays for them and then a problem arises. What are the terms of the parties' contract?
2-207(b) is where the real difficulties with this section of Article 2 lie. It provides that "between merchants", terms in an acceptance that materially alter an offer become part of the contract unless one of three things has occurred:
- the offer expressly limits acceptance to the terms of the offer;
- they materially alter it; or
- notification of objection to them has already been given or is given within a reasonable time after notice of them is received.
The critical issue that is covered in 2-207(c) is that a contract has in fact been formed even though the parties do not agree on all its terms.
Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act.
This is, essentially, why the buyers often win in a battle of the forms. If one form says "you are making me a warranty" and the other form says "I'm not making any warranty", then the warranty clause is not a clause on which the parties agree. Since the implied warranties of Article 2 are "supplementary terms", however, the seller will be subject to them unless it can disclaim them effectvely.
Who Wins? There are three times when a buyer can complain to a seller, with a cascading series of rights and obstacles depending on where you are in the timeline.
The easiest situation is upon delivery. At the point of delivery, you have the "perfect tender" rule, which provides that if goods "fail in any respect to conform to the contract", they may be rejected. Not only that, but you may reject all of them, accept all of them, or reject any commercial unit and accept the rest. Thus, if you get a box of rotten apples in a carload, you can choose to reject them all, accept them all or reject the rotten box and keep the rest. Indeed, you can technically reject them if a single apple is rotten.
Applied to a food recall, this is again the simplest case. If the food has been recalled, it will not conform to the contract and may be rejected. Even if all warranties have been disclaimed, the delivered food would not conform to the contract because it will not, in any meaningful sense, be food.
What if delivery has occurred, but the food is recalled before it is processed, consumed or sold?
This is where the rules for revocation of acceptance may apply. In order to revoke your acceptance of goods, the following must be true:
- the non-conformity must substantially impair the value of the goods to the buyer
- it was accepted because its non-conformity was difficult to discover
- the revocation of acceptance occurs within a reasonable time of discovery of the non-conformtiy
- the revocation occurs before any substantial change in the goods
- the buyer notifies the seller
In the case of recalled food, the first requirement should be easy to satisfy, and the second would appear to be easy as well--the recalled status of food is usually not the buyer's responsibility vis-a-vis the seller. The third and fifth requirements will depend on the buyer's diligence, but ordinarily in the case of a food recall, at least a merchant buyer will tend to be relatively diligent.
The real action is in the question of whether substantial change has occurred to the goods.
Interestingly, one of the leading cases in this area involves peanuts. It held that peanuts that had been blanched were not substantially changed, and thus were eligible to have their acceptance revoked, while those that had been processed were substantially changed.
If revocation of acceptance is not available, then the action will be for breach of warranty. If the seller has made a warranty that the goods will be fit for human consumption, then it will not be difficult to make a claim for breach of warranty with respect to recalled goods. If the warranty was disclaimed, then of course the situation would be reversed.
The reality is that in the case of recalls that involve deaths, the really culpable party will, like PCA, most likely end up in bankruptcy. Everyone else in the distribution chain, from distributors of raw materials to processors to distributors of processed foods to retailers to consumers, will be essentially an innocent party seeking to find some way out of its loss. In general, whoever supplied the contract may end up with the best chance of prevailing.
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.
The National Grain and Feed Association has reported to its members that Senator Richard Durbin (D-IL), is likely to reintroduce food safety legislation next week. Senator Durbin has introduced similar bills in prior Congresses. Likely, co-sponsors include Senator Edward M. Kennedy, chairman of the Senate Health, Education, Labor & Pensions (HELP) committee, and Republican Sens. Richard Burr of North Carolina, Lamar Alexander of Tennessee and Judd Gregg of New Hampshire. According to NGFA, the bill would require participants in the food chain to develop food safety plans to identify hazards that could adversely affect human or animal health.
Because of the peanut butter recall, there may be an attempt to take the bill straight to the Senate floor, bypassing committee hearings.