As recently reported in Food Safety News, food fraud (by way of species substitution) presents more than a risk of ripping off consumers.  Pregnant women may be unwittingly exposed to toxins, gastric distress, and allergens from consuming seafood that is not what it purports to be.  Honest employees of fishing companies, distributors, and retailers that sell genuine products can lose sales and their jobs.

U.S. Senator Barbara Boxer (D-CA) recently asked the FDA to increase its efforts to reduce seafood mislabeling.  For bad actors, increased “traceability and enforcement . . . from bait to plate” presents risks of criminal prosecution and civil damages from class action litigation.  However, for seafood companies that adopt best practices, it also provides promotional and marketing opportunities.

Why is this Happening?

Chinese consumers are willing to pay a premium price for NZ baby formula due to its perceived safety and quality advantages over Chinese-made products.  Chinese consumer confidence in the safety of domestically-produced food has declined over the last year, and dairy products are the number one imported food in the country.  In just June and July 2012, Chinese firms recalled infant formula and milk products contaminated with mercury, aflatoxin, and lye.  These recent problems demonstrate that the country still needs to improve its food safety and quality after the 2008 melamine-contaminated infant formula disaster that implicated 22 companies.

Why should my Company Care about COOL Fraud?

Companies should consider proactively addressing country-of-origin labeling (COOL) fraud to reduce the risk of brand dilution, lost sales, and injuries to their customers.  New Zealand has a top-three country brand name.  Some of its manufacturers are specifically marketing their products as being “safe” or “tamper proof,” based on the country’s strong food safety and environmental standards.  Higher Western food safety standards present an opportunity to boost sales to Chinese consumers.  COOL fraud also may present risks of civil and criminal liability as well as conviction in the court of public opinion.

Food companies face huge risks from this litigation due to the enormous size of the potential plaintiffs’ classes.  In the U.S., Halal-certified foods are a $20 billion market.  Kosher consumers buy $12.5 billion in food annually, and the broader market for Kosher ingredients exceeds $300 billion.  (Many non-Kosher consumers choose to buy Kosher foods due to their perceived higher quality, and Kosher is the “hottest word on food labels.”)

In addition to civil liability, fraudfeasors also face risks of criminal prosecution and conviction in the court of public opinion.

To manage some of these risks in the CPG market, some researchers are exploring the use of RFID technology to trace Halal-certified foods throughout the supply chain.  Food companies in related market segments should consider developing plans to manage their risks of this emerging and costly litigation.

Iowa Rep. Steve King has stated he supports Mr. Smith’s use of the court system to “get to the bottom of this” alleged controversy, but why?  And why has he stated that the federal government should order public schools to buy LFTB for their discounted lunch programs?  (Only three states have chosen to purchase LFTB next year due to public demand to curtail its use.)

Do these have anything to do with the fact that BPI is one Rep. King’s top 20 campaign contributors?  For other social issues, Congressman King has raised a concern that the nation’s “runaway judiciary” plays an “active role in the lives of our children.”  Rep. King also contends he is “a firm believer in states’ rights” and the need to “protect parental rights from being infringed by the federal government.”   Why is the LFTB/pink slime controversy any different?

Another unanswered question for Mr. Smith and Rep. King: if LFTB is so great, why did BPI make a concerted effort to avoid labeling it instead of just disclosing it on product packaging?  The free market Rep. King supports requires freely-available information so consumers can make intelligent buying decisions.  Two LFTB producers have submitted labeling requests to the USDA, because some consumers who have learned more about the product want to buy it.  Good for them.  As Marion Nestle (quoting Carolyn Scott-Thomas) noted, if companies selling this product had proactively disclosed its presence in the first instance, they might have minimized customer outrage (and BPI job losses) from its recent publicity.

The defendants, of course, are innocent until proven guilty beyond a reasonable doubt.  The purpose of this posting is not to suggest otherwise.  Rather, it is to identify three (of many) underlying reasons why COOL laws are important to businesses and consumers.

First, some consumers choose not to buy imported foods like shrimp and honey, because they may be contaminated with banned chemicals that might cause personal injury.

Second, even if no one suffers personal injury from an imported food, in some states, economic injury is enough to provide standing for plaintiffs to sue, because labels matter.  Consumers often are willing to pay more for foods from certain countries (or to avoid buying foods from others) for many reasons not directly related to safety, such as supporting local jobs or reducing energy use.

Finally, companies that are accused of violating COOL laws should keep in mind they risk conviction in the court of public opinion.  Many consumers understand that companies willing to violate COOL laws may also be more likely to break other laws that affect food safety.

What is Food Fraud?

Food fraud occurs when someone sells a product that is not what it purports to be.  A few examples include short weighting (e.g., including the weight of excessive ice glazing) of frozen seafood, species substitution, dilution of premium olive oil with inferior oil, and misrepresenting a product’s country of origin.

How do Fraudsters Get Away with It?

Many times, only minor distinctions differentiate competing products, so it can be difficult even for trained professionals to detect fraud.  Almost two hundred years ago, British writer Cyrus Redding stated that consumers could avoid food fraud by becoming “perfect[ly] acquaint[ed] with that which is good.”  But how can one become “perfectly acquainted” with the differences between conventionally-produced and “free range” eggs, other than by the price paid?

Why is this an Emerging Litigation Risk?

Food fraud is economic fraud, because labels matter, and customers want to get what they pay for.  Some states have already seen food fraud class actions filed that allege honey laundering.  Food fraud also presents a risk of food allergy personal injury litigation for companies that substitute cheaper finfish products like surimi for shellfish like crab.   Food fraud also may result in criminal indictment and imprisonment.  There  are also the indirect costs of negative publicity arising from conviction in the court of public opinion.

What can be Done to Manage Food Fraud Risks?

Companies that implement food fraud risk management plans that include traceability systems like RFID and third-party verifiers may be able to reduce their food fraud risks and increase sales.

The purpose of this posting is not to take sides in the “pink slime” vs. “boneless lean beef” debate or to argue that one side’s arguments are more palatable, no pun intended. 

Rather, it is to highlight the importance of labeling, advertising, and promotional practices as part of a proactive risk management program.  That’s why this blog addresses more than just food safety issues; regardless of the product’s purported safety or purity, the key issue appears to be the lack of disclosure to consumers.  Why did it take 20-plus years for consumers to be able to identify what products contain this ingredient?  How could BPI, the largest producer of this product, not have seen this PR train wreck coming?

The irony of industry complaints about how the media have ”smeared” the product and its producers’ reputations is that the industry’s wounds are almost entirely self-inflicted.  The producers chose not to disclose the pervasive addition of the product to ground beef, so critics naturally focused on why it was concealed from the public.  Iowa Rep. Steve King called for congressional hearings about the product’s critics, stating “they’ll have an obligation then to explain themselves why they could not base their allegations on facts and what they’ve done to damage an industry.”  However, the congressman failed to address a key issue: if the producers had disclosed these “facts” proactively, there would probably have been no “damage” to the industry.  

Consumers for decades (if not longer) have expected their ground “100 percent beef” to appear this way, not this way.  Similarly, BPI does not have even one picture of its product anywhere on its website or in its YouTube video rebuttals to films like Food Inc.  Its published images portray children enjoying burgers and the high technology used to produce its product.  Its videos feature company officers, a scientist who can’t make eye contact with the camera, and a lobbyist.  The lack of disclosure begs the question of what else might be in food fed to children?

Now, imagine that the companies producing this product had focused proactively on its claimed merits: that it’s a safe, sustainable, low cost, way to enjoy beef.  Photos of production machinery that looks like an indoor oil refinery just might appeal to the market segment that enjoys products like toxic waste candy.  Perhaps a catchy brand name like “spin safe” ™ could have defined the debate about using centrifuges to separate fat from lean meat.  Most importantly, calls for mandatory labeling of the product would become irrelevant; half of consumers do not read labels anyway. 

Lesson learned: manage labeling, advertising, and promotional issues proactively.