COMMENT: Needles in strawberries, mobile phones in mince, alcohol in ginger beer…. New Zealand has seen a flurry of high-profile product recalls in recent weeks.
Deciding when to recall (or not) and how to do it are choices that can have a massive impact on a business' reputation, and balance sheet.
If a cautionary tale is needed, look no further than "Switch-Gate".
In 2014, General Motors initiated a recall of millions of vehicles, due to a defect in an ignition switch. GM was later found to have known about the safety risk posed by the defect for some time before the recall.
In a settlement with the US Department of Justice, GM agreed to pay a US$900 million ($1.3 billion) fine, admitting that it had failed to disclose "a potentially lethal safety defect" and "affirmatively misled consumers about the safety" of affected vehicles.
Inevitably, it suffered a barrage of negative publicity and a sharp drop in its earnings.
By contrast, a well-managed recall campaign can enhance, rather than harm, a business' reputation. By way of example, the Harvard Business Review cites the recall rolled out by GM subsidiary Saturn Corporation, after it found a flaw in a front-seat recliner mechanism.
The campaign went so well that it inspired a Saturn advertisement, featuring a rep personally delivering a replacement seat to Alaska.
While the prospect of a recall is a daunting one, it pays to prepare for the worst. It is perhaps telling that Saturn had reportedly put into place a recall plan more than a year before it launched its first vehicle.
All suppliers and manufacturers of products should have such a plan, and keep it under regular review. It should address such things as:
• The names and contact details of a recall "team" (ideally with relevant expertise such as technical, legal and communications)
• How to notify all affected parts of the supply chain
• How to put a "stop" on further potentially affected products entering the market
• How to trace products that have already been sold or supplied
• Template recall notices and press releases, informing consumers of the issue
• How to monitor progress of the recall and deal with returned products
• Providing necessary notifications to insurers and stakeholders
It is also essential that a plan provide for the relevant regulator to be notified of the recall.
Different products will give rise to different obligations but there is a general requirement that the Chief Executive of MBIE be notified of a recall on safety grounds within two working days of it being made public. Failure to do so is an offence that could give rise to enforcement action.
In a sense, formulating the plan is the easy part. Deciding whether it is necessary to roll it out is often harder. The starting point is understanding the relevant legal obligations.
Under the Consumer Guarantees Act, manufacturers and suppliers of consumer products are deemed to guarantee that they are "safe".
At a minimum, goods must comply with any mandatory safety standards or unsafe goods notices issued by the Minister of Consumer Affairs. Additional industry-specific requirements also apply, for example, in relation to food, medicines and electrical goods.
Section 32 of the Fair Trading Act provides for the Minister to step in and order a recall if:
• a supplier fails to recall:
- goods that do not comply with a prescribed product safety standard; or
- goods of a kind that will or may cause injury to any person; or
• it appears to the Minister that a reasonably foreseeable use (including misuse) of the goods will, or may, cause injury to any person.
Ideally, the Minister will not intervene, as the supplier will have commenced the recall of its own initiative.
For this reasons, suppliers should have proper, documented systems in place to identify potential safety issues, from the initial design phase onwards.
Once the product is in the market, all safety-related customer complaints should be taken seriously, and investigated thoroughly.
If the worst happens and a real risk is identified, acting early and responsibly and controlling the message to the market and the regulator can limit the fall-out and enhance customer goodwill.
Just like accidents, product safety issues will happen, even to careful and responsible businesses.
How the business plans for, and reacts to, these issues will determine the long-term effect they have on its profit and its reputation.
- Anita Birkinshaw is a special counsel at Buddle Findlay.