California Supreme Court’s Decision

On May 20, 2015, the California Supreme Court denied Windsor Food Quality Company Ltd.’s petition for review of the decision of the Court of Appeal for the Fourth Appellate District of California that denied coverage under a PCI policy related to a ground beef recall. See Windsor Food Quality Co. Ltd. v. The Underwriters of Lloyds of London et al., No. S225719, California Supreme Court. California’s highest court denied Windsor’s petition for review without explanation. In February 2015, in a 2–1 decision, California’s Fourth Appellate District affirmed a trial court’s decision in favor of QBE Insurance(Europe) Limited and the Underwriters of Lloyd’s of London. The intermediate appellate decision addressed Windsor’s claim for insurance coverage under a PCI policy, which included coverage for “accidental product contamination” and “malicious product tampering.”

Trial Court Decision

Windsor’s claim for insurance coverage arose out of a ground beef recall by Westland/Hallmark Meat Company. Windsor used Westland’s ground beef as an ingredient in its Jose Ole frozen food products. The ground beef was recalled based on potential risks related to the company’s use of disabled cattle that may have been infected with mad cow disease or other maladies. As a result of the issues with Westland’s product, Windsor recalled its own products that incorporated Westland beef, incurring approximately $3 million in costs.

Underwriters denied Windsor’s claim for coverage because they determined the recall did not constitute an “accidental product contamination insured event” as such term was defined in the policy. Windsor subsequently filed a declaratory judgment action against the insurers in California Superior Court of San Bernardino County, entitled Windsor Food Quality Company Ltd. v. The Underwriters of Lloyds London, CA Super. Ct. No. CIVRS905013 (Feb. 6, 2015).

On summary judgment, the trial court found no disputed issues of fact and no evidence of a public health risk or of product tampering. The trial court also found that the recalled products were not an “insured product” under the PCI policy.

Fourth Appellate District of California Decision

On appeal, the Court of Appeal for the Fourth Appellate District of California found the term “insured product” unambiguous, which resulted in favorable rulings for the insurers. See Windsor Food Quality Co. Ltd. v. Underwriters of Lloyds of London, 234 Cal. App. 4th 1178 (Feb. 6, 2015). The court ruled that any contamination or tampering must take place during or after manufacture but not before Windsor’s production processes. In support of this ruling, the court cited to the decision rendered in Caudill Seed & Warehouse Co. Inc. v. Houston Cas. Co., 835 F.Supp.2d 329 (W.D. Ky. 2011).

The court found that the U.S. Department of Agriculture’s recall was based on Westland’s failure to notify the USDA about its use of disabled cows, not because there had been contamination or tampering. Therefore, the court ruled that there was no contamination or tampering of Westland’s or Windsor’s products and, consequently, no malicious product contamination.

In addition, the court held that there had not been an “accidental product contamination insured event.” As the court found no coverage under the PCI policy, it also dismissed the bad faith causes of action.

The court found the PCI policy’s wording unambiguous and held that the PCI policy is not a recall insurance policy, citing a number of decisions in support of this holding.

The dissent asserted the language in the policy was ambiguous and therefore should be construed against the insurer.

Far-Reaching Implications

The California Supreme Court’s refusal to review the appellate court’s decision merely adds the Windsor Food decision to an increasing line of decisions finding no coverage under PCI policies for incidents involving only potential and not actual contamination. However, at this critical time, the decision has far-reaching implications for food companies, experienced PCI brokers and PCI insurers.

The U.S. Food and Drug Administration Food Safety Modernization Act critically impacts the supply chains that provide 80 percent of the food consumed in the United States. The first and most significant regulations addressing Preventive Controls for Human Food and Animal Food will be issued on Aug. 30, 2015. Additional regulations addressing all aspects of the food industry under the U.S. Food and Drug Administration’s jurisdiction will be issued over the course of the following months. The companies that provide the vast majority of food to U.S. consumers will have one year to implement and complete overhauls to their operations so they are in line with the new regulations. The issuance and enforcement of these regulations will be a watershed event not only for the food industry but also for PCI brokers and insurers.

PCI was initially developed to fill the gaps in the standard insurance portfolio with respect to product contamination and recall crisis events. General liability and property policies, the policies usually found in a company’s standard portfolio, either do not provide coverage or provide minimal coverage for costs involved with a product recall crisis event and the economic costs and loss of profit involved can be catastrophic.

Many companies are unprepared and unable to survive product contamination crisis events and the number of companies involved in these events will increase significantly once the new regulations come online.

More importantly and critical to the majority of food companies, PCI policies offer a panel of experts to midand small-cap companies, which could not otherwise afford the expertise necessary to survive a recall crisis event. PCI policies provide an insured with a hotline number to a panel of experts, including public relations, government agency relations, marketing specialists, scientists, supply chain specialists and lawyers, who can parachute in and provide critical assistance during a crisis event. Additionally and significantly in regard to the issuance of the new regulations, the panel of experts can be used before a crisis occurs to assist companies with the overhaul of their operations. Under most PCI policies, these expert or crisis consultant costs are offered outside of the policy’s limits.

Conclusion

The Windsor Food decisions come as food companies and PCI brokers and insurers prepare for the regulatory watershed event and PCI wordings are being reviewed in the context of potential contamination claims. While government recall and adverse publicity coverages are listed among the coverages that have expanded standard PCI offerings, wordings are also being examined to clarify what events are covered under PCI policies. Food companies must discuss with experienced PCI brokers and underwriters which wordings and coverage offerings best suit their operations based on their position in the industry and their place on respective supply chains.

Ultimately, the most important question a risk manager will ask is, why does my company, which excels at quality assurance, need PCI? The answer is simple. The food regulatory environment is literally going through a climate change the like of which has not been seen for nearly a century. We have already witnessed increased regulatory activity as the number of recalls announced on governmental food agencies’ websites has significantly grown since FSMA’s passage and many of the listed companies are the best in the business.

On Aug. 30, 2015, new regulations will commence the overhaul of the food industry and, more importantly, the operations of every affected company. In preparation for this hostile regulatory environment, companies up and down supply chains will seek additional assurances in the event of a product contamination or recall crisis event. Standard insurance portfolios will provide neither sufficient protection nor the necessary expertise to assure survival in a crisis event.

Under the new regulations, food companies will find an increasingly hostile regulatory environment and will need to enhance standard insurance portfolios. Based on the size of the company, the area of the industry in which it operates and its place on the supply chain, each company will need to consider different PCI policy wordings and coverages. They should engage PCI-experienced brokers and underwriters to assist with the emerging regulatory risks.

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—By Joseph F. Bermudez and Jessica C. Collier, Wilson Elser Moskowitz Edelman & Dicker LLP

Joe Bermudez is regional managing partner of Wilson Elser’s Denver office.

Jessica Collier is an associate in Wilson Elser’s Denver office.

This article is for general information purposes and is not intended to be and should not be taken as legal advice.

The proliferation of social media in the workplace has increased the risk of potential liabilities for companies. Specifically, there is a growing amount of litigation arising out of the use of confidential or proprietary information shared on social media websites. Employers have been facing, and will continue to face, a range of claims brought on by the use of social media in the workplace. Such claims may come in the form of invasion of privacy, copyright and trademark infringement, defamation, securities disclosure, advertising and consumer protection, harassment, discrimination, professional negligence and a continually evolving list of other claims.

Employers need to be aware of potential confidentiality breaches by both current and former employees. In Sasqua Group, Inc. v. Lori Courtney, et al., Case No. 10CV00528 (U.S.D.C. E.D.N.Y. 2010), a financial services company’s former managing director, Lori Courtney (Courtney), left the company to start her own financial services firm. Several of Sasqua’s clients moved their business to Courtney’s new firm. Sasqua then sought a temporary restraining order against Courtney, claiming that its trade secrets included “client contacts, their individual profiles, their hiring preferences, their employment backgrounds, and descriptions of previous interactions with client contacts.” Courtney countered with the argument that almost all potential clients in their industry have their information available on “Bloomberg, LinkedIn, Facebook or other publicly available databases.” Ultimately, the court adopted the Magistrate’s Recommendation that the information not be afforded trade secret protection and that injunctive relief be denied. Sasqua Group, Inc. v. Courtney, 2010 U.S. Dist. LEXIS 93442 (E.D.N.Y. Aug. 2, 2010).

Sasqua is an example of how the proliferation of information shared on social media sites can make it increasingly difficult for companies to maintain that sensitive information is either proprietary or confidential.

Another consideration regarding proprietary information is how to handle the information once it either intentionally or inadvertently becomes public. In Katiroll Co., Inc. v.Kati Roll and Platters, Inc., 2011 U.S. Dist. LEXIS 85212 (D.N.J. Aug. 3, 2011), the court considered a trademark infringement dispute between two restaurants. During litigation, the defendant removed his Facebook profile, which had included a photograph displaying the infringing trade dress at issue. Plaintiff alleged that the evidence had not been properly preserved. The court ultimately found that defendant had removed his Facebook pages at plaintiff’s request due to the infringement issues and, consequently, any spoliation of the evidence was unintentional. The court ordered that the Facebook picture be publicly visible again for a short period of time in order for plaintiff to obtain whatever it needed. Consequently, even if a party inadvertently posts confidential information, there may be legal ramifications associated with the subsequent removal of that information. If lawsuits are filed, then the confidential information or the misrepresentation of proprietary information will receive unwanted exposure and attention, regardless of who prevails in the lawsuit.

Another concern arising out of the dissemination of proprietary information through social media was illustrated in the recent case of PhoneDog v. Kravitz, Case No. C 11-03474 (N.D. Cal. 2011) in which a mobile news and reviews company sued former employee Noah Kravitz (Kravitz) over who owned a Twitter account. The Twitter account was started in association with PhoneDog, but was then used by Kravitz as his own Twitter account.This raises the issue of who actually owns a social media account. Although the matter remains pending in the Northern District of California, the court’s denial of Kravitz’s motion to dismiss the trade secret claim highlights the possibility of a forthcoming determination on a crucial question of law in the evolving field of social media claims.

Understandably, many employers are concerned that their employees will share proprietary information through social media sites and have established policies prohibiting such conduct. In response to such policies, the National Labor Relations Board (NLRB) maintains that a confidentiality policy is illegal if it limits employees’ ability to communicate with others regarding their working conditions. According to the General Counsel of the NLRB, a social media policy that limits use of the company’s name “without prior approval of the law department” is unlawful. (See Officeof the General Counsel, Report of the Acting GeneralCounsel Concerning Social Media, January 24, 2012.)

Therefore, under Section 7 of the National Labor Relations Act, employees have the right to use a company name and logo on items such as electronic or paper leaflets, cartoons or picket signs as long as they are engaging in protected, concerted activity.

On the other hand, one administrative law judge, in G4S Secure Solutions (USA) Inc., Case No. 28-CA- 23380 (March 29, 2012), upheld an employer policy that prohibited placement of photographs or videos of GS4 employees in uniform or at the workplace on social networking sites without express permission. In supporting the employer’s action, the court concluded that the employer had a legitimate reason for restricting the posting of pictures of its employees on social media sites and that “[t]o read it as a prohibition on Section 7 activity strikes me as a stretch.” In contrast, that very same court concluded that the employer could not restrict employees from using social media sites as a vehicle for commenting on work related matters.

It is important for companies to proactively implement social media policies regarding confidential and proprietary information that will serve to protect their interests even further in this ever-changing environment. Such policies should be carefully tailored to abide by the numerous laws and authorities that are emerging in this area. Just having the appropriate social media policies is not enough – companies need to appropriately communicate those policies to their employees and train employees\ on compliance. Further, companies that fail to secure appropriate social media insurance coverage to safeguard their interests will likely find themselves perilously exposed in a world driven by this exploding area of liability.