Department Of Justice (DOJ) Prioritizes Prosecutions Of Food Companies

The post below is a follow-up to an earlier post written by my colleagues, Edward Heath and Kate Dion. Edward is my partner and is Chair of Robinson + Cole’s White-Collar Defense and Corporate Compliance Practice. Kate is a litigation associate who routinely handles government and internal investigations for manufacturing clients.

In the wake of reports about the government’s investigation of Blue Bell Creameries, the United States Department of Justice has issued an ominous warning to food companies: compliance failures will be aggressively prosecuted.

Last week, the third highest-ranking DOJ official announced that food safety investigations and prosecutions are a priority for the agency.  Noting that both companies and individual employees are subject to prosecution, the DOJ official directed his comments to senior management: “It is easy to think — that could never happen at my company. It is easy to think — that could never be me.”

He then added:

Even a single decision to cut corners can have deadly consequences. The criminal prosecutions we bring should stand as a stark reminder of the potential consequences of disregarding danger to one’s customers in the name of getting a shipment out on time — of sacrificing what is right for what is expedient.

To reinforce the point, the official noted that the government is willing to rely upon criminal laws that are not directly related to food manufacturing, such as those addressing obstruction of justice, and mail and wire fraud.

DOJ has conducted some noteworthy prosecutions in the last two years involving the sale of adulterated food.

  • In one case, the company entered a guilty plea to a misdemeanor violation of the federal Food, Drug, and Cosmetics Act in connection with the sale of a contaminated food product.  The company admitted that some of its employees were aware that the product could be contaminated.  The plea agreement required the company to pay millions of dollars in a criminal fine and forfeiture of assets.
  • In another case, two former company officials were tried and convicted on criminal charges related to the sale of a contaminated product.  The evidence presented at trial established that the defendants misled consumers about the contamination and then fabricated COAs accompanying various shipments.  When FDA officials visited the plant to investigate the outbreak, the defendants then gave misleading or untrue answers to their questions.  Those defendants are still awaiting sentencing.

Blue Bell has entered into voluntary agreements with several state agencies outlining corrective actions necessary to commence selling its ice cream products again, including engaging an expert to oversee sanitation efforts and instituting a “test and hold” procedure that requires it to obtain negative test results before distributing its product for sale.  While the FDA has approved of these agreements and is in discussions with Blue Bell concerning resuming sales of its product, the government has not yet indicated whether it will pursue criminal charges against that company for the three deaths and seven people that were hospitalized as a result of the listeria outbreak.

Regardless, the DOJ’s latest commentary is a striking reminder of the importance of a robust, well-enforced compliance program that addresses all applicable Federal and State rules and regulations.

Proposed DOL Rulemaking Means Uncertainty for Manufacturers

On June 30, 2015, the United States Department of Labor (DOL) issued a Notice of Proposed Rulemaking seeking comments on a proposal to raise the salary threshold for the so-called “white-collar” exemptions from $455 per week ($23,660 annually) to an expected $970 per week ($50,440 annually), as projected by the DOL for 2016. The DOL also proposes that the salary basis track the 40th percentile of the earnings of full-time salaried workers, meaning that if adopted this salary threshold would adjust automatically in the future without further DOL action. The DOL further seeks comments on the current duties tests for determining whether employees are performing work that is exempt from overtime under the executive, administrative, professional, outside sales, and computer exemptions.

Under the federal Fair Labor Standards Act, employers must pay employees overtime pay of one and one-half times their regular rate for any hours worked over 40 in a workweek, unless the employer can establish that the employee is exempt. The salary threshold for “white-collar” exemptions was last updated in 2004. Many states, including Connecticut, Massachusetts, and New York, have separate salary basis and duties tests for determining whether employees are exempt.

The DOL’s proposal did not include proposed changes to the duties tests for comment; rather, it seeks comment on whether any changes should be made to the duties tests for the “white-collar” exemptions. In particular, the DOL noted difficulties in litigating the “primary duty” test, which requires employers to show that an exempt employee’s primary duty involves the performance of exempt tasks. The DOL also noted that some commentators believe it should consider a rule that requires workers to spend at least 50 percent of their time on exempt tasks to qualify for the exemption, as done in California.

If adopted, the DOL’s proposed rule may have a substantial impact on manufacturers. Many working foremen and other professional, administrative and executive staff currently classified as exempt could automatically lose the exemption from overtime as a result of the raising of the salary threshold. Even those who meet that salary threshold in one year could lose it the next simply because their salary did not keep up with the rate of inflation. (To this writer, pegging an increase in the threshold salary to the 40th percentile of all salaried workers would seem to put inflationary pressure on the entire spectrum of salaried positions.) Finally, to the extent the DOL changes the “primary duties” test to require more than 50 percent of the employee’s time be spent on exempt duties, many working supervisors and managers would become eligible for overtime without regard to their salary.

These changes may require manufacturers to modify their payroll and other practices. Employees previously (and properly) exempt from overtime may not have recorded working hours or tasks. Simply speaking there was no need to conduct any job task analysis to prove exempt status. That may no longer be true. Going forward, the failure to track job tasks and time spent may endanger the exempt status of not only the particular employee in question, but the entire class of employees working in the same job classification.

The Notice of Proposed Rulemaking was published in the Federal Register on July 6, 2015, and is subject to a 60-day comment period. Interested parties may submit comments at before September 4, 2015. If the proposed rule becomes final, the salary threshold increase is not expected to take effect until sometime in 2016. To view the announcement by the U.S. Department of Labor, click here. To view the Notice of Proposed Rulemaking, click here.

Major Expansion of EPA Rules for Underground Storage Tanks

Thank you to my colleague Brian Freeman for his contributions to this post.  Brian is an attorney in the Environmental & Utilities Practice Group who has significant experience with underground storage tank issues for industrial and petroleum clients.

On July 15, 2015, the United States Environmental Protection Agency (EPA) published a final rule significantly expanding its program for underground storage tank (UST) systems that store petroleum or hazardous substances.

The final rule is lengthy and detailed but focuses on several areas in particular, such as:

  • Expanded secondary containment requirements for new UST systems or existing system components being replaced;
  • Expanded operation and maintenance requirements, including periodic inspections and testing of UST system components;
  • Expanded requirements to confirm compatibility and notify EPA before switching a UST system to store newer fuels such as ethanol blends and biodiesel;
  • Operator training requirements for site owners, managers, and employees; and
  • Release detection requirements for previously-deferred UST systems storing fuel for emergency power generators.

The final rule becomes effective on October 13, 2015. In states without existing, EPA-approved UST regulations, UST system owners and operators must comply with the revised federal regulations as of this date.  Certain requirements must be met immediately. For example, if you store ethanol blends or biodiesel, you must immediately ensure that your UST system is compatible with such fuels. Secondary containment requirements for new UST systems or dispenser systems take effect within 180 days after the effective date. Other portions of the final rule, such as inspection, testing, and training requirements, will take effect three years from the effective date.

States that currently have EPA-approved UST regulations have three years to revise their regulations and have them approved by EPA as meeting the revised federal regulations.

EPA’s website contains a summary of the final rule and other materials that can be useful tools for understanding the new requirements and their applicability.


More Federal Money for Manufacturers

As reported by Industry Week, the U.S. Secretary of Commerce recently announced that 12 additional communities will receive designations under the Obama Administration’s Investing in Manufacturing Communities Partnership (IMCP) initiative.  According to Industry Week:

The 12 designated Manufacturing Communities will receive coordinated support for their strategies from the following eleven federal agencies with more than $1 billion available in federal economic development assistance:

  • Appalachian Regional Commission

  • Delta Regional Authority

  • Environmental Protection Agency

  • National Science Foundation

  • Small Business Administration

  • U.S. Department of Agriculture

  • U.S. Department of Commerce

  • U.S. Department of Defense

  • U.S. Department of Housing and Urban Development

  • U.S. Department of Labor

  • U.S. Department of Transportation

The only community in the Northeastern United States on this recent list is in Connecticut.  The Connecticut Advanced Manufacturing Communities Region is focused on supporting aerospace and shipbuilding, which are critical industries in Connecticut.

Although it is important to continually invest in U.S. based manufacturing, the key will be whether the funds and support are truly easy to access.  Many of our manufacturing clients apply for government funding and loans, but often they come with delay and expense.  To encourage true growth, government assistance needs to be streamlined, which often is not the case.


Disclosing Violations to EPA in a Digital Age

Thank you to my colleague Bob Melvin for his contributions to the post below. Bob is a partner in the Environmental & Utilities Practice Group whose practice focuses on representing manufacturers with enforcement, compliance, and permitting issues.

Under EPA’s Audit Policy and Small Business Compliance Policy, companies that discover, promptly disclose, and expeditiously correct environmental violations may be entitled to penalty mitigation and other incentives. EPA recently developed a proposed plan for efficient and consistent disclosure of violation discoveries. In the Fall of 2015, the Agency plans to launch its “eDisclosure” portal for the reporting of both Emergency Planning and Community Right-to-Know Act (EPCRA) and non-EPCRA violations under EPA’s Audit Policy. The web-based program would not change any of the Audit Policy criteria, but it would dramatically change the manner in which the Policy is implemented.

To use the eDisclosure portal, a company must register with the system, disclose violations online within 21 days of discovery, and submit an online Compliance Report certifying that it corrected any noncompliance.

The portal will provide for two tiers of disclosures – Tier 1 and Tier 2. Tier 1 disclosures generally include most EPCRA disclosures (not to be confused with tier I and II EPCRA reporting). The online Compliance report must be submitted within 60 days from the date of discovery under the Audit Policy and 90 days from the date of discovery under the Small Business Compliance Policy, with no opportunity for an extension. The system will then automatically generate an electronic Notice of Determination, or “eNOD”, conditionally confirming that the violations are resolved without civil penalties.

Tier 2 disclosures generally include all EPCRA violations not covered by Tier I and all non-EPCRA violations. While the same timelines for submittal of the Compliance Report for Tier 1 disclosures apply to Tier 2 disclosures, there is an opportunity for an extension to those deadlines under Tier 2. The system will automatically issue an Acknowledgement Letter noting EPA’s receipt of a Tier 2 violation. The Acknowledgement Letter will also confirm the Agency’s commitment to determining eligibility for penalty mitigation if and when the Agency considers the matter and decides to take an enforcement action.

EPA’s proposed program seems to be designed to streamline the disclosure process, but companies looking for written resolutions documenting no penalty or enforcement action may be disappointed. In addition, not only is EPA planning to make this web portal the exclusive method for making most Audit Policy disclosures, it also plans to maintain the centralized database out of EPA Headquarters. Information disclosed on the portal is expected to be public and accessible under the Freedom of Information Act.

EPA’s website provides more information on its proposed eDisclosure portal, the process for implementation, and the Audit Policy in general.

Even More Reason for Manufacturers to Update Their Employment Agreements

In an increasingly competitive landscape, a manufacturer’s significant employees may hold the “keys to the kingdom.” Loss of such a worker to a competitor could have a substantial impact on future business growth. Many manufacturers invest significant resources to keep key employees and, by doing so, preserve their market advantage.  Strategic use of employment agreements, post-employment restrictions and confidentiality provisions have been a proven tool to help protect trade secrets, customer relationships and confidential information.

Two recent developments highlight the need for manufacturers to periodically review and update the employment agreements of their key executive, R&D and sales employees.

On June 3, 2015, the Connecticut Legislature adopted a measure effectively making unlawful any confidentiality agreement which would prohibit employees from discussing wages. Misleadingly labeled “An Act Concerning Pay Equity and Fairness,” the law prohibits employers from preventing employees from disclosing their own wages or the wages of any other employee who otherwise voluntarily disclosed it to them. The law does not limit in any way the entity to which this information may be disclosed nor does it require the express consent of the individual whose wages are being disclosed. The Governor is widely expected to sign the legislation and it would become effective on July 1, 2015.

The “Pay Equity” Act, as written, permits an employee to disclose what many could consider to be confidential information to competitors. So, for example, if a key sales-employee casually mentions her or his compensation schedule to a co-worker, that co-worker has license to share that information with anyone else. This means former employees who go to work for a competitor are seemingly free to share the compensation data of their peers and co-workers, helping the competitor recruit future defectors. The “Pay Equity” Act also makes “retaliation” for disclosing such information unlawful and authorizes a private cause of action and an award of compensatory damages, punitive damages and attorneys’ fees and costs.

The second significant development occurred on June 12, 2015, when the New York Court of Appeals refused to apply the parties’ selected choice of law because that law was “repugnant” to the public policy of New York State. Most employment agreements, and especially those which contain provisions restricting an employee’s activities after she or her leaves employment, contain so-called “choice of law” provisions. Under a choice of law provision, the parties can select the law of a particular jurisdiction which they may wish to apply when interpreting the agreement. In Brown and Brown v. Johnson, the parties’ agreement selected Florida law as governing law in any dispute. However, when the plaintiff sought to enjoin its former employee from violating her post-employment restrictions, the defendant argued that New York (not Florida law) should govern. The Court of Appels ultimately agreed, holding that Florida law with respect to post-employment restrictions was “truly obnoxious” and inconsistent with New York’s public policy as Florida law did not give sufficient consideration to the interests of the individual employee.

These two developments show that manufacturers must constantly assess the means and manner in which they protect both employees and information from unfair competition.

Federal Trade Commission (FTC) Continues To Focus On Manufacturers’ Warranties

As readers of the blog know, we have written previously about the importance of periodically reviewing warranty language to avoid scrutiny from the Federal Trade Commission (FTC).   This week, the FTC blog published another article entitled “The latest word of warranties.”

In the post, the FTC offered the following guidance:

If your business offers warranties, here are some steps to consider:

  • Read your warranties to see if they prohibit a consumer from using other sellers’ parts or services – or if consumers might read your warranty to imply that. Conform your policies to the just-announced clarifications to the Warranty Act’s Interpretations.
  • Check your website to make sure your warranties are posted close to the warranted products.
  • Review your warranties and service contracts to ensure all material terms and conditions are disclosed clearly and conspicuously.
  • Read the FTC’s brochure, A Businessperson’s Guide to Federal Warranty Law.

My take on this post is that it reaffirms that the FTC continues to focus on consumer warranties and ensuring that a normal consumer would be able to understand what is and what is not covered.  Ultimately, a warranty is only good if it can be enforced so there needs to be balance between disclaiming liability and offering service to consumers.

Superfund Divisibility Defense Gets New Life

The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), commonly known as Superfund, is a federal law under which contaminated sites are identified and evaluated by the Environmental Protection Agency (EPA). EPA designates certain sites for cleanup and pursues potentially responsible parties (PRPs) to investigate and remediate those sites.

Liability under CERCLA is joint and several. Under such a scheme, any party that contributed “hazardous substances”, a term broadly defined in CERCLA, to a site can be held liable for the entire cleanup. Because it is fairly easy to establish a PRP’s liability, Superfund sites tend to capture a lot of PRPs. Any manufacturer that uses, produces, or disposes of hazardous substances could be at risk.

While most cases under CERCLA rest on joint and several liability, there are some defenses that, if proven, may allow a party to escape it. One of these defenses is divisibility – if a party can prove that the harm is divisible, or capable of being apportioned in some way, the party will only be held liable for its fair share of the harm. The divisibility defense has been notoriously hard to prove. It was recognized and used by the Supreme Court in 2009, but countless parties have tried to use it since – and failed – until now.

In May 2015, a federal court in Wisconsin proved that the divisibility defense is alive and well. In that case, a PRP, NCR Corporation, argued that its contribution of contamination to the Fox River was divisible and response costs should be apportioned appropriately. The court agreed, holding that NCR’s volumetric contribution of waste was a proper basis for apportioning its liability at the site. The court evaluated the range of NCR’s percentage contribution of hazardous substances to Fox River, and used that range to determine how much NCR had to pay towards the cleanup. Importantly, the court held that “it is reasonableness, not scientific precision, that governs an apportionment analysis.”

The divisibility defense will always hinge on the facts of a particular case. But the fact that it has been acknowledged and used by a federal court is good news for anyone that uses, produces, or disposes of hazardous substances. Given the complex and costly nature of CERCLA cleanups, avoidance of joint and several liability can significantly reduce a party’s exposure, and the divisibility defense is one way to get there.

The case is United States v. NCR Corp., et al., No. 10-C-910 (E.D. Wis., May 15, 2015).

Teamster Plan to Cut Pensions Presents Significant Issues for Manufacturers

In April, the Teamsters Central States Pension Fund (“Central States”) announced its intention to cut the benefits of retired workers under the recently enacted 2014 Multiemployer Pension Reform Act (“MEPRA”). I previously blogged about the MEPRA in December. There I noted that, for those financially stressed pension plans seeking protection, the process for implementing benefit cuts would likely begin in 2015, with the actual cuts themselves not felt until 2016 at the earliest. As if on cue, with its announcement, Central States becomes the first multiemployer pension plan to seek relief under the new law.

The troubled financial status of Central States explains why its Trustees felt dramatic action was needed. According to Central States’ Executive Director Thomas Nyham, Central States has a $2 billion annual funding shortfall and is only 50 percent funded. During an April 14, 2015 “Town Hall” conference call, Nyham disclosed that Central States would be insolvent by 2026 – a mere eleven years from today. Thus, Nyham explained, if the Trustees did not take action, by 2026 all Central States’ retirees’ and participants’ retirement benefits would be worthless. You can read Central States announcement or listen to an audio recording of the Town Hall call here.

The precise scope of the planned benefit reductions have not been announced.  The U.S. Treasury Department must still issue the MEPRA implementing regulations (expected this summer). Central States must then proposal a “Rescue Plan” for Treasury Department approval, followed by an approval vote by all plan participants. It should be noted, however, that the Treasury Department may implement a Rescue Plan rejected by the plan participants if the Pension Benefit Guarantee Corporation (PBGC) faced projected liability of more than $1 billion as a result of plan insolvency, a threshold which Nylan disclosed would certainly be met by Central States’ collapse.

While the plight of Central States may represent an extreme, its financial difficulties are not unique. In its 2014 Annual Report, the PBGC reported that its multiemployer pension plan deficit reached a record $42 billion and that its risk of insolvency was 50% by 2022 and 90% by 2025. A significant number of the 1400 multiemployer pension plans in the United States face financial pressures similar to Central States and this writer expects the Central States’ “Rescue Plan” to become one roadmap to address the looming crisis.

The Central States’ “pension cut” approach is not the only option troubled plans have followed in recent years. In August 2012, UPS announced an agreement with the New England Teamsters and Trucking Industry Pension Fund (“NETTI”) to restructure the pension liabilities of its 10,000 UPS employees. In that restructuring, UPS agreed to immediately begin paying its $2.1 billion withdrawal liability (over fifty years) and remain in the fund by contributing to a separate “pool.” Since that restructuring of the NETTI, other employers have followed the UPS lead.

Manufacturers currently contributing to multiemployer pension plans should take special notice of the Central States’ and NETTI’s competing approaches. Among other things, manufacturers approaching bargaining in 2015 or 2016 should consider:

  • The funding status of the multiemployer pension plans to which they contribute;
  • Given the uncertain funding status of some plans, whether active employees will seek or a manufacturer should offer supplemental pension benefits in some form;
  • Whether reducing plan contributions or moving contributions to a designated pool would trigger withdrawal liability;
  • To the extent a manufacturer’s multiemployer plan follows the Central States’ approach and seeks to cut retiree benefits, whether retirees will seek the opportunity to return to the workforce in a part-time, temporary or reduced capacity and, if so, whether the manufacturer would be willing to consider such an option given conflicting seniority, bumping, and other contractual obligations.

To the extent that manufacturers face funding short-falls in the multiemployer plans covering their employees or retirees, proactive planning becomes essential. Central States’ decision to cut retiree pension benefits may turn out to be the “canary in the coal mine” – a warning of the coming crisis.

Avoiding a Rocky Road: Lessons For Manufacturers From Blue Bell Creameries’ Listeria Investigation

The post below was written by my colleagues, Edward Heath and Kate Dion.  Edward is my partner and is Chair of Robinson + Cole’s White-Collar Defense and Corporate Compliance Practice.  Kate is a litigation associate who routinely handles government and internal investigations for manufacturing clients.

Ice cream maker Blue Bell Creameries has found itself in a sticky situation that underscores the importance of a having a comprehensive and robust compliance program, even for companies who do not manufacture consumer products.

Blue Bell sells its ice cream throughout much of the United States and numerous foreign countries.  It is reportedly the third highest-selling ice cream brand in the United States.  Unfortunately, according to documents released as part of a Food and Drug Administration investigation, Blue Bell is also reported to have known of listeria in its Oklahoma plant as early as March 2013 but failed to issue any recalls or warnings or halt production until this year after the products were publicly linked to listeria illnesses, which resulted in three deaths in Kansas.  

In a recent statement, Blue Bell acknowledged that it did not adequately improve its cleaning and manufacturing practices even after it learned that its machinery was testing positive for listeria.  The FDA’s investigation report cited many shortcomings of Blue Bell’s compliance program.  In April, Blue Bell recalled its products and halted all sales. Extensive employee layoffs and furloughs followed, along with considerable negative media attention.

Comprehensive compliance programs include not only provisions that adopt industry standards and good manufacturing practices for day-to-day operations, but also processes for properly investigating potential compliance failures.  A conflict-free individual is designated to receive compliance concerns and then report them to management, who then would insure that an independent, thorough, and complete investigation is conducted.  The internal investigation gathers and preserves the relevant evidence, assesses the extent of any failures, analyzes potential criminal and civil liability, and may propose remedial measures.  The results are sometimes memorialized in a report, although it is not always appropriate to do so.

Compliance programs may provide for management to decide whether outside counsel will be retained to conduct the internal investigation. One critical factor in that decision is whether future criminal or civil litigation, or a government investigation is likely, since maintaining the confidentiality of the investigation is greater if it is conducted by outside counsel.

Done early and properly, an internal investigation may best position a manufacturer to avoid a costly, public crisis that has the potential to devastate sales, damage the brand’s reputation, trigger Government investigations and sanctions, foster resource-draining class action lawsuits, and cause management and other employees to lose their jobs.

This is true for all manufacturers, not just those who make consumer goods like Blue Bell.