BEECH-NUT’S APPLE JUICE

By Donna J. Wood and Alden Detwiler

During the 1970s and early 1980s, the Beech-Nut Nutrition Corporation, with primary plant facilities at Canajoharie, New York, and headquarters near Philadelphia, was the second largest maker of baby foods in the United States, with roughly a 15 percent market share (comparable to Heinz’s market share), compared to Gerber’s 70 percent. From its origins as a meatpacker in 1891 to its modern status as a diversified food manufacturer, the company had built a reputation for pure, natural, high-quality products (Welles, 1988; Traub, 1988).

In 1973, lawyer Frank Nicholas and a group of colleagues bought the baby foods division of Beech-Nut from Squibb Corporation, which had acquired the company in 1969. The new owners were undercapitalized and overloaded with debt from the beginning, and the company began to lose money.

Beech-Nut signed an agreement in 1977 with a wholesaler run by Zeev Kaplansky, Interjuice Trading Corporation, to purchase apple juice concentrate. Interjuice was able to offer concentrate well below the market price (Welles, 1988), an opportunity that Beech-Nut was reluctant to turn down, given its financial troubles. By 1978, with apple juice products accounting for 30 percent of total sales, the Interjuice contract provided significant cost savings to a firm deeply in debt (Welles, 1988). Early savings from the contract amounted to about $250,000 a year on a $50 million operating budget. Later, the disparity between the Interjuice product and the market price of juice concentrate grew to 20-25 percent (Traub, 1988).

Jerome J. LiCari, Beech-Nut’s director of research and development, and the chemists on his staff heard about the new contract and, because of adulteration rumors flying about the juice industry, wanted to test the new supplies for purity and quality. Although there was no conclusive test of apple juice purity available, the chemists tested the Interjuice product with procedures known to provide good evidence of the presence of adulterants such as corn sugar. Their conclusion was that the Interjuice concentrate was likely to be heavily adulterated, if not completely fake (Welles, 1988). At this point, Beech-Nut was buying about 90 percent of its apple concentrate from this supplier (Mintz, 1987).

Interjuice, through its distribution firm, Universal Juice Company, claimed to be importing its concentrate from Israel to a Queens, New York, facility of the Food Complex Company, whose owner, Raymond H. Wells, was Zeev Kaplansky’s partner in Interjuice and Universal Juice Company. In 1978 two Beech-Nut employees went to Queens to visit the supplier and investigate the manufacturing process. Factory officials showed the Beech-Nut people a warehouse area, but would not let them into the area where juice concentrate was being processed (Welles, 1988).

LiCari and other scientists at Beech-Nut told managers, including Operations Vice President John F. Lavery and President Neils L. Hoyvald, that Universal was not a reliable supplier of high-quality product (Welles, 1988). Lavery, a pillar of his local church and community (Traub, 1988), told LiCari that if he thought the contract should be voided, he would have to prove that the concentrate was adulterated. LiCari knew, however, that other juice manufacturers, including the market leader Gerber, required their suppliers to prove the purity of their products or lose out on contracts (Welles, 1988).

Lavery apparently did take action on LiCari’s information. Initially, he required Kaplansky to sign a “hold harmless” agreement, whereby Universal would bear the costs of any consumer complaints or lawsuits concerning their product. Later, after LiCari had informed him that the concentrate was now “probably” adulterated with beet sugar, then impossible to detect conclusively (unlike corn sugar), Lavery directed that the concentrate should be used only to make mixed juice products. Adulteration is much more difficult to detect in such products, compared with single juice items (Traub, 1988).

It later developed that Universal’s juice concentrate product was completely fraudulent; its chemists could replicate apple juice chemically, using cheaper ingredients. A Gerber executive told a Business Week reporter, “When it comes in at that price, you don’t have to test it. You know it’s fake.” It was a deal too good to be true (Welles, 1988).

Nicholas and his partners sold Beech-Nut to Nestlé in 1979 for $35 million (although Nicholas stayed on as president until 1981). Nestlé invested almost twice again that much – another $60 million – in capital improvements and marketing, but the company continued to lose money.

LiCari went to work in 1981 on developing a more reliable and conclusive test for adulteration. He was concerned that the Universal concentrate would cause trouble for the company’s new line of products geared for children of various ages that emphasized “all natural” ingredients (Welles, 1988). By August of that year, LiCari and other scientists in his unit felt that they had virtually conclusive proof that Universal’s product was fraudulent. In August, LiCari wrote a memo to Beech-Nut’s senior management, including Lavery, stating the circumstantial evidence leading him to this conclusion (Traub, 1988). After receiving no response to his memo, LiCari scheduled a meeting with Lavery. According to LiCari, Lavery told him he was not a team player and might lose his job (Welles, 1988). A colleague described the conflict between LiCari and Lavery as an inevitable clash between the approaches of a general and a scientist (Traub, 1988).

LiCari claims that he then drove to the company’s Fort Washington, Pennsylvania, headquarters near Philadelphia and met with Hoyvald, who heard him out and appeared shocked, but later told him, in the late fall of 1981, that nothing would be done about the problem. Hoyvald denied having these conversations with LiCari ((Welles, 1988; Traub, 1988).

In the fall of 1981, according to a former employee of Beech-Nut, Lavery raised the possibility of getting a new apple concentrate supplier at a budget meeting, given the possibility that the Interjuice/Universal product might be adulterated. Hoyvald, according to this witness, nixed the idea, claiming that higher costs could not be sustained. That year, the company lost $2.5 million on sales of $62 million. Next year, Hoyvald had promised Nestlé, would be a turnaround year for profits (Welles, 1988). Incredibly, he had promised a profit of $700,000 on a negative cash flow of $1.7 million, but the parent company had insisted that cash flow be zero or positive (Traub, 1988).

H.J. Heinz Company entered the picture in 1981. The company bought some apple juice concentrate from Universal, but returned it after the product could not pass quality control tests and Universal would not permit Heinz managers to visit their plant (Traub, 1988).

Jerome LiCari resigned from his job at Beech-Nut in January 1982 (Traub, 1988). In June of that year, private investigator Andrew Rosenzweig visited Beech-Nut’s Canajoharie plant to tell executives there about his investigation for the Processed Apples Institute Inc., an association of companies making apple-based products. Documents he had discovered in a dumpster near the Queens plant, along with a new test for adulteration and his own stake-out of the plant and tailing of a tanker truck of sugar water delivered to Beech-Nut, had revealed that the concentrate sold by Interjuice/Universal was fraudulent. Beech-Nut was offered the opportunity to join the other juice companies in a lawsuit against Universal, but the company absolutely refused, although it finally canceled its contracts for the bogus product (Welles, 1988; Traub, 1988; Mintz, 1987).

Rosenzweig secretly tape-recorded his conversation with Beech-Nut executives and later introduced this tape as evidence in court. A New York Times reporter commented that Lavery and two other executives, when presented with Rosenzweig’s evidence, “unleashed a cascade of tortuous rationalizations,” claimed they would no longer order from Universal, but refused to give Rosenzweig any samples of product they had bought from Universal, which by then was their sole supplier of apple concentrate (Traub, 1988; Mintz, 1987). A month later, the Processed Apples Institute suit succeeded in closing down Universal’s operations (Welles, 1988).

Hoyvald was notified three days later (June 28, 1981) of Rosenzweig’s visit by the head of quality control, Paul E. Hillabush, at the Canajoharie plant. Hillabush recommended that all products made with the Universal concentrate be recalled, but Hoyvald decided instead to move the products out into the market as quickly as possible (Traub, 1988). Such “dumping” is commonplace with products that are about to pass their expiration date, or are soon to be replaced by a “new and improved” variety.

Beech-Nut, despite warnings in the summer of 1982 from the Food and Drug Administration (FDA) and the New York State Agricultural Department that adulterations had been found in its apple juice (Welles, 1988) (which Hoyvald claimed in court were his first indications of trouble (Traub, 1988), continued to sell products made from the Universal concentrate until the spring of 1983. In October 1982, the company finally issued a national product recall for its “pure” apple juice products under pressure from the FDA, but continued to sell mixed juice products made from the contaminated inventory well into the next year. Beech-Nut sued Universal in December 1982 for selling a fraudulent product (Welles, 1988), and claimed to have recovered a significant amount of money (Mintz, 1987).

Beech-Nut had $3.5 million in inventory at stake. Investigations later revealed that, as soon as the FDA identified a contaminated batch of apple juice, the company would destroy the entire batch so no legal action could be taken against it and no publicity could be generated. The FDA typically moves against products, not companies, and cases are labeled on the order of “United States vs. 25 cases of canned peaches,” so Beech-Nut’s strategy was indeed the way to avoid regulatory confiscation and fines.

In August, when a state official told the company that little if any juice had been found in one sample of product, Beech-Nut officials arranged for nine semi-trailers to take the entire inventory – 26,000 cases of juice – across state lines into New Jersey. Subsequently, one executive testified that Hoyvald had demanded that the Universal concentrate products be discounted and sold “fast, fast, fast” (Welles, 1988). Product was exported to Puerto Rico and the Dominican Republic (Welles, 1988; Traub, 1988). And your senior author, who was a poor young faculty member and had a young child at the time, recalls responding to newspaper ads trumpeting “Buy 6 bottles of Beech-Nut pure infant apple juice, get 6 free!”

Beech-Nut on Trial

The FDA first grouped Beech-Nut with other “innocent victims” of the Interjuice/Universal scam. However, after the company stonewalled and spent so much effort hiding tainted inventory, the FDA decided that perhaps it was not such an innocent victim after all (Welles, 1988).

Beech-Nut, its president, Neils L. Hoyvald, and its head of operations, John F. Lavery, were indicted on 470 counts by a federal grand jury in November, 1986 (Welles, 1988). That year, Beech-Nut had 20 percent of the U.S. baby food market, and a new president, Richard C. Theuer, was appointed (Traub, 1988).

A year later, the company pleaded guilty on the grounds of “collective knowledge” to more than 200 felony counts as well as food and drug law violations, for selling fraudulent apple juice from 1981 to 1983. Zeev Kaplansky and Raymond H. Wells, perpetrators of the Interjuice/Universal fraud, also pleaded guilty to charges brought against them (Welles, 1988).

The two Beech-Nut executives, however, pleaded not guilty and appeared to believe that they were guilty of nothing more than “mistakes in judgment” (Traub, 1988). Hoyvald’s attorney, for example, said in his opening remarks that the bogus apple juice was “a healthy product” that was merely mislabeled (Mintz, 1987). In court, when Hoyvald was asked why he didn’t immediately order a product recall upon first learning of possible adulteration, he replied, “And I could have called up Switzerland and told them I had just closed the company down. Because that is what would have been the result of it” (Traub, 1988).

Hoyvald first claimed to have known nothing of the adulterated juice concentrate, then later said he had no proof of adulteration, and in any case he had been acting on the advice of Nestlé attorney Thomas J. Ward (who, by the way, had been involved in Nestlé’s response to the boycott against its infant formula marketing practices and, more recently, the Guinness financial scandal in Great Britain). Lavery claimed that he knew of allegations that the concentrate was adulterated, but had no proof. Nestlé attorneys, who defended the two, claimed that the blame belonged solely on the shoulders of lower-level employees (Welles, 1988).

The Trial Ends

The New York State case against Beech-Nut came to an end in March 1988, when the company paid a $250,000 fine in restitution for the crime of selling adulterated apple juice. The company was fined another $2 million by federal courts for the violations of federal food and drug laws to which it had pleaded guilty in the fall of 1987 (“Beech-Nut Pays,” 1988: D10). The final sanction levied against Beech-Nut came in April 1989, when it was barred from doing business with the federal government through 1991 (“U.S. Bars,” 1989: D19).

Legal proceedings against Neils Hoyvald and John Lavery were somewhat more circuitous. The initial trial in the Eastern District Court of New York in February 1988 resulted in a guilty verdict for Lavery on 448 counts of mail fraud, conspiracy, and violations of the Food, Drug, and Cosmetics Act (Buder, 1988c: D3). Hoyvald was also convicted of some 350 counts of violating the food act, but a mistrial was declared in regard to the charges of conspiracy and mail fraud because the jury was unable to reach a verdict (“Beech-Nut Retrial,” 1989: D14).

Each of Hoyvald’s convictions carried a maximum of three years in prison and a $10,000 fine, while each of Lavery’s convictions carried a five-year prison term (Buder, 1988c: A1, D3). Both men requested leniency in sentencing. Hoyvald hoped that rather than sending him to jail, the judge would allow him to lecture business students on the mistakes he had made (Buder, 1988a: D2). Lavery’s lawyer asked that he be sentenced to community service and house detention. At sentencing, Hoyvald pleaded with the judge not to jail him; Lavery said nothing (Traub, 1988).

The prosecuting attorney described the two men’s crimes as a “massive fraud of American and foreign customers,” and Judge Thomas C. Platt apparently agreed. He stated that the situation was “pretty extraordinary,” and that both men deserved “a period of incarceration.” In June 1988, both Hoyvald and Lavery were sentenced to a year and a day in jail, and required to pay fines of $100,000 (Buder, 1988b: D1).

Both men were freed on bail pending appeals which followed the sentencing. These appeals paid off in February 1989, when the U.S. Court of Appeals for the second circuit overturned the convictions on the technicality that the first trial had been held in the wrong court. Hoyvald and Lavery had been tried in the Eastern District Court of New York, because Interjuice Trading Corporation, the company from which they had purchased the adulterated concentrate, was located on Long Island. But the appeals court judge ruled that they should have been tried in the Northern District Court, because the factory where Beech-Nut produced the juice from the adulterated concentrate is located in Canajoharie, New York, near Albany (McGill, 1989: D5). All of Hoyvald’s convictions were overturned, as well as Lavery’s convictions for violations of the food act. The guilty verdict against Lavery for mail fraud and conspiracy, however, was allowed to stand (“Mistrial,” 1989: D2).

Hoyvald was retried in September 1989 for mail fraud and conspiracy, but another mistrial was declared on September 26 because the federal jury was unable to reach a verdict. A third trial, set for November 1989, never took place, as Hoyvald entered a guilty plea early in that month in the federal district court in Brooklyn on ten felony counts of violating the Food, Drug, and Cosmetics Act. Judge Thomas Platt sentenced Hoyvald to five years’ probation and six consecutive months of full-time community service (“Guilty Plea,” 1989: D1). Meanwhile, the Supreme Court rejected John Lavery’s appeal, allowing the mail fraud and conspiracy convictions and the district court’s sentence to stand (“Justices Decline,” 1989: D 16).

New Owners

Nestlé put the company on the block in the fall of 1989, and Beech-Nut Nutrition Inc. was purchased a few months later by St. Louis-based Ralston Purina Company, a $6-billion food conglomerate. Industry analysts estimated that the sale price was less than $100 million. At that time Beech-Nut had about $150 million in annual sales and 15 percent of the U.S. baby food market (“Briefly,” 1989; “Ralston,” 1989). Within two years, the Beech-Nut division was growing and was considered to be one of the few bright spots in Ralston Purina’s portfolio of businesses (Leckey, 1991).

Costs

Fines against Beech-Nut totaled $2.25 million. In 1987, a class action suit against the company was settled for an initial $7.5 million, later increased to $10 million (Traub, 1988; “Cost,” 1989). Market share fell from 20 percent in 1986 to 17 percent in 1988 and even lower the year after. The loss of government contracts is incalculable (Traub, 1988). Legal defense cost the parent company several million dollars, perhaps as much as $10 million (“Cost,” 1989). Hoyvald and Lavery were put on leave, but received their salaries, throughout the trial and appeals process (Traub, 1988). Total cost of the fraud to Beech-Nut and Nestlé has been estimated at $30 million (“Cost,” 1989).

Explanations

Beech-Nut executives offered several defenses for their years of fraud. First, they said, adulterated juice was common and they weren’t doing anything that no other company was doing. Second, even if the juice was adulterated, there was no proof that it was harmful. A former executive testified, “So suppose the stuff was all water and flavor and sugar. Why get so upset about it? Who were we hurting?” Third, some executives ignored the problem: “It was just something you hoped would go away.” Finally, the lack of conclusive proof of adulteration was used by some to justify inaction. Industry representatives claim, in contrast to these defenses, that 5 percent or less of juice is adulterated. And, of course, there was no evidence that the fraudulent product was safe (Welles, 1988).

Jerome LiCari’s 1981 performance evaluation, written by Lavery, criticized LiCari for judgment “colored by naïveté and impractical ideals.” Asked later by a federal Justice Department attorney if he felt he had been naïve, LiCari replied, “I guess I was. I thought apple juice should be made from apples.” (Welles, 1988)

Updates

In October, 2001, the FDA mandated a recall of 6,767 cases of Beechnut Naturals 100% Mixed Fruit Juice after finding mold in the product (FDA, 2001).

Discussion Questions

1. What is the relationship between “evidence” and “proof” in this case? What ethical decision rules can be applied in a situation where there is evidence, but no proof?

2. Where, if anywhere, do you think the “smoking guns” or “red flags” are in this case?

3. Prosecutors accused Beech-Nut of violating its “sacred trust” of providing healthful, nutritious food for babies. Beech-Nut lawyers argued that the bogus apple juice was not harmful and would have been okay to sell if appropriately labeled. How do you assess this conflict?

4. What did Beech-Nut have to gain or lose by joining the Apple Processors’ lawsuit against Universal?

5. How did Nestlé’s purchase of Beech-Nut change the dynamics of the apple juice situation?

6. What do you think about “a deal too good to be true” as an ethical decision rule?

7. What would be your response if you brought a potential problem to management’s attention, and you were called “naïve” and “idealistic” in response?

References

“Beech-Nut Pays a Fine,” New York Times (May 31, 1988), p. D10.

“Beech-Nut Retrial,” New York Times (July 27, 1989), p. D14.

“Briefly: Ralston Purina Buying Beechnut,” Los Angeles Times (Sept. 18, 1989), p. 4.

Buder, Leonard. “Ex-Beech-Nut Chief Seeks Probation,” New York Times (June 7, 1988a), p. D2.
Buder, Leonard. “Jail Terms for Two in Beech-Nut Case,” New York Times (June 17, 1988b), p. D1.

Buder, Leonard. “Two Former Executives of Beech-Nut Not Guilty in Phony Juice Case,” New York Times (Feb. 18, 1989), p. A1.

“Cost of Beech-Nut Apple Juice Fraud Outweighs Small Saving,” The Reuter Business Report (Nov. 14, 1989).

“Guilty Plea by Ex-Officer of Beech-Nut,” New York Times (Nov. 14, 1989), pp. D1, D4.

“Justices Decline to Review DES, General Dynamics Cases,” Washington Post (Oct. 31, 1989), pp. D1, D16.

Leckey, Andrew. “Fredericks’ Stock an Alluring Buy,” Chicago Tribune (Oct. 14, 1991), p. Bus-3.

McGill, Douglas C. “Convictions Are Overturned in Beech-Nut Labeling Case,” New York Times (Mar. 31, 1989), p. D5.

Mintz, Morton. “Careers, Trust at Stake in Beech-Nut Trial,” Washington Post (Nov. 29, 1987), p. H2.

“Mistrials in Beech-Nut Case,” New York Times (Sept. 27, 1989), p. D2.

“Ralston Purina to Buy Beech-Nut,” The Reuter Business Report (Sept. 15, 1989).

Traub, James. “Into the Mouths of Babes,” New York Times (July 24, 1988), p. 18.

“U.S. Bars Beech-Nut,” New York Times (Apr. 6, 1989), p. D19.

Welles, Chris. “What Led Beech-Nut Down the Road to Disgrace,” Business Week (Feb. 22, 1988).

“John F. Lavery, Petitioner v. United States of America,” No. 89-216 in the Supreme Court of the United States, October Term 1989.

FDA Enforcement Report, Recalls and Field Corrections – Foods, Class 1, (Oct. 3, 2001), available at http://www.fda.gov/bbs/topics/ENFORCE/2001/ENF00713.html, accessed