Do Not Pass Go: Federal Judge Orders Execs Jailed for Contempt of Recall Order

A recent federal decision has made clear that court-ordered recalls can have real teeth, not just for manufacturers but also their officers—especially when the court has reason to suspect a company’s execs are deliberately dragging their feet.

On Tuesday, September 2, the Northern District of Georgia held the CEO and a senior vice president of Hi-Tech Pharmaceuticals in contempt for their repeated delays in carrying out a court-ordered recall.  The court had issued the original recall order in May 2014, finding that Hi-Tech had run afoul of a long-standing injunction by continuing to make unsubstantiated weight loss claims about its dietary supplement products in violation of Sections 5 and 12 of the Federal Trade Commission Act.  Months later—and with the recall far from complete—the court ordered the executives jailed as a sanction.

Expressing concern that the execs were not implementing the recall in good faith, the court emphasized several facts justifying the harsh penalty:

• The FTC had presented evidence showing that large volumes of the non-compliant products were still available in retail stores.
• Hi-Tech had not begun circulating a recall notice to its retailers until 50 days after the court ordered the recall.
• That recall notice did not identify the relevant products by lot or serial number, nor did it provide instructions for returning the products to Hi-Tech.
• Hi-Tech could not show that its proposed mailing list accurately reflected the complete universe of retailers carrying the non-compliant supplements.
• The company’s sales department had not adequately followed up with retailers to ensure that they were complying with the recall.
• Hi-Tech had not conspicuously disclosed the recall notice on its website.

The court explained that the execs would remain incarcerated until they could show that four conditions were met:

1. No more products making the barred claims remain on retail store shelves.
2. Hi-Tech has issued a revised recall notice detailing exactly which specific products are being recalled and what return procedures to follow.
3. The company has distributed the recall notice to all its retailers and distributors by letter or email.
4. The recall notice is prominently displayed on each page of the company’s website.

The court's reaction, severe as it may seem, didn’t exactly come out of left field.  The original permanent injunction barring Hi-Tech from making the advertising claims at issue was issued in 2008.  Five years later, in August 2013, the court found that Hi-Tech had resumed making the prohibited claims in violation of that injunction, before issuing sanctions and ordering a recall in May 2014.

The incarceration decision, in short, represented the culmination of a persistent pattern of non-compliance that had begun years earlier.  But the extreme fact pattern in this case should not obscure how important it is for companies to tackle every recall, voluntary or court-ordered, with a detailed plan and timeline for achieving compliance.

Monopoly image: courtesy of Flickr (Licensed) by Mark Strozier

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