I t ’s Fr i d a y afternoon. It's been a long week—a very long week! But things have finally calmed down. It's going to be a great weekend.
Then you get the call.
A reporter asks for your comments about newly discovered purported defects in your company’s products manufactured overseas. The reporter claims that the products violate state and federal regulations, create potential toxic exposures, and pose related health risks to product users in the U.S. and abroad. The story will be posted on the paper’s web site later today and run in tomorrow’s hard-copy edition.
So much for that relaxing weekend.
Your instincts tell you this could be bad. They're right. The fallout from these allegations and the related adverse publicity may well include expensive and risky class-action lawsuits, aggressive U.S. and foreign government investigations and actions, adverse state attorney general and state regulatory actions, and business injury claims by vendors and others—not to mention the risks of monetary damages, penalties, fines, and onerous injunctive relief. Protecting your company from these potential consequences will require careful planning and prompt and coordinated action. While every case differs, and there certainly is no one approach applicable in all circumstances, many of the issues and steps that may need to be considered in any significant product crisis involving foreign-made products are discussed below.
Assembling the Team
Your first order of business should be to put in place a command structure that can quickly identify and respond to expected threats and do so in a coordinated manner consistent with an overarching and well-thought-out strategy. Think war and war room. The central body of your command structure should be a relatively small Steering Committee, the size and composition of which will turn, in part, on your assessment of the potential magnitude of the crisis. Keep in mind that denial is frequently an initial reaction to these situations, so the tendency is to underestimate the threat.
How you structure the Steering Committee and the various teams reporting to it—and the quality of those you choose to populate them—will likely determine your success or failure. The Steering Committee must have real power and authority. Participation of one or two key company executives, even the CEO (in truly serious cases), will be helpful. The Steering Committee must include those who, by reason of their constituencies and objectives, will bring different points of view to the table: for example, a senior QA/QC executive or engineer; key marketing, public relations, and operating executives; the general counsel; a lobbyist; a PR consultant; and, of course, high-quality lead counsel. How and by whom final decisions are made must be clear, and those involved must understand that once the Steering Committee makes a decision, all must follow the course set.
The Steering Committee must delegate authority to various teams that can focus on specific threats and issues, e.g., a fact investigation team, a U.S. regulatory response team, a congressional response team, an insurance coverage team, a foreign government relations team, a state attorneys general team, and U.S. and foreign litigation teams. Choose your best people, delegate wisely, and establish clear lines of communication and responsibility. The demands on each of the teams will be different, so choose the members of each team carefully, matching individual strengths to the expected tasks of the team to which they are assigned.
The Fact Investigation
“What actually happened here?” is the first question that must be answered—and fast. Thus, one of the first teams needed is a fact investigation team. The team should be dogged, aggressive, and unrelenting in obtaining facts, while sensitive enough to political issues to know the proper channels to be used and when to raise issues with the Steering Committee.
When investigating facts in foreign countries, time and language differences may pose challenges, of course. But the team also must be aware of cultural and legal differences that can affect the ability to obtain complete and objective information, as well as worker protection laws in certain countries that may impede employee interviews. For all of these reasons, the fact investigation team must carefully plan its “attack,” identifying potential contingencies and preemptive actions.
For example, to conduct face-to-face interviews, U.S. team members must secure necessary visas and other appropriate travel documents, which can take longer than anticipated. For effective interviews, relevant documents should be reviewed in advance so as to prompt more complete responses and test the accuracy of the information obtained.1 Yet obtaining relevant documents overseas and transporting copies to the U.S. may implicate thorny data privacy laws not applicable in the U.S. or prompt punitive action by a foreign government.
The fact investigation must be designed and conducted to obtain information to: (1) respond to any resulting government investigation and/or litigation, (2) prepare necessary regulatory and government notices, (3) prepare necessary corporate and securities disclosures (e.g., SEC Form 8-K and similar filings) and any other required regulatory public disclosures, and (4) otherwise address the public, company executives and employees, the company’s business partners, and financial markets. For example, where the product is covered by the Consumer Product Safety Act and Consumer Product Safety Commission (“CPSC”), the company must “immediately” report to the CPSC if it obtains information that “reasonably supports,” among other things, the conclusion that a product fails to meet applicable product safety rules or contains a defect that could create a “substantial product hazard” or “creates an unreasonable risk of serious injury or death.”2 While federal regulations offer some guidance as to what “immediately” may mean in that situation,3 there is much controversy surrounding its interpretation. In any event, the deadlines will likely seem too short, given the complexity of the situation. Moreover, claims of reporting violations (and the imposition of fines for late or nonreporting) are common and have been used in later litigation and by the media to enhance claims or cast the company in a bad light. Other countries where the product was sold may likewise have similar reporting, disclosure, or regulatory oversight requirements.
Data and Product Preservation
U.S. litigators know that one of the first issues to address when a company reasonably anticipates litigation is the preservation and collection of relevant data and tangible items.4 This obligation applies even when the data or product exists only in another country.5 Preserving (and collecting) data and items in other countries pose unique challenges. For example, moving data or products in and out of various countries, even when the title is in the company’s name, may be problematic due to data privacy or other host-country laws. Even taking actions merely to preserve certain types of data can trigger laws not necessarily familiar to U.S. litigators. All potentially applicable laws must be considered, and preservation and collection actions undertaken, with those laws in mind.
In U.S. litigation, the company must preserve data and tangible items—even in the possession of a third party—when that information is “in the possession, custody or control” of the company. For purposes of control, however, it does not matter that the data or product may be located abroad. Carrying out the company’s obligation to preserve information often can be dicey with respect to foreign third parties, given that such requests may be met with little cooperation by foreign companies and by certain foreign governments. Obtaining and reviewing vendor contracts may be necessary, among other things, in determining whether the company has “control” over data or products in the hands of foreign third parties. Despite the obvious difficulties, reasonable efforts to preserve relevant data or items are imperative.
U.S. Government Investigatio ns and Litigation
Numerous federal, state, and local entities may become involved when the safety of a foreign-made product is at issue. The company could face multiple civil and criminal investigations—and simultaneous data and testimony demands. Whether it is an “invitation” by a U.S. congressional committee for the CEO to testify and provide documents, a request from a congressional investigative staff to interview a plant manager, or a formal document and data demand from a state attorney general, the company will likely receive urgent, competing demands for documents, data, interviews, and testimony. Working with each requesting party must be closely coordinated to ensure accurate, timely, and consistent responses. Inaccurate or inconsistent responses may prove more harmful than any damages resulting from the alleged product defect, particularly since communication— and, in some cases, coordination—among these various entities is common.
Purported class actions and individual and shareholder lawsuits also often follow product recalls or claimed product defects. The number and nature of the cases will depend on various factors, including the extent to which health issues or injuries have been reported, the extent of adverse publicity, whether government entities allege regulatory violations, and the company’s perceived performance in handling allegations with respect to the product. Lawsuits may assert claims ranging from the typical strict liability and negligence allegations to less typical but “trendy” theories, such as public nuisance.
Given the interrelationships of the multiple investigations and litigation, it is important to develop an overall strategy to coordinate their successful resolution. For example, promptly resolving a government or regulatory investigation may or may not help ease the litigation threat or even be in the company’s best interest. With respect to litigation, it is important to consider its different potential directions and inevitable evolutions when making overall strategy calls, including the timing of any trials or resolution. For these reasons, the company will be better served if one highly experienced law firm develops and coordinates overall strategy to minimize legal exposure, adverse government actions, and negative public relations.
Key litigation decisions must be made early on. For example, a federal forum may be more beneficial than a state forum— mandating that any issues under the Class Action Fairness Act or other removal options be immediately addressed. The company must also quickly analyze whether certain defenses, such as jurisdiction, are viable; if so, it must act to preserve and adequately develop them. In addition, the company must use all effective case-management tools and strategies, including appropriately bifurcated discovery and targeted motion practice.
Another question that must be answered is whether it is in the company’s best interest to seek coordination of pretrial proceedings under federal multidistrict litigation (“MDL”) laws and rules or state-law equivalents, as there are risks and benefits to MDL coordination. For example, in many cases, MDL treatment results in the filing of additional lawsuits because plaintiff’s counsel frequently believe that a global settlement will eventually occur, with relatively little or no work required by them. Moreover, where lawsuits proceed separately, appropriate strategy decisions can capitalize on the differential progress of various of the active lawsuits, including targeted motion practice. MDLs, on the other hand, may save a defendant significant litigation expense because there typically is less repetitive discovery, along with consistent discovery and pretrial rulings that are applicable to all federal cases. Federal MDL proceedings may be informally coordinated with or serve as guidance for any applicable state MDL counterparts or individual state cases. The MDL forum and judge, of course, are significant factors in measuring the benefits or disadvantages of MDL treatment, and typically they are not determinable in advance of action by the Judicial Panel on Multidistrict Litigation.
Foreign Government Investigations and Litigation
Depending on the geographic distribution of the product, the company may face government investigations and litigation in one or more other countries. Early in the process, the company will likely need to respond to data demands and requests for information from involved foreign governments. You must develop a country-specific litigation strategy that complements the U.S. litigation and public-relations strategies. Where a single firm has offices in the countries affected, a cohesive response is usually easier to achieve.
Another potential issue to consider is the impact on the company’s import/export licenses and other international trade requirements. Having a foreign country shut down the company’s operations within its borders or quarantine products because of an alleged product safety issue is entirely possible. U.S. due process procedures may not be available, and creative thinking and alternative approaches to minimize or prevent these problems may be required.
In many countries, criminal actions against the company— and even its individual officers—are possible for the sale or distribution of allegedly unsafe products or related activities. Learn what potential criminal laws are implicated, consult with experienced practitioners in the applicable countries, and coordinate the defense of the criminal charges with U.S. investigations, U.S. litigation, and the overall government and public-relations strategies.
Message management is critical. While “no comment” may have been the typical response years ago, it is almost never the best approach today. With nearly instantaneous publication of news and events via the internet, Twitter, Facebook, blogs, and the like, the importance of getting ahead of adverse publicity with the company’s story cannot be overemphasized. Widespread negative publicity increases the likelihood of lawsuits and government investigations.
In addition to facing media inquiries, the company may find itself under extreme pressure to respond to the federal government, state attorneys general, and federal, state, and local agencies—all demanding “immediate” answers and data in the form of civil investigative demands and otherwise. Tremendous pressure will also exist from business partners, distributors, and retailers, many of whom will be facing pressure themselves to respond to the media or consumers or to take action regarding the products. Although U.S. congressional and state attorney general investigations and hearings can sometimes be considered politically motivated grandstanding, they nonetheless certainly could have legal and public-relations ramifications.
In short, communicating with the media and the government— both accurately and timely—is a high priority. However, never sacrifice accuracy for speed. Despite pressure to say something to help resolve the situation, special care must be taken to limit responses to what is known to be factually accurate, together with appropriate indications of concern for and attention to safety. Communications in such situations will be closely examined. If later shown to be inaccurate, they will be used to cast the company in negative terms and deployed against the company in litigation or investigations.
The company’s customers—obviously a key constituency— will also press for responses. They will understandably want to know the scope of the alleged problem and how the company is dealing with it. They also may demand redress for the time and expense they incur in responding to a problem they view as yours. The company must develop and execute a plan to address likely customer issues and concerns.
Another important group requiring attention is the company’s employees. It is important that employee morale remain high and that employees understand that the company is doing not only what is right for the company, but what is right for those who use their company’s products.
Consequently, an overall communications plan must be developed in conjunction with the company’s corporate public-affairs department and outside consultants. Such a plan should anticipate media, government, and public inquiries, and it should dovetail with the company’s overall strategy to resolve the crisis. It should also be designed not only to minimize damage to the company’s reputation but to preserve applicable privileges.
Privileges and Confidentiality
In the heat of the crisis, obtaining accurate information may be your primary concern. But preserving the confidentiality of information and any applicable privileges is critical. Statements to Congress, the CPSC or other U.S. government agencies, or foreign governments likely will not be privileged or confidential. Other statements may be. While the company, of course, needs to communicate both internally and externally about the issues, care must be taken to ensure that inaccurate and damaging statements are not made inadvertently. This applies to all employees, including executives. Many understand that what is said to the media/public is not privileged, but sometimes less care is given to what is said to U.S. and foreign government officials or staff members, investigators, insurers, or employees. Communications with and among these groups must be planned and coordinated to ensure that privileged and confidential information is not divulged or that any potential risk of waiver is minimized.
It also is generally safest to assume that almost everything written or said by company personnel will be discoverable in subsequent litigation. Everyone should understand the consequences of misplaced, inaccurate, or careless language in all communications, including emails. Product issues should not be the subject of offhand comments or callous or sarcastic emails or other communications. Personnel need to be reminded that what they write or email may become alleged “admissions” in the eyes of plaintiff’s counsel, making them witnesses in the litigation and potentially harming the company.
It is likely that various U.S. and foreign government entities will request the production of confidential information. The company may find itself balancing the need to provide necessary information with the need to preserve the confidentiality of that same information. Doing so can be extraordinarily difficult, particularly when a foreign government, with the power to adversely affect or effectively freeze the company’s foreign business operations, demands information that will not be privileged or confidential once disclosed. For business reasons or otherwise, trade-offs sometimes must be made, but they must be debated thoroughly and the consequences fully understood. Care must be taken to obtain appropriate and enforceable confidentiality agreements, where possible, before production is made.
Communications with the company’s in-house counsel in foreign countries also need to be considered. No one-size-fitsall rule applies regarding what is protectable privilege-wise in foreign countries. Foreign countries’ privileges are not necessarily identical to U.S. privileges, and they are certainly not all consistent with each other. Last year, for example, the European Court of Justice held that communications between company management and in-house lawyers are not protected from disclosure or discovery in the context of investigations by the European Commission.6 How far that ruling will ultimately extend may not be certain, but it clearly warrants stringent consideration when communicating about foreignmade product defects with foreign-based in-house counsel.
The company should promptly take steps to maximize its insurance coverage, identifying potentially applicable insurance policies and making appropriate and timely notifications. You will want to quickly understand the relevant terms of any potentially available company policies offering coverage for product recalls, product liability, errors and omissions, and/or directors and officers.
As soon as possible, the company should analyze what may or may not be covered and under what circumstances. For example, some losses must be documented in certain ways under certain types of policies. Investigation costs may or may not be covered, depending on the actual or stated purposes of the investigation and whether they were incurred in connection with actual or anticipated government investigations or product liability or shareholder derivative litigation. Coverage may be affected by offers of indemnification the company makes to downstream business partners. Insurance could also affect selection of outside counsel and the structure of defense costs.
A communications plan with the company’s insurers should be established early in the crisis. Whether coverage is clear or not, insurers may demand facts and other data relating to the company’s products and actions. How that is handled by the company can affect ongoing litigation and the company’s potential exposure. Tying in insurers early may assist in maximizing coverage, or at least in anticipating the insurers’ positions, which may affect decisions about structuring the company’s defenses.
The company may want to consider potential indemnification or other claims against third parties. The success of such claims may depend on, for example, the contract terms, applicable law, the financial wherewithal of the third parties, foreign government attitudes about protecting that country’s businesses and employees, and the company’s desire to pursue such claims. Planning for potential claims should be addressed early in the process, as obtaining necessary evidence and interviews may not be as effective—or even possible— after a lapse of time.
Internal Business Changes
The company also may need to address underlying issues related to the design or manufacture of the allegedly defective product, keeping in mind that the company’s actions might be admissible in subsequent litigation and, at a minimum, are likely to be scrutinized heavily by regulators or other government entities, both in the U.S. and abroad. Company executives may be grilled by a U.S. congressional committee—not to mention the media and plaintiff’s counsel— about whether they identified the cause of the alleged problem and whether and how they are fixing it. Such issues will be uppermost in the minds of politicians, investigators, reporters, and the public.
Whether making changes makes sense depends, of course, on the underlying problem. It also may be influenced by what is necessary to appease Congress or government regulators or to resolve pending litigation. What may make good business sense in any country—and, indeed, what might be the “right thing” to do—must still be done in a manner that, if possible, minimizes subsequent adverse litigation decisions and publicity, takes into account privileges and confidentiality, and considers the impact of the changes on other relevant issues.
The situation becomes more problematic if the company’s foreign-made products must be recalled in the U.S. but are still being sold in other countries. Not only must each of those countries’ health/safety/recall laws be addressed, but other potential actions, such as withdrawing the products from those markets, must be considered. Whether alternative avenues, e.g., informal recalls or withdrawals, are appropriate will depend on the relevant countries’ laws, regulations, and culture. Retaining a law firm with relevant experience and a broad international reach is vital.
You may lose your weekend, and many others. And the difficulty of the tasks you face may appear overwhelming. But if you approach the crisis with a coherent, well-developed, and well-executed strategy and organize and staff the effort wisely, not only can you help your client successfully navigate the crisis, but it can become a rewarding personal and professional experience.