The Economics of Food Purity Laws

A. Introduction.

Economic adulteration, which is the practice of using inferior, cheaper ingredients to cheat consumers and undercut the competition, has been an “enduring problem…[s]ince ancient times.”[1] Economic adulteration violates Section 402(b) of the FD&C Act, 21 U.S.C. §342(b).

Hygienic adulteration is the presence in food of any substance that has not been approved for use in food in accordance with the procedures prescribed by Section 409 of the Act, 21 U.S.C. §348.  Hygienic adulteration may be the result of negligence (e.g., defective canning practices that create botulin), or it may be intentional and economically motivated—for example, using Oleum 320/IDEA to extend the shelf life of orange juice.  Hygienic adulteration violates Section 402(a)(2)(A) of the Act, 21 U.S.C. §342(a)(2)(A).  

The FDA has six options for enforcing the laws against adulteration, five of which are explicitly authorized by statute.  The sixth option, the widely misunderstood system for the voluntary recall of contaminated or defective foods, is a creature of administrative regulation. 

The deterrent value of the FDA’s enforcement options sharply declined during the Carter Administration and throughout the 1980s, as Congress slashed the FDA’s resources for enforcement even as it was expanding the agency’s responsibilities. 

B. The five enforcement options explicitly authorized by statute.

The FDA has five statutory options for enforcing the laws against adulterating foods.  First, under Section 304(a)(1) of the Act, 21 U.S.C. §334(a)(1), the agency can initiate a seizure proceeding against adulterated or misbranded articles anywhere in the stream of interstate commerce—from wholesalers, retailers or consumers. 

Second, under Section 302 of the Act, 21 U.S.C. §332, the FDA can seek an injunction to restrain violations of the Act. 

Third, under Section 303(a)(2) of the Act, 21 U.S.C. §333(a)(2), the FDA can press felony criminal charges against the corporate officials or employees who adulterate food intentionally.  If convicted, they can be imprisoned for up to three years and fined up to $10,000 for each offense.

Fourth, under Section 303(a)(1) of the Act, 21 U.S.C. §333(a)(1), the FDA can bring misdemeanor criminal charges against corporate officials who did not know about the adulteration, but who were in a position to prevent or remedy the adulteration and failed to do so.  If convicted, they can be imprisoned for up to one year and fined up to $1,000. 

Persons charged under Section 303(a)(1) are subject to a strict liability standard. United States v. Dotterweich, 320 U.S. 277 (1943).  They can escape liability only if they affirmatively show that it was “objectively impossible” for them to prevent or remedy the violation.  United States v. Park, 421 U.S. 658 (1975).

Fifth, under Section 705 of the Act, 21 U.S.C. §375, the FDA can disseminate information about violations of the Act, either before or after a judicial or administrative hearing on the merits of the alleged violation. 

Post-trial publicity is authorized by Section 705(a), which directs the FDA to publish periodic “reports summarizing all judgments, decrees, and court orders…rendered under [the Act], including the nature of the charges and the disposition thereof.”  Post-trial publicity is viewed as an especially effective deterrent “because public knowledge that the product has been involved in a violation of the law serves to prejudice it in the eyes of wholesalers and retailers and to some extent the consumers, and the data contained in the notices of judgment are doubtless made use of by trade competitors.”  Lee, The Enforcement Provisions of the Food, Drug, and Cosmetic Act, 6 LAW & CONTEMP. PROBS. 70, 90 (1939).  See generally Pines, Regulatory Letters, Publicity and Recalls, 31 Food Drug Cosmetic L.J. 352 (1971).

More controversial is the agency’s authority under Section 705(b) to publicize alleged violations without any prior judicial or administrative hearing whenever, in the FDA’s opinion, there is an “imminent danger to health, or gross deception of the consumer.”  The FDA exercises this authority

only when it believes the public needs to be alerted about a serious hazard.  For example, if a canned food product, purchased by a consumer at a retail store, were found by FDA to contain botulinal toxin, an effort would be made to retrieve all the cans in circulation, including those in the hands of consumers.  As part of this effort, the Agency also could issue a public warning via the news media to alert as many consumers as possible to the potential hazard.[2]  (emphasis added)

Critics contend that the FDA’s Section 705(b) powers are unfair because sovereign immunity shields the FDA from liability for libel and slander.  They point out that when the FDA, in good faith or bad faith, relies on erroneous information that disparages a company or an industry, the aggrieved company or industry has no recourse.  Johnson, Publicity and the FDA, an Update, pp. 4-7 (1997)[“Johnson”].[3]

C. The cranberry scare that begat the FDA’s voluntary recall program. 

Protecting consumers from dangerous or mislabeled food is a primary mission of the FDA.  Fulfilling this mission requires that the agency be able to swiftly remove defective products from the market. The traditional procedures for product removal—seizures and injunctions—require a due process hearing and court approval, so they can be costly and time-consuming.  A public warning issued under Section 705(b)—just a “press release or a news conference requiring very little time or money”—has proven to be a cost-effective alternative to the traditional procedures. Johnson, p. 3.

Section 705(b) became law in 1938, but the first national warning about contaminated food came 21 years later.  Shortly before the 1959 Thanksgiving holiday, the Secretary of Health, Education and Welfare advised consumers not to purchase cranberries grown in Oregon or Washington, saying that they might be contaminated with a weed killer that had been found to cause cancer in laboratory rats.  The Secretary had no information that cranberries from other states were contaminated.  Nevertheless, in response to a question from a reporter, the Secretary declared that he would not be eating cranberries that Thanksgiving. Gellhorn, Adverse Publicity by Administrative Agencies, 86 Harv. L. Rev. 1380, 1408 (1973).

The nation followed the Secretary’s lead, with economic consequences that devastated cranberry growers everywhere, not just those in Oregon and Washington.  Virtually the entire holiday crop of cranberries, valued at $21.5 million ($144.8 million in 2006 dollars) went unsold. 

Ever since the so-called cranberry scare, “the mere threat of a public announcement [has] functioned to help enforce a voluntary recall procedure.” Gellhorn, 86 Harv. L. Rev. at 1408; accord, Johnson, p. 3, citing James T. O'Reilly, Federal Information Disclosure, §25.02 (2d ed. 1995). 

D. The three classes of voluntary recalls.

The voluntary recall program that evolved out of the cranberry scare has been codified at 21 C.F.R. §7.3.  This regulation defines a recall as “a firm’s removal or correction of a marketed product that the FDA considers to be in violation of the laws it administers and against which the agency would initiate legal action, e.g., seizure.”  21 C.F.R. §7.3(g). 

The FDA issues a weekly Enforcement Report that lists current recalls.  The list describes the product that is being recalled, any identifying codes, the recalling firm or manufacturer, the reason for recall, the volume of product in commerce, and the distribution of the recalled product.  The FDA also conducts health hazard evaluations of products under recall and classifies recalls on the basis of their potential health threat.  FDA assigns one of three numerical designations to the recall to indicate the relative degree of health hazard presented by the product being recalled. 21 C.F.R. § 7.3(m).  

A recall is classified as Class I if there is a reasonable probability that use of, or exposure to, the violative product will cause serious adverse health consequences or death. 21 C.F.R. § 7.3(m)(1).  Examples of Class I recall classifications are a food with undeclared allergens,[4] ice cream that contains undeclared egg;[5] and over-the-counter dietary supplements containing undeclared prescription ingredients.[6]

A Class II recall is a situation in which the use of, or exposure to, the violative product may cause temporary or medically reversible adverse health consequences or where the probability of serious adverse health consequences is remote. 21 C.F.R. § 7.3(m)(2).  Examples of Class II recalls include: eye drops manufactured under non-sterile conditions;[7] food products containing undeclared colors;[8] and egg rolls that contain glass fragments.[9] 

A recall is classified as Class III if the use of, or exposure to, the violative product is not likely to cause adverse health consequences.  21 C.F.R. § 7.3(m)(3).  Examples of Class III recalls include lack of English labeling in a retail food, off-taste or color in a bottled drink, or the plastic material delaminating on a container.[10] 

The FDA has no general authority to order a recall of adulterated or misbranded foods, even if it has reason to believe that a firm’s product presents an “imminent danger to health or gross deception of the consumer.” Curatolo, Pop Tarts and Elixirs of Death: An Examination of FDA’s Recall Authority, pp. 10 (2005)[“Curatolo”].[11]  However, if a firm refuses an agency request to recall a dangerous or deceptive product, the FDA could then exercise its power under Section 705(b) of the Act to disseminate information about the product that “in the opinion of the Secretary, [involve] imminent danger to health, or gross deception of the consumer.” 

Industry believes that cooperating with an FDA request for a recall will induce the FDA to tone down the publicity surrounding the recall. [12] Curatolo, p. 22. 

E. Survey of the public’s acute sensitivity to health risks associated with food:  1966-1991. 

The 1959 cranberry scare is an early example of the public’s acute sensitivity to health risks associated with food and the immediate, and often irreversible, economic effects that ensue.  Three explanations have been offered for this sensitivity. 

Summarized below are five more examples of the public’s sensitivity to health risks associated with food.  In four of the cases, the public’s sensitivity to the health risk led to irreversible economic damage.  In the fifth case, the firm suffered steep losses, but it avoided permanent damage by swiftly accepting responsibility and offering to make consumers whole through a refund program. 

1. 1966: Borden’s recall of Starlac powdered milk.

Starlac was a leading brand of powdered milk.  In early October 1966, the FDA detected salmonella contamination at a Borden’s plant in Dixon, Illinois.  On October 27, Borden notified its district offices that the product was being recalled.  The first public report of the recall came on November 3, 1966, in the New York Times.  By then, Borden believed Starlac had been removed from virtually all of the 67,000 retail stores that carried it.  In other words, Borden’s had acted swiftly and responsibly. 

Nevertheless, the market’s reaction to the contamination compelled Borden to withdraw the Starlac brand from the market.  “The negative publicity…kill[ed] the Starlac brand-name.  The entire powdered milk industry, which had thrived due to the low cost and nonfat nutrition of the milk, was never the same.”  Curatolo, pp. 24-25.

2. 1971: Bon Vivant’s recall of vichyssoise soup.

In June 1971 a husband and wife ate soup from a can of Bon Vivant vichyssoise contaminated with botulin.  The husband died; the wife became seriously ill.  On July 2, 1971, the FDA released a public warning and requested a recall of the 6,444 cans made in the same batch as the can known to be contaminated.  The recall was soon extended to all Bon Vivant products after the FDA found abnormally high percentages of defective cans in the company’s other product lines.  Another reason for extending the recall was that Bon Vivant’s cooking records had so many “inaccuracies, inconsistencies, and instances of incompleteness [that they] render[ed] the records totally worthless” in determining whether products were properly sterilized.  (New York Times 9/16/71, quoting FDA affidavit).

After the recall was completed, it was determined that of the tens of thousands of cans recalled, only five were contaminated with botulin.  Nevertheless, the publicity surrounding the incident “destroyed public confidence in the company and its trademark.”  Gellhorn, 86 Harv. L. Rev. at 1413.  Bon Vivant filed for bankruptcy shortly after the recall was announced.

3. 1971: Campbell’s recall of chicken vegetable soup.

In August 1971 the Campbell Soup Company discovered botulin in a test can of chicken-vegetable soup.  The company notified the FDA, recalled 4,799 cans of soup, and offered refunds to all purchasers.  Unlike Bon Vivant, Campbell had reliable cooking records that allowed for a speedy and effective recall.

The refunds cost Campbell $10 million in gross receipts ($50 million in 2006 dollars) and $5 million  in net profits ($25 million in 2006 dollars).  (New York Times 11/20/71, p. 41.)  However, Campbell did not suffer any long-term adverse effects. Gellhorn, 86 Harv. L. Rev. at 1414.

The ameliorative steps taken by Campbell are not a practical alternative for a company that knowingly adds an unsafe additive to food, as Everfresh did.

4. 1986-89: The Alar scare.

The chemical daminozide, sold as Alar, is sprayed on certain eating apples to ensure that the fruit ripens uniformly and to extend its shelf life and fresh appearance.  In 1986 and 1987 Ralph Nader publicized laboratory tests showing that Alar created a risk of cancer in humans. 

The economic impact of this news was gradual but steep.  Over the next two years, sales of Alar dropped by 75%.  Leading apple processors—H.J. Heinz Company, Beech-Nut Nutrition Corp., Gerber Products, Mott’s U.S.A., Welch Foods, among others—stopped purchasing Alar.  By the end of 1988 Alar was used on only 5% of the nation’s apple crop.  Shabecoff, “Hazard Reported in Apple Chemical,” New York Times (2/2/89).  

On February 2, 1989, the Environmental Protection Agency finally announced that Alar would be removed from the market, but not for another 18 months.  This announcement caused no discernable reaction until February 26, 1989, when Sixty Minutes broadcast a report that highlighted the link between Alar and cancer in children. 

The apple market collapsed in the wake of the 60 Minutes report, even though Alar had disappeared from all but 5% of the apple supply.  School boards in New York, Atlanta, San Francisco, and Chicago stopped distributing apples altogether.  Apple growers in Washington, who produce 60% of the nation’s apple crop, lost at least $125 million in the six months after the 60 Minutes report.  “Health Official Rebukes Schools Over Apple Bans,” New York Times (3/16/89).  Apple prices fell to $7 for a 42 pound box, well below the $12 break-even level, and remained depressed for the rest of 1989.  “Apple Growers Bruised and Bitter After Alar Scare,” New York Times (7/19/91). 

5. 1991: Peninsular Products recall of orange juice treated with Oleum 320/IDEA: 

In February 1991, during a routine inspection at Peninsular’s plant in Lansing, Michigan, an FDA agent saw an employee adding something from a barrel to a batch of chilled orange juice.  The barrel contained orange pulp wash, which isn't permitted by the standard of identity  for pure orange juice. [13]  This observation triggered a search warrant.  The search turned up evidence that Peninsular was adding Oleum 320/IDEA to chilled orange juice that was diluted with inferior ingredients. Ropp, “Juice Maker Cheats Consumers of $40 million,” FDA Consumer (Jan-Feb. 1994).

On March 7, the Michigan Department of Agriculture seized all of the orange juice processed at Peninsular on the date of the inspection.  Then, on March 22, Peninsular began recalling its juice products still on the market. About 94,400 pounds of the products were destroyed March 27, 28 and 29, by the firm under supervision by the Michigan Department of Agriculture.  (Id.)

The FDA published a notice of the recall in its weekly enforcement report.  Shortly after the recall was initiated, Peninsular shut down operations and filed for bankruptcy. 

F. The FDA’s limited resources, from the Carter Administration onward, for enforcing the food purity laws. 

The FDA has a mandate to “ensure the accuracy and safety of approximately 25% of all consumer products in the market.”  McFarland, p. 8.  Since the days of the Carter Administration, however, there has been an ever-widening gap between the FDA’s responsibilities and the resources available to the agency. Hilts, Ailing Agency—The FDA and Safety; A Guardian of U.S. Health is Buckling Under Stress, New York Times (12/4/89). This disparity has forced the FDA to prioritize its enforcement objectives.  The agency’s high priorities became “health hazards, filth, and nutrition;” food economics and food standards became the agency’s “lowest priorities.”  McFarland, p. 9.

The scarcity of FDA resources has lead to predictable holes in FDA attention and coverage.  McFarland, p. 24.  For example, between 1980 and 1988, the number of inspections of plants and warehouses dropped more than 40%, from 32,778 to 19,876.  During the same period the number of seizures, injunctions, and criminal prosecutions dropped from 582 to 237. Hilts, New York Times, (12/4/89). 

Scarce resources impaired the FDA’s most important enforcement tools—the laboratories and equipment the agency uses to assess the safety of food, drugs, and medical devices.  A federal review of the agency’s performance during the 1980s (hereafter referred to as the “Edwards Committee Report”) characterized the condition of the FDA’s laboratories as “abysmal—overcrowded, poorly maintained, hazardous and inefficient.  Much of their scientific equipment is obsolete and technologically inadequate.” Pear, “Panel Calls Federal Drug Agency Unable to Cope with Rising Tasks,” New York Times (4/11/91).   

The holes in FDA enforcement coverage encouraged firms to approach compliance with food and drug laws using a cost/benefit calculus.  Firms compared the benefits to be gained from non-compliance versus the costs, such as fines and seizures of offending items, discounted by the chances of getting caught. (Id. at 25.)  See also, R. Posner, Economic Analysis of Law 219-27 (6th ed. 2003).

[1]  M.T. Law, History of Food and Drug Regulation in the United States, in EH.Net Encyclopedia, published on-line at http://eh.net/encyclopedia/article /Law.Food.and.Drug.Regulation.

[2] Center for Food Safety and Applied Nutrition, FDA, Industry Affairs Staff Brochure: FDA Recall Policies (June 2002).

[3] Johnson’s paper is available on line in Hutt’s Electronic Book at http://leda.law.harvard.edu/leda/data/183/sjohnson.html

[4] Center for Food Safety and Applied Nutrition, FDA, Industry Affairs Staff Brochure: FDA Recall Policies, (June 2002). 

[8] See FDA Enforcement Report, No. 05-15 (Apr. 13, 2005), http://www.fda.gov/bbs/topics/enforce/2005/ENF00895.html

[10] Center for Food Safety and Applied Nutrition, FDA, Industry Affairs Staff Brochure: FDA Recall Policies, at http://vm.cfsan.fda.gov/~lrd/recall2.html (June 2002). 

[11] Curatolo’s paper is published on line in Hutt’s Electronic Book, http://leda.law.harvard.edu/leda/data/729/Curatolo05.html. The FDA does have authority to recall certain non-food products under certain circumstances, such as medical devices, infant formula, biological products, and human tissue intended for transplantation. (Id. at 32-46.)

[12] There are other economically sound reasons for cooperating with the FDA in a voluntary recall.  Getting the violative product off the market as quickly as possible may avoid potential product liability lawsuits or civil liability.  If lawsuits are inevitable, “using the fastest, most effective procedures” for removing an arguably hazardous product from the hands of potential plaintiffs “may minimize damages and certainly punitive damages.”  Curatolo, p. 22.

[13] A standard of identity is the recipe that establishes the criteria that must be met before a food can be labeled in a certain way.  The standard of identity for orange juice from concentrate is codified at 21 C.F.R. §146.145