TEACHING NOTE

for
ODWALLA, INC., AND THE E. COLI OUTBREAK

This case illustrates the following themes and concepts discussed in the chapters listed:

Theme/Concept Chapter
Stakeholders: primary and secondary 1
Crisis management 2
Corporate social responsibility 3
Corporate citizenship 4
Business ethics 5
Ethical reasoning: utilitarian, rights, justice 6
Government regulation of business 8
Technology 13
Product liability 16
Consumer protection 16
Product recalls 16
Media relations 20

This case describes the actions taken by Odwalla, Inc., a leading producer of fresh fruit
and vegetable based beverages in the western United States and Canada, in response to an
outbreak of e. coli poisoning apparently caused by its unpasteurized apple juice products
in October, 1996. The first part focuses on the crisis facing Odwalla after executives
were informed of a possible epidemiological link between the company's products and
several e. coli cases in the Seattle area. Executives needed to decide quickly, on the basis
of incomplete information, if the company should organize a recall and if so how it
should be carried out. The second part of the case describes the Odwalla recall effort and
other actions taken by the company, including its interactions with the media and with
families of poisoning victims. It then focuses on the dilemma facing the company
concerning how to reintroduce its products safely to the marketplace without losing the
support of Odwalla's core natural foods customer and describes Odwall's decision to flash
pasteurize its apple juice. At the end of the case Odwalla considers how to respond to
efforts by government regulators to impose stricter controls on the juice industry.
Discussion Questions

1. What factors contributed to the outbreak of e. coli poisoning described in the

case? Do you believe that Odwalla was responsible, wholly or in part, for the
outbreak? Why or why not?

Factors contributing to the outbreak may have included:

Odwalla's failure to pasteurize its juice, prior to the outbreak;

Odwalla's failure to attach a warning label to its products, indicating the rare but still
possible risk of bacterial contamination to infants, the elderly, and those with
suppressed immune function;
Faulty or careless handling of apples by growers or packers, permitting contamination
of a batch or batches by cow or deer manure;
Poor personal hygiene by an Odwalla employee, grower, or shipper;
Failure by Odwalla to train employees properly concerning proper personal hygiene
for workers in the food industry;
Inadequate microbial testing at the Dinuba plant;
Failure by the Food and Drug Administration, the Centers for Disease Control and
Prevention, and other government agencies to publicize information about earlier
incidents of contamination involving unpasteurized apple cider;
These agencies' failure to issue regulations or advisories to industry concerning the
risk of e. coli contamination in acidic food products;
Failure by Odwalla executives or scientists to properly monitor the scientific
literature relevant to food safety;
The failure of the authors of the JAMA article to recommend pasteurization of apple
juice.

Based on students' analysis of the relative weight of these factors, they may assign
varying degrees of responsibility to Odwalla.

2. What should Odwalla do, as of October 30, 1996? As of November 11, 1996? In
each instance please list at least three options and state the arguments for and
against each.

The major options open to Odwalla on October 30, 1996, were the following:

Do nothing and wait for the results of the investigation underway by the King County
Department of Health;
Organize a non-public recall, removing the suspect product and conducting their own
investigation privately, postponing a decision until such an investigation was
complete;
Organize a public recall of all products potentially implicated (those containing
unpasteurized apple juice, about 70% of its products).
Student discussion of the relative merits of these options is likely to be spirited and wide-
ranging. Arguments that students may make against a public recall include:

There was no proof that Odwalla products had caused the cluster of e. coli cases
observed in the Seattle area.
There were scientific reasons for believing that e. coli could not survive in apple
juice, so the company was probably not responsible for the outbreak.
The company was not legally required to recall the product.
A recall would alarm the public and cause confidence in fresh juice products to
decline.
The public had not been informed that there might be a problem. The media had not
been alerted. By ordering a recall, the company would create a crisis where there was
none.
A recall would be extremely expensive.

Arguments that students may make in favor of a public recall include:

Odwalla had an overriding ethical obligation to its customers to protect their health
and safety.
If it did not act immediately, more customers might consume contaminated product
and become ill, or even die.
Odwalla's core values and mission focused on nourishment. A failure to act to protect
its customers' health would violate the company's espoused values.
A non-public recall would remove possible tainted product from store shelves, but
would not alert consumers who had already purchased contaminated product not to
drink it.

Teaching Tip
In analyzing the relative merits of these options, students should be encouraged to
identify criteria that may be used to choose among them. These may include:

Cost: Can the company afford it? The company had a strong cash position, and
reasonably good liability insurance coverage. Arguably, the company could afford a
recall, although it was clearly going to be very expensive. (Data in the case indicate
that the company was selling about $1.1 million worth of product a week. If it
immediately recalled and destroyed about 2 weeks worth of product, as a rough
estimate, the recall would immediately cost over $2 million.) A non-public recall
could be as expensive, or nearly as expensive, in the short run. Doing nothing would
be the cheapest option, in the short run.
Corporate image and public relations: A public recall would associate the company
initially with a tainted product. However, most research on crisis management
indicates that prompt, full disclosure; assumption of responsibility; expression of
concern; and efforts to correct mistakes in the long run are the best strategies for
protecting a company's reputation.
 Corporate values: Which option is most consistent with the company's espoused
values? Odwalla called its values and mission statements "touchstones" for corporate
decision-making. In this instance, the company's values were clearly most consistent
with an immediate public recall.

The six major options open to Odwalla on November 11, 1996, are summarized in the
case. Arguments that students may make include the following:

Elimination of apple juice products was the only way to fully guarantee the safety of
the product. However, since apple juice was an ingredient in 70% of the company's
products, this option would be very costly.
Improved manufacturing processes, including a full HACCP program, would
decrease the likelihood of contamination at many points in production. It could be
tailored to the particular product, plant, and expertise of personnel. However, it
would also be costly.
Labeling was a low cost option, and might decrease the company's liability exposure.
It would reduce the chance that vulnerable individuals would become gravely ill in
the future, if another contamination should occur. However, it might have the effect
of frightening off some customers and generally decreasing public confidence. It
might enable the company to continue to sell unpasteurized juice, appealing to the
hard-core natural foods customer who would reject a pasteurized product.
Standard pasteurization would kill most microorganisms and prolong shelf life.
However, it would also destroy many nutrients, affect the taste and appearance of the
product, and undermine basis for the product's price differential. Natural foods
customers would be displeased. The procedure was well established and understood.
Modified pasteurization would kill most microorganisms, but not prolong shelf life.
It would destroy some nutrients. Natural foods customers would be displeased. The
procedure was well established and understood.
Although some alternative technologies showed promise, they were not sufficiently
developed to be available for immediate implementation.

3. What steps, if any, should Odwalla take as of the point case ends?

At the time the case ends, Odwalla was facing growing pressure from government
regulators to improve the safety of fresh juice. Several major juice producers, including
Cargill and Nestle, supported mandatory pasteurization. Some public health advocates
supported this position. Odwalla, on the other hand, supported industry self-regulation.
Although the company itself had decided to pasteurize its products, it did not believe
pasteurization should be required. One option opened to the company at this point would
be to organize politically with other juice producers to oppose mandatory pasteurization
or to help develop regulatory guidelines for the industry consistent with their own
position. Odwalla also needs to take steps to rebuild its brand name in a manner that is
consistent with the company's underlying values.
4. Do you consider Odwalla's voluntary recall decision to be an act of corporate
social responsibility? Why or why not?

YES: The recalls of Odwalla juice were not mandated by any government agency. They
were undertaken on a purely voluntary basis. The recalls were very costly to the
company. In several other respects, the company's actions went way beyond the
minimum required by the law. Additional steps taken voluntarily by the company
included paying the medical costs of injured persons, providing a hot-line, and later
instituting flash pasteurization and improved HACCP procedures to improve the safety of
its products. The company chose to do the "right" thing, even though it had to act under
conditions of extreme uncertainty and incomplete information and at considerable risk to
its reputation.

NO: Odwalla was acting solely from economic self-interest. The recalls, although not
legally mandated, were necessary to prevent further injuries and to limit the company's
financial liability. The recalls were necessary to restore public confidence in the product
and hence to protect the company's long-term viability.

5. What is the appropriate role for public policy in the area of food safety? Assess
the role of government authorities in this case. In your view, did they act properly?

Various agencies of government, including the Food and Drug Administration, have
responsibility for assuring the safety of the nation's supply of food and beverages.
Arguably, government regulators failed by not requiring pasteurization of fresh fruit
juices, especially following publication in 1993 of a study linking an outbreak of e.coli
poisoning to fresh apple juice. At the very least, regulators could have publicized the
findings of this study. The their defense, government regulators were operating in an
environment in which rapidly advancing scientific knowledge and the emergence of new
pathogens, such as new strains of e. coli, mad it very difficult to keep regulations current.

Teaching Tip
Odwalla has produced a three-part videotape, each segment running approximately 3
minutes, documenting the e. coli crisis, the company's response, and the reactions of
customers. These videotapes may be ordered from Odwalla, Inc., 120 Stone Pine Road,
Half Moon Bay CA 94019.
Epilogue

Odwalla has been widely praised for its effective handling of the crisis created by the E.
coli outbreak. The company has been recognized for its prompt, well-executed recall,
which may have saved lives; for its open and candid communication with the press; and
for its vigorous efforts to improve the safety of its products. Odwalla's actions have
probably strengthened its organizational commitment to its core mission and values.

Financial recovery

Right after the recall, Odwallas sales fell to 10 percent of their pre-recall levels. But by
mid-1997, the company's sales had recovered to 80 percent of their pre-recall levels. 85
percent of the retailers with whom they had done business prior to the recall had retained
their Odwalla accounts. The company's core California markets were the least impacted
by the crisis; most adversely impacted were sales in the Pacific Northwest, site of the
1993 Jack-in-the-Box incidents. By mid-1998, sales had reached close to 100 percent of
their pre-recall levels, and the company continued to grow rapidly in the next several
years as it acquired Fresh Samantha, Inc., the leading premium refrigerated juice
company on the East Coast, and introduced a number of new products.

The company lost almost $5 million in the first quarter, 1997, and a bit over $3 million in
the second quarter. However, the company resumed profitability by the end of fiscal
1997.

Odwalla stock continued to slide for some time after the crisis. After hitting a low of
around $5 a share in late 1997, the stock recovered somewhat. By mid-summer, 1998,
Odwalla stock was selling at around $10 a share, still well off its highs in the upper-20s
before the E. coli incident.

Lawsuits against the company

In total, 21 personal injury and fraud lawsuits were filed against in connection with the E.
coli incident. Most of these lawsuits stated that Odwalla should have known of the
danger of selling unpasteurized juice; the juice was improperly processed; the product
should have been tested for E. coli; and warnings should have accompanied the product.
By 1998, most of these cases had been settled out of court, and company analysts
described the remaining cases as minor. Total payouts to settle the lawsuits were
estimated at over $12 million.

Relations with the Gimmestad family

In January, 1997, at the invitation of Steltenpohl and other Odwalla executives, Anna
Gimmestad's parents traveled to the company's headquarters in Half Moon Bay to meet
with Odwalla employees, who spoke with them personally. Steltenpohl later described
this as "the most intense part of the whole experience for me. It was very emotional for
everyone," he added, "but in the end allowed us to emotionally process what had
happened."

The Gimmestads declined to pursue legal action against Odwalla. However, the
company worked with the family to determine a suitable memorial to the child, and
donated funds to build a playground in her hometown in Anna's memory. The company
also made a gift to the trauma unit of the hospital that had cared for the child during her
illness.

Settlement of federal criminal charges

A grand jury in Fresno, California (near the site of Odwalla's manufacturing facility) met
for about 18 months during 1997 and 1998 to consider bringing criminal charges against
Odwalla for its role in the E. coli outbreak. In July 1998, Odwalla agreed to pay a file of
$1.5 million to settle 16 misdemeanor charges that it had shipped contaminated juice. It
also agreed to 5 years probation. At the time, this was the largest fine ever levied in a
federal food injury case. Steltenpohl stated that the settlement "closes a very painful
chapter for our customers and company, but it's also a huge positive closure for the
company. It puts us back on our feet and puts the worry behind us" Steltenpohl also
noted that the grand jury investigation had not found anything beyond what the company
had admitted voluntarily on the first day of the crisis.

Regulatory action

The FDA declined, for the time being, to require pasteurization of fresh juice. However,
it undertook a major program to develop voluntary guidelines to encourage producers to
handle fruits and vegetables more safely. In 1998, President Clinton called for a major
expansion of the nation's food safety inspection program, and asked Congress to expand
the FDA's authority to block import of fresh foods from other countries will weaker
inspection standards.

What happened?

Most observers believe that the cause of the outbreak will never be known definitively.
The two most likely explanations are contamination by ground apples, or poor personal
hygiene by an infected worker. However, these events, if they had occurred, could likely
never be established after the fact.