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Marler Blog Providing Commentary on Food Poisoning Outbreaks & Litigation

Marler Op-ed – Peanut Recall: Many Unhappy Returns – $1 Billion in Losses

With each new outbreak of foodborne illness, my colleagues and I go to bat for a new round of sick people – mostly kids and senior citizens.

At the same time, we brace ourselves for the familiar rant: We are the blood-sucking ambulance chasers who impose crippling legal costs on honest companies that have made innocent mistakes trying to feed the nation. So be it. Limbaugh, Hannity, O’Reilly, Beck, Dobbs and friends can bash us all day and all night for our efforts to make companies pay the personal costs associated with their mistakes. If somebody knows a better way to get justice and compensation for injured people, I want to hear about it. But, for the record, trial lawyers like me are not the reason that screw-up companies like Peanut Corporation of America (PCA) go bankrupt. We are not the reason our Government has failed to protect its citizens.

The ongoing peanut recall is a case in point. In the end, PCA and various manufacturers will be stuck with a tab of, say, $30 to $35 million for the nine people who died and the hundreds who were sickened by peanuts tainted with salmonella. That’s serious money, but all or most of those costs will be covered by insurance.

More important, those settlements will be, well – peanuts – compared to the other costs surrounding the nationwide recall. And, it is those preventable recall costs that will drive businesses into bankruptcy.

As of this week, tainted peanuts have been blamed for well over 650 illnesses and nine deaths in 45 states and Canada, and we know that thousands more salmonella cases were never diagnosed nor reported.

In an attempt to end the outbreak, more than 200 companies have recalled some 2,850 products that may be contaminated – products ranging from candy bars and crackers to ice cream and pet food.

Who would disagree that recalling tainted food is the right thing to do – for legal and ethical reasons as well as basic public relations?

But recalls come with astounding costs. One of my good friends in the food-processing industry estimates that the peanut recall will cost well over $500 million – that’s half a billion bucks. It’s impossible to assign precise numbers, but you can start with the costs of tracking down, retrieving and transporting millions of items, most of which have already found their way onto retail shelves and kitchen cabinets.

Kellogg, just one of the companies that recalled products recently, has estimated those costs at $75 million – for just one company.

Then there are the lost sales – not just of the tainted products themselves, but most likely of related peanut products that may be completely safe. The tomato Salmonella recall last year resulted in $100 million in lost tomato sales – even though the real culprit proved to be peppers. E. coli-tainted spinach cost that industry over $175 million even though the outbreak was linked to one fifty acre farm. The peanut industry estimates that its sales already have plummeted by more than 25 percent, which breaks down to at least $500 million in losses on 2.6 million tons of raw peanut sales.

Also, do not forget the costs of advertising and public relations aimed at restoring consumer confidence. We have already seen expensive newspaper ads from peanut butter-makers, reassuring readers that their product is safe. What about the cost of restoring tainted brands?

Suppliers may or may not have to reimburse retail stores for lost sales. Large retailers like Wal-Mart include such reimbursement in their contracts; small businesses probably don’t do that, but suppliers may reimburse them anyway.

And, then there are the losses to stock prices. My friend reports that one major food processor lost $1 billion in stock value following an E. coli outbreak. Imagine what’s happening to peanut stocks these days.

The Big Guys – the Kellogg’s and Con Agra’s and Jack-in-the-Box’s – can sustain those losses. Not so the smaller retailers. My heart goes out to mom-and-pop businesses like Betsy Sanders, of Santa Clara, California whose small business supplies cookies for local PTA and marching band fundraisers, and who now has to reimburse her customers for recalled products that contained peanut butter from PCA.

So look for the costs of this recall to exceed $1 billion – many times more than the likely costs of compensating their sickened customers. And, virtually none of that $1 billion will be covered by insurance.

In an economy already battered by failing banks, lost jobs and scarce credit, people will be driven out of business – not by ambulance-chasing lawyers, but by greedy and careless food processors and by a Government that has walked away from its moral responsibility to protect the public.

  • One crucial economic calculation is left out of this excellent analysis. At a moment in time when many Americans are suffering financially, throwing out food is hugely problematic. As a high-nutrition, relatively low-cost food, peanut butter is a reliable protein source for low-income populations. How many people chose to keep their potentially contaminated peanut butter products–and feed these to their children–risking illness or even death, because they literally couldn’t afford to waste food? And, too, food banks and soup kitchens have been hard hit by this recall, at a time when donations are already at an all-time low. No one’s tracked how much product had to be destroyed by food banks, but it’s an important calculation, too.

  • Eddie – comment right on point – frankly, I was so focused on the “business” economic losses that I forgot to think about the poor (as many do too often). Something else I should have mentioned is the cost the government – military products have been recalled as well as FEMA products. My guess is that are many more.

  • From someone who wants to remain nameless:
    Any enemy of Limbaugh, Hannity, O’Reilly, Beck, Dobbs and friends is a friend of mine. You serve a useful purpose. My wife and I were discussing last night whether it is possible to have a “safe food supply” as long as men continue to be motivated by greed. That greed, coupled with a failure of much of our public health infrastructure to see the real problems and focus on them, means we will continue to have outbreaks- many of them preventable.
    I actually “played” you in high school- I was Don Quixote in Man of La Mancha- always tilting at windmills. Keep on tilting Bill!

  • Cathy Crawford

    Nicely said, Bill.
    I want to comment briefly on the processors and recalls. While consumer safety is paramount, many pepole do not recognize that the recall is larger and more expensive than the actual food safey concern.¬† The volume¬† of food recalled and often destroyed may well exceed the volume that is tainted.¬†Unfortunately, there is some uncertainty.¬†Not every portion can be tested,¬†so all suspect food is part of the process.¬†Any food not able to be proven safe, is then considered unsafe.¬† All recalls, or most, inidcate that the¬†food “may be” contaminated.¬† This shows the dedication and commitement to food¬†safety on the part of companies¬†that make errors.¬† I don’t necessarily include PCA in that category.¬† This recall appears associated with negligence and not error, but in many many cases, the companies¬†involved in a reacall had made honest efforts toward safety and failed somewhere along the way.¬† Kudos to all the companies participating in this recall and others to protect the public by removing food from commerce.

  • Tom Schwarz

    Bill –
    While I agree completely with everything in this op ed piece, I’m a little concerned (read defensive) about what you say about the government’s failure. It comes across to the average reader that the government should assure the safety of every food. We, who are in the know, realize that it’s the producer or seller who is responsible. Don’t get me wrong, the regulators are doing a very poor job, and in this case, could have taken action years before that might have prevented this outbreak. But stuff can still happen, even with the best government oversight. That’s why there is a distinction between criminal activity with intent and civil recourse with concomitant liability. Both can end up with dead citizens, but perfection is not possible when we are trying to feed 300+ million folks, 3+ meals a day, with scores of ingredients at each meal.
    Tom Schwarz

  • Erik B. Ellingson

    While millions of people across the country were watching the Super Bowl, I was taking calls and emails from a client/snack food packager who had just discovered that some of his product may have contained tainted PCA peanuts. His initial and overriding concern was to get as much of his company’s product off the shelves, quickly, so that purchasers would be spared the possibility of illness (or worse). It was his central focus and rightfully so. Now, one month later, he is still trying to quantify the economic insult to his business and accept the reality that he, too, is an innocent victim.
    Keep up the good work, Bill.

  • Matt

    Ok, the insurance guy who wishes to remain anonymous has to weigh in here. I’d like to make an important point that manufacturers of food products should ensure that they have Product Recall insurance. This is a form of insurance that can reimburse for many of the costs associated with a recall, including the cost to pull potentially contaminated food off of shelves, the cost to advertise to maintain the good name of your company, the cost to test food products, and even the cost to replace food products. Risk Managers at food manufacturers should talk to their independent insurance agents to ensure they have protection from these types of losses. While not the answer to the problem, having the appropriate protection in the event of a loss can keep a business from suffering irrepairable damage.