Beech-Nut and the No-Apple-Juice

Apple Juice Beech-Nut was heavily in debt, had only 15% of the baby food market, and was operating out of a badly maintained 80-year-old plant in Canajoharie, New York. Creditors and debt were growing. Beech-Nut needed to keep its costs down, its production up, and increase its market share. In 1977, Beech-Nut made a contract with Interjuice Trading Corporation (the Universal Juice Corporation) to buy its apple juice concentrate. The contract was a lifesaver for Beech-Nut because Interjuice's prices were 20% below market, and apple con-centrate was used as a base or sweetener in 30% of Beech-Nut's baby food products.

With this much lower cost key ingredient (the savings were estimated to be about $250,000 per year), Beech-Nut had reached a turnaround point. Here was a little company that could take on Gerber Baby Foods, the number-one baby food company in the United States. Nestl Corporation, the international food producer based in Switzerland, saw poten-tial in this little company and bought Beech-Nut in 1979. By the early 1980s, Beech-Nut had become the number-two baby food company in the United States. However, because of its substantially increased marketing costs, Beech-Nut's money pressures remained.

Licari Raises Questions ... often

Dr. Jerome J. LiCari was the director of research and development for Beech-Nut Nutrition Corporation. Beech-Nut still had the low-cost Interjuice contract, but LiCari was worried. There were rumors of adulteration (the addition or substituted use of inferior substances in a product) flying about in the apple juice industry. Chemists in LiCari's department were suspicious, but they did not yet have tests that could prove the adulteration.

In October 1978, Dr. LiCari learned from other sources that the concentrate might be made of syrups and edible substances that are much cheaper than apples. LiCari reported what he had learned to John Lavery, Beech-Nut's vice president for operations. Lavery's job included management of the purchasing and processing of apple juice concentrates.

Concerned, Lavery sent two employees to inspect Universal's blending operation. What the employees found was only a warehouse without any blending facility. Lavery did noth-ing more and did not ask about where Interjuice's blending operation was or whether he could have it inspected. Instead, he had Universal officers sign a "hold harmless" agree-ment, an addendum to the purchase contract that was intended to protect Beech-Nut if any legal claims or suits related to the juice resulted.

Under federal law, a company can sell a product that tastes like apple juice but is not really apple juice so long as the label discloses that it is made from syrups, sweeteners, and flavors. However, Beech-Nut's labels indicated that there was apple product in its apple juice and apple sweetener in the other products in which the concentrate was used, such as the baby fruits, where it provided a sweeter taste. Selling products labeled as apple juice or as containing apple product when they are in fact made with syrups and flavorings is a fed-eral felony. Lavery wanted the hold-harmless agreement for protection against any claims that might be filed under these laws

During this time, LiCari and his staff were able to develop some tests that did detect the presence of corn starch and other substances in the apple concentrate that were consis-tent with the composition of adulterated juice. LiCari continued to tell Lavery that he was concerned about the quality of the concentrate supplied by Universal. LiCari told Lavery that if a supplier were willing to adulterate concentrate in the first place, it would likely have little compunction about continuing to supply adulterated product even after signing a hold-harmless document.

Lavery reminded LiCari that Universal's price to Beech-Nut for the concentrate was 50 cents to a dollar per gallon below the price charged by Beech-Nut's previous supplier. He also reminded LiCari of the tremendous economic pressure under which the company was operating. The revenue from Beech-Nut's apple juice was $60 million between 1977 and 1982. Lavery told LiCari that he would not change suppliers unless LiCari brought him tests that would "prove in a court of law that the concentrate was adulterated." He also told LiCari that any further testing of the product was to be a low item on his list of work assignments and priorities.

In 1979, LiCari sent the concentrate to an outside laboratory for independent analy-sis. The test results showed that the concentrate consisted primarily of sugar syrup. LiCari told Lavery of the lab results, but Lavery did nothing. In July 1979, Lavery also received a memorandum from the company's plant manager in San Jose, California, that indicated that approximately 95,000 pounds of concentrate inventory was "funny" and "adulter-ated," in that it was "almost pure corn syrup." The plant manager suggested that Beech-Nut demand its money back from the supplier. Instead, Lavery told the manager to go ahead and use the tainted concentrate in the company's mixed juices. Beech-Nut continued to purchase its apple juice concentrate from Universal.

LiCari and his staff continued their efforts to communicate to Lavery and other com-pany officials that the Interjuice concentrate was adulterated. In August 1981, LiCari sent a memorandum to Charles Jones, the company's purchasing manager, with a copy to Lavery, stating that although the scientists had not proven that the concentrate was adulterated, there was "a tremendous amount of circumstantial evidence" to that effect, "paint[ing] a grave case against the current supplier." LiCari's memorandum concluded that "[i]t is imperative that Beech-Nut establish the authenticity of the Apple Juice Concentrate used to formulate our products. If the authenticity cannot be established, I feel that we have suf-ficient reason to look for a new supplier."

Lavery took no action to change suppliers. Rather, he instructed Jones to ignore LiCari's memorandum, criticized LiCari for not being a "team player," and called his scientists In his evaluation of LiCari's performance "Chicken Little." He threatened to fire LiCari.647 for 1981, Lavery wrote that LiCari had great technical ability but that his judgment was "colored by naivet and impractical ideals."

In late 1981, the company received, unsolicited, a report from a Swiss laboratory con-cluding that Beech-Nut's apple juice product was adulterated, stating, "The apple juice is false, can not see any apple." Lavery reviewed this report, and one of his aides sent it to Universal. Universal made no response, and Beech-Nut took no action.

Nils Hoyvald became the CEO of Beech-Nut in April 1981. Both before and after becoming president of Beech-Nut, Hoyvald was aware, from several sources, about an adulteration problem. In November 1981, Beech-Nut's purchasing manager raised the problem. Hoyvald took no action. Rather, he told Lavery that, for budgetary reasons, he would not approve a change in concentrate suppliers until 1983.

In the spring of 1982, Paul Hillabush, the company's director of quality assurance, advised Hoyvald that there would be some adverse publicity about Beech-Nut's pur-chases of apple juice concentrate. On June 25, 1982, a detective hired by the Processed Apple Institute visited Lavery at Beech-Nut's Canajoharie, New York, plant, and told him that Beech-Nut was about to be involved in a lawsuit as a result of its use of adulterated juice. The investigator showed Canajoharie plant operators documents from the Interjuice dumpster and new tests indicating that the juice was adulterated. The institute invited Beech-Nut to join its lawsuit against Interjuice (a suit that eventually closed Interjuice). Beech-Nut declined. It did cancel its future contracts with Interjuice, but it continued to use its on-hand supplies for production because of the tremendous cost pressures and competition it was facing.

LiCari also took his evidence of adulteration to Hoyvald. Hoyvald told LiCari he would look into the supplier issue. Several months later, after no action had been taken, LiCari resigned. After leaving Beech-Nut, LiCari wrote an anonymous letter to the U.S. Food and Drug Administration (FDA) disclosing the juice adulteration at Beech-Nut. He signed the er, "Johnny Appleseed." The FDA began an investigation of Beech-Nut and its products and supplier, but Beech-Nut was not cooperative. The explanation managers offered was simple. When the FDA first notified the company of the problem, Beech-Nut had 700,000 cases of the spurious juice. By stalling, Beech-Nut was able to sell off some of those cases and ship others overseas (details follow), leaving it with the destruction of just 200,000 cases of the fake product.

An FDA investigator observed,

They played a cat-and-mouse game with us. When FDA would identify a specific apple juice lot as tainted, Beech-Nut would quickly destroy it before the FDA could seize it, an act that would have created negative publicity?

the cat-and-Mouse chase

When New York State government tests first revealed that a batch of Beech-Nut's juice contained little or no apple juice, Beech-Nut had the juice moved during the night, using nine tanker trucks. CEO Hoyvald realized that not being able to sell the inventory of juice the company had on hand would be financially crippling. So, he began delaying tactics designed to give the company time to sell it.

To avoid seizure of the inventory in New York by state officials in August 1982, Hoyvald had this juice moved out of state during the night. It was transported from the New York plant to a warehouse in Secaucus, New Jersey, and the records of this shipment and others were withheld from FDA investigators until the investigators independently located the carrier Beech-Nut had used. While the FDA was searching for the adulterated products but before it had discovered the Secaucus warehouse, Hoyvald ordered virtually the entire stock in that warehouse shipped to Beech-Nut's distributor in Puerto Rico; the Puerto Rico distributor had not placed an order for the product and had twice refused to buy the prod-uct even at great discounts offered personally by Hoyvald.

In September 1982, Hoyvald ordered a rush shipment of the inventory of apple juice products held at Beech-Nut's San Jose plant and took a number of unusual steps to get rid of the entire stock. He authorized price discounts of 50%; the largest discount ever offered before had been 10%. Hoyvald insisted that the product be shipped "fast, fast, fast" and gave a distributor in the Dominican Republic only 2 days, instead of the usual 30, to respond to this product promotion. In order to get the juice out of the warehouse and out of the country as quickly as possible, Beech-Nut shipped it to the Dominican Republic on the first possible sailing date, which was from an unusually distant port, which raised the freight cost to an amount nearly equal to the value of the goods themselves. Finally, this stock was shipped before Beech-Nut had received the necessary financial documenta-tion from the distributor, which, as one Beech-Nut employee testified, was "tantamount to giving the stuff away."

Hoyvald al Hoyvald and Lavery pleaded not guiltyso used Beech-Nut's lawyers to help delay the government investigation, thereby giving the company more time to sell its inventory of adulterated juice before the product could be seized or a recall could be ordered. For example, in September 1982, the FDA informed Beech-Nut that it intended to seize all of Beech-Nut's apple juice prod-ucts made from Universal concentrate; in October, New York State authorities advised the company that they planned to initiate a local recall of these products. Beech-Nut's lawyers, at Hoyvald's direction, successfully negotiated with the authorities for a limited recall, excluding products held by retailers and stocks of mixed-juice products. Beech-Nut eventually agreed to conduct a nationwide recall of its apple juice, but by the time of the recall Hoyvald had sold more than 97% of the earlier stocks of apple juice. In December 1982, in response to Hoyvald's request, Thomas Ward, a member of a law firm retained by Beech-Nut, sent Hoyvald a letter that summarized the events surrounding the apple juice concentrate problem as follows:

From the start, we had two main objectives:

1. to minimize Beech-Nut's potential economic loss, which we understand has been conservatively estimated at $3.5 million, and

2. to minimize any damage to the company's reputation.

We determined that this could be done by delaying, for as long as possible, any market withdrawal of products produced from the Universal Juice concentrate.... In spite of the recognition that FDA might wish to have Beech-Nut recall some of its products, management decided to continue sales of all such products for the time being.... The decision to continue sales and some production of the products was based upon the recognition of the significant potential financial loss and loss of goodwill, and the fact that apple juice is a critical lead-in item for Beech-Nut.

Since the mixed fruit juices and other products constituted the bulk of the products produced with Universal con-centrate, one of our main goals became to prevent the FDA and state authorities from focusing on these products, and we were in fact successful in limiting the controversy strictly to apple juice.

the charges and Fates

In November 1986, Beech-Nut, Hoyvald, and Lavery, along with Universal's proprietor, Zeev Kaplansky, and four others ("suppliers"), were indicted on charges relating to the company's sale of adulterated and misbranded apple juice products. Hoyvald and Lavery were charged with (1) one count of conspiring with the suppliers to violate the FDCA, 21 U.S.C. 331(a), (k), and 333(b) (1982 & Supp. IV 1986), in violation of 18 U.S.C. 371; (2) 20 counts of mail fraud, in violation of 18 U.S.C. 1341 and 2; and (3) 429 counts of introducing adulterated and misbranded apple juice into interstate commerce, in violation of 21 U.S.C. 331(a) and 333(b) and 18 U.S.C. 2. The suppliers were also charged with introducing adulterated concentrate into interstate commerce.

Hoyvald and Lavery pleaded not guilty to the charges against them. Eventually, Beech-Nut pleaded guilty to 215 felony violations of 331(a) and 333(b); it received a $2 million fine and was ordered to pay $140,000 to the FDA for the expenses of its investigation. Kaplansky and the other four supplier-defendants also eventually pleaded guilty to some or all of the charges against them. Hoyvald and Lavery thus went to trial alone. LiCari testified at the trials, "I thought apple juice should be made from apples."

The trial began in November 1987 and continued for three months. The government's evidence included that previously discussed. Hoyvald's principal defense was that all of his acts relating to the problem of adulterated concentrate had been performed on the advice of counsel. For example, there was evidence that the Beech-Nut shipment of adulterated juices from its San Jose plant to the Dominican Republic followed the receipt by Hoyvald of a telex sent by Sheldon Klein, an associate of the law firm representing Beech-Nut, which summarized a telephone conference between Beech-Nut officials and its attorneys as follows:

We understand that approximately 25,000 cases of apple juice manufactured from concentrate purchased from Universal Juice is [sic] currently in San Jose. It is strongly recommended that such product and all other Universal products in Beech-Nut's possession anywhere in the US be destroyed before a meeting with [the FDA] takes place.

Hoyvald and Klein testified that they had a follow-up conversation in which Klein told Hoyvald that, as an alternative, it would be lawful to export the adulterated apple juice products.

The jury returned a verdict of guilty on all of the counts against Lavery. It returned a verdict of guilty against Hoyvald on 359 counts of adulterating and misbranding apple juice, all of which related to shipments after June 25, 1982. It was unable to reach a verdict on the remaining counts against Hoyvald, which related to events prior to that date.

The federal district court sentenced Hoyvald to a term of imprisonment of a year and a day, fined him $100,000, imposed a $9,000 special assessment, and ordered him to pay the costs of prosecution. In March 1989, the federal court of appeals for the second circuit reversed the conviction on the ground that venue was improperly laid in the Eastern Dis-trict instead of the Northern District of New York. The case was remanded to the district court for a new trial.656

In August 1989, Hoyvald was retried before Chief Judge Piatt on 19 of the counts on which a mistrial had been declared during his first trial. After four weeks of trial, the jury was unable to agree on a verdict, and a mistrial was declared.

Rather than face a third trial, Hoyvald entered into a plea agreement with the govern-ment on November 7, 1989. The government recommended that the court impose a sus-pended sentence; five years of probation, including 1,000 hours of community service; and a $100,000 fine. On November 13, 1989, the district court accepted the plea and imposed sentence. At that plea proceeding, Judge Piatt agreed, at Hoyvald's request, to defer the beginning of his community service to give him three weeks to travel to Den-mark to visit his 84-year-old mother.

Six months later, in May 1990, Hoyvald again requested permission from his probation officer to return to Denmark to visit his mother and then to be permitted to visit "East and West Germany, Switzerland, Hungary, Czechoslovakia, and Greece" on business, a jour-ney that would take slightly more than three weeks. The Probation Department expressed no opposition to the trip so long as he "supplies an appropriate itinerary and documenta-tion as to the business portions of his trip." The United States Attorney did not oppose the request. On May 22, 1990, Hoyvald requested permission to travel to the other European countries to "look for a job and to investigate business opportunities" in those countries. The district court ruled that Hoyvald could visit his mother in Denmark but denied the request to travel to other countries.

Questions:

Why do you think Hoyvald and the others thought they could get away with the adulterated juice? Why did they play the "cat-and-mouse" game with the FDA? What principles about ethics have you learned that might have helped them analyze their situation more carefully and clearly? Are there some ideas for your credo from both their decisions and LiCari's actions?