Tag Archives: Christopher Ketcham

The Thorny Issues in a Product Recall

In 1982, people in Chicago began dropping dead from cyanide poisoning, which was linked to Johnson & Johnson’s Tylenol in select drug stores. Johnson & Johnson immediately pulled all Tylenol from the shelves of all stores, not just those in Chicago. It was ultimately determined that the product had been tampered with by someone outside of Johnson & Johnson. But the company’s aggressive actions produced a legend: The Tylenol scare was chalked up as the case to review for an effective brand-preserving (even brand-enhancing) product recall strategy.

In 2011, though, the FDA took the extraordinary step of taking over three Johnson & Johnson plants that produced Tylenol because of significant problems with contamination. This time, Johnson & Johnson could not blame a crazed killer, only itself. A company that should have learned from its own celebrated case study had not retained that knowledge 30 years later.

The problems associated with recalls often aren’t the recall itself. In a recall, stores pull the products, and the media helps get the message to those who have already purchased the product to return them for refunds, replacement, repair or destruction.

One problem crops up when companies are too slow to move. It was revealed in the press in June 2014, that GM allegedly knew of its ignition switch problems seven years before it recalled the product. The recall that began in February 2014 itself became tortuous as new models were added almost daily to the list of cars that were in danger of electrical shutdown while in motion. The press, the regulators and, of course, the lawyers pounced on GM for its alleged withholding of information for so long and for the seemingly endless additional recall of cars affected by the problem. In 2015, regulators have called meetings with GM and other auto manufacturers mired in what has become an epidemic of recalls to discuss why repairs are dragging on so long.

Denial, lack of information, hunkering down (bunker mentality), secrecy, silo mentality and fears for the impact on the bottom line all contribute to disastrous recalls. With all recalls, there is the cost of the recall, the cost of complete or partial loss or loss of use of certain products, repair costs in some cases (GM), regulatory scrutiny and fines, class action and other lawsuits and the loss of potential income during any shutdown. These can all be big-ticket items, and some companies will not survive these expenses and loss of revenue.

Probably the biggest cost of any recall is the cost to reputation, which can mean loss of existing and future customers. In recent years, lettuce growers and a peanut warehouse did not survive recalls over contaminated products. In the case of primary agricultural producers like growers and peanut warehouses, the processors simply change suppliers, leaving the primary producers without any customers. In the retail market, the competition for shelf space is high. Brands that are recalled that are new or that do not have high customer value are simply barred from shelf space, effectively destroying the ability to market their products.

However, there are others that have strong brand following and even cult-like status in local markets. Blue Bell Creameries (famous for its ice cream) is one such company that has secured an almost cult-like following in the Southern and Midwestern states. Blue Bell, founded in 1907, maintains its headquarters in the small town of Brenham, TX (pop. 16,000).

Problems began when hospitals in Arizona, Kansas, Oklahoma and Texas reported patients suffering from an outbreak of listeria-related diseases, some as early as 2010. Some reports included the deaths of patients. On May 7, the FDA (Food and Drug Administration) and CDC (Centers for Disease Control and Prevention) reported, “It wasn’t until April 2015 that the South Carolina Department of Health and Environmental Control during routine product sampling at a South Carolina distribution center, on Feb. 12, 2015, discovered that a new listeria outbreak had a common source, Blue Bell Chocolate Chip Country Cookie Sandwich and the Great Divide Bar manufactured in Brenham Texas.”

Listeria is a bacteria that can cause fever and bowel-related discomfort and even more significant symptoms, especially in the young and elderly. Listeria can kill. Listeria is found naturally in both soil and water. Listeria can grow in raw and processed foods, including dairy, meat, poultry, fish and some vegetables. It can remain on processing equipment and on restaurant kitchen equipment, and when food comes in contact with contaminated equipment the bacteria finds a ready-made food source in that food and multiples. The FDA has issued guidance reports to food processors, preparers and restaurants on how to prevent listeria contamination. This includes proper preparation techniques, cleaning techniques, hygiene, testing and manufacturing and processing methodologies.

Once Blue Bell understood that its cookie sandwiches and ice cream bars were implicated, the company immediately recalled the products. But soon it became evident to Blue Bell and others that this outbreak might not be limited to the ice cream bars or cookie sandwiches, and Blue Bell recalled all of its product and, to its credit, shut down all manufacturing operations.

The FDA conducted inspections of Blue Bell plants, and in late April and early May produced reports on three plants, noting issues of cleanliness and process that were conducive to listeria growth. The FDA has also reported that Blue Bell allegedly had found listeria in its plants as far back as 2010 but never reported this to the FDA.

As of this writing, Blue Bell plants are still shut down. The FDA investigation has come to a close, but many questions remain. The company has cut 1,450 jobs, or more than a third of its work force, and has said it will reenter the market only gradually, after it has proved it can product the ice cream safely.

The question is whether these things Blue Bell has done: the quick recall, first of the problem products and then all products, and the closure of plants to mitigate contamination issues are enough to save Blue Bell from further damage in the eyes of consumers and the stores that sell the product. There are many tough questions to be answered going forward.

In the intervening months, will competitors replace Blue Bell with their own products that consumers feel will compare favorably? If so, when Blue Bell products are returned to stores will consumers return, or has the stigma of listeria and the acceptance of the taste of comparable products weakened the brand? Will stores give Blue Bell adequate shelf space? And, does Blue Bell have enough of a cult following and viral fan base that once product is back in stores customers will return as if nothing had happened? These are the scary questions that affect all food and drug companies when recalls are from contamination in their own plants or those in their supply chain.

The American consumer seems to have become numb to the endless succession of automobile recalls from just about all manufacturers. We dutifully return our vehicles to the dealer to fix a broken or faulty this or that. Even though many recalls involve parts or processes that could cause car accidents, injuries and deaths, it is as if we have come to accept faulty auto products as the norm.

This is not the case with food-borne illnesses. The fact that a faulty car can kill as easily as a contaminated food product seems not to be an issue as people return again and again to buy new cars from the same car manufacturer that issued five recalls on their last purchased model. However, consumers will shun the food brand that made some people ill. This bifurcated approach to risk makes no sense even in the context of protecting children from harm. The faulty car that mom drives the kids around in every day may have the same probability of injuring or killing her child as the recalled food brand. She doesn’t abandon her car, but she bans the recalled food brand from her table.

In 1990, Perrier discovered benzene in its sparkling water product. It quickly recalled all its product but then hunkered down into a bunker mentality. The lack of communication by Perrier about the problem and what it was doing exacerbated the fears of consumers, and the press speculation and outcry ran high. Perrier had always touted the purity of its water, so toxic benzene shattered this claim. Hunkering down reduced consumer confidence, and many left Perrier for suitable alternative products. Perrier has never regained the market share it had previously.

Blue Bell has taken the time to do things right, to find the causes of the problem and take steps necessary to prevent contamination in the future. But time also means that existing or even new competitors with comparative products will try to fill the shelf space vacated by Blue Bell’s absence. You can be sure that other-region favorites with cult followings that could never before gain a foothold in Blue Bell’s territory have been pressuring retailers to try them out as a replacement for Blue Bell.

Is the Perrier loss of market share inevitable for Blue Bell even if Blue Bell communicates adequately and with transparency? Time will tell. For now, Blue Bell not only has to fix the problems of plant cleanliness, it also needs to address emerging questions about its past operations, such as allegedly not reporting to the appropriate

While we note the good press that surrounded the 1982 Tylenol (external-tampering) recall and have seen so far a good effort by Blue Bell to resolve its own plant contamination issue, ultimately it is contamination that is the problem. Companies can become complacent, let cleanliness slide, use outmoded procedures, not replace older equipment or even ignore warning signs and isolated contamination events. Regional and limited product line companies need to be especially cognizant that even though they have carved out a powerful niche in the marketplace, maintaining this niche is tenuous at best in the highly competitive world of food products. Cleanliness and contamination-free are assumed by consumers. Food processors and manufacturers must do everything possible to keep that assumption from becoming contradicted.

Why to Worry About the Law of The Sea

The seizure on March 26, 2015, of the Marshall Islands-flagged Maersk Tigris cargo ship by Iranian forces off its coast at the Strait of Hormuz on a years-old dispute over containers is something that should get everyone’s attention. What is even more troubling than the seizure of a commercial vessel is that Maersk had agreed to settle the dispute. Iran is appealing for more money in the courts, but, rather than let the courts proceed, took the matter into its own hands.

Understand that one fifth of the world’s oil passes through the Strait of Hormuz in a given year.

We know that piracy, especially off the east coast of Africa and in the vast Asian Pacific, has become a major concern to shippers. So much so that Rolls Royce has announced that one of the benefits of its proposed crewless ship is that it would be much easier to take down pirates, because there will not be the crew hostages to deal with, as there are today. However, if nations begin to seize ships outside the law and with as flimsy an excuse as Iran has in the Maersk case, this is cause for alarm.

While the U.S. will be escorting U.S.-flagged vessels in the area of the seizure, our military fleet is simply inadequate to serve all potential hot spots. Even with escort protection, the risks of confrontation accelerate. Confrontation can include blockades, using vessels to buzz or interfere with navigation or otherwise harass shipping and their escorts, firing shots across the bow, ramming and even firing on vessels and their escorts. Recall that the U.S. entered World War I and World War II and increased our presence in Vietnam as the result of the Germans’ sinking of the Lusitania, the Japanese bombing of Pearl Harbor and the very questionable U.S.-North Vietnamese Gulf of Tonkin incident—all military events involving the sea.

Not all military maneuvers on the seas are necessarily problematic. The U.S. Coast Guard has become adept in hunting down drug traffickers and human smugglers in U.S. waters and cooperates with Central and South American countries to interdict traffickers in the greater Gulf of Mexico. However, these small ships, submarines and speedboats are not like the huge container vessels that large shipping conglomerates operate worldwide.

Even so, there are times when even larger ships pose challenges to countries and militaries, generally for contraband, drugs or illegal shipments of weapons. In 2013, Panamanian officials detained the North Korean-flagged Chong Chon Gang en route from Cuba to North Korea on suspicion of drug trafficking. The investigation uncovered cargo that looked like weapon systems subject to international sanctions against delivery to North Korea. The Panamanian Government consulted with the UN, and the dispute was resolved. In this incident, international law was followed. In the Iranian incident, it is much less clear that its military had the authority to seize the Maersk ship over a payment dispute already in the court system under appeal.

The Shipping Juggernaut

The World Shipping Council reported that world container shipping alone in 2009 produced an annual economic contribution of:

  • Direct gross output or GDP Contribution — $ 183.3 Billion
  • Direct capital expenditure — $ 29.4 Billion
  • Direct jobs — 4.2 million
  • Compensation to those employees $ 27.2 Billion

The global supply matrix relies heavily on container and bulk shipping to move raw materials, parts and components and complete product between producers, suppliers and customers to virtually every large-vessel navigable port in the world. Some of the biggest container vessels can carry 11,000 containers, and the loss of even one could strain world marine insurance resources. The increase in traffic and size of vessels has led to major efforts to widen the Panama and Suez canals. The Port of Long Beach 20-mile Alameda Corridor went online in 2002 to speed rail traffic under the streets of Los Angeles to remove a major bottleneck to the U.S.’s busiest container port. We can only speculate that one reason why Warren Buffett purchased the Burlington Northern Santa Fe (BNSF) railroad in 2009 was because he saw the spectacular increase in container rail traffic from ports on all U.S. coasts to all parts of the interior.

The modern insurance industry has its roots and owes even much of its policy language to marine insurance beginning with Lloyds during the first tranche of globalization when Britain and other European powers needed to cover commercial trade to and from their vast worldwide colonies. The ocean is big business.

Law of the Seas Doctrine

Who owns the sea? We all do. However, after World War II, many countries led by the U.S. increased the size of their territorial waters for security, fishing and other purposes. In 1967, the UN decided it was time to convene a group to develop an international law of the sea. Unlike trade agreements, the international law of the sea is a framework not for tariffs, taxes and other international economic activities, but for how we may use the sea as our collective heritage. We might compare the international law of the sea to the rules promulgated by the National Parks Service for what people can and cannot do while visiting, working in or otherwise using the natural resources of Yellowstone Park.

The convention can be summarized as follows: The seas are open and free to all states, coastal or landlocked. Passage shall be free and unhindered. The sea is the heritage of all humanity, which includes conservation and protection of these resources from pollution or overfishing or other adverse activities. The seas shall be used for peaceful purposes. Ships and states have a duty to render assistance to vessels and persons in trouble. Cooperation is expected to repress piracy.

These are some of the key provisions relevant to the discussion of the Iranian seizure:

  • 12-nautical-mile limit on territorial waters.
  • “Ships and aircraft of all countries are allowed ‘transit passage’ through straits used for international navigation; States bordering the straits can regulate navigational and other aspects of passage”
  • “All other states have freedom of navigation and overflight in the EEZ [Exclusive Economic Zone], as well as freedom to lay submarine cables and pipelines”
  • “Land-locked and geographically disadvantaged states have the right to participate on an equitable basis in exploitation of an appropriate part of the surplus of the living resources of the EEZ’s of coastal states of the same region or sub-region; highly migratory species of fish and marine mammals are accorded special protection”
  • “All states enjoy the traditional freedoms of navigation, overflight, scientific research and fishing on the high seas; they are obliged to adopt, or cooperate with other states in adopting measures to manage and conserve living resources”
  • “Land-locked states have the right of access to and from the sea and enjoy freedom of transit through the territory of transit states”
  • “State parties are obliged to settle by peaceful means their disputes concerning the interpretation or application of the convention”
  • “Disputes can be submitted to the International Tribunal for the Law of the Sea established under the convention, to the International Court of Justice, or to arbitration. Conciliation is also available, and, in certain circumstances, submission to it would be compulsory. The tribunal has exclusive jurisdiction over deep seabed mining disputes.” (United-Nations 2012)

Iran is a 1982 signatory of the International Law of the Sea and included this statement:

In accordance with article 310 of the Convention on the Law of the Sea, the Government of the Islamic Republic of Iran seizes the opportunity at this solemn moment of signing the Convention, to place on the records its “understanding” in relation to certain provisions of the Convention…that only states parties to the Law of the Sea Convention shall be entitled to benefit from the contractual rights created therein. [including] The right of Transit passage through straits used for international navigation…The notion of “Exclusive Economic Zone” (Part V). – All matters regarding the International Seabed Area and the Concept of “Common Heritage of mankind” (Part XI)…In the light of customary international law, the provisions of article 21, read in association with article 19 (on the Meaning of Innocent Passage) and article 25 (on the Rights of Protection of the Coastal States), recognize (though implicitly) the rights of the Coastal States to take measures to safeguard their security interests including the adoption of laws and regulations regarding, inter alia the requirements of prior authorization for warships willing to exercise the right of innocent passage through the territorial sea…The right referred to in article 125 regarding access to and from the sea and freedom of transit of Land-locked States is one which is derived from mutual agreement of States concerned based on the principle of reciprocity.

However, Iran included this provision which may have led to its thinking it could lawfully detain the Maersk vessel.

Furthermore, with regard to “Compulsory Procedures Entailing Binding Decisions” the Government of the Islamic Republic of Iran, while fully endorsing the Concept of settlement of all international disputes by peaceful means, and recognizing the necessity and desirability of settling, in an atmosphere of mutual understanding and cooperation, issues relating to the interpretation and application of the Convention on the Law of the Sea, at this time will not pronounce on the choice of procedures pursuant to articles 287 and 298 and reserves its positions to be declared in due time.”

We can expect that there will be incidents that involve questionable cargo subject to international restrictions and conventions, such as drugs, piracy, and prohibited weapons. We can expect that some of these interdictions will involve questions of fact that will be disputed or will later be found to be the result of false or misleading information or observation. However, disputes over cargo payments or other commercial activities whether between commercial ventures or states and commercial ventures deserve to be heard in arbitration procedures, courts of law or other internationally sanctioned dispute resolution venues.

Global trade has become too important for individual states to begin regulating the high seas on their own. There are many places of narrow passage like the Strait of Hormuz that border on many countries. We need to be especially vigilant in these areas and all agree to this specific International Law of the Sea provision: “Ships and aircraft of all countries are allowed ‘transit passage’ through straits used for international navigation; States bordering the straits can regulate navigational and other aspects of passage.”

We need also to prevent harassment or other restrictive activities so that border states in these narrow straits only introduce navigation and rights of passage regulations that are consistent with legitimate safety and security concerns. Slowages, frequent boardings, detentions and other activities that unnecessarily and intentionally restrain trade should be vigorously protested and prosecuted by international bodies and global industry.

The Many Questions Raised by Drones

State Farm, AIG and USAA have received preliminary approval from the Federal Aviation Administration to test drones for their claims and underwriting functions. On the surface, this sounds like a straightforward proposition. Drones can more quickly and easily survey damage sites after fires, tornados and hurricanes than personnel on the ground. Drones can be equipped to use global positioning software to identify insured structures and take pictures of damage to better and more quickly inform ground-based adjusters, leading to faster settlements and good press for insurers. Drones might also be used by adjusters to reveal hail damage on roofs, which will help to mitigate falls and other injuries to adjusters. The thought is that drones also might be helpful in certain loss control activities, such as identifying otherwise hidden internal or external fire hazards to large structures or plants.

Small portable drones may also find bodies or even survivors in the aftermath of storms. Drones and their operators may see crimes such as looting or arson being committed.

But questions arise: What responsibilities will insurers now have to report crimes to the authorities? How quickly will insurers be required to report? Some drones may use live streamed images to ground-based operators; others may take static pictures that will be retrieved when the drone returns to base. Will the drone-equipped disaster adjuster be required to analyze these pictures immediately or send them to the authorities via Internet uplink as soon as they are retrieved? To avoid problems, should drones not be sent in until after all rescue efforts have ended? However, would this also not create an ethical issue about delaying the use of lifesaving tools because of possible legal complications?

What issues of privacy of customer information or stranger images will insurers face as a result of these new capabilities? For example, the camera is left on while the drone ascends the side of the building, capturing images of people in various stages of dress, seeing a man beating a woman on the 14th or witnessing people shooting up at a party in the penthouse. What must the adjuster report and to whom? What if the party in the penthouse is for diabetics and the adjuster reports this to police as a suspicious incident? Will the adjuster now need to add police investigative skills to competency requirements? How secure will these drones be from tampering if they should malfunction, or how easily can hackers intercept image transmission? Will they be equipped to hear, meaning they can record conversations that may have otherwise been thought to be confidential? In other words, will the drone engender additional responsibilities for the adjuster or will issues otherwise be covered by existing laws and regulations?

We can argue that the courts have agreed that our expectations of privacy with airplanes flying overhead is already reduced. However, airplanes and other commercial or pleasure craft rarely fly under 1,000 feet for any length of time. Commercial drones will operate at a much more personal, in-your-face, level; today they cannot fly higher than 400 feet. Will the courts react the same way as they have with aircraft to privacy concerns associated with drones?

Underwriters will want to use drones, as well, to survey large property complexes to establish baselines not only for pricing and capacity purposes but to provide claims adjusters with a before-loss picture of the property. Drones may also capture more than their own customer’s property. For example, the drone captures a picture or a video of a new product being tested in a courtyard of another business. The other business, fearing industrial espionage, calls the police and gives the clearly visible drone FAA-issued ID number to them.

Ground-based adjusters can trespass or go where they aren’t wanted. However, most are trained to get permission directly from owners and others before trampling on private property. I do not think we will see distantly operated drones knocking on doors, “Greetings human, I am seeking permission to scan your property…please sign here or just nod your agreement.”

Then again, there is the psychological. The convoy of multiple insurer trucks shows up at the town just after a devastating tornado. Up go the drones, circling like buzzards over the wreckage and the dead. Townspeople make rude gestures to the eyes in the sky and clamor after the trucks to gain anything, any image of a missing relative or friend. And the police and fire officials are there, too, crowding the adjusters for information. Will the insurers need to circle the wagons, be available all together to the authorities in an approved command post so that the authorities can gain immediate access to their images? The authorities might have some immunity if they arrest looters from these pictures, but will the insurers, for giving the authorities pictures of the alleged crime? Will the drone bring more frivolous lawsuits from perpetrators of crimes at disaster sites for invasions of personal privacy?

I do not want this to be a Luddite’s rant against drones. Far from it; drones have useful purposes. While drone capabilities were honed in war, their peaceful use should be considered. There is no reason why realtors, insurers, surveyors and others should not have a shot at making their case to use drones in the course of their legitimate business. However, there will be others who use drones in less than legal ways, and we must provide some guidance to insurers and others what constitutes legal and authorized use. We must also have means within each drone’s system that provide credible and legal evidentiary documentation of use: authorized, legal or not. Because the drone increases the field of vision for its user, issues of privacy and legitimate acquisition of images and other information by authorities needs to be spelled out. Disposal of drones must also be spelled out in regulations so that they or any remnant information are destroyed so that they do not get into the wrong hands.

The question isn’t whether drones will be used for legitimate business reasons; the question is when. Because they increase the visibility of their users, issues are raised in the area of privacy that require discussion and perhaps court attention. There is also the unknown, the psychological—the vulture drones over the tornado-stricken town. People in war zones have learned to fear the drones because they are harbingers of death. Granted, we have not experienced drone warfare in the U.S., but we know that they have been used as impersonal killers in other places. Unlike whirring helicopters and buzzing planes, they are small, quiet, can hover low to the ground and will interface with individuals. What will we think of the drone climbing outside of our apartment building with its dark camera lens pointed directly at us? Will we think Big Brother, or will we come to accept this new technology as we have the convenience store video camera or the red-light camera at the busy intersection?

These questions must be asked and answered to some satisfaction before we go trundling off and build vast drone fleets. The time is now, because after drones are deployed is not the time to understand that the user has increased his or her company’s risk of lawsuit and even criminal prosecution that has not been properly identified, assessed, and managed.

Select articles and studies of the issues associated with drones.

— Calo, Ryan. “The Drone as Privacy Catalyst.” Stanford Law Review Online 64 (2011): 29-33. Abstract: Associated today with the theater of war, the widespread domestic use of drones for surveillance seems inevitable. Existing privacy law will not stand in its way. It may be tempting to conclude on this basis that drones will further erode our individual and collective privacy. Yet the opposite may happen. Drones may help restore our mental model of a privacy violation. They could be just the visceral jolt society needs to drag privacy law into the 21st century.

— Cavoukian, Ann. Privacy and Drones: Unmanned Aerial Vehicles. Information and Privacy Commissioner of Ontario, Canada, 2012. Summary: The aim of this paper is to provide a background for general privacy readers, as well as for potential users or regulators of UAV activities, as they relate to the collection, use, and disclosure of personal information.

— Friedenzohn, Daniel, and Alexander Mirot. “The Fear of Drones: Privacy and Unmanned Aircraft.” Journal of Law Enforcement 3, No. 5 (2013): 1-14. Abstract: The article focuses on the consequence of the use of unmanned aircraft systems, (UAS) or drones, planned to be integrated by U.S. in the national space. Topics discussed use of the technology by military forces, confirmation hearings of disclosed by Central Intelligence Agency (CIA) Director John Brennan and degradation of privacy as a result of law enforcement’s relation with the use of the UAS.

— Pasztor, Andy, and John Emshwiller. “Drone Use Takes Off on the Home Front.” The Wall Street Journal, April 12, 2012. Issue Discussed: With little public attention, dozens of universities and law-enforcement agencies have been given approval by federal aviation regulators to use unmanned aircraft known as drones, according to documents obtained via Freedom of Information Act requests by an advocacy group.

— Wesson, Kyle, and Todd Humphreys. “Hacking Drones.” Scientific American 309, No. 5 (2013): 55-59. Abstract: The article focuses on the lack of safety measures in drone aircraft. It states that drones can be used in various settings, which include search and rescue operations, scientific research and power line monitoring. Also mentioned are the Modernization and Reform Act of 2012 issued by the U.S. Federal Aviation Administration (FAA), effectiveness of jamming devices in the navigation system of drones and the challenges to balance the economic benefits of drones. considering the public safety.