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Is Your Company Prepared for a Product Recall?

Summary: In the past several years, the Consumer Product Safety Commission, the Department of Transportation, the Department of Agriculture, the Food and Drug Administration, and other ...

In the past several years, the Consumer Product Safety Commission, the Department of Transportation, the Department of Agriculture, the Food and Drug Administration, and other government bodies have mandated recall of hundreds of products from the market.

In some cases, companies have voluntarily recalled products due to their potential for risk of injury. Because a recall can potentially threaten a company's reputation, and in severe cases its very existence, every company selling products should anticipate and plan for a product recall.

The company should foresee and prepare for potential financial hardships and liability resulting from a product recall. This article provides a brief discussion of logistical, legal, and financial planning for a product recall.

Logistics of a recall

Anticipate a recall:

The first step in preparing for a product recall is formulating a plan to anticipate and conduct product recalls. The goal should be to remove from the market as soon as possible any product, which because of a defect in manufacturing, design, warnings or instructions, may cause injury or damage. The plan could provide for return of a product for a cash refund or a replacement, or for repair of the product.

An employee such as a quality control officer or an in-house attorney with at least basic knowledge of the applicable laws should be tasked with developing the plan. The designated person should establish company policies and procedures for recalls, in consultation with the government body regulating the product, if any, and/or an attorney with the relevant experience.

Policies and procedures should focus on early detection of products that might need to be recalled. To identify these products early, compliance with applicable federal and state regulations, product defects, customer complaints and injuries caused by the product must be monitored on a regular basis. The data should be analyzed using objective criteria, such as number of customer complaints, number of injuries, and severity of the injuries, to identify potential products for recall.

Stop selling the product:

Once a company voluntarily decides to recall a product it should immediately stop manufacturing, distributing and selling the product. All unsold product in the inventory must be identified and isolated in the entire distribution chain so that it will not enter the market.

Follow recall procedures:

Several government bodies have jurisdiction over specific categories of products and have established recall procedures. For example, the Consumer Product Safety Commission, which has jurisdiction over a great many "consumer" products, requires reporting of product recall including identification and description of the product, contact information of the manufacturer, nature and extent of the defect and injury associated with the product within a certain time of obtaining "reportable information," and provides guidelines for when, what, and where to report. The applicable procedures must be carefully analyzed and followed.

Communicate the recall:

A recall notice should clearly identify the product, provide reasons for the recall, and accurately and concisely state the potential for injury that could result from use (or in the case of warning/instruction defect, misuse) of the product.

The recall notice should be communicated to all customers and to all persons and entities in the distribution chain, including manufacturers, sellers, suppliers, distributors, and retailers. The notice should be sent to all customers to their last known address. In addition, it should be posted in the company's stores and on the websites. Efforts must be made to publicize the recall via electronic and social media.

Monitor effectiveness of the recall:

If a government body has jurisdiction over the product, it may require the company to provide periodic progress reports for assessing the effectiveness of the recall. Such reports may include number of customers notified, number of products returned to the company, and number of products disposed.

Regardless of the requirements, the company should monitor the recall responses and continue to reach out to the customers and to all parties in the distribution chain until the recall has been executed to the best of the company's ability and as many products as possible have been removed from the market.

Legal Planning

The company should formulate a legal plan to minimize liability in the event of a lawsuit. Distinct recall procedures and requirements might apply if there is a government body that regulates the product. To be fully compliant with the required procedures for recalling the specific product, the company should work closely with the regulating body, if any, and/or attorney with the relevant experience.

Regardless of any government requirements, the company should retain production records, quality control records, product defect reports, product registration cards, distribution records, documents related to customer complaints, warranty returns, and insurance claims.

In its contracts with parties in the distribution chain, the company should provide for indemnity from appropriate parties for potential product liability-related claims against the company. The company should also seek product liability insurance to cover its liability in the event of any lawsuits or claims.

Companies can also secure product recall insurance policies to cover the direct costs of recalls. If a company does secure insurance to cover a recall, it should be very familiar with the insurance policy's requirements about when the carrier must be notified of any actual or planned recalls; a failure to timely notify the carrier could result in a forfeiture of coverage.

Financial Planning

A recall may threaten a company's viability as a business. Therefore, financial planning for a recall is a must. As evident from the above, anticipating recalls and executing recall plans require investment of time, effort, and resources. The company's business plan should anticipate recalls and budget resources for the same. The business plan should allocate funds for product liability insurance coverage.

Dependence on any one product for revenues should be minimized. Back-up plans should be in place to launch alternate products that could potentially make up for the loss of revenues due to a product recall.

The above is a basic framework for planning for and conducting a recall. The detailed procedures that may need to be followed for a specific product recall will vary in each circumstance and should be addressed on a case-by case basis.

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Publication:Inside Counsel
Date:Sep 26, 2016
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