By Joseph F. Bermudez, Esq. and Robert F. Roarke, Esq. of Wilson Elser
Food companies are asking whether they can gain compensation from the United States government after a product recall. While the FDA Food Safety Modernization Act (FSMA) does provide for the possibility, a recent ruling by the U.S. Court of Federal Claims advises that compensation in such circumstances continues to be very rare. To avoid the “significant financial impact” of crisis management events involving governmental food safety regulatory actions, companies must consider the protection offered by product contamination and product recall policies that provide coverage for such insured events.
Anyone familiar with product contamination and product recall events will remember the 2008 Tomato/Pepper recall. In an attempt to establish the cause of an outbreak of salmonella-related illnesses, the U.S. Food and Drug Administration (FDA) issued a series of advisories or warnings in June and July 2008 informing consumers that the outbreak was potentially linked to the consumption of certain types of tomatoes. The FDA’s warnings over the six-week period economically devastated the tomato produce industry. The warnings’ ripple effect significantly impacted a wide range of foods and companies throughout the food industry. Eventually, the FDA determined that certain peppers, not tomatoes, were the cause of the outbreak.
In 2008, Dimare Fresh, Inc. (Dimare), a grower, packer and shipper of tomatoes in Florida and Georgia, claimed that it suffered significant economic losses because of the FDA’s outbreak response and the resultant collapse of the tomato produce market. Dimare brought an action in the U.S. Court of Federal Claims, Dimare Fresh, Inc. v. The United States (U.S. Ct., Fed. Cl., Sept. 18, 2014), against the United States government arguing that the FDA’s actions amounted to a regulatory taking and that it should be awarded compensation for its economic losses.
In its decision, the court initially addressed Dimare’s claim by analyzing the potential legal theories under which such a claim could be brought. In addressing the possibility of alleging that the FDA negligently misrepresented the danger of consuming tomatoes, the court advised that the discretionary nature of FDA warnings typically renders the FDA immune from tort liability.
Regulatory Taking Claim
As the court dismissed the possibility of the claim sounding in tort, it focused on Dimare’s claim of a regulatory taking. After examining a long series of related decisions, the court ultimately found that Dimare’s claim was not plausible and reiterated a general rule or principle in regard to the FDA’s actions in outbreak situations:
A regulatory takings claim is not plausible and cannot proceed when the government action at issue has no legal effect on the plaintiff’s property interest. Advisory pronouncements, even those with significant financial impact on the marketplace, are not enough to effect a taking of property under the Fifth Amendment.
In upholding this long-standing rule, the court dismissed Dimare’s logical and practical arguments. Though Dimare claimed that the FDA’s advisories amounted to a hold of the tomatoes “until they perished,” the court disagreed and found that the advisory announcements did not rise to the level of a quarantine. Dimare also argued that the FDA had the ability to seize the tomatoes, enjoin their sale or even bring criminal proceedings if the companies did not heed its warnings. However, the court found that the FDA never exercised such powers. Dimare further contested that the practical consequences of the warnings created a taking. While the court agreed that government action can act as the “functional equivalent” of a taking, the case law supports that governmental public statements and advisories are not regulatory takings if they have no legal effect on property interests. Based on the long string of decisions in the government’s favor, the court dismissed Dimare’s action against the government.
Governmental regulatory actions may have “significant financial impact on the marketplace.” For many companies, the impact could be catastrophic. In the instance of a governmental product advisory, a standard insurance portfolio of general liability and property policies offers no protection. Going forward, companies would be well advised to consider governmental recall and adverse publicity coverages that are contained in product contamination and product recall policies. Otherwise, the next governmental regulatory action may be catastrophic to their bottom line.