The threat is real! Protect your clients—help them be proactive

While companies face many types of risks, a product recall can be devastating and extensive. An event can change a company’s financial profile, market performance, and reputation—even cause bankruptcy, criminal prosecution, or the company to shut down.

Often, large corporations are better equipped to deal with the short-term impacts of a product recall without experiencing long-term ramifications. Small companies, on the other hand, may not be able to recoup because they operate without robust cash flow and brand recognition.

Depending on the product category and governing body, each has their own guidelines and procedures that must be followed, including the FDA1 and the CPSC2. However, no matter the industry, consumer protection laws require manufacturers and suppliers to bear the cost of all product recalls and any associated costs. From replacement expenses, lost sales, government sanctions, and lawsuits, a product recall can amount to a multi-billion-dollar ordeal. And if shareholders and customers lose confidence, stock prices can plummet for even large corporations. For instance, Toyota’s stream of gas pedal recalls around 2010 resulted in a $2 billion loss related to repair expenses and lost sales with over 10 million vehicles recalled. Stock prices also dropped approximately 30% or $35 billion in conjunction with the financial crisis. This was after they already experienced a related recall of their floor mats in 2009.3

As far as food recalls, companies experienced an average of $10 million in direct costs alone, according to a study by the Food Marketing Institute and the Grocery Manufacturers Association (GMA) in the U.S.4

Bankruptcy can be the result for smaller companies

In 2008, Peanut Corporation of America, a small peanut processing company and maker of peanut butter for bulk distribution to institutions and private label companies, suffered one of the biggest recalls in U.S. history with almost 4,000 products recalled.5 This salmonella outbreak resulted in 600 illnesses, more than half of them children, and about a dozen deaths. The company filed Chapter 7 bankruptcy which liquidated their assets to repay creditors rather than reorganize—therefore dissolving the operation.

In the same year, now-defunct Westland/Hallmark Meat Co., one of the biggest suppliers of ground beef to the National School Lunch Program (NSLP), experienced the largest-ever meat recall as the result of animal abuse footage provided by the Humane Society of the United States.  In 2012, a partial settlement was reached with two of the nine defendants of the False Claims Act lawsuit. A final judgment of $497 million against the company was entered.7 Donald Hallmark Sr. and Donald Hallmark Jr. agreed to pay a total of $316,802 to the Department of Justice and a small portion to the prosecution. The undercover abuse footage prompted the recall of 143 million pounds of ground beef, of which 37 million had been supplied to the NSLP. Due to the company’s insolvency after the abuse footage, full judgment could not be collected.6

Executives face criminal charges due to product recall

Since the passage of the Food, Drug and Cosmetic Act (FDCA) in 1938, it is a statutory violation of federal law to introduce (accidently or otherwise) adulterated or misbranded food into interstate commerce. If suspected of this act, a company executive, manager, or employee can be found guilty of a misdemeanor and/or felony. Also, the FDA Food Safety Modernization Act (FSMA) that was passed in 2011 published guidelines for criminal prosecution of corporate individuals which states that the government can convict an executive, manager or employee of a strict liability crime under the FDCA without his or her having any involvement in or knowledge of the violation.

One of the best examples of product recall prosecution was the Takata Corp., a Japanese automotive supplier of airbags. The faulty Takata air bags could rupture or explode and propel shrapnel into the vehicle. A federal grand jury indicted three former Takata Corp. executives, charging them with conspiring to provide auto makers with misleading test reports on rupture-prone air bags.8 The safety recall was linked to 11 deaths and 184 injuries in the U.S. Criminal charges were brought for conspiracy and wire fraud. The company’s stock plunged more than 65% following reports that its bankruptcy filing was imminent, and shares were suspended as the company was to be delisted from the Tokyo Stock Exchange. Major automakers who used Takata airbags, including Honda, Toyota and GM would end up picking up an estimated $5 billion tab to replace tens of millions of the Takata airbag inflators in existing vehicles.9 The settlement came just days after the Justice Department announced that six executives at Volkswagen were indicted in that automaker’s emissions-cheating scandal.10

On the food contamination side, Chipotle Mexican Grill recently agreed to pay $25 million, the largest criminal fine ever in a food safety case, to settle criminal charges linked to multiple foodborne illness outbreaks that occurred between 2015 and 2018 in the Los Angeles area, Boston, Virginia and Ohio. Chipotle was charged with adulterating food in violation of the Federal Food, Drug, and Cosmetic Act. The series of outbreaks not only sickened thousands and provided the government with fodder for criminal charges—it saw the end come for the founder and CEO of the Company, Steve Ells, who had pledged from the beginning to provide wholesome, natural food sourced in a sustainable fashion. The scandal saw his company’s stock drop to less than half its value and was the writing on the wall for Ells.11 The incidents stemmed primarily from store-level employees’ failure to follow company food safety protocols at company-owned restaurants, including a Chipotle policy requiring the exclusion of employees who were sick or recently had been sick. The outbreak involved norovirus, a highly infective pathogen that can easily be transmitted by food workers handling ready-to-eat foods and their ingredients.12

Other executives who have faced individual criminal prosecution associated with a product recall or contamination include:

  • Peanut Corporation of America (2015) – Stewart Parnell, owner and president, 28 years in prison; Michael Parnell, broker, 20 years in prison;  Mary Wilkerson, QA manager, 5 years in prison; Samuel Lightsey, operations manager, 3 years in prison; Daniel Kilgore, operations manager, 6 years in prison for shipping salmonella-positive peanut products before the results of microbiological testing were received and falsifying microbiological test results.13
  • Rancho Feed Corporation (2016) – Jesse “Babe” Amaral Jr., owner, 1 year imprisonment; Robert Singleton, co-owner, and Felix Cabrera, foreman, each sentenced to 3 months in prison for the distribution of adulterated, misbranded and uninspected meat.14
  • Midamar Corp. (2016) – William Aossey, Jr., founder, sentenced to 2 years in prison for directing employees to change markings on packages of beef product originating from an unapproved slaughter facility to make it appear as if the products originated from an approved slaughter facility.15 
  • Quality Egg, LLC (2015) – Austin “Jack” DeCoster and Peter DeCoster, owners, convicted of unknowingly selling misbranded and adulterated food in interstate commerce and each sentenced to 3 months in prison and 1-year probation.16
  • Jensen Farms (2014) – Eric Jensen and Ryan Jensen, principals, were each sentenced to five years’ probation, including 6 months home detention, for unknowingly introducing adulterated food into interstate commerce.17
  • Castle Cheese Company (2016) – Michelle Myrter, president, 3 years’ probation for selling imitation cheese products.18

Resources:

  1. Regulatory Procedures Manual—Chapter 7: Recall Procedures”, FDA, June 2020
  2. Duty to Report to CPSC: Rights and Responsibilities of Businesses”, CPSC
  3. Accounting for Toyota’s Recalls”, Washington University, Foster School of Business, April 2011
  4. Recall: The Food Industry’s Biggest Treat to Profitability”, Food Safety Magazine, October 2012
  5. Phil Wahba and Emily Chasan, “Salmonella-hi peanut company files for bankruptcy”, Reuters, February 13, 2009
  6. Helena Bottemiller, “Landmark Settlement Reached in Westland-HallmarkMeat Case”, Food Safety News, Nov. 18, 2012
  7. Carolyn Heneghan, “More than money: What a recall truly costs”, FoodDive, Sept. 26, 2016
  8. Mike Spector, “Takata Executives Criminally Charged in U.S. Probe of Faulty Air Bags”, The Wall Street Journal, Jan. 13, 2017
  9. Jethro Mullen, “Takata, Brought Down by Airbag Crisis, Files for Bankruptcy”, CNN Business, June 26, 2017
  10. Steven Overly, “Six Volkswagen Executives Indicted in Emissions-Cheating Scandal”, The Washington Post, Jan. 11, 2017
  11. Chipotle Agrees to Pay $25 Million Federal Fine for Role in Some Outbreaks”, Food Safety News, April 22, 2020
  12.  “Chipotle to Pay $25M to Settle Criminal Charges Linked to Norovirus Outbreaks”, CBS Los Angeles, April 21, 2020
  13. Former Peanut Company Officials Sentenced to Prison for Their Roles in Salmonella-Tainted Peanut Product Outbreak“, Department of Justice, October 1, 2015
  14. Petaluma Slaughterhouse Employee Sentenced For Scheme To Distribute Adulterated Meat“, Department of Justice, March 18, 2016,
  15. Prison Term and Nearly $1 Million in Judgments Ordered Against Midamar Founder, Midamar, and ISA“, Department of Justice, February 25, 2016
  16. Quality Egg, Company Owner and Top Executive Sentenced in Connection with Distribution of Adulterated Eggs“, Department of Justice, April 13, 2015
  17. Statements Regarding The Sentencing Of Eric And Ryan Jensen“, Department of Justice, January 28, 2014
  18. Castle Cheese Company Executive Michelle Myrter Sentenced in Adulterated Cheese Case“, Department of Justice, October 11, 2016

Disclaimer: Berkley Global Product Recall is pleased to share this material with its customers. Please note, however, that nothing in this document should be construed as legal advice or the provision of professional consulting services. This material is for general informational purposes only, and while reasonable care has been utilized in compiling this information, no warranty or representation is made as to accuracy or completeness.