Blue Bell managed poorly, suits say
Blue Bell Creameries played off its small-town roots while becoming the nation’s top selling ice cream brand — until the outbreak of a deadly bacteria traced to its products forced a nationwide recall and temporary shutdown of its factories.
Since then, the company has gradually returned to normal, addressing its sanitation problems, reopening the observation deck to visitors at its flagship Brenham factory, launching new flavors, including Sweet ‘n Salty Crunch, a vanilla ice cream with chocolate-coated pretzels, almonds and chocolate chunks in July.
But Blue Bell appears unlikely to put the episode behind it anytime soon. Two shareholders have filed suit against the company, alleging that mismanagement by executives and the
board of directors led to a Listeria outbreak that two years ago caused three people to die and several others to become seriously ill.
The lawsuit claims the product contamination damaged the company’s finances and brand and cost it money. It’s unclear how much it cost Blue Bell, how large a stake the shareholders own, and how much value they lost because the company is privately held and not required to report financial information. In the lawsuits, any reference to the company’s finances and the ramifications for revenues and profits were redacted, with whole pages blacked out.
Some analysts, however, estimate that the company’s sales plunged by hundreds of millions of dollars as a result of the Listeria contamination. Euromonitor, an international market research firm, estimated that the ice cream maker’s sales fell by about half to $445 million in 2016, a year after the outbreak.
Blue Bell declined to comment. The company has not yet filed responses to the allegations.
The lawsuits allege that Blue Bell and its officers breached their fiduciary duties by letting sanitation problems fester. Federal food regulators found that equipment-cleaning procedures were inadequate and allowed condensation to drip from ceilings and contaminate food and food surfaces. The U.S. Food and Drug Administration and a private laboratory found that the sanitation failures were widespread, affecting operations at all three of Blue Bell’s plants, which are in Brenham, the company’s largest and oldest, and in Oklahoma and Alabama.
One of the machines — known as “Gram” — that made ice cream bars and sandwiches was so contaminated with Listeria that Blue Bell announced it would permanently stop using the machine.
One of the shareholders, Mary Giddings Wenske, alleged in her lawsuit that Blue Bell, its executives and board members “willfully disregarded” their obligation to run Blue Bell’s plants to sound industry standards, noting that prior to the 2015 recalls, “unsanitary practices and conditions were rampant” within the company’s facilities. She also alleges that the company’s testing and monitoring procedures were “woefully deficient.”
Wenske is the owner of a Blue Bell limited partnership share, according to the lawsuit she filed earlier this month. She is also trustee of a trust that owns an unspecified number of shares.
Jack L. Marchand II owns 29 shares of Blue Bell stock and alleged in the lawsuit that Blue Bell along with key members of the company’s leadership team breached their fiduciary duty by failing to maintain necessary standards to make and distribute the company’s ice cream products in a sanitary and safe manner. Marchand filed his case in August.
Blue Bell has been run by the Kruse family for nearly a century. The 10-member board consists of four family members, three longtime employees and three close friends and associates, according to Marchand’s lawsuit. It’s unclear what the relationship of Wenske and Marchand is to the company or the family, since those details were redacted from the public copy of the lawsuit.
Lawyers for Wenske and Marchand would not discuss their clients or their cases. Both Wenske and Marchand are seeking unspecified damages.
Trey Branham, a Dallas lawyer specializing in shareholder rights, said the purpose of shareholder lawsuits is often to force a company to reform its practices as much as compensate the plaintiffs for avoidable losses. Marchand, for example, is asking the court to direct Blue Bell to nominate independent directors without family, employment or other ties to the company.
Shareholder suits rarely get to juries, Branham said. They are typically settled out of court, sometimes leading to substantial changes at the company.
“A lot of times, the fight is about whether it’s good for the company or not,” Branham said.
Blue Bell took extensive measures to clean up its plants before it resumed ice cream production, starting with its Alabama plant in July 2015, three months after the company temporarily halted production. It reopened its plant in Oklahoma in September 2015 and finally Brenham in November 2015.
Blue Bell also received a cash infusion from Fort Worth investor Sid Bass, who offered to lend it up to $125 million in exchange for a one-third stake.
Since the Listeria outbreak, Blue Bell has slipped to the fourth bestselling brand, behind Breyers, Ben & Jerry’s and Haagen-Dazs, according to the data analysis firm Statista.
Blue Bell asked the FDA last year for permission to discontinue expensive precautions adopted after the Listeria outbreak and return to more standard food safety procedures. The FDA would not say whether Blue Bell’s request was granted. It has not yet responded to a Freedom of Information Act request filed by the Houston Chronicle.