Planning for and implementing a product recall.

• Author: Wix, David G.

WITH THE unparalleled and continued expansion of the global economy, product manufacturers must develop a keen awareness of the laws and regulations of the jurisdictions in which their products are distributed and sold. The importance of foreseeing and planning for multi-jurisdiction product recalls cannot be overemphasized. As distribution systems become more efficient and legal systems more sophisticated, the frequency, costs, and global reach of such recalls will continue to increase dramatically. The development of an effective plan to deal with the inevitable product recall is therefore imperative.

Product recalls can present a major crisis for a manufacturer, potentially involving adverse media publicity, and in the case of a public company, a negative effect on stock price. A product recall that is not handled properly, effectively, and efficiently can result in permanent damage to the product brand, reduced profits, and loss of reputation and goodwill with consumers. Manufacturers, distributors, and retailers must have a plan in place to ensure that defective products are quickly removed from the marketplace and distribution chain in order to reduce those risks. Manufacturers, often in conjunction with outside counsel with product recall and product liability experience, should also establish a coordinated media response, an appropriate litigation strategy, and ensure that senior executives work together as they make critical decisions.

In seeking to manage a product recall, which can include the replacement, retrofitting, and/or refurbishing of the product, a manufacturer will have a number of considerations in mind. First and foremost is the need to protect consumers from injury, as their interests must always be paramount. Closely aligned with this priority is the duty to comply with regulatory requirements. Next is the natural desire of the manufacturer to ensure that any product recall or product safety campaign should help to avoid or at least mitigate potential product liability. Finally, the manufacturer will wish to minimize or, where possible, avoid altogether collateral damage either to product goodwill, or to the company's overall reputation. These objectives should never be regarded as conflicting; indeed, if the first two are achieved, the second two frequently follow.

The immediate priority of every product recall should be to bring the product risk to the attention of affected consumers and to enable them to adopt the company's chosen corrective measures as quickly as possible. Regulatory compliance is an important component of every product recall and many jurisdictions, particularly the United States and the European Union, have mandatory reporting requirements in place. Moreover, in the United States, for example, various governmental agencies are involved in at least some aspects of a company's product recall depending on the product involved. Those agencies include the Consumer Product Safety Commission, the Food and Drug Administration, the Environmental Protection Agency, the Federal Aviation Administration, the Department of Transportation, the Department of Agriculture, and the National Highway Traffic and Safety Administration. Each of those agencies has different reporting requirements and has available specific legal means to effectuate recalls if the manufacturer is hesitant or fails to do so when it otherwise should. This legislative authority includes both criminal and civil penalties and the ability to obtain restraining orders and injunctions to remove the product from the market and halt its immediate distribution. Manufacturers should have an established plan or protocol to deal with a recall situation and to cooperate fully with the appropriate governmental agency.

Because time is usually of the essence, it is important to ensure that manufacturers (with the assistance of others in the supply chain) are in a position to implement corrective measures as quickly and effectively as possible. None of this is attainable without preparation and proper protocols. The following guidelines outline some suggested best practices:

1. Before a Safety Issue Arises

   1. Plan for a Global Product Recall In Advance

      Most companies that manufacture and sell products to consumers will have to institute a product recall or similar corrective action at some point in time. A product recall campaign typically is implemented quickly, and notification to the relevant authorities is required when a significant safety issue becomes known. Since the key to any successful recall campaign is preparation, all manufacturers should have a standard product recall plan or protocol, with checklists of what to do, whom to contact, and where to locate relevant information so that the protocol can be implemented swiftly. A manufacturer should consider conducting mock recalls before an actual crisis occurs to ensure that the recall plan operates effectively and efficiently. In addition, many companies have established product safety committees to whom any safety related complaints from customers will be directed--committees whose members will assess not only whether a recall is necessary but, if so, how to implement it. To be effective, any recall plan developed by a manufacturer must be a cooperative venture among legal counsel, finance, sales and marketing, product safety, engineering, and quality assurance team members.

      An effective product recall protocol should focus on:

      * the establishment and training of a multi-disciplinary product recall team;

      * the availability of technical expertise;

      * the adoption of a plan designed to trace, account for and, where appropriate, retrieve the products;

      * the steps to be taken to notify distributors, dealers, retailers and consumers;

      * the requirements for notification or disclosure to all applicable government or regulatory agencies;

      * the importance of clear, concise communications both internally and externally--to consumers, regulatory authorities, customers, employees, the media (in appropriate cases), and other stakeholders; and

      * the retention and preservation of relevant documents, including electronic documents, related to the recall and/or the products at issue.

      Any recall plan also should delineate the central roles to be served by both in-house and outside counsel. For example, once a decision has been made to initiate a recall, it is often advisable that all communications with the governmental agency representative assigned to the recall be conducted by outside legal counsel rather than directly by the company. Many reasons support this recommendation. One of the most important is to serve as the contact person for any governmental agency inquiries and protect company personnel from receiving and having to respond directly to inquiries from the investigatory staff of the agency. Although some governmental agencies require company representatives to remain involved in discussions with it regarding the recall, outside counsel can serve as the conduit for those discussions, which ensures that the company's responses are not only coordinated and consistent, but also minimizes the risk of contradictory or inappropriate responses by company employees. Outside counsel can also ensure that all formal reports comply with applicable governmental requirements. Finally, outside counsel experienced in product recalls and product liability issues can help minimize potential liability in any subsequently filed lawsuits stemming from the recall by reviewing all written materials and public announcements to make sure the company is not making statements that will be detrimental to its anticipated defenses.

      In addition to preparing for a recall by having a plan in place, to the extent available, a company should also consider obtaining product recall, or, where relevant, product contamination insurance, to protect against the significant expenses and business interruption costs associated with conducting a product recall. Insurance coverage for product recall related costs and expenses often is excluded from Commercial General Liability (CGL) or Product Liability policies that most companies have in place. Therefore, a company must obtain separate product recall and/or product contamination insurance to cover the costs typically associated with a recall, including, among others, recall expenses, product replacement, lost profits, public relations expenses, and consultant costs.

      Finally, companies that either use component parts provided by third-party suppliers or that outsource the manufacturing of their products to a third-party face additional risks that should be addressed prior to an actual recall. The company will want to include appropriate provisions in the supply contracts requiring the third-party to indemnify it for expenses related to recalls necessitated by defective component parts and/or products. In addition, before selecting a third-party supplier or manufacturer, a company should conduct appropriate due diligence, which should include, among other things, an analysis of financial data and an in-depth inspection of the third-party's production facility to determine the third party's financial viability, professional quality, and competence. Companies that do not take these steps at the front end increase the risk of receiving inferior quality component parts and bearing the financial responsibility for recalls necessitated by defective parts and/or products purchased from unscrupulous...