Food Liability Law Blog : Food Safety and Liability Lawyer & Attorney : Stoel Rives Law Firm : Food Safety, Organic Food, Recalls

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.   

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The Georgia House of Representatives today considers proposed legislation to strengthen food safety rules in that state.  Among other things, Senate Bill 80 includes a provision that would require food makers to alert state inspectors within 24 hours if a plant’s internal tests show products are tainted.  Experts say no other state has such a rule.

The bill already has passed the Georgia Senate.  House approval would mean Georgia Gov. Sonny Perdue soon could sign the bill into law.

The bill was introduced following the salmonella outbreak linked to Peanut Corporation of America.  Investigators say the company knowingly shipped salmonella-laced products even after PCA's internal tests showed the products were tainted.  State law did not require the company to share those test results.

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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. 

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