Blue Bell Case Shows Why Companies Should Keep Leaders Off Stand

Blue Bell Creameries Inc.’s ex-CEO meant to sound endearing when he said US Army auditors were “sticklers” for sanitation in the company’s ice cream plants.

That’s not smart to say in a trial over whether their monitoring systems failed to catch problems leading up to a listeria outbreak in 2015 that lead to the deaths of three people.

The corporate directors’ testimony over four days of trial last week in Delaware Chancery Court illustrates why these kinds of cases usually settle when companies can’t get them dismissed. No business wants its senior leaders appearing to admit they just didn’t track what sounds like an obvious red flag.

Blue Bell actually walked into court with an advantage: oversight liability claims, like those at the center of the case, have always been the toughest to prove. Maybe its monitoring systems weren’t perfect, but well-documented weekly and monthly meetings should be more than enough to show they made a good faith effort to keep tabs on how their ice cream was made. Right?

Vice Chancellor Nathan A. Cook didn’t seem to think so. He asked the same two questions over and over: You didn’t make the connection between sanitation and food safety? And nobody asked additional questions about operational audits that raised bacterial concerns?

“So, did you get to the bottom of this or not?” he asked the former CEO, Paul Kruse.

Cook tried to probe each director’s thought process through the good times before the outbreak, and the tense months that followed. They all thought everything was going fine, just as it always had for generations in the privately held company—until suddenly it wasn’t fine at all.

The Army’s ice cream order was dwarfed by those of Kroger, Walmart, and other corporate customers, but it made Blue Bell proud, and its auditors’ repeated concerns were well-known and being addressed. Or so the directors said. But the copious board meeting notes that company officials pointed to were conspicuously missing any comments about the Army’s alarm at high levels of coliform—common bacteria that aren’t dangerous but can indicate sanitation problems. That troubled Cook.

Seven current and former Blue Bell officials testified about the company’s heart in a small Texas town midway between Houston and Austin. Board Chairman Jim Kruse, a cousin of ex-CEO Paul Kruse, cried when he described his father learning to package ice cream as a 10-year-old. Dorothy McLeod MacInerney, whose grandfather had been an executive and director, likewise got emotional in talking about the relief trucks loaded with ice, water, and ice cream to survivors of hurricanes, floods, and other disasters across the Southeast.

But no one could tell Cook why something so important to the Army apparently wasn’t questioned by the board.

Meta Platforms Inc. must have wanted to keep Mark Zuckerberg from giving those types of answers when it decided to settle days before he was scheduled to testify at trial over similar claims stemming from the Cambridge Analytica data scandal. Other cautionary tales include evasiveness from FTX co-founder Sam Bankman-Fried, and Elon Musk’s complaints about being judged for focusing on a social media platform he’d just acquired instead of the other companies he leads.

There’s still time for Blue Bell directors to avoid going down as the first board to lose on oversight claims and settle. One remaining day of trial has yet to be scheduled, to be followed by post-trial arguments.

It’s important to note that the derivative lawsuit, which is trying to hold Blue Bell accountable for leadership that led to a nationwide recall and months-long operational shutdown, isn’t one of the more recent cases that worry corporate attorneys for potentially expanding the definition of “corporate trauma” to encompass alleged sexual misconduct or toxic workplaces.

This is old-school: what did the directors know, when did they know it, and what did they do about it? Oversight liability in Delaware may hinge on the discontinued “Fudge Bombstick” treat—whether cleaning its equipment was sufficiently monitored by the board.

The facts against Blue Bell never looked good for the company: The Delaware Supreme Court said so in a ruling that kept the shareholder claims alive, and a special litigation committee appointed by the board found the claims were worth pursuing.

Blue Bell’s board argued the whole ice cream industry learned its lesson about contamination risks from the listeria outbreak. The directors offered up another learning opportunity when they lost control of their own narrative on the witness stand.