BEECH-NUTâS APPLE JUICEBy Donna J. Wood and Alden DetwilerDuring the 1970s and early 1980s, the Beech-Nut Nutrition Corporation, with primaryplant facilities at Canajoharie, New York, and headquarters near Philadelphia, was thesecond largest maker of baby foods in the United States, with roughly a 15 percentmarket share (comparable to Heinzâs market share), compared to Gerberâs 70 percent.From its origins as a meatpacker in 1891 to its modern status as a diversified foodmanufacturer, 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 divisionof Beech-Nut from Squibb Corporation, which had acquired the company in 1969. Thenew owners were undercapitalized and overloaded with debt from the beginning, and thecompany 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 ableto offer concentrate well below the market price (Welles, 1988), an opportunity thatBeech-Nut was reluctant to turn down, given its financial troubles. By 1978, with applejuice products accounting for 30 percent of total sales, the Interjuice contract providedsignificant cost savings to a firm deeply in debt (Welles, 1988). Early savings from thecontract amounted to about $250,000 a year on a $50 million operating budget. Later, thedisparity between the Interjuice product and the market price of juice concentrate grew to20-25 percent (Traub, 1988).Jerome J. LiCari, Beech-Nutâs director of research and development, and the chemists onhis staff heard about the new contract and, because of adulteration rumors flying aboutthe juice industry, wanted to test the new supplies for purity and quality. Although therewas no conclusive test of apple juice purity available, the chemists tested the Interjuiceproduct with procedures known to provide good evidence of the presence of adulterantssuch as corn sugar. Their conclusion was that the Interjuice concentrate was likely to beheavily adulterated, if not completely fake (Welles, 1988). At this point, Beech-Nut wasbuying about 90 percent of its apple concentrate from this supplier (Mintz, 1987).Interjuice, through its distribution firm, Universal Juice Company, claimed to beimporting its concentrate from Israel to a Queens, New York, facility of the FoodComplex Company, whose owner, Raymond H. Wells, was Zeev Kaplanskyâs partner inInterjuice and Universal Juice Company. In 1978 two Beech-Nut employees went toQueens to visit the supplier and investigate the manufacturing process. Factory officialsshowed the Beech-Nut people a warehouse area, but would not let them into the areawhere juice concentrate was being processed (Welles, 1988).LiCari and other scientists at Beech-Nut told managers, including Operations VicePresident John F. Lavery and President Neils L. Hoyvald, that Universal was not a©1994, 2007, Donna J. Woodreliable supplier of high-quality product (Welles, 1988). Lavery, a pillar of his localchurch and community (Traub, 1988), told LiCari that if he thought the contract shouldbe voided, he would have to prove that the concentrate was adulterated. LiCari knew,however, that other juice manufacturers, including the market leader Gerber, requiredtheir suppliers to prove the purity of their products or lose out on contracts (Welles,1988).Lavery apparently did take action on LiCariâs information. Initially, he requiredKaplansky to sign a âhold harmlessâ agreement, whereby Universal would bear the costsof any consumer complaints or lawsuits concerning their product. Later, after LiCari hadinformed him that the concentrate was now âprobablyâ adulterated with beet sugar, thenimpossible to detect conclusively (unlike corn sugar), Lavery directed that theconcentrate should be used only to make mixed juice products. Adulteration is muchmore difficult to detect in such products, compared with single juice items (Traub, 1988).It later developed that Universalâs juice concentrate product was completely fraudulent;its chemists could replicate apple juice chemically, using cheaper ingredients. A Gerberexecutive told a Business Week reporter, âWhen it comes in at that price, you donât haveto test it. You know itâs fake.â 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 (althoughNicholas stayed on as president until 1981). Nestlé invested almost twice again thatmuch â another $60 million â in capital improvements and marketing, but the companycontinued to lose money.LiCari went to work in 1981 on developing a more reliable and conclusive test foradulteration. He was concerned that the Universal concentrate would cause trouble forthe companyâs new line of products geared for children of various ages that emphasizedâall naturalâ ingredients (Welles, 1988). By August of that year, LiCari and otherscientists in his unit felt that they had virtually conclusive proof that Universalâs productwas fraudulent. In August, LiCari wrote a memo to Beech-Nutâs 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 meetingwith Lavery. According to LiCari, Lavery told him he was not a team player and mightlose his job (Welles, 1988). A colleague described the conflict between LiCari andLavery as an inevitable clash between the approaches of a general and a scientist (Traub,1988).LiCari claims that he then drove to the companyâs Fort Washington, Pennsylvania,headquarters near Philadelphia and met with Hoyvald, who heard him out and appearedshocked, but later told him, in the late fall of 1981, that nothing would be done about theproblem. 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 thepossibility of getting a new apple concentrate supplier at a budget meeting, given the©1994, 2007, Donna J. Woodpossibility that the Interjuice/Universal product might be adulterated. Hoyvald,according to this witness, nixed the idea, claiming that higher costs could not besustained. 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 juiceconcentrate from Universal, but returned it after the product could not pass qualitycontrol 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). InJune of that year, private investigator Andrew Rosenzweig visited Beech-NutâsCanajoharie plant to tell executives there about his investigation for the Processed ApplesInstitute Inc., an association of companies making apple-based products. Documents hehad discovered in a dumpster near the Queens plant, along with a new test foradulteration and his own stake-out of the plant and tailing of a tanker truck of sugar waterdelivered to Beech-Nut, had revealed that the concentrate sold by Interjuice/Universalwas fraudulent. Beech-Nut was offered the opportunity to join the other juice companiesin a lawsuit against Universal, but the company absolutely refused, although it finallycanceled its contracts for the bogus product (Welles, 1988; Traub, 1988; Mintz, 1987).Rosenzweig secretly tape-recorded his conversation with Beech-Nut executives and laterintroduced this tape as evidence in court. A New York Times reporter commented thatLavery and two other executives, when presented with Rosenzweigâs evidence,âunleashed a cascade of tortuous rationalizations,â claimed they would no longer orderfrom Universal, but refused to give Rosenzweig any samples of product they had boughtfrom 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 closingdown Universalâs operations (Welles, 1988).Hoyvald was notified three days later (June 28, 1981) of Rosenzweigâs visit by the headof quality control, Paul E. Hillabush, at the Canajoharie plant. Hillabush recommendedthat all products made with the Universal concentrate be recalled, but Hoyvald decidedinstead to move the products out into the market as quickly as possible (Traub, 1988).Such âdumpingâ is commonplace with products that are about to pass their expirationdate, or are soon to be replaced by a ânew and improvedâ variety.Beech-Nut, despite warnings in the summer of 1982 from the Food and DrugAdministration (FDA) and the New York State Agricultural Department that adulterationshad been found in its apple juice (Welles, 1988) (which Hoyvald claimed in court werehis first indications of trouble (Traub, 1988), continued to sell products made from theUniversal concentrate until the spring of 1983. In October 1982, the company finallyissued a national product recall for its âpureâ apple juice products under pressure fromthe FDA, but continued to sell mixed juice products made from the contaminated©1994, 2007, Donna J. Woodinventory well into the next year. Beech-Nut sued Universal in December 1982 forselling a fraudulent product (Welles, 1988), and claimed to have recovered a significantamount of money (Mintz, 1987).Beech-Nut had $3.5 million in inventory at stake. Investigations later revealed that, assoon as the FDA identified a contaminated batch of apple juice, the company woulddestroy the entire batch so no legal action could be taken against it and no publicity couldbe generated. The FDA typically moves against products, not companies, and cases arelabeled on the order of âUnited States vs. 25 cases of canned peaches,â so Beech-Nutâsstrategy 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 inone sample of product, Beech-Nut officials arranged for nine semi-trailers to take theentire inventory â 26,000 cases of juice â across state lines into New Jersey.Subsequently, one executive testified that Hoyvald had demanded that the Universalconcentrate products be discounted and sold âfast, fast, fastâ (Welles, 1988). Product wasexported to Puerto Rico and the Dominican Republic (Welles, 1988; Traub, 1988). Andyour senior author, who was a poor young faculty member and had a young child at thetime, recalls responding to newspaper ads trumpeting âBuy 6 bottles of Beech-Nut pureinfant apple juice, get 6 free!âBeech-Nut on TrialThe FDA first grouped Beech-Nut with other âinnocent victimsâ of theInterjuice/Universal scam. However, after the company stonewalled and spent so mucheffort hiding tainted inventory, the FDA decided that perhaps it was not such an innocentvictim 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 âcollective knowledgeâ tomore than 200 felony counts as well as food and drug law violations, for sellingfraudulent apple juice from 1981 to 1983. Zeev Kaplansky and Raymond H. Wells,perpetrators of the Interjuice/Universal fraud, also pleaded guilty to charges broughtagainst them (Welles, 1988).The two Beech-Nut executives, however, pleaded not guilty and appeared to believe thatthey were guilty of nothing more than âmistakes in judgmentâ (Traub, 1988). Hoyvaldâsattorney, for example, said in his opening remarks that the bogus apple juice was âahealthy productâ that was merely mislabeled (Mintz, 1987). In court, when Hoyvald wasasked why he didnât immediately order a product recall upon first learning of possibleadulteration, he replied, âAnd I could have called up Switzerland and told them I had just©1994, 2007, Donna J. Woodclosed the company down. Because that is what would have been the result of itâ (Traub,1988).Hoyvald first claimed to have known nothing of the adulterated juice concentrate, thenlater said he had no proof of adulteration, and in any case he had been acting on theadvice of Nestlé attorney Thomas J. Ward (who, by the way, had been involved inNestléâs response to the boycott against its infant formula marketing practices and, morerecently, the Guinness financial scandal in Great Britain). Lavery claimed that he knewof 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 lowerlevel employees (Welles, 1988).The Trial EndsThe New York State case against Beech-Nut came to an end in March 1988, when thecompany paid a $250,000 fine in restitution for the crime of selling adulterated applejuice. The company was fined another $2 million by federal courts for the violations offederal food and drug laws to which it had pleaded guilty in the fall of 1987 (âBeech-NutPays,â 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 (âU.S.Bars,â 1989: D19).Legal proceedings against Neils Hoyvald and John Lavery were somewhat morecircuitous. The initial trial in the Eastern District Court of New York in February 1988resulted in a guilty verdict for Lavery on 448 counts of mail fraud, conspiracy, andviolations of the Food, Drug, and Cosmetics Act (Buder, 1988c: D3). Hoyvald was alsoconvicted of some 350 counts of violating the food act, but a mistrial was declared inregard to the charges of conspiracy and mail fraud because the jury was unable to reach averdict (âBeech-Nut Retrial,â 1989: D14).Each of Hoyvaldâs convictions carried a maximum of three years in prison and a $10,000fine, while each of Laveryâs convictions carried a five-year prison term (Buder, 1988c:A1, D3). Both men requested leniency in sentencing. Hoyvald hoped that rather thansending him to jail, the judge would allow him to lecture business students on themistakes he had made (Buder, 1988a: D2). Laveryâs lawyer asked that he be sentenced tocommunity service and house detention. At sentencing, Hoyvald pleaded with the judgenot to jail him; Lavery said nothing (Traub, 1988).The prosecuting attorney described the two menâs crimes as a âmassive fraud ofAmerican and foreign customers,â and Judge Thomas C. Platt apparently agreed. Hestated that the situation was âpretty extraordinary,â and that both men deserved âa periodof incarceration.â In June 1988, both Hoyvald and Lavery were sentenced to a year and aday 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. Theseappeals paid off in February 1989, when the U.S. Court of Appeals for the second circuit©1994, 2007, Donna J. Woodoverturned the convictions on the technicality that the first trial had been held in thewrong court. Hoyvald and Lavery had been tried in the Eastern District Court of NewYork, because Interjuice Trading Corporation, the company from which they hadpurchased the adulterated concentrate, was located on Long Island. But the appeals courtjudge ruled that they should have been tried in the Northern District Court, because thefactory where Beech-Nut produced the juice from the adulterated concentrate is locatedin Canajoharie, New York, near Albany (McGill, 1989: D5). All of Hoyvaldâsconvictions were overturned, as well as Laveryâs convictions for violations of the foodact. The guilty verdict against Lavery for mail fraud and conspiracy, however, wasallowed to stand (âMistrial,â 1989: D2).Hoyvald was retried in September 1989 for mail fraud and conspiracy, but anothermistrial was declared on September 26 because the federal jury was unable to reach averdict. A third trial, set for November 1989, never took place, as Hoyvald entered aguilty plea early in that month in the federal district court in Brooklyn on ten felonycounts of violating the Food, Drug, and Cosmetics Act. Judge Thomas Platt sentencedHoyvald to five yearsâ probation and six consecutive months of full-time communityservice (âGuilty Plea,â 1989: D1). Meanwhile, the Supreme Court rejected JohnLaveryâs appeal, allowing the mail fraud and conspiracy convictions and the districtcourtâs sentence to stand (âJustices Decline,â 1989: D 16).New OwnersNestlé 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 $6billion 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 15percent of the U.S. baby food market (âBriefly,â 1989; âRalston,â 1989). Within twoyears, the Beech-Nut division was growing and was considered to be one of the fewbright spots in Ralston Purinaâs portfolio of businesses (Leckey, 1991).CostsFines against Beech-Nut totaled $2.25 million. In 1987, a class action suit against thecompany was settled for an initial $7.5 million, later increased to $10 million (Traub,1988; âCost,â 1989). Market share fell from 20 percent in 1986 to 17 percent in 1988and 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 muchas $10 million (âCost,â 1989). Hoyvald and Lavery were put on leave, but received theirsalaries, throughout the trial and appeals process (Traub, 1988). Total cost of the fraud toBeech-Nut and Nestlé has been estimated at $30 million (âCost,â 1989).ExplanationsBeech-Nut executives offered several defenses for their years of fraud. First, they said,adulterated juice was common and they werenât doing anything that no other company©1994, 2007, Donna J. Woodwas doing. Second, even if the juice was adulterated, there was no proof that it washarmful. A former executive testified, âSo suppose the stuff was all water and flavor andsugar. Why get so upset about it? Who were we hurting?â Third, some executivesignored the problem: âIt was just something you hoped would go away.â Finally, the lackof conclusive proof of adulteration was used by some to justify inaction. Industryrepresentatives claim, in contrast to these defenses, that 5 percent or less of juice isadulterated. And, of course, there was no evidence that the fraudulent product was safe(Welles, 1988).Jerome LiCariâs 1981 performance evaluation, written by Lavery, criticized LiCari forjudgment âcolored by naïveté and impractical ideals.â Asked later by a federal JusticeDepartment attorney if he felt he had been naïve, LiCari replied, âI guess I was. I thoughtapple juice should be made from apples.â (Welles, 1988)UpdatesIn 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 Questions1. What is the relationship between âevidenceâ and âproofâ in this case? What ethicaldecision rules can be applied in a situation where there is evidence, but no proof?2. Where, if anywhere, do you think the âsmoking gunsâ or âred flagsâ are in this case?3. Prosecutors accused Beech-Nut of violating its âsacred trustâ of providing healthful,nutritious food for babies. Beech-Nut lawyers argued that the bogus apple juice wasnot harmful and would have been okay to sell if appropriately labeled. How do youassess this conflict?4. What did Beech-Nut have to gain or lose by joining the Apple Processorsâ lawsuitagainst Universal?5. How did Nestléâs purchase of Beech-Nut change the dynamics of the apple juicesituation?6. What do you think about âa deal too good to be trueâ as an ethical decision rule?7. What would be your response if you brought a potential problem to managementâsattention, and you were called ânaïveâ and âidealisticâ in response?ReferencesâBeech-Nut Pays a Fine,â New York Times (May 31, 1988), p. D10.©1994, 2007, Donna J. WoodâBeech-Nut Retrial,â New York Times (July 27, 1989), p. D14.âBriefly: Ralston Purina Buying Beechnut,â Los Angeles Times (Sept. 18, 1989), p. 4.Buder, Leonard. âEx-Beech-Nut Chief Seeks Probation,â New York Times (June 7,1988a), p. D2.Buder, Leonard. âJail Terms for Two in Beech-Nut Case,â New York Times (June 17,1988b), p. D1.Buder, Leonard. âTwo Former Executives of Beech-Nut Not Guilty in Phony JuiceCase,â New York Times (Feb. 18, 1989), p. A1.âCost of Beech-Nut Apple Juice Fraud Outweighs Small Saving,â The Reuter BusinessReport (Nov. 14, 1989).âGuilty Plea by Ex-Officer of Beech-Nut,â New York Times (Nov. 14, 1989), pp. D1, D4.âJustices Decline to Review DES, General Dynamics Cases,â Washington Post (Oct. 31,1989), pp. D1, D16.Leckey, Andrew. âFredericksâ Stock an Alluring Buy,â Chicago Tribune (Oct. 14, 1991),p. Bus-3.McGill, Douglas C. âConvictions Are Overturned in Beech-Nut Labeling Case,â NewYork Times (Mar. 31, 1989), p. D5.Mintz, Morton. âCareers, Trust at Stake in Beech-Nut Trial,â Washington Post (Nov. 29,1987), p. H2.âMistrials in Beech-Nut Case,â New York Times (Sept. 27, 1989), p. D2.âRalston Purina to Buy Beech-Nut,â The Reuter Business Report (Sept. 15, 1989).Traub, James. âInto the Mouths of Babes,â New York Times (July 24, 1988), p. 18.âU.S. Bars Beech-Nut,â New York Times (Apr. 6, 1989), p. D19.Welles, Chris. âWhat Led Beech-Nut Down the Road to Disgrace,â Business Week (Feb.22, 1988).âJohn F. Lavery, Petitioner v. United States of America,â No. 89-216 in the SupremeCourt of the United States, October Term 1989.FDA Enforcement Report, Recalls and Field Corrections â Foods, Class 1, (Oct. 3, 2001),available at http://www.fda.gov/bbs/topics/ENFORCE/2001/ENF00713.html, accessed©1994, 2007, Donna J. Wood