Companies in the dock


By Sujit Bhar

An interesting piece of news has emerged across Indian media, which says that Dabur India, a highly respected company within the subcontinent, has spend Rs 65 crore in the first half of financial year (FY) 2024 on legal fees, and will be spending Rs 20 crore each quarter going ahead for legal fees as it fights cases against it in the United States and Canada.

The money is being spent because on October 19, Dabur and its subsidiaries were among companies sued in those two countries by customers who alleged that the use of its hair relaxer products had caused ovarian cancer, uterine cancer and other health issues. About 5,400 cases have been filed against several companies, including Dabur India’s subsidiaries, Namaste Laboratories, Dermoviva Skin Essentials and Dabur International.

According to reports, legal expenses in those countries are only partly covered under insurance. The rest will have to be borne by the companies sued.

Hair relaxers are basically beauty products. What they do is straighten the hair. The way this happens is that chemicals in the relaxer penetrate the cuticle and the cortex layers of the hair shaft to loosen the natural curl pattern. It is an accepted fact that this not only weakens the hair, making it brittle and prone to breakage, but can also burn the skin and cause permanent damage to the scalp. The short term effect of this may be hair loss. Now, it has been alleged that these chemicals can also have carcinogenic effects in the long term.

The Johnson & Johnson case

While the Dabur issue cannot be categorised with the case filed against Johnson & Johnson, there are similarities in the processes. The case was one of the largest consumer action suits in recent times and it was all over the media.

Recently, though, a New Jersey appeals court threw out the $223.8 million verdict against Johnson & Johnson that a jury had awarded to four plaintiffs who claimed they “developed cancer from being exposed to asbestos in the company’s talcum powder products.”

The Superior Court of New Jersey, Appellate Division found that a lower court judge should not have allowed some of the scientific experts testimony the plaintiffs presented to jurors at trial.

J&J Worldwide Vice President of Litigation Erik Haas has called this “junk science” advanced by “purported experts paid by the mass tort asbestos bar.”

The company, in turn, has sued four doctors who published studies citing links between talc-based personal care products and cancer. The products are back on the shelves.

The Nestle India case

Then there was this case against the giant Nestle India, which was pulled up for its supposedly “unsafe” Maggi instant noodles, one of its largest selling products in the country. That happened in 2014, when food safety regulators from the Barabanki district of Uttar Pradesh reported that samples of Maggi noodles had high levels of mono­sodium glutamate (MSG), apart from high lead content above the permissible level. At the time, the labelling on packets of Maggi Noodles indicated that it had no added MSG.

Sanjay Singh, food inspector in UP government’s Food Safety and Drug Administration, saw the “no added MSG” label on the Maggi packets during a routine check and sent it to a state laboratory in Gorakhpur, which supposedly found that the product had MSG. The samples were then sent to the Central Food Laboratory (CFL) in Kolkata a few months later which confirmed the Gorakhpur lab results a year later. It had said that amount of lead found “was over 1,000 times more than what Nestle India Ltd had claimed”.

It was a disaster and Nestle had to recall the popular snack from the market, with nearly 38,000 tonnes of Maggi Noodles recalled from the market between June 5 and September 1, 2015. Maggi’s market share at the time was 80%.

The issue blew off slowly and the brand could be back on the shelves in after a year, though the entire issue of whether it actually had so much lead remained unresolved.

The Dabur Effect

In the current case for Dabur, which is a mid level company—nowhere near the massive structure of either Johnson & Johnson or Nestle—this legal expense will be a reasonably big hit.

Dabur’s consolidated net profit for FY24 second quarter was Rs 507.04 crore, showing a quarter on quarter growth of 3.29%. It has been said by the company that these legal expenses will affect the company’s foreign business only and will have no effect on its India operations. Incidentally, though, 25% of Dabur’s international business is in the hair relaxant category. That is a big setback.

The overall scenario with such legal actions internationally and in India is the loss of face and market share by companies, sometimes because of no fault of their own. These setbacks are typically more than those trademark infringement cases that are filed often. Those are just blips in the entire scenario and are not major legal hurdles to business and brand building.

Think about the massive loss of credibility for Samsung, when it was reported across social media and other platforms that the batteries included in the company’s phones were catching fire, sometimes resulting in fatalities. Airports even banned fliers from carrying certain Samsung models.

It was said by the world’s wisest investor, Warren Buffet: “It takes years to build up a reputation while it takes minutes to destroy it.” It is true; and the best way to destroy the reputation of a brand or a company is to just start a court case.

Within the extremely competitive world of brand promotion, a company is built on its reputation, an intangible item that evolves into trust. This is directly connected to the company’s bottomline.

For Dabur, it is not important how many dollars the company is spending in employing high flying corporate lawyers. It is just important that the company has had to employ lawyers to clear its name.

There have been several instances where major corporate houses have opted for Alternative Dispute Resolution (ADR) channels, but when a class action suit is filed in court the ADR option is thrown out of the window.

If we study the cases of John & Johnson, Nestle and others and dare to go beyond the precincts of the courts and beyond the margins of legal documents, we might be able to find a bigger picture—sometimes even a bigger conspiracy—that this is a small part of. 

In the end, it depends on when and how the courts accept these—often specious—arguments and allow the cases to run in court. Apart from issues where the US FDA has brought cases to the fore, or where there seems to have been a blatant case of cheating, there has to be a line drawn for issues to be tried with a sane mind.

The problem with such cases is that even after the courts have cleared the name of the company and its product, the trust is never fully recovered. The compensation provided is never enough, and there is a whole line of business, jobs and careers that go down because of a nefarious act by some lawyers or a group of people.

Such suits in India are rare, but not unheard of, such as in the case of Nestle India. As consumerism takes hold of the Indian market psyche, the Indian justice system has to prepare for the challenges, take lessons from international experience and decide how and when the good of many overrides the good of a select few.

It is not that legal action should not be taken for patently illegal activity by a company. That, illegality, however, needs to be established before the plaintiffs start blowing their own trumpets. Class action suits have, in many cases, triumphed over corporate greed. Similarly, legal cases have sometimes dealt fatal blows to many small companies with small ambitions and small employment.