Mitigate Third-Party Supply-Chain Risks with Planning, Calm & Creativity

Mitigate Third-Party Supply-Chain Risks with Planning, Calm & Creativity

Just scan the headlines about food recalls and you will never eat again. Read the reports posted on foodsafetynews.com, a website backed by — guess who? — a well-respected attorney who specializes in representing victims of food-borne disease, and you will think there wasn’t a decent meal to be found in May 2012.

Live chicks and ducklings from an Ohio hatchery sickened 93 people with salmonella. More than 80 cases of salmonella were linked to products sold by a North Carolina company. The CDC reported 316 cases of salmonella poisoning from frozen sushi tuna across 26 states and D.C. E. Coli sickened people in South Carolina and Canada. America’s pets were not immune either. Chicken jerky treats imported from China were blamed for as many as 1,000 canine illnesses and deaths.

There is no better source of cautionary tales about third-party supply-chain risk than in the food and drug industries. “We’re dealing with supply chain problems which can vary in severity depending on where you are in the chain,” said Stephen Weisbrod of Weisbrod Matteis & Copley during a recent food and drug seminar he co-chaired for HB Litigation Conferences. Weisbrod recently played a leading role in the settlement of $34 million in salmonella claims. He predicts supply-chain claims to become a larger issue in the medical device and drug arena, as well, since ingredients increasingly come from overseas.

Not only can food-borne illnesses ruin your company picnic, they can ruin your company. Recall last year’s listeria outbreak that was traced to cantaloupe from Jensen Farms in Colorado. Last month, the grower filed for Chapter 11 bankruptcy protection under the pressure of wrongful death and personal injury lawsuits. The outbreak sickened 146 people and killed 36. The Denver Post quoted Jensen’s bankruptcy attorney as saying the filing will eventually free up millions of dollars to pay victims — including insurance money — which can play a critical role in resolving disputes and saving companies.

Attorney and Food Safety News publisher William Marler of Marler Clark in Seattle, who represents 37 clients in the suit, including 12 of those who died, says he will now seek remedies from entities all along the supply chain. He plans to pursue litigation against Frontera Produce, the cantaloupe distributor, and retailers like Wal-Mart and Kroger.

Recall Costs

In addition to defense and liability costs, recalling products can be astronomically expensive as well.

Sarah Brew of Faegre Baker Daniels, who also co-chaired the HB food litigation conference, reminded in-house counsel of the 2009 Peanut Corporation of America case in which a 43-state salmonella outbreak killed eight people and sickened another 500, half of them children. The recall list grew to more than 400 products with highly recognized brands like Keebler and Jenny Craig. The New York Times® said the outbreak “illustrated the complexities of the industrial food chain, and left consumers scrambling to figure out if some food in their cabinets posed a danger.” Lawsuits and even criminal investigations followed.

In its coverage of the case The Times explained that peanut paste used in candy and crackers also was produced at the now-shuttered plant. “Tracking how the paste travels through the food supply can be challenging, because several companies can be involved in making the final food,” The Times reported. “[O]ne manufacturer might coat the paste in chocolate and make a peanut butter cup, which is then sold to another company that mixes it into ice cream that may or may not also contain peanut butter. A grocery chain might buy that ice cream and sell it under a private label.”

“In addition to substantial damage claims arising from personal injury and wrongful death claims,” Brew said, “the commercial recall-related costs were $500 million by the time the hundreds of PCA-related ingredients that had worked their way through the supply chain were finally recalled.”

Please Remain Seated

Of course, even if everyone takes every precaution in the world bad things will happen. But there are ways to mitigate expenses before and after an outbreak occurs. “Panic, chaos and confusion are always an obstacle to accomplishing anything when something goes wrong,” Weisbrod warned. “Uncertainty over who is responsible for what, mutual finger-pointing, disputes over contractual obligations, including over terms of indemnification obligations or insurance obligations all get in the way of reasonable resolutions.” And, he said, “There may not be as much of a challenge assigning blame as assigning value. If you can’t agree on value you are unlikely to get to a quick resolution. Sometimes that is just a result of companies not documenting their losses very well.”

“Acting quickly to minimize harm is essential,” Weisbrod told the conference attendees. “Get your product off the market quickly. And reach out to your customers, whether they are individuals or businesses.”

Recall Plans & Mock Recalls

Faegre’s Sarah Brew strongly urges companies not only to have recall plans, but to routinely revisit them and put them to the test. “There are scientific studies proving that companies that perform mock recalls will do much better when faced with an actual recall,” she said. “For a while, the standard for companies has been to run a mock recall once a year, but lately I’ve seen companies conduct two per year.”

In the event a company has to perform a recall, Brew says it is important to conduct a post-mortem to identify how the recall unfolded with an eye toward improving performance next time. Along with removing hazardous products from the market and complying with the regulations and demands of the FDA, companies want to make sure they are executing recalls efficiently and documenting all of the expenses in the event they need to support claims against others.

According to Ohio State’s College of Food, Agricultural and Biological Engineering, “While it is hard to predict recalls, having a tested recall plan and taking all the preventive cautions can protect a company from costly recalls. The company should appoint a recall coordinator, establish a recall team, select a recall contact at each facility (plants, warehouses, brokers, distributors, stores), have a recall contact at each supplier and customer, and prepare a recall plan. A communication plan to make sure that recall/market removal notices are relayed to the responsible employees should also be part of the recall plan. In addition, simulation of a recall based on the recall plan can evaluate the effectiveness of the plan and ensure that the organization will be ready for a recall.”

According to an article published by AIB International, an organization committed to food supply chain safety, a mock recall is really a crisis drill. “Its main objective is to test the crisis-handling side of a recall,” wrote the article, AIB’s authors Stephanie Lopez and Kerry Beach. The authors break the essential elements down to three:

Confirm all contact information. Lopez and Beach urge companies to get all business and after-hours contact information for members of the recall team, as well as for customers, suppliers, distribution and warehouse personnel, plus certification bodies and legal counsel.

Challenge your team’s decision-making capabilities. Make sure they can determine if a recall is warranted; what technical expertise is needed; what additional warehousing or transportation needs there might be; if the correct people are on the recall team; if correct alternates are identified for a recall team.

Confirm you team’s access and skills. Make sure responsible personnel and their alternates know how to contact regulators. Make sure they can access the Reportable Food Registry, the facility’s FDA facility registration information, and the company computer systems. Make sure they can do basic things like set up a conference call and set up a log of recall activities. Make sure they can write customer communications for phone and email, press releases and media statements.

Auditing Companies

Attorney Sarah Brew said auditing companies also face risk for failing to perform adequate audits that may have caught the contaminated product before going to market. When you have creative plaintiff lawyers and companies with limited insurance, or companies that may go bankrupt, those plaintiff lawyers are going to find a lot of tangential companies to bring into the litigation.

A good example of this is in the Jensen Farms case. In addition to suing cantaloupe distributors and retailers, plaintiff attorney William Marler is pursuing Primus Labs, the third-party auditor whose subcontractor reportedly gave the Jensen Farms facilities a “superior” inspection rating just six days before the salmonella outbreak.

Protecting Privilege

Companies often turn to outside crisis management companies with experience and expertise in just that. Sarah Brew cautions, though, that with a flurry of back-and- forth communications food and drug producers and their outside counsel need to be extra cautious to protect attorney-client privilege. “Plan to protect communications early,” she says, “and take steps to know all [team members] are taking measures so privilege is not compromised.”

Indemnity Provisions

When you examine the supply chain relationships in the food industry, it is not unusual to see an absence of written contracts, attorney Brew says, noting that deals are still sometimes made on handshakes. “In those situations a manufacturer is still o.k., because they still have their UCC warranty-type remedies, an implied warranty of merchantability, implied warranty of fitness for a particular purpose, potential tort remedies, although [they are] challenged by the economic loss doctrine. Eventually they will bring suit, of course, but have to worry about the amount of damages recoverable because under the UCC damages are limited.”

Of course, Brew advocates for a written contracts with indemnity provisions. Then, she says, “I can write it so the sky is the limit in terms of the damages [we] can recover.”

Manufacturers need to be concerned with statutes of limitations and decide when the time is right to sue ingredient suppliers. In some states a company can wait until judgments are entered or settlements are reached, Brew explained, while in others the time frame to sue a supplier is finite. Contracts help the manufacturer in these cases, for example, by stating which state’s law will be applied and what kinds of relief are available, Brew said, adding that having indemnification language is huge in any type of sales-supply contract.

Insurance

Companies who find themselves with these liabilities always turn to their carriers for defense and indemnity coverage, as was the case in the Jensen Farms cantaloupe listeria litigation. While in that case the company ended up in Chapter 11, a unique settlement in another case that was partially funded by insurance kept the defendant out of bankruptcy.

Attorney Weisbrod recently helped secure $11 million in insurance coverage as part of a larger settlement for individuals sickened by a salmonella-tainted flavor enhancer. Valuing the claims was critical in that case, of course. In their coverage of the litigation brought in federal court in Nevada against Basic Food Flavors, Inc., and the insurance settlement with Employers Fire Insurance Co., Law360® reported on the motion for approval of the agreement in which Employers and Basic Food used a neutral administrator to oversee a claims evaluation process. The administrator approved more than $34 million in claims. In addition to the insurance coverage, sums will be placed in claims trusts, which also will be fed by a percentage of Basic Food’s profits from 2012 to 2017.

Weisbrod told Law360 that the unusual settlement “managed to make the pie bigger for all of the major parties.” As a result, he said, “Basic [Foods] avoided bankruptcy, and its owners preserved their equity in the company. Although Employers paid full policy limits, it avoided paying millions of dollars in defense costs. The claimants received the benefit of full policy limits without taking the risk that Basic would lose its coverage lawsuit and without suffering the delays and paying the costs associated with a Chapter 11 bankruptcy case.”

In light of the often bet-the-company characteristics of risks posed by third parties in your supply chain — clearly illustrated by litigation involving food-borne disease — preparation, calm, creativity and careful management of supplier relationships are all needed to protect your company.