Product extortion threats — what you need to know
25 May 2006Product extortion threats, particularly over the past decade, have cost Australian manufacturers millions of dollars and present to the corporate victims of these crises challenges that include maintaining public safety and confidence in their products, while minimising negative publicity and potential legal liability.
How to respond?
The manner in which a company should react to a threat of extortion will obviously depend on the particular circumstances, including the nature and credibility of the threat presented, the risk of injury to consumers and the likely effect on the reputation of the company if the company’s reaction is considered insufficient. A consideration of matters such as these will dictate the nature of the response, which could range from a simple warning to consumers to a full-scale product recall supported by an intensive media campaign.
Where possible, an extortion response decision should be taken after a speedy but rigorous investigation of the threat, rumour or report identifying the possibility of tampering. All stages of the investigation should be underscored by a consideration of the likelihood of injury to consumers and the severity of that injury. Where investigations reveal that a threat is credible, the response of the company, particularly in the first 24 to 48 hours, will be crucial to its chance of successfully dealing with the crisis.
When to speak to the authorities?
Where an immediate threat to consumer safety is posed, a company will rarely have time to gather all available information relevant to the credibility of the extortionary attempt. In that situation, the first decision—even before a product recall is implemented—is the necessity and timing of contact with authorities. Obtaining input at an early stage from police or other relevant authorities (such as the Therapeutic Goods Administration) will also be critical, particularly if enquiries can be made within an acceptable range of publicity risk.
Some level of police involvement is inevitable where a credible extortionary threat has been received. There is an obvious public safety concern associated with apprehending an extortionist, and early notification can ensure that the company’s crisis response maximises the effectiveness of a police investigation.
Even where an extortion threat is suspected to be a hoax, it may be prudent to notify police in order to create a record and an audit trail that can later be pointed to as a demonstration of the company’s proactiveness. This will also build a line of communication and trust that can be beneficial should a credible threat emerge. The police are increasingly familiar with the commercial implications of a major product extortion and, when a line of communication exists, authorities are not insensitive to the need for discretion and confidentiality, particularly where companies are making notification decisions prior to a determination of whether or not a threat is credible.
Insurance issues
Product extortion insurance may be costly and difficult to obtain, but there are tangible, long-term benefits such as cost protection and corporate peace of mind. However, product liability insurance policies traditionally do not provide comprehensive risk coverage and, in many circumstances, do not cover manufacturers and suppliers for the work required to rebuild reputation and profitability following a product extortion threat or some other form of extortionary tampering. For this reason, manufacturers must be prudent in their insurance decisions and remain aware that specialist product liability policies are required to accommodate for the significant expenses associated with extortion. Such expenses include costs of physically recalling products (which are often distributed nationally or internationally), significant and wide-scale advertising of product recall initiatives or other crises responses, logistical costs associated with transportation of products and resupply and, of course, major loss in profits particularly over the short and medium-term.
Publicity
Research conducted by companies in the food and manufacturing industries suggests that, as soon as a product is recalled from the marketplace, consumers want to know what steps are being taken to address the extortion issue and an estimate of when the product will likely be returned to shelves. Communication with consumers at this point is critical to avoid the consequence of consumers moving to a competitor’s products. Successful companies have advertised throughout the course of the crisis and provided information as to what the company was doing 'behind the scenes', from manufacturing to packing and shipping, in order to demonstrate that the company is working to return the product to the market. The message is that increased communication enhances reputation.
Companies that prioritise the concerns of their customers and their key stakeholders are ultimately rewarded by the process. The rewards are not short-term however, especially in cases where a product must be recalled from the market. Yet experience shows that consumers remember companies that promote consumer safety and the result is reputation protection and a longer term viability of brand and profitability. Sales of Mars and Snickers bars were reportedly 250 per cent higher than average during the product’s first week back on New South Wales shelves. In short, the cost of properly managing the crisis is significant, but ordinarily a company’s long-term reputation is worth more.
In the aftermath of an extortionary threat, a company’s actions will be judged, with the benefit of hindsight, more by the court of public opinion than by its judicial equivalent. Those companies demonstrating proactivity are most likely to survive an extortion threat and possibly even augment their reputations as a result. This all requires some 'crystal ball gazing'. To assist, a company’s legal advice should address more than just the strict legal requirements triggered by an extortion attempt, and incorporate the increase in consumer goodwill enjoyed by companies which value public safety and the well being of customers. Companies should work with their legal and other advisers (eg public relations and risk consultants) to ensure that, at the forefront of every decision associated with an extortion, is a focus on the public concern that everything has been done by the company to appropriately manage a potential crisis.
This is an abridged version on an article written by Peter Holloway, Partner and Jason Betts, Senior Associate. For the full version, please click here.
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Title : Partner
Office : Melbourne
Phone : +61 3 9288 1693
Fax : +61 3 9288 1567
Email : peter.holloway@freehills.com
