Earlier this month, the National Highway Traffic Safety Administration (“NHTSA”) , the federal agency responsible for overseeing automotive safety, released figures showing that 2014 involved a record number of automotive safety recalls – higher than 2011, 2012, and 2013 combined. In all, the industry recalled almost 64 million vehicles in 803 separate recall campaigns, 680 of which were voluntary and 123 of which were compelled by NHTSA. The most prominent recall story in 2014 has of course been GM ignition switches. The New York Times’ coverage of the NHTSA statistics is here .
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The story is similar in the food world. In 2014, the FDA recalled more food, pet products, medications, and medical devices than ever. Although, many industry experts believe that food quality is better today than at any time in the past.
In light of these developments, is there anything that we should recall about recalls that involve shared, joint, or unclear responsibility between component suppliers and end-product manufacturers? In other words, supply chain recalls.
First, recall this: Recalls are a corporate nightmare. Almost nothing taxes a supply chain more than executing a recall. Amidst the inevitable finger-pointing that takes place whenever a recall involving a supply chain becomes necessary, supply chain partners have to find the time to determine the scope of the recall, configure an execution plan, craft appropriate consumer notifications, and deal with the media. This is difficult even in industries where recalls are commonplace.
Second, there is the matter of allocating financial responsibility between supply chain partners for recall costs.
Recalls can be extremely expensive. How expensive? Like, maybe needs to be reported as a “loss contingency” in your SEC filings expensive. Like, if you ever have a perfect supply chain relationship and you want to see what can ruin it… that expensive. Yes, recalls are to perfect supply chain relationships like what Angelina Jolie was to Brad Pitt and Jennifer Anniston. (Oooh… went there!)
In other words, recalls often cause supply chain disputes.
Some supply chain contracts are better than others in dealing with the possibility of product recalls. Supply chain contracts that are most likely to help supply chain partners avoid supply chain disputes are those that address recalls directly and in detail.
For instance, a case addressing a topic near and dear to our hearts: Meatballs. In General Mills Operations, LLC v. Five Star Custom Foods, Ltd., 703 F.3d 1104 (8th Cir. 2013) , General Mills sued its meatball provider after the meatballs became the subject of a contamination recall. The supply chain contract between the parties was clear that the meatball supplier bore all recall liability, stating that the supplier “shall promptly pay or reimburse [General Mills] for all costs and damages (including lost profits) incurred by [General Mills], including, without limitation, costs for … recall.” Therefore, General Motors won on summary judgment.
A case on the other end of the spectrum is Prestige Brands, Inc. v. Guardian Drug Co ., 951 F.Supp.2d 441 (S.D.N.Y. 2013), which involved the recall of a medical product due to the contamination of one of its ingredients. The supply chain contract between the ingredient supplier and the buyer did not address recalls directly, even though recalls are common in the food and drug industry. Absent any contract provision, the buyer argued that the supplier’s obligation to indemnify it arose from “industry standards and practices.” The court was unconvinced, and – not surprisingly – held that the buyer could not recover its recall costs from the supplier.
Often, supply chain partners who do not address recalls directly in their contracts try to fit recall claims into their “warranty” provisions. The typical response, though, is that “warranty” claims apply to individual products in which something demonstrably goes wrong. A recall, on the other hand, addresses more than just individual products that fail; recalls also include products that are perfectly fine and therefore go beyond what typical warranty provisions cover. Courts and juries go either way on this question.
The lesson is that for industries and products where recalls are common, supply chain partners should negotiate responsibility for recalls at the outset of their relationship. Supply chain partners should also consider negotiating which party should lead the administration of any recalls and communications with regulators.