U.S. Food Safety Law and Strategy

1. Brian C. Anderson O’Melveny & Myers LLP Washington, D.C. U.S. Food Safety Law and Strategy

2. U.S. Consumers Are Risk-Averse • Expect no safety risk • Expect full-disclosure of all risks

3. U.S. Consumers Are Suspicious of Manufacturers • Believe companies sacrifice quality and safety to cut costs and increase profits • Believe companies conceal risks, overstate quality to increase sales • Assume that most imported products are low quality • Especially suspicious of Chinese-made products due to recent controversies

4. The “Vicious Circle” of Business Controversies

5. Key Points: • Whether or not you believe the controversy over Chinese food safety is justified, it is real • Complaining about it will not help • Companies that deal in Chinese-made foods (and other products) should realistically acknowledge the controversy, determine how it affects them, and develop an effective response

6. The Good News • Industry and government in U.S. and China are taking steps to increase consumer confidence in the safety of Chinese products • If these efforts are successful, the “Chinese products are unsafe” phenomenon will fade away • Companies that act wisely will survive the current controversy and prosper in the long run

7. Overview Of US Food Safety Law

8. Two Sources of Food Safety Laws • US Government • Federal laws implemented by agencies through regulations • Set safety standards and order/request recalls of unsafe/mislabeled products • State Governments • State laws allowing consumers to sue manufacturers and sellers of defective or fraudulently marketed food products • State laws implemented by state law enforcement officials • Generally invoked to sue manufacturers for damages or monetary penalties

9. Federal Food Safety Regulation

10. Food & Drug Administration (FDA) • Regulates most foods, drugs and cosmetics • FDA can seize unsafe products, • FDA can seek court injunction requiring recall • FDA can impose civil penalties in some areas • FDA can bring criminal action • FDA usually cannot order a recall; they are usually “voluntary” • Manufacturer discovers defect and voluntarily recalls • FDA discovers defect and suggests manufacturer recall

11. FDA Seizures • FDA can seize unsafe or mislabeled foods and drugs • FDA has an internal administrative process to decide whether seizure warranted

12. FDA Recalls • Company voluntary proposes recall • FDA reviews company’s recall strategy • Depending on seriousness of defect, recalls go to: • wholesale distributors only • retail sellers • individual consumers • Recalling firm must do “effectiveness checks” on recall success

13. Food Safety and Inspection Service • Inspects meat, poultry, and eggs (including imports) for compliance with safety standards and rejects non-compliant foods • Requests recalls of unsafe foods

14. State Laws Supporting Private Lawsuits

15. State Laws Supporting Private Lawsuits Strict Liability • Manufacturer/seller automatically liable for any injury caused by unreasonably dangerous product Negligence • Manufacturer/seller did not act with reasonable care to ensure safety of product • Negligent design • Negligent manufacture • Negligent marketing

16. State Laws Supporting Private Lawsuits Breach of Express Warranty • Seller’s explicit representation about characteristic of product Breach of Implied Warranty • Merchantability: Seller implicitly promises that product is fit for its intended purpose

17. State Laws Supporting Private Lawsuits Common Law Fraud • Fraudulent misrepresentation • Fraudulent concealment/failure to disclose material fact Consumer Protection Laws • “Deceptive” conduct toward consumers • overstating product’s benefits/safety • concealing defects

18. Types of Private Lawsuits Single plaintiff lawsuit • Alleges personal injury, property damage, or economic damage • Brought by alleged victims through their lawyer • Usually sue in court near where they live • Seek compensatory and punitive damages

19. Types of Private Lawsuits Class Action • Developed by lawyer, who sues on behalf of token “victim” • Filed in court that plaintiffs’ lawyer thinks is most favorable to him • Brought on behalf of all purchasers of product • Usually seeks “economic damages” – purchase price or diminution in value – or statutory penalties that require no showing of injury

20. Types of Private Lawsuits Aggregated Litigation • Product controversies often spawn large numbers of individual personal injury lawsuits (hundreds or thousands), and multiple proposed class actions • Federal courts and some state courts allow multiple lawsuits involving the same product defect allegations to be consolidated in one court for litigation

21. State Attorney General Lawsuits • Brought by state’s top law enforcement official • Sues on behalf of: • state/state agencies (as purchasers of product) • citizens of state (as their legal protector) • Invokes state consumer protection laws • Seek damages, penalties, court orders regulating future conduct

22. How To Avoid Product Controversies

23. How to Avoid Product Controversies Maximize product quality • Design to meet and exceed all government standards • Establish and implement robust manufacturing processes • Choose reputable ingredient suppliers and enforce high standards • Establish reliable distribution/retail channels that minimize risk of spoilage

24. How to Avoid Product Controversies Testing/Quality Control • Design and manufacturing testing (possibly by third-parties) • Make corrections when products fail tests • Preserve all test results and corrective documents • Early warning systems/stop-production rules • Inspect distribution chain if risk of spoilage • Put your people on site to monitor processes

25. How to Avoid Product Controversies Inter-Company Agreements • Indemnification provisions • Commitments to share information in litigation/regulatory situations

26. How to Avoid Product Controversies Early-Warning Systems • Customer complaints/warranty claims • Legal actions • Government inquiries • Employee concerns • Media reports

27. Customer Complaints/Warranty Claims • Have coordinated process for collecting/analyzing customer complaints and warranty claims • Look for patterns of complaints, especially involving safety • Elevated complaints may signal need to modify design, manufacture, or distribution • Elevated complaints may signal emerging high-profile controversy

28. Legal Actions • Monitor and analyze litigation activity involving your products • Elevated numbers of individual lawsuits may signal a problem • Repeat lawsuits brought by the same lawyers, class action lawsuits, and lawyers pursuing media coverage may signal an emerging lawyer-manufactured controversy

29. Government Inquiries • Take government inquiries seriously, both because they are inherently serious, and because they may signal an emerging broader controversy

30. Employee Concerns • Encourage employees to raise concerns about product quality/safety to company management • Listen to and carefully evaluate those concerns, taking action if necessary • Benefits of obtaining/acting on reports from the front-line usually exceed the later litigation risk of having dismissed employee reports

31. Public Information Sources • Monitor industry trends from public source information • Consider how those trends may apply to your business practices

32. How To “Manage” Product Controversies

33. How to “Manage” Product Controversies • Assemble a crisis management team • Senior executive who will be “voice of the company” (at least internally) • Representative of company legal department • Human resources representative • Public affairs specialist • Internal audit representative • Compliance officer, if applicable • Outside expertise as needed in any of these areas

34. How to “Manage” Product Controversies • Intensively manage the first 72 hours • Step 1: Understand the allegation • Step 2: Gather all the facts • Step 3: Formulate a corrective action plan • If the problem is real, admit it, and devise short-term and long-term solutions • If the problem is not real, defend the product • Step 4: Execute the plan – and get it right the first time

35. How to “Manage” Product Controversies • Establish credibility with government agencies • Candidly disclose all relevant facts • Combine advocacy with conciliation when communicating with government representatives

36. How to “Manage” Product Controversies • To the media: say it early, say it all, say it often • Participate in the first news cycle: don’t cede the airwaves to your adversaries • Be truthful: stick to the known facts; don’t speculate • Be consistent: if the message is correct, repeat it at every turn

37. How to “Manage” Product Controversies • If litigation looks likely, start planning litigation defense immediately • Preserve and start gathering all relevant evidence • Do the “right” thing for the customer, but be aware of how written statements will look in later litigation • Include legal defense counsel in all strategy meetings, both for guidance and to create privileged setting • Consider ways to resolve “legitimate” customer injuries outside of litigation, reserving litigation for non-meritorious claims

38. How Will Food Safety Issue Be Solved? • Market forces • Business customers and consumers will not buy from companies with a bad reputation for safety • Chinese government • Will increase standards and enforcement to improve quality • U.S. government • Will increase inspections and enforcement against unsafe products