Food Industry Outlook for 2015

February 27, 2015

For 2015, the food and beverage industry will experience governmental attention on a number of fronts. Given the Department of Justice’s recent success in prosecuting food manufacturing executives on criminal charges, the industry likely will see more of the same in the near future. Expect further impact due to President Obama’s immigration reform initiative, data privacy problems and liability, EU competition and regulatory developments, a new Clean Water Act definition for “waters of the United States,” and an abundance of citizen suits.

Criminal Prosecution

R. Trent Taylor, Richmond

2014 was a watershed year for criminal prosecutions in the food industry. In 2013, the federal government brought high-profile criminal charges against food company executives in two important cases. In 2014, both of these cases concluded with victories for the federal government.

The most high-profile of these criminal prosecutions concluded on Sept. 19, 2014, and resulted in the convictions of three former executives of the Peanut Corporation of America (PCA): (1) Stewart Parnell, former owner; (2) Michael Parnell, former food broker; and (3) Mary Wilkerson, former quality control manager. This trial involved allegations that the Parnells knowingly shipped contaminated peanut butter and peanut paste to customers and faked lab tests intended to screen for salmonella, resulting in one of the largest food recalls in U.S. history. The 12-member jury found Stewart Parnell guilty of 67 federal felony counts, including conspiracy, wire fraud and obstruction of justice, while Michael Parnell was convicted of 30 counts related to falsification of lab results but was acquitted of actually shipping salmonella-tainted food. Mary Wilkerson was convicted on one count of obstruction of justice but acquitted on another; she faces a maximum of 10 years in prison and a $250,000 fine. The Parnells’ convictions are enough to send them to federal prison for the rest of their lives, as each count carries a maximum sentence of five or 10 years. However, to date, sentencing has not occurred due to a number of post-trial motions.

This prosecution is significant because it is one of the first times that food processors have been criminally tried in a federal food-poisoning case. Although both civil and criminal statutes and penalties against a company and individuals are available, the government has rarely used criminal provisions to charge individual food industry executives and employees. But that may be changing.

Also significant are the resources that the government devoted to this prosecution and how aggressively it prosecuted the case. The prosecution called 45 witnesses, and its case in chief lasted 26 days. The government indicted these individuals on 76 federal felony counts and went to trial on 71 of those counts. The charges carry prison sentences of up to 20 years apiece. Moreover, the government aggressively sought information from several law firms that formerly represented PCA by issuing subpoenas, and demanded that these attorneys be available for testimony at trial. The law firms sought to quash the subpoenas (claiming attorney-client privilege and work product), and the judge never decided the issue before the case went to the jury. In addition, two of PCA’s former top managers (plant manager Samuel Lightsey and operations manager Daniel Kilgore) reached pretrial plea bargains with the prosecution and testified at trial on behalf of the government. Their plea agreements appear to contemplate jail time.

After the victory, one of the prosecutors, U.S. Attorney Michael Moore for the Middle District of Georgia, said the verdicts in the PCA case have put the food industry on notice that it is now going to be held responsible for foodborne illnesses.

Another recent groundbreaking prosecution targeted Eric and Ryan Jensen, two corporate executives of a cantaloupe farm that was linked to a 2011 listeria outbreak that reportedly resulted in 33 deaths. They were charged with misdemeanors and faced up to six years in jail. The government issued warrants for their arrest, and the Jensens were brought to their arraignments in shackles – unusual for misdemeanor prosecutions. They pled guilty and were sentenced in January 2014 to six months in home detention and five years of probation, and ordered to pay $150,000 in restitution. What is significant about this prosecution is that there reportedly was no evidence that these executives knew about any adulteration of their cantaloupes prior to sale.

Aggressive criminal prosecution of the food industry likely will not only continue, but increase in 2015. One such case that is being followed closely is the prosecution in federal district court in Iowa of food industry executives related to allegedly falsified export documents and certificates involving the international sale of “Halal” beef. Indictments were handed down in October 2014, and the trial was scheduled to start in March 2015. A continuance has been granted, however, due to concerns expressed by both the prosecution and defense that the case is too complex to be tried so quickly. Another closely watched case is the prosecution of Jesse J. Amaral Jr., former Rancho Feeding Corp. co-owner. His trial in federal court in San Francisco, scheduled to begin in July, relates to charges he conspired to sell cattle known to have eye cancers and other problems, for consumption by humans.

Now that the most high-profile of these criminal prosecutions – the only one that actually went to trial – has ended successfully for prosecutors, the food industry is likely to see this weapon of criminal prosecution used more frequently. Success no doubt will beget more criminal prosecutions in 2015.

Obama’s Recent Immigration Executive Order: Immigration Reform

David Z. Izakowitz, Charlottesville
Jacquelyn E. Stone, Richmond

On November 20, 2014, President Obama announced a series of executive actions to improve the U.S. immigration system. Of particular importance to U.S. employers is the initiative focused on modernizing, improving and clarifying immigrant and nonimmigrant programs to grow the economy and create jobs. This initiative is designed to support U.S. businesses by better enabling companies to hire and retain highly skilled foreign-born workers while providing workers increased flexibility to pursue career advances with their current employers or seek similar opportunities with other U.S. employers. For example, the U.S. immigration system has long been characterized as having extremely lengthy waits for immigrant visas (green cards) because of the low numerical limits on immigrant visas established by Congress in 1990. The resulting backlog has prevented U.S. employers from attracting and retaining foreign national workers critical to their businesses. To address this issue, U.S. Citizenship and Immigration Services (USCIS) and the Department of State have been directed to amend current regulations and make other administrative changes to provide needed flexibility to workers with approved employment-based green card petitions.

Increasing Worker Portability

The employment-based visa system, in its current form, creates hardships for many foreign workers who have filed for adjustment of status, the final step in the green card process, but are unable to become permanent residents because of a lack of available immigrant visas. These workers may change jobs without losing their ability to adjust to permanent resident status, but only if the new job is in the “same or similar” occupational classification as the job for which the green card application was submitted. The lack of certainty associated with the “same or similar” requirement prevents many workers from changing employers or positions for fear that a change in employment might negatively impact their approved employment-based petitions. Pursuant to the President’s Executive Order, the USCIS will issue guidance to clarify the types of job changes that meet the definition of “same or similar” under current law. As an example, the guidance should make clear that an employee can accept a promotion to a supervisory position or accept related jobs within his or her field of specialization while waiting for the immigrant visa to become available.

Optional Practical Training

In addition to modernizing aspects of the immigrant visa system, President Obama’s initiative includes reforming optional practical training (OPT) for foreign nationals attending U.S. schools in F-1 student status. Currently, a foreign student may request 12 additional months of F-1 student visa status for OPT, which allows a student to extend his F-1 status in the U.S. for temporary employment in his field of study. Foreign students in science, technology, engineering and math (STEM) fields are eligible for an additional 17 months of OPT after completion of the initial 12 months of employment if their employers have enrolled in E-Verify, the USCIS’s Internet-based system for verifying employment authorization of workers. Under the president’s initiative, regulations will be developed to expand the degree programs eligible for OPT and extend the time period and use of OPT for STEM students and graduates.

L-1B Visa Program

The L-1B intracompany program is critically important to multinational companies seeking to transfer specialized knowledge professionals to the U.S. for temporary employment. However, it is increasingly difficult for companies to obtain approval of L-1B status for their employees due to vague guidance and inconsistent interpretations of the term “specialized knowledge” in the adjudication of L-1B petitions by the USCIS. The USCIS has been directed to issue a policy memorandum that provides clear guidance on the meaning of “specialized knowledge” to improve consistency in adjudications and increase approvals.

Data Breaches in Food Industry

Adam A. Grove, Chicago

Credit Card Breaches Continue to Plague the Industry

In 2014 grocers and restaurants continued to be plagued by attacks leading to the theft of credit card information. Among others, Supervalu Inc. and Jimmy John’s both experienced intrusions in 2014, extending the string of intrusions and breaches in recent years that have hit stores and restaurants in the food and beverage industry.

  • On August 14, 2014, Supervalu experienced an intrusion into the portion of its network that processes credit card data. This breach hit as many as 1,000 stores, including many no longer owned by Supervalu but for which Supervalu was still providing IT services. While investigating that breach, Supervalu identified a separate and unrelated incident that occurred weeks later, where malware had been installed in the portion of its network that processes credit card data.
  • Jimmy John’s experienced a credit card data breach that lasted from June 16 to September 5. The hacker may have gained access to Jimmy John’s point of sale systems using login credentials stolen from the company’s point of sale vendor. This breach affected 216 stores.

Financial Responsibility for Credit Card Breach

2014 also saw developments in stores’ and restaurants’ liability for credit card data breaches. One of the most active areas involves whether those stores and restaurants hit by data beaches are liable to transactions processors and financial institutions for costs such as issuing new credit cards. Here, the news has been mixed for stores and restaurants.

  • On one hand, a court interpreted a contractual limit of liability to narrow a grocer’s liability for a data breach. Schnuck Markets had claims asserted against it by its transactions processing vendors for costs associated with replacing credit cards and other expenses, which costs and expenses had been assessed against the transactions processors by Visa and Mastercard. In denying the claim by the transactions processors, the court entered into a detailed analysis of the limitation of liability in the agreement between the processors and Schnuck Markets and found that the limitation of liability excluded these categories of damages. This case underscores that, while negotiating a protective contract takes time and effort up front, it can substantially limit a company’s exposure when a problem arises. (Schnuck Markets Inc. v. First Data Merchant Svcs. Corp., 2015 BL 9927, E.D. Mo., 13-cv-02226, 1/15/15)
  • On the other hand, in litigation resulting from the Target data breach, a federal judge denied Target’s motion to dismiss claims asserted against it by the financial institutions of customers affected by the breach. These banks – which estimate that the total harm to them and retailers may eventually exceed $18 billion – asserted that Target was negligent in failing to take steps to avoid the data breach. The court found that the harm alleged by the banks was sufficiently foreseeable for it to deny Target’s motion to dismiss the negligence claims alleged by the banks. A key distinction from the Schnuck Markets case is that here there was no direct contractual relationship between the store and the financial institutions, so no limitation of liability was in play. In any event, both the Target case and the Schnuck Markets case are useful reminders that consumer litigation is just one risk arising from a data breach (In re Target Corp. Customer Data Security Breach Litigation, MDL No. 14-2522, 2014 WL 6775314 (D. Minn. Dec. 2, 2014))

EU Competition and Regulatory Issues

Matthew Hall, Brussels

Unfair Trading Practices

The European Commission (EC) in 2014 adopted a communication encouraging EU member states to look for ways to improve protection of small food producers and retailers against the unfair trading practices (UTPs) of their sometimes much stronger trading partners. The communication on UTPs suggests a number of stakeholder priorities to facilitate an effective EU-wide framework against such practices. It does not propose regulatory action at EU level but encourages member states to make sure they have appropriate measures against UTPs in place, taking into account their national circumstances. This includes support for the voluntary Supply Chain Initiative launched in September 2013.

During 2015, the EC will monitor and assess progress by evaluating the actual impact of the Supply Chain Initiative and its national platforms and the enforcement mechanisms set up by member states. The EC will present a report to the council of the EU and the European Parliament (EP) at the end of 2015. In light of this report, the commission will decide whether further action should be taken at EU level to address the issues.

Choice and Innovation in the Food Sector

The antitrust directorate of the EC published in 2014 a retail food study examining whether increased concentration (of food retailers/food brand manufacturers) or other factors (such as shop type/size, private label penetration, socio-demographic characteristics) have affected choice and innovation for the consumer in European shops. This study assesses how concentration and potential imbalances between retailers and brand manufacturers have been developing in the EU food supply chain over the last decade. The EC is inviting stakeholders to submit their comments, including those regarding possible follow-up actions, by Jan. 30, 2015.

New Rules Governing the Agri-Food Sector

On May 6, 2013, the EC proposed a “landmark package” that would update the rules governing the agri-food sector in the EU. The reform would replace almost 70 pieces of current legislation. Summarizing the proposal, the EC said it would provide “smarter rules for safer food” in the EU. The main elements of the proposal can be divided into four sections, dealing with official controls, animal health, plant health and plant reproductive material.

During 2014, the European Parliament (EP) considered the legislation and adopted amendments to three of the proposals. It rejected the proposal for legislation governing the production and making available on the market of plant reproductive material (the “Seed Regulation”), which was subsequently withdrawn by the EC. The council of the EU will be considering the three remaining proposals during 2015.


The negotiations for the proposed Transatlantic Trade and Investment Partnership (TTIP) between the EU and United States will continue during 2015, with the eighth round scheduled to take place in Brussels Feb. 2-6, 2015. TTIP is intended to be more than a traditional trade agreement, since the two sides are also aiming at regulatory cooperation, convergence and harmonization across all sectors. The ultimate goal is an EU-U.S. single market, with priority given to sectors where there is an industry demand. The food and beverage sector is a crucial part of the discussions, and it’s unlikely that there will be an overall agreement if agreement relating to the sector cannot be reached.

Competition Law Enforcement

In 2012, a report of the European Competition Network (the group of competition law regulators in the EU, including the EC and national regulators) showed that strong enforcement of competition rules in the food sector had helped operators access supplies and markets and helped consumers enjoy lower prices. The EC has carried out a number of investigations concerning food products and is also working with the national regulators to implement the specific competition rules applying to agricultural products following the reform of the common agriculture policy in 2014 (the sector-specific rules for agriculture can be found in Regulation 1184/2006 and Regulation 1308/2013, known as the “Common Market Organisation (CMO) Regulation”). During 2015, further competition law enforcement in the food and beverage sector (including agriculture) can be expected EU-wide.

Expo Milano 2015

The theme chosen for Expo Milano 2015 is “Feeding the Planet: Energy for Life.” The event is intended to be a milestone in planetary debate on food and sustainability, and a platform for political discussion and policy initiatives on these issues. The universal exposition, from May 1 to Oct. 31, 2015, will host countries, international organizations, NGOs, corporations and other institutions, including the European Union, and an expected total of 20 million visitors. In parallel, a “cyber Expo” will target Internet users.

There will be an EU pavilion at the Expo, which will focus on topics closely related to the theme of the Expo, such as sustainability, food-waste prevention, innovation and food safety. Some events at the pavilion will address issues that relate specifically to the competitiveness of the EU agri-food sector, e.g., an ad hoc European Food and Drink Week and other events focusing on the specific needs of SMEs in the sector.

Environmental Update

Benne C. Hutson, Charlotte

“Down on the farm” (with an emphasis on “down” in its most negative sense) could likely describe the environmental year ahead for the nation’s food sector, as the following issues await:

Waters of the U.S.

In April, EPA and the Army Corps of Engineers anticipate finalizing a rule clarifying what qualifies as a “water of the United States” subject to Clean Water Act permitting. While many have voiced objections to the proposed rule, the biggest hue and cry has come from farmers who contend the rule will basically eliminate the Act’s longstanding permit exemption for normal farming practices. EPA and Corps tried to address these concerns through an interpretive rule but Congress directed that this approach be scrapped as confusing and ineffective. EPA and the Department of Agriculture are working on a policy to clarify what farming practices are exempt, but uncertainty persists as this approach may not take the form of an enforceable rule. This confusion will only increase if no action is taken before the broader “waters of the United States” rule is promulgated.

Citizens Suits Galore

Last year ended with nearly 600 plaintiffs in eastern North Carolina filing nuisance suits against over 50 hog CAFOs, while environmental groups brought Clean Water Act citizen suits against numerous hog farms for alleged surface water and groundwater contamination. Local governments are getting on the litigation bandwagon as well, as evidenced by the case brought by the Des Moines Board of Water Works against three counties alleging nitrate runoff is increasing the city’s treatment costs by $5,000 each day. Now these parties have a new weapon at their disposal. In January, a federal court in Washington, in what is known as the Cow Palace decision, ruled that citizen suits for groundwater contamination (which courts traditionally have said cannot be brought under the Clean Water Act) can be brought under the Resource Conservation and Recovery Act, the nation’s solid waste law. It can be expected that environmental groups and other plaintiffs will seek to use the precedent elsewhere, especially in states with Republican governors and legislators viewed as unsympathetic to the environment.

Data Privacy

A long-running suit as to whether the federal government can release the names, home addresses and other personal information of owners and operators of concentrated animal feeding lots will continue well into 2015. While rejecting the claims of industry groups that such information should remain confidential, the Minnesota federal court has ordered EPA not to release the data until that decision can be appealed. Any decision by the 8th Circuit Court of Appeals will not be issued until late 2015 or early 2016.