The Blue Bell Dairy CEO Indictment and its Implications for Executive Liability

Michael W. Peregrine and David S. Rosenbloom are partners at McDermott Will & Emery LLP. This post is based on their McDermott Will & Emery memorandum.

The May 1, 2020 federal felony indictment [1] of former Blue Bell Creameries LLP CEO Paul W. Kruse provides an important lesson to governing boards and their senior executives on the regulatory risks associated with communications during times of corporate crisis, especially communications with public health and safety implications.

Company executives and public relations consultants often debate about what is too little or too much to say in a time of crisis. The Kruse prosecution is a reminder that there can be criminal implications to those debates, and sometimes there can be more risk in what a company does not say than in what it does say. The case also provides a cautionary note about the broad scope of anti-fraud enforcement authority available to the federal government. Together, these are risks that corporate leadership should discuss with their general counsel and the compliance officer, especially given the ongoing pandemic.

The most immediate of these lessons are the critical need (a) for corporate leaders to be extraordinarily careful with the transparency and accuracy of crisis communications, especially those relating to acute impact on consumers created by the company’s products or services; and (b) to confirm that the company’s compliance program adequately alerts the board to the presence of such risks.

Background

The charges were based upon a series of events arising from indications of unsanitary or contaminated manufacturing conditions in Blue Bell ice cream production plants from 2009 to 2014, which Blue Bell and its leadership allegedly failed to address. In 2015 a listeria outbreak affected its ice cream products in the market place, which ultimately prompted management to recall the products and to shut down the affected plants. The listeria outbreak sickened many consumers; led to three consumer deaths, prompted the termination of up to one third of the company’s workforce and created a liquidity crisis for the company. [2]

Nature of the Charges

Mr. Kruse was charged with seven felony counts arising from what the government alleged was his effort to deceive certain Blue Bell customers by removing contaminated products from stores without revealing the full details of the listeria outbreak

Specifically, Mr. Kruse is alleged to have directed employees to remove potentially contaminated products from stores without informing either the stores or their customers of the specific reasons for the removal. He is also alleged to have instructed Blue Bell employees to provide only vague, general reasons why products had been removed (i.e. citing unspecified manufacturing reasons as opposed to listeria concerns).

Analysis

The Impact of the Charges. Ever since Watergate, white collar defense lawyers often will quote former President Nixon when reminding their clients that, worse than any original misconduct, “it is the cover-up that really hurts.” It seems that every few years there is a high profile prosecution that serves to remind us of that lesson.

Martha Stewart survived the investigation of insider trading, but was convicted of obstructing the investigation by lying about the reasons for her trading. When the government could not prove that renowned investment banker Frank Quattrone had engaged in any wrongdoing relating to IPO allocations, it alleged his direction to “clean up files” constituted an obstruction of justice. The general teachings of these cases for corporate executives under investigation has been simple: the best way to “do no harm” is keep your mouth shut.

The charges recently brought against Mr. Kruse show that even the “keep your mouth shut” strategy is not without risk. The indictment in the Kruse case alleges that, after learning that some Blue Bell products tested positive for Listeria contamination, Kruse directed Blue Bell employees who were removing remaining product from store shelves to explain simply that there were unspecified quality issues or manufacturing irregularities. While many of the vague statements allegedly given by employees may have been literally true, at least as far as they went, the government goes on to allege that Kruse rejected a press release drafted by Blue Bell employees that would have notified the public of the risk of ingesting Listeria contaminated products. The indictment alleges that by this conduct Kruse engaged in a scheme to defraud Blue Bell’s customers.

While Kruse is presumed innocent of the charges until proven guilty, [3] the message the government has sent by bringing these charges is clear: Corporations have a duty to communicate accurate information to customers (and presumably other constituencies) about the nature of an acute health risk created by the company’s product. Anything less than full transparency from corporate leaders potentially can rise to the level of felony misconduct.

It is notable that the Kruse prosecutors chose to focus on the alleged defrauding of customers through allegedly misleading statements and omissions, because there were other charges available to the prosecution if they wanted to focus solely on the danger created by the contaminated product. Indeed, the government allowed the company, Blue Bell, to plead guilty to misdemeanor charges of distribution of adulterated food. [4]

Even though misdemeanor adulteration is an offense for which the government often will allege a responsible corporate officer is strictly liable, [5] the prosecutors in Kruse undertook the heavier burden of proving that Kruse had the specific intent to defraud customers. The willingness to allow the company to plead guilty to a misdemeanor, while seeking felony charges against Kruse, appears to reflect the emphasis on individual accountability that DOJ previously announced in the Yates Memo.

The fraud theory alleged in the Kruse indictment has the potential to reach conduct beyond food or drug safety, and leaves unanswered several difficult questions that all executives must face while managing a product crisis. For example, how is a company to know what information about past, remediated conduct, is considered so material to potential future purchases of the company’s products that non-disclosure of that information might be alleged by prosecutors to be part of a scheme to defraud? These types of questions are far more than hypothetical for companies literally adapting every day to new information about novel health threats.

Corporate Responsibility Concerns. The indictment also is notable to the board in connection with its risk oversight obligations. The board, or its compliance committee, should adopt protocols to assure that crisis communications between the company and its consumers and other constituents (e.g., employees) are transparent and accurate as to the nature of acute risks created by the company’s product or services. This protocol should further assure that the chief executive officer confer with the Board Chair and the general counsel in connection with any crisis communication plan, and that the general counsel be involved in conversations with the company’s crisis management communications advisors

More broadly, the indictment is a reminder of the critical need for fulsome management-to-board reporting with respect to actual and potential legal risks, and for corporate compliance programs to be sensitive to the types of regulatory reporting gaps that were at the heart of the Blue Bell controversy. This is particularly the case given subsequent Delaware decisions [6] that follow the basic interpretation of risk oversight obligations set forth in Marchand v. Barnhill.

Conclusion

The Kruse indictment is important for two key reasons. First, it reflects the broad scope of the government’s authority to pursue fraud-based allegations against individuals. Second, it is an important reminder of the value of an integrated approach to corporate compliance that links senior management, the compliance officer/general counsel and the board on developments that suggest potential harm to the consumer and to the company. The general counsel is well-situated to brief the senior leadership team, the board as a whole and the compliance committee in particular, on the relevance of the entire Blue Bell controversy to the company.

Endnotes

1https://www.nytimes.com/2020/05/01/business/blue-bell-listeria-paul-kruse.html?smid=em-share; The charging document in the case technically was a criminal information. An information differs from an indictment only in that the U.S. Attorney files an information directly, while the grand jury returns an indictment. The government’s burden of proof to convict is the same in either case. For ease of reference, we refer hereinafter to the charging document as the indictment.(go back)

2These facts also resulted in a seminal 2019 decision of the Delaware Supreme Court affecting the application of the Caremark doctrine, and its historically forgiving standard of the director’s risk oversight responsibilities. Marchand v. Barnhill, 212 A.3d 805 (Del. 2019).(go back)

3Of course, the criminal information is result of what was no doubt a lengthy governmental investigation of both Blue Bell and Mr. Kruse.(go back)

4Simultaneous with Kruse Criminal Information, Blue Bell agreed to plead guilty to two misdemeanor counts of distributing adulterated ice cream products (in violation of FDA regulations) and to pay a criminal fine and forfeiture of $17.25 million. In addition, Blue Bell agreed to pay $2.1 million in settlement of civil False Claims Act allegations with respect to ice cream products manufactured under unsanitary conditions and sold to federal facilities. https://www.justice.gov/opa/pr/blue-bell-creameries-agrees-plead-guilty-and-pay-1935-million-ice-cream-listeria.(go back)

5The “responsible corporate officer doctrine” is a controversial strict liability theory interpreted by the government as permitting (in certain circumstances) the prosecution of corporate officers and directors for misdemeanor criminal offenses—without the need to establish their intent or personal involvement in wrongful conduct. It is based upon two U.S. Supreme Court decisions which upheld the conviction of corporate officers for public welfare-based crimes without evidence that they participated in or had knowledge of the core criminal activity.(go back)

6In re Clovis Oncology, Inc. Derivative Litig., C.A. No. 2017-0222-JRS (Del. Ch. Oct. 1, 2019); Hughes v. Hu, (Delaware Chancery Court April 27, 2020) C.A. No. 2019-0112-JTL.(go back)

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