Beef producers and packers have been required for years to “identify hazard points and critical points during beef slaughtering, which is a necessary first step toward developing a hazard analysis and critical control point system to control meat contamination by Escherichia coli O157:H7.” See R. Guyon, et. al, Hazard Analysis of Escherichia coli O157:H7 Contamination during Beef Slaughtering in Calvados, France, J. Food Protection, Vol 64, No. 9, 2001, pp 1341-1345. While protecting the health of employees and customers is of utmost importance, in addition to the development and implementation of robust HACCP plans that address the former, food producers can help protect themselves from the financial impact of an E. coli outbreak or similar contamination in food products by ensuring that agreements with suppliers, producers, and insurers includes a provision that expressly covers such a situation. The following summary of a recent case provides guidance for others to use, to avoid similar outcomes.
In April 2011, beef from Meyer Natural Angus (“Meyer”), a Colorado natural beef producer, and processed by Greater Omaha Packing (“GOP”) allegedly tested positive for a dangerous strain of E. coli bacteria. Meyer Natural Foods LLC v. Greater Omaha Packing Co., Inc. 302 Neb. 509 at *2 (Neb. 2019).
Meyer had a processing agreement with Greater Omaha Packing (“GOP”), pursuant to which GOP would slaughter, process, and fabricate Meyer’s cattle into various beef products. Id. The processing agreement also required GOP to maintain property insurance on Meyer property in its possession, with a total value of $1.8 million. Id. at *5. Further, Meyer had the option to reject “all products failing to meet the warranties and specifications” contained in the agreement and return said rejected products to GOP and charge GOP its out of pocket expenses of storing and reshipping any products properly rejected by Meyer. Id. at *6.
On April 25, 2011, Meyer delivered 1600 head of cattle to GOP for slaughter and processing. After processing, GOP sealed and delivered the beef to Meyer. Id. at *2. While on “hold” for testing prior to delivery to stores, 17.5% of the beef tested returned presumptively positive for E. coli. Id. Meyer immediately recalled the trucks with the contaminated beef, and sent the beef either to the cooker to be sold at a reduced charge or to a landfill because it was unsafe for human consumption. Id. at *3.
After the contamination, Meyer sued GOP claiming that GOP was responsible for contaminating the beef and alleging breach of contract, breach of warranty, breach of an indemnity obligation, failure to obtain insurance, and breach of the guarantee. Meyer moved for partial summary judgment for failure to obtain and maintain property insurance on the value of Meyer’s beef. The district court denied Meyer’s motion because it found that GOP had a property insurance policy that provided coverage for any non-owned personal property in GOP’s care, custody, and control that GOP “agreed, prior to loss, to insure.” Id. at *5. Thus, GOP complied with its contractual obligations. The district court also granted summary judgment to GOP on Meyer’s remaining claims because Meyer failed to return the rejected products to GOP, as required by the processing agreement. Meyer appealed.
In March of this year, the Nebraska Supreme Court issued its opinion upholding the district court’s decisions. On appeal, Meyer argued that the insurance policy’s exclusion of coverage for damage resulting from E. coli constituted a breach of the contractual requirement between Meyer and GOP that GOP maintain property insurance on Meyer’s property in its possession. Id. at *4. Nebraska’s Supreme Court concluded that the processing agreement did not contain any language regarding the inclusion of E. coli coverage or the prohibition of exclusions contained within the insurance policy. Id. at *5. Thus, GOP did not breach its contract with Meyer by maintaining a policy that excluded coverage for E. coli contamination. Id. Nebraska’s Supreme Court also upheld the district court’s conclusion that Meyer was not entitled to damages for GOP’s breach because it failed to return the rejected products to GOP. Meyer could have avoided the loss caused by GOP’s breach by doing so. Id. at *6-7.
Meyer also argued that GOP breached its express warranty that the meat it processed would “not be adulterated or misbranded” by contaminating it with E. coli. Id. at *7. The Nebraska Supreme Court agreed that GOP breached its express warranty by adulterating the beef with E. coli, but because Meyer failed to return the beef to GOP for full credit as provided for by the processing agreement, it was not entitled to recovery. Id. at *8-9.
Lastly, the court rejected Meyer’s negligence claim because there was no evidence presented that demonstrated that GOP was negligent on the days on which GOP fabricated Meyer’s cattle. Id. at *9.
Takeaways: Review your agreements with third party vendors and ensure that you are requiring those vendors to maintain insurance policies that actually cover the main risks in your business, and be sure to follow the remedies required in your agreements when a breach occurs.
Stayed tuned for more analysis on the court’s conclusion regarding adulterating.
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