When we think of product harm crises, we tend to focus on the organization that created the product. That is the organization is full crisis as they must recall the product and cope with the disruptions and financial burdens of the process. Obviously, retailers are affected by a recall to some to some degree. They must remove productions from the shelves, place notifications about recalls for customers (bulletin boards in stores and at web sites are common channels), and see that the product is returned to the manufacturer when need be. But this is not a serious disruption because there are usually other brands with the same type of product on the shelves and the retailer is not the one liable for injuries and deaths resulting from the product harm.
Actually there are circumstances where a retailer can be responsible can be liable for some of the injuries and deaths from a product they sold but did not make or produce. The SoyNut Butter Company filed for bankruptcy as a result of their E. coli outbreak linked to its I.M. Healthy brand peanut butter substitute. The outbreak sickened 32 people and 26 of them are children. The product was contracted through Dixie Dew Products and that company will soon file for bankruptcy. The Food Safety News offered this report about the effects of the bankruptcies:
Seventeen of the victims are represented by Seattle attorney Bill Marler, who has been practicing in the foodborne illness arena since 1993 when he represented victims in the Jack in the Box hamburger E. coli outbreak.
“The bankruptcy was not unexpected,” Marler said Tuesday. “We expect Dixie Dew to follow suit in the next 30 to 60 days.”
The action in bankruptcy court effectively puts civil cases filed by outbreak victims in state and federal courts on hold, Marler said. Insurance coverage that SoyNut Butter Co. and Dixie Dew Products have, assuming the manufacturer also files for bankruptcy, will total about $12 million and can only be used to compensate outbreak victims, not other creditors, Marler said.
If both SoyNut Butter Co. and manufacturer Dixie Dew Products go bankrupt, retailers who sold the implicated soy nut paste will be liable to outbreak victims, Marler said. Those retailers include Target and Amazon.
“This underscores how important it is that retailers pay attention to where they’re getting their products,” Marler said.
“If a responsible retailer would have looked at Dixie Dew and I.M. Healthy they would have seen what the FDA saw. You can’t just buy stuff and sell it without knowing where it comes from.”
A quick review of other legal sites provided similar information. Retailers can be liable for recall damages, especially when the supplier or manufacturer is bankrupt. Here is how one law firm phrases it:
In most cases it is the manufacturer that bears the responsibility and expense of a product recall. However, in cases where the manufacturer is out of business, in bankruptcy or is located in a foreign country (thus beyond CPSC’s jurisdiction), the US- based wholesaler-distributor may become the responsible party. The bottom line consequence to a wholesaler-distributor may be substantial since the net profit realized on a sale is a small fraction of the product’s sale price.
The wholesaler-distributor can minimize this liability exposure by exercising due diligence when selecting a supplier to assure that the company has insured against this risk and is likely to be able to fulfill its recall responsibility if required. It is also prudent for the wholesaler-distributor to consider buying product recall insurance coverage as part of the firm’s general liability policy.
Another law firm notes:
A manufacturer bankruptcy can leave the retailers in a lurch but it does not leave the retailer without recourse in all situations. It is important to note that the bankruptcy only applies to the debtor. If the manufacturer is a subsidiary business the bankruptcy filing should be consulted to see if the manufacturer is included in the bankruptcy process. If it is not, then there may be no bankruptcy issue. It is also important to know that the insurance policies that may apply to the manufacturer and retailer, as an additional insured, are not covered by the bankruptcy and may be available to the retailer for the purpose of providing both indemnity and a defense providing that there is coverage to the retailer and the aggregate has not been reached under the policy limits.
The takeaway is that retailers are at risk from the product they sell. Retailers must show due diligence about product safety. Retailers must stay informed about any recalls, review safety records of the companies they buy from, and keep careful records.
Questions to Consider
1. Does it seem fair retailers can be held liable for products produced by others? Why or why not?
2. What implications does this have for risk analysis and crisis communication planning?
3. How and why would you explain this risk to your employees?