The Litigated Dish: Pay now or pay later

— OPINION —

Believe it or not, many food companies find it cheaper to pay millions of dollars to “resolve” foodborne illness outbreaks and product recalls after they occur than to overhaul their food safety systems to prevent them in the first place. 

And while this may seem like a “win” in the short term, it overlooks the severe long-term consequences that come with a major recall or outbreak. Here’s why taking that risk is a dangerous game that can hurt a company’s brand and bottom line in ways that can’t easily be fixed.

1. A crisis waiting to happen

In 2024 alone, the U.S. Food and Drug Administration posted company recalls for 815 food and beverage products from the market for violating agency regulations. Recalls happen for a variety of reasons, but most often due to contamination — whether biological, chemical, or physical. While many of these contaminated products are often recalled early enough that no consumer is injured, sometimes they are not recalled early enough.

And the small fraction of recalls that results in illness or adverse effects in consumers can cause lasting damage to the brands involved — beyond monetary damage. One day, a company is selling its products on grocery store shelves; the next, it’s scrambling to manage a public health — and public relations — crisis. 

2. The immediate fallout from a major recall

Once a food product is recalled or identified as the source of an outbreak, the company involved must act swiftly and decisively to get their product off the shelves and out of consumers’ freezers, pantries and refrigerators. 

Getting the product off the shelf seems easy enough but can be incredibly costly. Earlier this year, Boar’s Head recalled 7 million pounds of deli meats — a drop in the bucket of the tens of billions of dollars spent annually on recalls and foodborne illness outbreaks.

But removing the product from store shelves is just the beginning. Getting consumers to discard the contaminated product is far trickier. Companies and grocers must track down each individual who purchased the product and ensure they’re notified about the recall. Loyalty programs that track customer purchases help, but in many cases, customers do not have a loyalty account or profile with the company and do not provide their information at checkout.

This is the case for one unnamed, international grocer that does not offer a loyalty program. When it has recalls, it cannot directly contact affected customers; instead, the grocer posts notices of recalls to its website and on paper notices at checkout. I know this because one of my clients was sickened by a food product sold by this grocer and was never notified of the recall. And let’s face it, most people ignore, or just don’t notice, these notices. 

This situation makes it difficult for companies to track down every purchaser, leaving them exposed to indeterminate liability. The risk is even greater when frozen products or products with long shelf lives are involved — if consumers aren’t promptly notified and instructed to discard the product, it can be forgotten for years in the back of a freezer or pantry and consumed years after the recall occurs. 

The more widely distributed the product is and the longer its shelf-life, the more the company will worry about sending its consumers to the hospital and being served with lawsuits if a contaminated product is recalled.

3. Speaking of lawsuits. . .

Enter, my law firm. If the recall is linked to a foodborne illness outbreak, such as E. coli, Salmonella, or Listeria, the company will almost certainly face product liability lawsuits from affected consumers. 

These lawsuits can be costly — particularly if the outbreak results in severe illness, hospitalization or death — and involve every entity in the supply chain of the affected product. 

Claimants in these lawsuits typically seek compensation for a wide range of damages, including medical expenses, past and future, out-of-pocket expenses, wage loss, pain and suffering, loss of consortium, and, in severe cases, the long-term health consequences and associated costs of their illness. If the company has experienced repeat outbreaks, it may also face punitive damages or criminal fines, which can run into the millions of dollars. 

Companies will have to hire defense counsel to defend against these lawsuits. If they are not resolved quickly, they could cost hundreds of thousands of dollars in attorneys’ costs and wreak long-term reputational damage on the company — on top of what the company will ultimately have to pay to claimants.

4. The hidden costs of a major outbreak

As discussed above, a single foodborne outbreak can cost a food company millions of dollars in recall costs and legal fees. But, in many cases, the longer-term financial toll is even more significant. For companies that rely on insurance to cover recall costs or legal fees, the result is almost always a major increase in insurance premiums.

Then there’s the lost revenue from reputational damage. After Chipotle’s series of foodborne illness outbreaks in 2015, it took years for the company to regain consumer trust. Profits fell 44 percent and shares were still down by 40 percent in 2018 as consumers reeled from the foodborne illness scandals. In an effort to rebuild its reputation, Chipotle implemented a comprehensive food safety program, investing millions to improve its food handling protocols, supplier audits, and testing technologies. It also paid $25 million to settle criminal charges related to its food safety violations.

In some cases, food companies are forced to shut down entire factories, incurring millions in losses. This happened earlier this year when Boar’s Head shuttered its Jarratt, VA, facility, the source of a deadly listeria outbreak that killed at least 10 people and hospitalized 59 others. Similarly, after an E. coli outbreak linked to its frozen pizza factory in Caudry, France, Nestlé shut down the Caudry plant, which had been implicated in the deaths of two children.

Once the immediate crisis is over, companies face a long road to recovery. The most successful companies take this opportunity to make meaningful changes to their food safety practices to prevent future outbreaks. 

For food companies, the key takeaway is the importance of prevention. As we have seen recently, even the largest food companies are not immune from major recalls. In fact, the larger the company and the more products it handles, the higher the likelihood it will eventually face an outbreak. The good news is that these incidents can be largely avoided by investing a bit more money and attention upfront, ultimately saving far more in the long run.

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Source: https://www.foodsafetynews.com/2024/12/the-litigated-dish-pay-now-or-pay-later/