The Uniform Commercial Code and Food Recalls
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.
Maple Leaf Foods: A Case Study in the Persistence of Memory
Maple Leaf Foods is Canada's largest food processor, and as the name implies, it traces its history a long way with our neighbor to the north. It has always prided itself on its food safety procedures.
Last year, as was widely reported, more than 20 people all across Canada died from listeriosis traced to one of Maple Leaf's processing plants in Toronto. A huge recall of Maple Leaf products was ordered. Recently, the company settled class action cases for a reported $27 million.
Perhaps Maple Leaf thought that put it all behind them. Hardly. A Thomson-Reuters article described how Maple Leaf considers itself well-placed in the current economic environment. The story is 11 paragraphs long. Five of the paragraphs tell the company's story. Six of the paragraphs, including the lead paragraph and the final five, are concerned in whole or in part with the listeriosis outbreak, plus a new recall of frankfurters and hot dogs.
People have long memories. The article in today's Wall Street Journal that peanut butter sales in the four weeks ending February 21 dropped 13.3% compared to the same period last year is just another indication of that.
PCA Files for Chapter 7 Bankruptcy
It will come as no surprise that Peanut Corporation of America has filed for bankruptcy protection in the Western District of Virginia.
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.
Two points are critical: they filed for Chapter 7 liquidation, not Chapter 11 reorganization. While voluntary Chapter 7 filings are not typical, they are less unusual than you might think.
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.
A Nicely Balanced Article from the AP
I came across this article on Google News from Holly Ramer at the AP.
What I liked about the article is that it is not afraid to quote from parents who are still feeding peanut butter to their kids. Among those parents: President Obama and his wife Michelle.
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.
PCA President Parnell Pleads Fifth Amendment Before House Committee
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
For help in following the story, the AP has posted a nice timeline of events. If we know anything, we know it will need supplementation.
The Human Cost of the Peanut Recall Part Three
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.
The Human Cost of the Peanut Butter Recall Part Two
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.
Update on Criminal Risk Management: The Peanut Case
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.
Irradiation as a Part of Food Safety Reform?
In the wake of the latest Salmonella recall, Congress is holding well-publicized food safety hearings, and food safety may be rising on the priority list of the Obama administration. One question that arises is whether the perceived crisis in food safety will lead lawmakers and the public to revisit the option of food irradiation. The New York Times recently ran a nice piece on the topic. The article begins:
Before the recent revelation that peanut butter could kill people, even before the spinach scare of three summers ago, the nation’s food industry made a proposal. It asked the government for permission to destroy germs in many processed foods by zapping them with radiation.
That was about nine years ago, in the twilight of the Clinton administration. The government has taken limited action since.
The article quotes Suresh Pillai, director of the National Center for Electron Beam Research at Texas A&M University, as saying “It’s unnecessary for people to be getting sick today with pathogens in spinach or pathogens in peanut butter.” He describes the potential for irradiation of food as “humongous” and says that “[w]e have the technologies to prevent this kind of illness.”
As discussed previously on this blog, irradiation has wide support in the food industry and even has the support of plaintiffs’ lawyers such as Bill Marler, who has written a lengthy three-part series on the topic.
The question may not be whether irradiation is another tool that can prevent food-borne illness, but rather why is irradiation not being used on a wide-scale. Mr. Pillai likened fears of irradiation to “early phobias about the pasteurization of milk.” Aside from lengthy delays in FDA approval, consumer fear may be the problem. The only solutions may lie in (1) a joint effort between industry and lawmakers to educate the public on the benefits and safety of food irradiation, and (2) action by Congress and the FDA to help provide industry with the resources and political cover to begin using irradiation on a wide scale.
The Human Cost of the Peanut Recall Part One
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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.
Lengthy List of Products NOT Affected By Peanut Butter Recall
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.
Peanut Butter - Avoiding The Panic
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.
