Monterey County Herald
Dania Akkad, Larry Parsons and Virginia Hennessey
It could be at least a year before fallout from the E. coli spinach outbreak settles in the Salinas Valley.
A month into the largest agricultural crisis in recent county history, the FBI probe into the incident that killed three people and sickened nearly 200 others continues. The Mexican government is holding strong on a ban against California lettuce, tangentially connected to the outbreak.
And health investigators -- some working 18-hour days during the past month -- are still scouring local fields, searching for the answers that may set protocols, clarify liabilities and give closure to an incident weighing heavy over the valley, its growers and ranchers.
What will happen to the local company tied to the outbreak, to the spinach and lettuce markets, to the regulatory and industry landscapes as the year moves forward? It's all still up in the air.
One thing is certain: Salinas Valley agriculture will never be the same.
Changes are bound to be made for the food-safety practices growers and processors follow. The industry will have to win back consumer confidence in spinach as well as other fresh-cut and bagged products that are taking a hit.
One attorney, representing 93 people sickened after eating fresh spinach, questions whether the company at the center of the outbreak, Natural Selection Foods LLC, can survive intact.
Bill Marler, a partner in the Seattle law firm Marler Clark, who has represented victims in high-profile foodborne illness lawsuits against Odwalla and Jack in the Box, said he doesn't think San Juan Bautista-based Natural Selection has enough insurance to cover victims' claims, which he estimates at more than $100 million.
The result, Marler said, is that Dole -- for whom Natural Selection processed and packaged spinach and whose bagged spinach has been the only brand to which investigators have traced the E. coli strain -- will eventually have to cover some claims.
"The problem for Natural Selection," he said, "is for every dollar Dole pays, they are going to want it out of Natural Selection's hide."
To protect themselves from paying back Dole, Marler predicts that Natural Selection -- parent company of Earthbound Farm, the largest grower-shipper of organic produce in the country -- will need to file for bankruptcy.
Samantha Cabaluna, spokeswoman for Natural Selection, said that the company has not considered filing for bankruptcy and declined to speculate on the company's legal or insurance issues.
"Since the investigation is still ongoing," Cabaluna said, "it would really be speculative."
Whatever happens in the end, the former CEO of a company that suffered major blows after a foodborne illness outbreak with more than twice the number of victims said the key to keeping down costs is to settle claims quickly.
Hugh Hilton, co-founder and managing director of Los Angeles-based turnaround firm, Catalyst LLC, was at the helm of the Tex-Mex chain Chi-Chi's in 2003 when more than 600 customers who had eaten salsa were infected with hepatitis A. Three people died.
Chi-Chi's had already filed Chapter 11 bankruptcy when Hilton was brought in as interim CEO to sell that chain and two others owned by a parent company. A potential buyer had come forward to buy Chi- Chi's when the outbreak struck.
The hepatitis was soon traced to Mexican-grown green onions used in salsa served at some of the chain's Pennsylvania locations.
At first, Hilton said, he was reluctant to accept full responsibility for the outbreak: Chi-Chi's hadn't grown the green onions. An employee hadn't infected them, either. They just used them in salsa.
But as far as the law went, Hilton soon realized, it really didn't matter. The company was liable though it hadn't purposely or knowingly served tainted onions.
The company had a choice. It could blame people in the supply chain, or quickly and publicly accept responsibility. It choose to do the latter.
"If you move quickly to address the customers needs and their out- of-pocket expenses," he said, "that goes a long way toward building a bridge, and when it comes to settling their claims, they did settle them in a reasonable manner."
Speeding up process
To speed up the settlement process, Hilton said, his company took groups of people with similar claims and settled with them all at once.
"It was a great way of doing it," Hilton said.
Eventually, the company paid nearly $40 million in damages. Still, the damage to the Chi-Chi's brand was so extensive, Hilton said, it was never able to recover and stand on its own. Outback
Steakhouse Inc. bought the chain for $42.5 million in August 2004, transforming it into a new chain, Cheeseburger in Paradise.
Hilton said he has recently contacted Natural Selection's chief operating officer Charles Sweat to offer advice, something Hilton said he wished he had during his outbreak crisis.
"Most people, when they are running their company," he said, "this is a completely alien experience for them."
Similar to the Chi-Chi's case, attorney Bruce Clark -- the Clark of the Marler Clark law firm -- said Jack in the Box negotiated claims swiftly with victims after a 1993 E. coli outbreak that sickened more than 600 people and killed four.
All of the groups on the supply side -- Jack in the Box, meat suppliers and others -- pooled their insurance to cover the victims' claims and only later settled disagreements about who had caused the outbreak, said Clark, who represented Jack in the Box against his future law partner Marler, who was representing victims.
"Let's not let plaintiffs' attorneys like Marler Clark dictate the situation," Clark said of the proactive strategy.
Changes to practices?
As the rest of the local industry removed from the litigation looks in and watches the situation unfold, the growing question is how the details will shape the way farming is practiced into the future.
Jim Bogart, president of the Central California Grower-Shipper Vegetable Association, said the industry is anxiously waiting to learn how the deadly E. coli strain may have gotten from cattle dung to bagged spinach.
"Is it the smoking gun? Now we're trying to find how the bullet got from the smoking gun to the spinach," Bogart said.
He said "any information and solid facts" will enable the produce industry to take more steps to lower contamination risks.
Scott Violini, president of the Monterey County Cattlemen's Association, said local cattlemen are waiting for more facts from ongoing state and federal investigations that last week linked cow manure with the same pathogenic E. coli strain that caused the nationwide health crisis.
"We're going to wait until we find out what the big boys are going to do," said Violini. "We're a little nervous, to say the least, but like (a health official) said, this is not the 'smoking cow.'"
He said cattle ranchers are like everyone else involved in agriculture with a "job to produce the safest product possible."
He said his 100-member association works closely with water- quality officials and other regulators.
"At this time, we're just kind of waiting to see," he said.
The possible link between grazing cattle and spinach contamination could cause hard feelings between ranchers and growers, Violini acknowledged.
"We're all agriculture," he said. "I'm not going to say there won't be any friction, but that's up to the individual."
Discovering the apparent link between spinach contamination and cow manure was "a big step," said Joe Pezzini, vice president of operations for spinach-growing Ocean Mist Farms.
"That's important to us. We want to learn from that to move our food-safety practices forward," Pezzini said.
Even with field investigators looking for answers, the market for spinach has registered the hit to the local industry's bottom line.
One Salinas Valley spinach grower, who asked not to be identified because he has been overwhelmed by media calls, said his firm is selling about 60 percent of the spinach it would normally be supplying to processors at this time. The market is bouncing back slowly.
"That's better than zero percent a few weeks ago," Pezzini said.
The shift of spinach production to the Imperial Valley next month may provide another boost to the reeling industry. The immediate stigma of spinach from the Salinas Valley will be gone, and sales personnel will offer desert-grown fresh product instead of the "nasty Salinas Valley spinach," he said.
Virtually all spinach is out of local fields by Thanksgiving, and the leafy green isn't grown in the Huron area because chemicals sprayed on cotton fields can spot spinach leaves, he said.
Other shippers likely will pick up new customers that move away from Natural Selection foods.
"Everybody is sort of bullish. We all sort of are waiting to pick over the carcass," the grower said.
There is still a lot of confusion in the market, and it will take industry action, government safety assurances, and marketing aimed at trade groups, retailers and consumers to win back scared customers, Pezzini said.
It's not just the future of fresh spinach greens at stake, but a lot of other fresh vegetables.
"A lack of confidence bleeds over into a lot of other products," Pezzini said.
During the winter, Ocean Mist grows in the Coachella Valley and Yuma, Ariz., areas, like many other firms. That could lower the immediate heat for fresh produce on the market.
"It may be a mixed blessing and bring customers back, but what happens next spring?" Pezzini said.
About $188 million worth of spinach was grown in Monterey County in 2005. But that is only the value that growers received for their crop.
What is not recorded with that number is the amount of money processors made selling ready-to-eat products, nor the money that was invested to bag, ship and stock the spinach.
Bogart said the economic losses are significant, but estimates aren't available. His association is conducting a survey to put a dollar figure on the losses.
"I would say the entire industry has been hurt," he said.
Bogart said the industry will seek "some sort of (economic) relief from anybody and everybody" because losses have been virtually uncovered by insurance.
While all industry members would have general liability insurance in case their product sickens someone, very few have "product recall" or "contaminated products" policies, Central Coast insurance brokers said this week.
Only growers or shippers whose products were contaminated will be able to collect.
"It's really kind of unfortunate that the actions of a few have had such a drastic impact on the majority," said Trey Busch, executive vice president of Aon Risk Services in Salinas. "If you're an innocent bystander -- like Ocean Mist or New Star Fresh Foods -- that wasn't implicated, there's really no insurance coverage for any of those people that they can fall back on."
Product recall insurance pays industry members whose products are the subject of recalls because of contamination. The only way the policy pays for collateral losses to others in the same industry is if the original contamination was caused by purposeful tainting.
Francis Svedas, co-owner of Barlocker Insurance in Salinas, said his clients are "finding out the hard way" that their losses aren't covered because their produce wasn't contaminated and the E. coli outbreak is apparently accidental.
"My ears perked up when I first heard the FBI was investigating," he said. "I thought maybe somebody tampered (with the tainted spinach), so people would be covered."
Svedas said the vast majority of growers and shippers do not carry recall insurance because it is "prohibitively expensive" and they trust their production practices.
He said it is ironic that in the end, the bad apple in the bunch gets reimbursed.
"It's almost as if someone is being rewarded for doing a poor job, " Svedas said.
The best insurance, some industry players say, may be investing in research that can shed light on how E. coli contaminated leafy greens in 20 outbreaks over the past decade. Nine of the outbreaks have been linked to Central Coast produce.
On Oct. 27, Rep. Sam Farr, D-Carmel, plans to host a meeting in Salinas of researchers and industry leaders to discuss research needs and to prioritize them. The 2007 federal agricultural spending bill hasn't been approved, leaving open the possibility of squeezing out additional funding when Congress resumes in November.
"When you go to the doctor, you don't just say, 'I'm sick,'" Farr said. "You say, 'These are the symptoms I'm having' and they try to diagnose a specific prescription. That's where we are going with our industry."
Said Pezzini, "Nobody wants to go through this again. Nobody in the industry wants anybody injured by our product. There is a real sense of urgency."