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The Legal Environment of

Business, eBook: A
Managerial Approach:
Theory to Practice
Content

Capstone Case Study1:

The Odwalla Juice Company Crisis

p. 656

Overview and Objectives

In 1996, a deadly strain of bacteria broke out among residents of some West Coast states and
eventually spread into western Canada. When the bacteria was traced to juice products made by
the Odwalla Juice Company in California, the company's loyal customers and market analysts were
shocked in disbelief. Odwalla had prided itself on being a socially responsible company that was
passionate about producing the healthiest juice on the market.
The events that followed the outbreak provide an example of how vastly different areas of the law
impact corporate strategy during a corporate crisis and how business ethics principles help drive
the decision-making process. The objective of this case study1 is to attempt to understand legal
and ethical implications using a comprehensive and practical approach. In analyzing this case,
students hone skills in constructing a business strategy for handing a crisis by (1) spotting the
multifaceted legal and ethical challenges of the crisis, (2) recognizing the strengths and
weaknesses in Odwalla's responses, and (3) using legal insight and ethical decision-making
models to craft a response.
Review Legal Concepts
Prior to reading the case, briefly review the following legal concepts that were covered previously in
this textbook: Food and drug safety (p. 535), Products liability (p. 226), Negligence (p. 217),
Criminal law (p. 553), and Business ethics (p. 110). Think of these areas of the law as you read the
case study facts and questions.

THE ODWALLA JUICE COMPANY'S ORIGINS

Odwalla Juice Company was started in 1986 by a group of health-conscious friends living together
in the San Francisco Bay area. Starting with a hand juicer and organically grown fruit, the owners
produced fresh juice in the back shed of one of the founder's homes and sold their juice by
delivering it daily to area restaurants. Perhaps the most essential part of their business model was
their claim that their juice was fresh from the fruit and without the pasteurization process that was
used by other juice producers. In fact, Odwalla was one of the pioneers of a wider movement in the
United States favoring more organic food consumption. Odwalla's founders held the belief that
pasteurization, the process of heating the juice to a certain temperature for purposes of killing any
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bacteria that had developed during growing, picking, or processing, affected the taste of the juice
and was unnecessary. Instead, Odwalla used an acid-based rinsing process to kill bacteria.
Producing fresh organic fruit juice as a central component of its business model, Odwalla
developed a loyal following of consumers that desired the freshest juice possible and its sales grew
exponentially. By the mid-1990s, Odwalla was selling nearly $90 million worth of juice per year.

SOIL TO Soul
Odwalla's founders were at the forefront of the corporate social responsibility movement that can
be traced to the mid-1980s. Indeed, as one of their founders was fond of saying, they embraced a
Zen-like philosophy in all of their dealings, where community was an important factor in the
equation. The company employed a soil to soul metaphor to describe its commitment to using fresh
organic fruit (soil) to nurture the body whole (soul) of its consumer. Odwalla's reputation as a
socially responsible, growth-oriented company flourished as they received awards from Business
Ethics magazine in 1995 for Outstanding Corporate Environmentalism and from Inc. magazine in
1996 as Employer of the Year.

CRISIS ON THE COAST

In early October 1996, an outbreak of E. coli2 struck several West Coast states, including
California and Washington, and reached into western Canada as well. E. coli is a potentially deadly
bacterium that develops as a result of contamination of food products or processing. On October
30, 1996, health officials in the state of Washington notified Odwalla that they were investigating a
possible link between the E. coli outbreak and Odwalla apple and carrot juice. After learning of the
potential link, Odwalla's executive management team had an emergency meeting to discuss their
response. Although there was no demonstrable link at this point, Odwalla's executive management
team decided to mobilize a voluntary recall of products containing apple or carrot products. This
was a major financial commitment involving the removal of Odwalla products from nearly 4,600 retail
outlets in seven states in just 48 hours. Odwalla claimed that it spent $6.5 million on the recall
effort.
p. 657

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The Odwalla juice company faced a corporate crisis, which included legal issues and ethical
questions, after their product was tied to an E. coli outbreak.
Odwalla's corporate crisis took a tragic turn when in November 1996, a 16-month-old child died
from E. coli after drinking Odwalla apple juice. As many as 60 other consumers were hospitalized
with E. coli-related illnesses in a period of just one month. At the height of the outbreak,
government investigators confirmed that the Odwalla products were in fact the source of the E. coli
contamination. Odwalla implemented a media strategy including daily statements to the press,
internal conference calls where managers were informed of updates, and setting up a Web site to
disseminate information. Odwalla publicly promised to pay for all medical expenses of injured
consumers and to reevaluate its manufacturing process immediately.

FALL OUT
Odwalla's brand name was decimated by the crisis. Immediately after the outbreak, Odwalla's stock
price dropped 34 percent and sales of its juice products fell 90 percent in one month. The
outbreak triggered numerous investigations by federal and state authorities. Customers filed
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negligence lawsuits claiming that Odwalla had known that the acid-rinse method was ineffective
and that scientific studies had shown that the method was effective in killing bacteria that caused E.
coli only 8 percent of the time. After it had been shown that pasteurization was a widely used
practice in the industry (although not required by federal or state laws) and that Odwalla
management had ignored its own head of quality assurance's warning about potential
contamination sources in the factory, the Food and Drug Administration levied a $1.5 million fine,
the largest in the agency's history at that time.
Immediately after the recall, Odwalla was widely praised by the media and commentators for its
handling of the crisis. The company decided that, despite mounting financial pressures from
lawsuits and fines, no employees would be laid off and that they would continue to donate to
community charities. Odwalla hired a public relations firm that constructed a standard explanation
that the contamination was unforeseeable and that all appropriate safety measures were in place.
The public largely believed Odwalla's explanations because its reputation for social responsibility
was iron-clad in its consumers' minds. Even the parents of the child whose E. coli-related death
had ignited the crisis were quoted as saying that they didn't blame the company for her death and
that Odwalla had done everything they could have under the circumstances.
However, during the discovery process in one of the lawsuits filed by an injured consumer, it was
revealed that Odwalla had more knowledge of a potential health hazard prior to the outbreak than
had been previously reported. A report surfaced that indicated that the U.S. Army had rejected
Odwalla's proposal to sell their juice in U.S. Army commissaries after an Army inspector found
uncommonly high levels of bacteria in a sample and concluded that the risk of contamination was
extraordinarily high. The Army rejection had taken place four months prior to the E. coli outbreak.
Responding to the Army's findings, Odwalla's head of quality assurance recommended that the
company add an additional layer of contamination protection by employing a chlorine-based
washing system for the fruit. His recommendations were rejected, however, due to management's
concern that the chlorine wash would affect the taste of the juice. After the Army disclosures were
made public, Odwalla settled several lawsuits despite its earlier resistance to a nonlitigation
solution.
p. 658

Soon after the settlement, The Seattle Times wrote a scathing editorial about Odwalla's course of
action. The editorial predicted that Odwalla would forever be known as the careless provider of
poisoned fruit juice. Odwalla's stock was now trading at its lowest level ever, and the company was
incurring massive debt to cover litigation costs and technology upgrades.

ODWALLA TODAY
After the fallout from the E. coli crisis, Odwalla invested heavily in quality assurance technology and
eventually became an innovator of a flash-pasteurization process that killed all bacteria, but kept
the fresh taste and quality of the juice intact. Just two years after the crisis began, the readers of
San Francisco Magazine voted Odwalla Best Brand. Although the company looked poised for a
comeback, it had accrued substantial debt and was forced to begin exploring the possibility of
merger opportunities. After a merger with East Coast juice maker Fresh Samantha in 2000,
Odwalla ended up as part of a large acquisition by the Minute Maid division of The Coca-Cola
Company in October 2001. Today, Odwalla remains a subsidiary of Coca-Cola and has over 650
employees. Their management continues to focus on its soil to soul model and now feature 25
organic products within eight product lines including smoothies, soy shakes, and food bars.
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Connecting Legal and Ethical Concepts: Questions for Discussion

Chapter 5, Business Ethics
1. Is there a disconnect between Odwalla's corporate social responsibility model and its actions
or course of conduct? In what ways did Odwalla's course of conduct differ from its stated social
goals?
2. Because Odwalla was not specifically required to use the pasteurization process at the time,
what ethical considerations factor into the decision on whether or not to use pasteurization?
3. Does the fact that the industry standards at the time were to subject the juice to pasteurization
impact the ethical decision-making analysis?
Chapter 9, Product Liability
1. Did the manufacturing or design process of the juice render it an unreasonably dangerous
product under the Restatements? Why or why not?
2. Are there any other ways in which the product could have been defective aside from
manufacturing or design?
3. What defenses, if any, could Odwalla use to rebut a claim of a defective product?
Chapter 9, Negligence
1. Are there any incidents of negligence indicated in the case (either pre- or postcontamination)?
2. In the context of a negligence analysis, what legal duties did Odwalla owe to its consumers?
Do they owe any special duty to consumers?
3. Does failing to comply with industry standards at the time of the contamination constitute a
breach of duty?
Chapter 21, FDA Food Safety Regulation
1. What federal statute regulates Odwalla's processes and procedures?
2. Because the FDA required no specific pasteurization standards at the time, should Odwalla be
fined for failing to use such a system?
3. If Odwalla had not voluntarily recalled the juice, what options did the FDA have in response to
the outbreak?
Chapter 22, Criminal Law
1. Apply the Model Penal Code sections on criminal liability for business entities to the Odwalla
case. Do the facts in the case indicate that Odwalla's action rose to the level of criminal
culpability? If yes, what defense, if any, is available to Odwalla?
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2. Odwalla's management consistently issued statements denying that they had any actual or
constructive knowledge that Odwalla's processing systems were dangerous. Do any facts in
the case study contradict those statements? Are these facts sufficient to establish the
elements of criminal intent on the part of the executive that made the denials?
ASSIGNMENT: Devise Odwalla's Strategy
Odwalla ordered a voluntary recall that was expensive and potentially devastating to the company
before an affirmative link was found. Assume you were one of the managers at the Odwalla
emergency meeting held after the E.coil outbreak. What are Odwalla's options? Using the legal
decisions in business analytical model in Chapter 1, Legal Foundations, and the ethical decisionmaking paradigm in Chapter 5, Business, Societal, and Ethical Contexts of Law, as a starting
point, devise a strategy that includes the appropriate balance between (1) representing the best
interests of the primary and secondary stakeholders, (2) protecting the company's future, (3)
minimizing the risk of public harm, and (4) fulfilling the corporation's commitment to corporate
social responsibility.

1A

complete bibliography for this case study may be found on this textbook's Web site at
www.mhhe.com/melvin.
2For

purposes of this case study E. coli is shorthand for E. coli 0157:H7, which is the name of a
strain of bacteria that lives in the digestive tracts of humans and animals. E. coli has been found in
uncooked meat, raw milk or dairy products, and in raw fruits and vegetables that have not been
properly pasteurized or processed.

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