This article was first published in issue 264 Lawyers Weekly
The recent extortion attempts against Mars and Snickers chocolate bars represent the latest instalment in a series of threats against Australian companies through product contamination and malicious interference. Product extortion threats, particularly over the past decade, have cost Australian manufacturers millions of dollars and present to the corporate victims of these crises challenges that include maintaining public safety and confidence in their products, while minimising negative publicity and potential legal liability.
There is no substitute in these situations for a detailed crisis response plan, and the role of lawyers is to provide advice not only concerning the potential legal liabilities that these situations present, but also to liaise closely with risk consulting firms and public relations advisers.
Notable extortionary threats
Product extortion is not a new phenomenon in Australia, although it has again been brought into focus by the Mars and Snickers recall earlier this year.
In 1991, Colgate-Palmolive received an extortion threat in the form of a potassium cyanide-laced tube of toothpaste delivered to its Australian head office. In 1997, Arnott’s conducted a massive recall of its biscuits, reportedly across 3000 supermarkets and service stations along the eastern seaboard, after they were told their products would be poisoned if extortionary demands were not met (Arnotts’ reported costs flowing from the extortion threat were close to $22 million). Nestlé also became an extortion target in 1997 when threats emerged that its products would be injected with poison. In June 1998, Sanitarium Health Foods conducted a large-scale recall after a threat of contaminants within its soy milk. In March 2000, an extortion attempt was made against Herron Pharmaceutical capsules with threats that products had been poisoned with strychnine, requiring the withdrawal from sale of millions of dollars worth of stock. In March 2005, Australia’s biggest construction company, Muliplex, disclosed a threat to shoot its crane drivers unless it delivered $50 million to an extortionist.
Given the threat they present to public safety and the immediate crisis they pose for the target company, extortion threats such as these attract immediate media attention. Trends within Australia and overseas suggest that the food and pharmaceutical industries are particularly at risk, although since the early 1990s, there have been a number of high-profile product tampering crises or extortion attempts across a range of different Australian industries.
How to respond?
The manner in which a company should react to a threat of extortion will obviously depend on the particular circumstances, including the nature and credibility of the threat presented, the risk of injury to consumers and the likely effect on the reputation of the company if the company’s reaction is considered insufficient. A consideration of matters such as these will dictate the nature of the response, which could range from a simple warning to consumers to a full-scale product recall supported by an intensive media campaign.
One often expressed view is that where a manufacturer or supplier has a reasonable basis for believing that an extortionary threat is not serious or poses no real danger to consumers, then its legal obligations are minimal and a ‘do nothing’ response may be appropriate. That proposition may be correct, but a decision of that nature should be approached with extreme caution. If the decision is not properly founded, inaction can lead to severe criticism, in the courts and in the media, should the extortionary threat result in injuries to consumers or other members of the public. A failure to act promptly will almost certainly be damaging to a company’s ability to control legal exposure and minimise damage to reputation. Further, should litigation arise out of a product defect, a slow reaction will draw criticism from the courts and may exacerbate any subsequent damages claim or sanction against the company.
At the very least, confidential notification of the existence of a threat to other companies in the supply chain, even when the threat is not considered credible, will increase the level of trust and goodwill in the commercial relationship between suppliers that will be critical if a real crisis develops.
Where possible, an extortion response decision should be taken after a speedy but rigorous investigation of the threat, rumour or report identifying the possibility of tampering. All stages of the investigation should be underscored by a consideration of the likelihood of injury to consumers and the severity of that injury. Where investigations reveal that a threat is credible, the response taken by the company, particularly in the first 24 to 48 hours, will be crucial to its chance of successfully dealing with the crisis.
When to speak to the authorities?
Where an immediate threat to consumer safety is posed, a company will rarely have time to gather all available information relevant to the credibility of the extortionary attempt. In that situation, the first decision—even before a product recall is implemented—is the necessity and timing of contact with authorities. Obtaining input at an early stage from police or other relevant authorities (such as the Therapeutic Goods Administration) will also be critical, particularly if enquiries can be made within an acceptable range of publicity risk.
Some level of police involvement is inevitable where a credible extortionary threat has been received. While publicity at any time is a major concern for a company, many lawyers advising clients faced with an extortionary threat, sometimes even before credibility can be assessed, will suggest that the company immediately notify the police. There is an obvious public safety concern associated with apprehending an extortionist, and early notification can ensure that the company’s crisis response maximises the effectiveness of a police investigation. Furthermore, if an initial decision not to contact police is reconsidered, it is likely that the attitude of the police will be frosty at least initially.
Even where an extortion threat is suspected to be a hoax, it may be prudent to notify police in order to create a record and an audit trail that can later be pointed to as a demonstration of the company’s proactiveness. This will also build a line of communication and trust that can be beneficial should a credible threat emerge. The police are increasingly familiar with the commercial implications of a major product extortion and, when a line of communication exists, authorities are not insensitive to the need for discretion and confidentiality, particularly where companies are making notification decisions prior to a determination of whether or not a threat is credible.
While acting on police advice or recommendations (or the advice of any authority) will unlikely be a justification for a company’s actions, a company should be wary of taking any step that is not completely consistent with the objectives of an official investigation. In circumstances where the police suggest a step that may be considered unreasonable or seriously uneconomical from a commercial perspective, avenues exist for further discussion, particularly where good relationships have been established with those responsible for the investigation. Conversely, care should be taken in taking actions that are contrary to the recommendations or desire of the authorities.
In any crisis situation involving significant potential expense and liability to the company, notification under applicable insurance policies is important. A conservative approach is generally to be preferred when considering insurance notification, given the serious consequences that may ensue if appropriate notifications are disputed. Having said that, the most important decisions in relation to insurance coverage should be made well in advance of a crisis.
Product extortion insurance may be costly and difficult to obtain, but there are tangible, long-term benefits such as cost protection and corporate peace of mind. However, product liability insurance policies traditionally do not provide comprehensive risk coverage and, in many circumstances, do not cover manufacturers and suppliers for the work required to rebuild reputation and profitability following a product extortion threat or some other form of extortionary tampering. For this reason, manufacturers must be prudent in their insurance decisions and remain aware that specialist product liability policies are required to accommodate for the significant expenses associated with extortion. Such expenses include costs of physically recalling products (which are often distributed nationally or internationally), significant and wide-scale advertising of product recall initiatives or other crises responses, logistical costs associated with transportation of products and resupply and, of course, major loss in profits particularly over the short and medium term. Legal advice in relation to these issues is also an expense that needs to be considered.
One message that emerges from the experience of companies faced with product extortions is that an upfront approach to the media and a proactive stance in dealing with the crisis will for the most part attract praise from both the public and the authorities. Conversely, companies that avoid media attention at all costs frequently attract the most attention and also lose the ability of managing whatever ‘spin’ the media wish to place on the crisis. The only way for a company to ensure accurate reporting of its response to a crisis is to involve itself in the media telling.
Research conducted by companies in the food and manufacturing industries suggests that, as soon as a product is recalled from the marketplace, consumers want to know what steps are being taken to address the extortion issue and an estimate of when the product will likely be returned to shelves. Communication with consumers at this point is critical to avoid the consequence of consumers moving to a competitor’s products. Successful companies have advertised throughout the course of the crisis and provided information as to what the company was doing 'behind the scenes', from manufacturing to packing and shipping, in order to demonstrate that the company is working to return the product to the market. The message is that increased communication enhances reputation.
Companies that prioritise the concerns of their customers and their key stakeholders are ultimately rewarded by the process. The rewards are not short term, however, especially in cases where a product must be recalled from the market. Yet experience shows that consumers remember companies that promote consumer safety and the result is reputation protection and a longer term viability of brand and profitability. Sales of Mars and Snickers bars were reportedly 250 per cent higher than average during the product’s first week back on New South Wales shelves. In short, the cost of properly managing the crisis is significant, but ordinarily a company’s long-term reputation is worth more.
Important considerations for all companies include:
- lessons learned from competitors who have experienced similar extortion issues
- seeking legal advice on likely exposure if timely action is not taken, and
- understanding the company’s position if the matter progresses to litigation (eg because of an allegation that the company failed to warn consumers of the risks associated with an extortionary threat or take prompt recall action).
In the aftermath of an extortionary threat, a company’s actions will be judged, with the benefit of hindsight, more by the court of public opinion than by its judicial equivalent. Those companies demonstrating proactivity are most likely to survive an extortion threat and possibly even augment their reputations as a result. This all requires some 'crystal ball gazing'. To assist, a company’s legal advice should address more than just the strict legal requirements triggered by an extortion attempt, and incorporate the increase in consumer goodwill enjoyed by companies which value public safety and the well being of customers. Companies should work with their legal and other advisers (eg, public relations and risk consultants) to ensure that, at the forefront of every decision associated with an extortion, is a focus on the public concern that everything has been done by the company to appropriately manage a potential crisis.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.