Podcast: Today’s wholesalers face new liability risks

Recording date: 12/19/23
Air date: 1/10/24

Industrial Revolution 4.0 has transformed the way the traditional supply chain looks today. Explore the risks and gain insights into the complex potential drawbacks associated with wholesalers entering the manufacturing space. Bill Seleznoff, Industry Practice Director for Zurich's Retail and Wholesale division, discusses the evolving supply chain, the risks wholesalers may not be aware of, and the strategies wholesalers are using to remain relevant as they overcome hurdles to regain their market share.

Guest:

Bill Seleznoff
AVP, Industry Practice Director, Wholesale and Retail
Zurich North America

Bill Seleznoff is an accomplished insurance professional with over 26 years of experience. He has primarily focused on underwriting middle market businesses throughout his career. Bill has held a variety of specialized underwriting roles which includes a past role as Technical Director on trends, practices and solutions for the wholesale and manufacturing industries. Bill joined Zurich in 2022 and currently acts as the AVP, Industry Practice Director for the Retail and Wholesale industry segments for Zurich’s Middle Market team.

Host:

Stephani Gordon
Executive Employee Communications Business Partner
Zurich North America

As part of the Zurich North America Communications team, Stephani Gordon finds and shares stories by asking questions that connect people with ideas to pique curiosity, broaden awareness and create communities. Fondly considered a compassionate interrogator, she has coached executive communications for the CEOs of Zurich North America and Zurich Canada, lead C-suite video productions and connected employees with corporate strategy through storytelling and engagement. In addition to hosting this podcast, she unabashedly admits to spending too much time on TikTok in the guise of “anthropological study.”

 

Episode transcript:

STEPHANI GORDON: Hi, my name is Stephani Gordon. I'm today's host for the Zurich Insurance Future of Risk podcast. So, prior to the mid 1990’s, when e-commerce created a new digital marketplace, the historic supply chain for goods was really manufacturer, wholesaler, distributor, retailer and consumer. But that's been disrupted now and wholesalers are looking for ways to remain relevant and regain some of the market share they may have lost. But there are some risks associated with that strategy that wholesalers or a whole new generation of “do-it-yourself” retailers might not be aware of. So, we're going to discuss that today. Bill Seleznoff is our guest. He's an Industry Practices Director in Zurich's Retail and Wholesale division. So, Bill, welcome to the podcast.

BILL SELEZNOFF: Well, thanks so much, Stephani. Glad to be here.

GORDON: To start with, why don't you frame the situation for us with the manufacturing supply chain today. What's the backstory to how we got to where the industry is?

SELEZNOFF: As you said, historically, going back to the Industrial Revolution, the supply chain was manufacturers, wholesalers, retailers. It's kind of an oversimplification; you know, wholesalers actually do sell to manufacturers, too. But for today's topic, we're going to go with that premise — specifically more on the product liability side. But that's historically how things flowed. The manufacturer was focused on “making the widgets.” They had the plant, the materials … they sourced the raw goods, they sourced the labor, and they had the facilities and machinery. They kept that all going, coming up with whatever the latest and greatest idea and widget that they thought [of], making it as efficiently and profitably as possible. On the other side, you had the retailers, and their whole business strategy was having as much goods and products on hand [as they could potentially sell], generating the consumer demand — selling them anything and everything they needed … getting people in the door and that was how they made their dollar. And then, in between, you had the wholesalers working with a manufacturer or multiple manufacturers, and a retailer or multiple retailers. Their focus was having the warehouse space, managing the logistics, the trucks, the sales network. You know the manufacturer didn't really want to have to deal with the distribution side. It wasn't part of the business model. per se. It was a tie-up of too much capital. But the wholesalers were glad to do that and the wholesalers also didn't have necessarily the retail space. They were more about shipping gigs in between. But now, where we're at today is Industrial Revolution 4.0, and that is the omnichannel experience, [that] as you mentioned, has revamped all of that. So, everything's now kind of a “salad bowl.” You have manufacturing today isn't what it once was. You have manufacturing where a lot of the manufacturing is overseas. So, a lot of manufacturers today look like maybe design companies. You have manufacturers selling direct to the consumer, so they might even be just going straight to retail. Which is really an old idea going back to the old “catalog days” and things of that nature. But then you have digitally native brands selling only exclusively to online platforms. And then you have retailers who look a lot more like wholesalers. This is where we get the term “big box store.” Name your favorite retailer big store and they probably don't even have enough warehouse space because they're just outgrowing that, and [they] have tons and tons of stock on hand. So, that's put a big squeeze on the wholesale market and then where do you go with this product liability side of private label? How does that fit in the mix? Well, you've got inflationary pressures now, and anything you're looking at today, you're probably looking at, “Well, what are my options? If I wanted that item, is there a cheaper option that's just as good? And is there a knockoff brand?” You have very educated customers now; we can research anything we want. So, there's that dynamic with inflation pushing the pressure on the consumer, and how's the whole supply chain kind of fill that need? So, a lot of things going on today and we probably all have a lot more line of sight about what the supply chain is overseas coming out of COVID and why we can't get certain items. So, we have to look for options. And sometimes those options are private label products or store brands. Maybe we just don't have the cash to buy the top-shelf item and we're going to look for something that'll suffice. So, that's kind of things in a nutshell today.

GORDON: Yeah, I think the salad analogy was an interesting one. And I do think it's very true that as consumers, we became much more aware of the supply chain than we had been previously because — at least in the U.S. — we took for granted that you went into a store or a car dealer or a grocer … what have you … and what you wanted would be there. And it was a surprise to us when that started to change.

SELEZNOFF: Right. We didn't know how much that new car we wanted relied on something that's in Europe because we can't get that out of Europe now. Or knowing that anything as simple as toilet paper to the latest car that we were interested in … to maybe some clothing products [was available] … everything was, you know, thrown up in the air. And this ties into a bigger manufacturing topic of reshoring and onshoring. But it's affected almost every industry for sure.

GORDON: So, what's driving wholesalers to increasingly enter the manufacturing space?

SELEZNOFF: Their business model's been squeezed. So, there's a couple very big, well-known companies — Amazon, Walmart, Home Depot — all these very reputable big box retailers; they have a wholesale division. They give wholesale discounts; they sell things in volume, big shipments — that whole business model. So, the omnichannel experience also applies to wholesale. So, those larger retailers may have the warehouse space to do it and that has taken a big bite out of the traditional wholesale business model. So, wholesalers being innovative and understanding this, are looking at it and saying, “Well, how do we get our market share back? What do we have to do?” There's a couple ways that they are reinventing themselves. One is through the actual services. For some garden-variety products, there's not a lot of technical expertise necessary. But sometimes there really is. So that's where wholesalers excel. But the other side, too, is having exclusive products. Wholesalers have been in this seat saying, "These manufacturers I work with — I know where they really get their product from. It's someplace overseas. Well, if we can design it in-house, can we work with those same manufacturers overseas, and we can be become the direct importer.” Or coming up with exclusives to sell to the retailer, because they also have a closeness to the retailers … knowing what the demand might be and where they can fit something in that private label space and show some value in that. They already have the warehouse; they already have the logistics, the sales networks. So, they are looking to reinvent that. So, that's one part of it. But also, the margins tend to be better. A traditional wholesaler operates on “Make it up on volume,” but that margin is really 3 to 4 percent on average. Margins on private label products tend to be much higher. They could be in the teens to multiples of that, depending on what particular segment or industry or type of product you're talking about. But they are generally better. So, you kind of have a two-sided thing. They have to reinvent because of competition, but they're also seeing potentially a better need. So, if you boil it down, that's what's spurring some of the private label [growth] and more direct importing than they maybe were traditionally used to.

GORDON: Thank you. So, of course, as a podcast about risk, we're going to talk about risk but here's how I was kind of thinking to get into that. I don't see things at a macro business level, like you will as a professional in this industry. But just at the consumer level, I have seen an increase in a lot of private individuals, for example, creating something like a “side hustle.” They're buying something inexpensively overseas, like you mentioned, perhaps and then becoming their own retailer, their own distributor. That might seem like kind of an easy income on the surface, but my bet is there's probably a lot of risk there. So, what are a couple of those risks that you see dealing with bigger-scale manufacturers?

SELEZNOFF: So, a constant theme I hear… almost … I don't want to say [on a] monthly basis but a regular basis is our customers don't make the stuff, they just import it. All they do is box it and I just cringe because … you have no idea. There's so much risk involved. There's profit involved for sure, but the product liability/tort liability system in the United States is very complicated. In addition, just the manufacturing defects and the manufacturing exposure. So, if I back up, a wholesaler traditionally didn't have to worry about product liability as much. They had a U.S.-based company or a relationship with somebody and they got the box in, they maybe broke it down, and then shipped it back out to somebody else. If any complaints came in, they probably went back to that company who was on the box or the label, or the retailer and things of that nature. But if you're a private labeler, your name is on it; you're going to be the backstop for anything. And if you're the importer of record on anything, there's probably little to no chance of getting any transference of a liability claim overseas. So, what are the products; what are the, the exposures? Well, I can name off a few. There's the manufacturing defects in the product itself that you would need to think about. There's defects in raw materials and the quality of the raw materials. There's a plethora of issues with warning labels and packaging and instructions. There's laws that stipulate that there's a variety of regulatory agencies that you would need to be aware of that could be governing that product. We can talk about that in a minute. There's industry standards, which may not necessarily be laws, but they're so commonplace, they effectively become the standard of law. Then the advertising and the copyright and patent infringement topics also come into play, because what you have on your product or your label is also cause for, potentially, a civil action. So, if you're a manufacturer and you've been making these widgets for years, you're well aware of all this stuff. You know the topic of manufacturing defects, you know what your product can or cannot say on the label. You probably already have attorneys or something like that. But if you're not accustomed to that, it's a huge, huge issue from a product liability standpoint.

GORDON: There's a lot to unpack there.

SELEZNOFF: Yeah.

GORDON: So, why don't we break a couple of those down, just like one at a time? You mentioned the first one was manufacturing defects. What’s the risk that wholesalers need to consider there? Because as you mentioned, this is not a space that they're historically familiar with.

SELEZNOFF: Right. So, a manufacturer, they'll be keenly in tune with what's called “reject ratios.” So, this is when stuff comes off the line, a manufacturer will keenly monitor that percentage of stuff that just didn't come out right. We've all heard of lemon laws or lemon cars, where something came off and it was never got fixed and it was just something was wrong with whatever on that particular version of that car. If you've ever been to a plastics manufacturing plant, there's always a scrap heat of stuff that came out and it was just misshapen — disformed parts didn't come out. So, manufacturers are very in tune, you know. We're used to buying stuff off the shelf and it's perfect, but that's not what actually happens in reality. And in a manufacturing plant, if you're a box-in/box-out wholesaler … everything looked fine, but again, you'd have to be in tune with — if you're getting something shipped to you from somebody else that was overseeing the entire manufacturing process — you have to ask the question of what are their quality control standards? How do they determine which stuff gets rejected and not? And sometimes there's a little bit of conflict with … well … if they reject the stuff, that's lost profit, potentially, on the manufacturer. So you might get something that's kind of questionable. Some higher-risk products are going to have very high QC (quality control) standards and maybe some lower-risk products may not have to have that same standard. It kind of all depends. But you just have to be aware that what goes on in the factory floor has to be accounted for. And you should have your own quality control standards and pull stuff and actually look at it, maybe have a third-party sample it. But effectively, yes, a manufacturing defect … you could be on the hook for that.

GORDON: If you're producing something like heart monitors versus paperclips, there's a standard of quality that we hope is upheld, right?

SELEZNOFF: Right. Yeah. As certain safety critical products and medical products, some of them are a hundred percent QC’d, rigorously tested, ID numbers put on them. So, same thing goes with certain aircraft quality products. On the other hand, a sweatshirt or a hoodie, does that need to be a hundred percent QC’d on every aspect of it? Probably not, but you should probably do some batch sampling and pull a few out and see are they all okay or “Do I just got one or two bad apples?”

GORDON: So, you know, I'm curious. During the early days of COVID, we did see a move by some manufacturers to try and repurpose their facilities to make, specifically, ventilators. Because in early COVID, that was like crucial, right? What, what kind of, I'm curious if you worked on any of those or if you saw any of that [as far as liability coverage issues]? Because when you mentioned medical device liability specifically — that can't have been as easy as maybe it sounded on the surface.

SELEZNOFF: Yes, it just so happens that … so you had this situation with the President invoking, I think, the War Powers Act. I might be a little fuzzy on the actual act, but they did enforce that certain manufacturing facilities had to retool to meet that [need]. Now, if I was a manufacturer, I'd be pushing back on saying, “Well, then you also have to not hold us accountable, because we may not have designed this product.” And there's a certainly a gray area there. You did see clothing and even upholstery shops get written requests from hospitals to make masks because they couldn't get masks. So, there was a variety of things that they did. You know, it all varies. It kind of depends on the level of expertise. So product liability comes through … there's the actual quality of the product, then who's responsible for the design? Maybe a little off-topic today, but is pertinent today is Wholesalers that were importing products [like] hand sanitizers; these were hot buttons for constantly getting recalled because of quality. I mean there were absolutely defective hand sanitizers. They were actually harmful. PPE gloves, you couldn't get gloves. So, I remember reading one insurance story where someone imported PPE from another country. I don't want to name that country, but it was all tainted. There was literally used PPE gloves.

GORDON: Oh, gosh.

SELEZNOFF: It was literally to the tune of millions of dollars that was lost and at stake. So, these are like extreme examples, but this stuff does show up. So, you do become at risk when you are the importer of record. If you do catch it, well, then you also have financial implications. Now you've got a shipment, you've already transferred money, and who's holding the bag, you know?

GORDON: Right.

SELEZNOFF: So, this is where it's important to have that relationship. If you are importing something and working with a company and you've designed and developed something, what's your relationship with that overseas company? The big manufacturers [have] very stringent relationships … that [they] only send their employees there [to check on an overseas company]. They've had ongoing relationships; very closely tied. So, it's almost like it's [the manufactured product] theirs, even though it's not theirs. But if you're just getting into it [dealing with manufacturers], you could have varying degrees of relationship issues and what kind of quality of product you're going to get.

GORDON: It's interesting that you say that. My brother-in-law is a brewing master — a beer brewing master. And I remember when he was setting up one of his breweries, he actually went overseas to watch the manufacturer of the big vats that he was buying to install, just so that he could understand exactly how it was being created and the safety, the quality issues that you mentioned, etc. because he knew that was obviously going to impact his downstream product in the end.

SELEZNOFF: Right. And then if there was a defect in it, then that sets him back to the point of, “Well, how do I fix this?”

GORDON: Yeah.

SELEZNOFF: You know, “I can't function as a business because now I've got this defect and the company's overseas.” I have many stories like that from a prior life and a prior company. When working with overseas manufacturers and critical products, yeah, quality is super important. It's not to be taken for granted.

GORDON: The supply chain is just … it's mind-baffling to me, in my line of work, how incredibly complicated and global it is. One of the other ones that you mentioned that I'm curious to hear more about is … you talked about raw material defects in quality. Can you talk to that risk a little bit?

SELEZNOFF: Yeah. Say that you get the batch of product and it looks like it's okay and everything cosmetically might be fine, but it turns out there's something with the raw materials. A common example would be lead. To this day, if you go to CPSC, Consumer Product Safety Commission, they’ve got a rolling page of things that are getting recalled and for what reasons, and you will constantly see lead showing up in metals products. So, from stainless steel drink tumblers to costume jewelry, even in the ink in silkscreen t-shirts.

GORDON: Wow.

SELEZNOFF: This still leeches in because of lower-grade materials, lower-grade products. You have to test these, this product, so you don't have the direct oversight of what's going into the raw material. Maybe your sample, maybe everything on the batch [on] first blush looked great, but it runs hot for lead. You have to recall it all. You see BPA, that was largely outlawed in plastics, but it could still show up. Another hot button: PFAS. PFAS run in everything from food packaging to our…

GORDON: And PFAS is?

SELEZNOFF: There's over a thousand different compounds. I'm not a chemist. I'm going to botch it, but it's…

GORDON: Is that what they call the “forever chemical?”

SELEZNOFF: It's “forever chemicals.” Thank you, yes. Then there's versions of it, but it shows up in your waterproof garments, shows up in a lot of clothing, anything that's been treated, or even your upholstery. It's shown up in cookware. It's shown up in food packaging because this product is water-resistant. So, it's what kept that really juicy burger from seeping into your lap. The problem is these things don't dissolve. They don't go anywhere. So, we could spend all day on PFAS, but the point here is, the product you’ve got, is it running hot with any of these things? And there are standards that they should be tested for. If you had a really bad case of lead in a drink tumbler, you could be liable for that, but then could go beyond that, too. Let's talk about the topic of clothing specifically. There is a Flammability in Fabrics Act and there's specific children's clothing guidelines. So, you may have had what looked like a perfectly good prototype … but then there's something wrong with the fabric itself and it didn't meet the flammability standards that are required. So, that would be an example of a raw material that failed the U.S. standards. I know of one product liability case was mattresses. A company imported mattresses and the filling, turned out later, it was fiberglass instead of…

GORDON: Oh gosh.

SELEZNOFF: … yeah. Very itchy. Very rough sleep at night. No fatalities, but that was definitely a product liability suit.

GORDON: So Bill, when you talk about things like those lead levels or those forever chemical levels, et cetera, in your opinion, do you think that's intentional or is that something that's accidental?

SELEZNOFF: I don't think it's intentional. I think the manufacturing process has so many steps along the way. That is why you have to have your own checkpoints. Testing of the raw goods, for example. Okay. Well, do we know if the privately label company [we] contracted with … do we know what their standards were on testing it when it came in the door? And then, was there something along, literally in the manufacturing line? Did it pick up something off the machine? Was it mishandled? I don't think it's intentional at all. I just think there's [a need for] being aware that there are so many processes where things can happen. And unless you have a checkpoint or quality standard along the way, this is where things go wrong. An example would be in the food industry where company has an allergen — undeclared allergen — it's never intentional in my experience. It's always just been, well, someone didn't clean the lines, right, or something didn't get checked along the way. Something just happened and protocols weren't followed or there wasn't a protocol to begin with. This is the nature of the risk … that it takes time, it takes energy, it takes thought, takes consultation and collaboration. So, I don't feel that it's ever intentional. I think it's just lack of awareness or understanding, which is maybe why we're talking about this stuff today.

GORDON: I think that it is interesting. So, from your perspective, it's not nefarious, but like you say, maybe there's just not a protocol in place. Because, for instance, I don't think, we used to put warning labels on things that were made in manufacturing plants that produce things with nuts, for instance. But now we do, because we've evolved and now, we know that's actually a danger to people. But, you know, we had to get to that realization, unfortunately, by someone getting sick, right?

SELEZNOFF: Right. Exactly. We can go down almost any product line that has something in it, and there's probably a standard. Manufacturers tend to be a little more cognizant of this. If you're direct importing it or coming up with design or an idea of something, you know, this is stuff you have to be aware of. There's a variety of things that happen in the actual manufacturing process aside from the prototype you might have developed,

GORDON: So, talking about food labeling, you mentioned the fiberglass mattresses, and it made me think about warning labels … packaging instructions. That’s probably an area that wholesalers need to consider from a product liability perspective also, right? I've seen some crazy warning labels, which tells me that some crazy things have happened.

SELEZNOFF: (laughs) Yeah. I think there's plenty of joke websites, too, about warning labels and things. But in all seriousness, this warning label instruction — how would I be responsible or what goes on [the label] — this is where your product or a product did not fail; it did exactly what it was supposed to. Everything went according to plan, but the user was not properly identified of what could go wrong. Maybe even the instructions showed something other than what the product you had [included]; it showed something that was confusing or misinterpreted. This could go on all day long. I'm thinking of a rock climbing company, years ago, that made rock climbing harnesses. And this company wrote about it in their own book, and they said that they were in a product suit because someone was injured using one of their harnesses. The harness did not fail. It was just the failure to warn the user of what the hazards are of rock climbing. And that became the basis of a suit. And this is why almost any product you buy now has got some sort of warning label attached to it. It's not just consumer products. There are also industrial-grade products that have to have warning labels. There are ANSI standards. So American National Standards Institution sets guidelines about what should be out there for your warning labels and so forth. But there's another company that had their own product — it was a retail store — had their own line of tools, and in their catalog, they showed [in] their advertisement — so, it's quasi-advertising, but it also could be warning — it showed a machine guard on there. The actual product didn't have it. People got injured because the machine guard wasn't there when they shipped product. But it was also in the instructions. So, you need to be aware of what those standards might be. Usually, you have to have an attorney involved if you're setting up instructions and warning labels. You should have an attorney engaged, because it's not only just the warning label. It has to be the right color; it has to have the right symbol. There are some standards, you know … it's very specific. I've seen even on websites products that had warning labels, and I could tell right away that's not even the correct symbol or standard or color. So having the right consultation is important in that regard.

GORDON: [It’s] so serious that people don't get that wrong and that they have someone who knows what they're doing, especially when you talk about standards for safety. So that actually makes me think about regulatory agencies. We've got Federal Trade Commission, Consumer Product Safety, FDA, the EPA. There has to be a ton of information that an organization has to know about, so they don't step out of regulatory compliance. Right?

SELEZNOFF: Right. Yeah. Again, if you're a manufacturer, you've been making and designing widgets, going to have school engineers or developers that kind of know what each one of these do. If you're just going onto Alibaba's website and having a crate shipped of a bunch of stuff to turn around and put your name [on it] or silk trade or sell it or whatever, you might not be understanding how all these government agencies work. So, to break down some of this: Federal Trade Commission. This is the agency responsible for the “dry clean only” label on your clothing. You have to have those by law. You have to have the care instructions. You have to also have the point of origin of where they were made. I mean, this is the “Made in America” versus “Assembled in America” agency that regulates that and make sure you're in compliance. So, this is a consumer-based agency, right? They're protecting the public when they buy stuff off the shelf. So, FTC, they set standards for a lot of consumer-grade products. The CPSC is Consumer Product Safety Commission. Now, CPSC has the authority to do recalls. Both of these agencies can levy fines. They work in conjunction with each other. CPSC does actually have what is called a Regulatory Robot. It'll help guide you on what you think you need to be in compliance with. Again, a huge, vast array [of what they oversee]. They're responsible for anything from coffee makers to toys, to household items, furniture. The USDA and FDA — these are typically food-related organizations. USDA is usually your poultry and meats shelled eggs. FDA, that's anything else: seafood, packaged foods prepared foods, animal foods … also your medical devices, cosmetics and drugs. The other one I'd say is FCC if your product is electronic and has any sort of communication … so [a] Bluetooth device. These little earbuds that I use here [are] Bluetooth-enabled; that's FCC regulated as well. So, you actually could be subject to CPSC because it's an electronic device with a little battery in it, and it can also be FCC, because now it's transmitting a signal. So, it does get very complicated. But you have to be aware of it. You know, these are the agencies that exist in the United States, and non-compliance could be very costly.

GORDON: Not to be taken lightly by any stretch of the imagination.

SELEZNOFF: Yeah and then beyond that, there's also state regulations. So, we're all familiar with California Prop 65 warning, right? So, this is, if your product contains any of the chemicals listed on Prop 65 you have to disclose that. California is not the only state that has that sort of regulation. It's probably the most well-known. But there are other states that also have disclosure laws and they can even be just as strict. To give you a couple examples, there are some states that have a lot [of] standards on baby products … so baby food, baby clothing and so forth. So, you'd have to be aware of if you're some of those industries and whatever state you might be [located in], you could have additional regulations, even at a state level.

GORDON: I have to be honest, I'm sitting here shaking my head because just, again, at my consumer level, one of the ways my teenage son got through the pandemic was he actually bought a kiln. He had been learning ceramics in school. And when the pandemic shut everything down, we actually bought a kiln, put it in the basement. You know, he had a big idea, he was going to be the manufacturer and the retailer and this was going to be a side hustle for him. I don't think any of it ever actually made it out into the world, but I do have it in my house. And I'm like, “I don't know where that clay came from, or what's in it (laughs). I don't know what that glaze is … what's in there. I don't know if the kiln he fired this stuff in is up to standards.” And I'm rethinking my beverage ware at the moment (laughs).

SELEZNOFF: (laughs) Hopefully you got some good coffee mugs out of it.

GORDON: I have some that I love, but I have to be honest, they don't have any warning labels on them. (laughs)

SELEZNOFF: Alright. So, the geek in me is saying, so that would be subject to FDA because it's food cookware and there are standards between transferring food between the cookware items and so forth. So, there you go.

GORDON: I'm going to reevaluate my coffee cup choices maybe a little more.

SELEZNOFF: Who knows, it might be better than some of the other stuff that was off the shelf. I mean, you know, it could go either way.

GORDON: Who knows? I'm questioning a lot of things right now. Okay, so another area that you mentioned in liability, I would assume falls under advertising, especially if you're a company. We talk about companies who are out of their usual level of familiarity. If you've got someone who's maybe doing graphic design off the side of their desk or something, [they] might not understand the seriousness of the laws around design of packaging and marketing and things like that, right?

SELEZNOFF: So, advertising injury gets very interesting, because this is now where we're getting into civil actions. It's more than just laws, per se. There could be some laws about what you have to put on your labels. I'll give you an example: If you say your product's “all natural” and it's not all natural, you could be sued because someone bought your product thinking that [it was]. A hot one is “organic.” This could be in your fabrics; this could be in the foods you eat. It could be a variety of things, but you say, “Oh, it's organic,” and it's actually tested out and [the results] said, “No, this is not organic.” That's a cause for civil action. I know of one case where a certain sports snack bar company put something on their label [claiming] the snack bar was healthy. I forget the exact actual, exact nomenclature, but they said something about how healthy it was. And in fact, it had 15 grams of sugar in each bar. An individual cited the American Heart Association, saying 15 grams of sugar in a bar is not healthy. They filed a suit, I don't know if it actually went to trial, but it settled out for a very large sum and in an exponentially a higher amount of attorney legal fees. So, anything seemingly innocuous could actually … you have to be very careful about what you're claiming your product is, what it does. Another case — it's active right now — is bedsheets and thread count. A company sold 400 thread count bedsheets [and the] customer went apparently [and] they had it tested and the thread count was actually 180; [it] wasn't even half of what was claimed on the package. (laughs) And this company …

GORDON: They didn't think anybody would notice.

SELEZNOFF: I guess not. I don't know. Go back to the raw materials thing we talked about. Maybe the prototype was three, four hundred thread count. That's what they signed off on. This is what we sold. This is what was on our label. What came out of the factory wasn't 400 thread count. We could speculate all day long, but this is the fact and it's a class action suit because it wasn't just one individual. They didn't sell one set of bedsheets. They sold thousands of bedsheets and did anyone get hurt? No. The case is going to be over economic loss. “We overpaid a fair amount for what this product actually was.” So, these are all examples of advertising statements. Greenwashing's another hot [button issue].

GORDON: I was going to ask if you were going to mention that one (laughs).

SELEZNOFF: Yeah, I mean, saying how environmentally friendly it is … this is another “minefield.” I don't have a lot of great examples off the top of my head but I know it exists. The topics I know revolve more at a D&O level — directors, officers — saying that “We're environmentally, socially responsible,” when maybe their products aren't made that way or what they're proposing. And then you get into things like if your product is a regulated product: alcohol, tobacco, you know, any things that should be age-specific and if it looks too much like a kid's product. There's been a number of suits where some beverages were “adult beverages” and they look more like soda pop. So, that all comes into play. So, if your product looks too similar to competitors [and] it confuses the customer, that could also be cause for a suit. I don’t know if this is an advertising or packaging suit, but there are standards in California where it's [the question] a “how much fill you can have in a package?” So, you can't have so much airspace by volume. This comes up more in food. So, you buy a box of cake mix and you find that there's too much air in there; that's actually cause for a suit.

GORDON: Wow. A lot of risks to look out for. So, again, we talk about wholesalers looking to regain value or reconsider their place in the supply chain. This is not an undertaking to be done lightly.

SELEZNOFF: Absolutely. Again, there are reasons to do it. We're just trying to highlight these are some of the things you have to be aware of.

GORDON: Last one I wanted to ask about, because I'm curious: copyright or patent infringement. What's the potential risk there?

SELEZNOFF: So, going back to the whole topic of private labels and some of these look like or are very similar to maybe a big-name product. I'm not going into the whole full-blown counterfeit rings; those exist, they're illegal. But then if you're towing that line saying, “Well, we want to make this product,” that customer's item is that company's item, you know, super-hot. It sells for thousands. You're going to make something very similar. If it gets knocked off too close [to the original], these bigger companies are very in tune with that. They have legal departments that look for the counterfeit rings and try to shut those down. But then your product could show up and if it's too similar, they will take action. They’re protecting their brand, their legacy. Some of these products are built around quality standards. There’s always an image or a story behind the brand that they’re also trying to maintain. They’ve worked hard and they have every right to. But you have to understand that there are patent such things as patent laws. There are such things as copyright laws. And even to the extent of the materials used and how the items are made. This goes on very much in the clothing industry — some sporting [good], some very technical products. Some of those fabrics are patented. Only a certain carrier that developed it can [sell it].

GORDON: Really?

SELEZNOFF: Yeah. So, if it showed up in something, even though it maybe didn't look like it [an original product], that raw material couldn’t be used; shouldn't be used. So, there is legal risk involved with that. Usually, again, it's economic or financial. Usually you get a warning letter —cease and desist. You name your consumer good, there's probably a knockoff. I also know the other extreme too is that some companies … I know of one company that had bicycle helmets and they had a very specific proprietary design. They spent a lot of time engineering it. They had very good high-quality controls overseas. A company was knocking it off and it wasn't even to the same quality standards. Helmets have to meet safety standards and these products were not meeting even these safety standards. It went to trial, and the judge actually was able to order shutting down the URL. So, these companies couldn't even sell the knockoff counterfeits. They couldn't control the companies overseas, but they were able to shut down the URLs so they couldn't effectively sell it. Now, that's an extreme example, but this does exist. Knockoffs and counterfeits — that's something to be aware of. Just where are you at in the chain of things? What are you trying to do? What are you trying to accomplish? If you have your own idea, your own image, your own product, that's all well and good. Just be aware where do you fit in the scheme of commerce in the market that you're at.

GORDON: Sure. And we should be grateful that we do have so many standards and protections in place to protect consumers and what have you. But it is not something to be taken lightly and I very much appreciate a great conversation. You've given us a lot in terms of exposure and risk, you know, liability, etc., that someone — a wholesaler looking to go direct into retail really needs to unpack and work with an expert before they make that step. So, thank you so much for your time.

SELEZNOFF: Absolutely Stephani, I'm really glad to be here and love chatting with you.

GORDON: Thank you. And to our podcast listeners, thanks for joining us for Zurich's Future of Risk. We'll talk to you soon.