Two Costco shareholders sue the board of directors for allegedly violating humane laws
SEATTLE, Washington––Costco Wholesale Corporation, better known as just Costco, in 2016 introduced a novel strategy to wring profits out of the necks of chickens.
Now Legal Impact for Chickens, a recently formed San Francisco-based nonprofit, is pursuing a novel legal strategy to try to stop or at least mitigate the Costco practices.
Costco, meanwhile, appears to be “playing chicken” with a variety of threats ranging from shareholder dissatisfaction with the use of $4.99 rotisserie chickens as a “loss leader” to entice customers, at increasing economic cost, to the risk of avian influenza wiping out the whole Costco corporate strategy.
“Do the right thing”
Lawsuits and other pressure tactics applied by a range of animal advocacy, labor, and environmental organizations may be the least of current Costco corporate concerns, but the public credibility of the Costco motto, “Do the right thing,” may be in trouble.
Right now the allure to average customers of $4.99 rotisserie chickens appears to be sufficient to keep Costco profits near an all-time high. But if for any reason those chickens become unavailable in sufficient volume to meet demand, or the price goes up to $5.99 or higher, Costco may discover that putting all of its chickens into underpriced plastic boxes was not the great longterm business plan most of the corporate board of directors thought it was.
That is when customers might start going down the street to closest rivals Walmart and Whole Foods Market instead, whose practices may be little better for the chickens involved, but keep the consequences of exploitive corporate behavior farther from coming home to roost.
“The farmers are not responsible”
Legal Impact for Chickens is hardly the first animal advocacy group to challenge Costco.
The Humane League, Mercy for Animals, and People for the Ethical Treatment of Animals, among others, have already buzzed Costco in recent years.
Mercy for Animals hit particularly hard in February 2021 with undercover video of cruel and gruesome practices on farms working under contract to Costco and the Costco subsidiary Lincoln Premium Poultry, formed in 2016 to ensure Costco a steady supply of $4.99 rotisserie chickens.
The Mercy for Animals video clips were broadcast without specific identification of the farms involved because, explained Mercy for Animals’ executive director Leah Garcés, “The farmers are not responsible in the sense that they are not dictating the type of breeds, they are not dictating the space, etcetera. This is all being dictated by Costco. Ultimately, we are asking people to hold Costco accountable.”
“Law compliance comes ahead of profit-seeking”
Holding the Costco board of directors responsible is the direct aim of the Legal Impact for Chickens lawsuit, based on a legal theory propounded by Leo E. Strine, chief justice of the Delaware Supreme Court from 2014 to 2019.
Wrote Strine in a 2010 article entitled Loyalty’s Core Demand: The Defining Role of Good Faith in Corporation Law:
“For a corporate director knowingly to cause the corporation to engage in unlawful acts or activities or enter an unlawful business is disloyal in the most fundamental of senses.
“A publicly chartered corporation becomes a legal citizen imbued with rights and responsibilities. When directors knowingly cause the corporation to do what it may not—engage in unlawful acts or unlawful businesses—they are disloyal to the corporation’s essential nature.
“Law compliance thus comes ahead of profit-seeking as a matter of the corporation’s mission,” Strine emphasized, “and directors owe a duty of loyalty to that hierarchy.”
Washington vs. Nebraska & Iowa
In the Legal Impact for Chickens case, Costco shareholders Krystil Smith and Tyler Lobdell, acting “derivatively on behalf of Costco Wholesale Corporation,” are suing the 17 Costco directors and the Costco Wholesale Corporation itself.
Smith, a Costco stockholder since 2020, and Lobdell, a Costco stockholder since 2016, ask the Superior Court of the State of Washington, King County/Seattle division, to declare that “Costco’s poultry production practices violate the laws of Iowa and Nebraska, finding the Individual Defendants liable for breaching their fiduciary duty to act lawfully, which they owe to Costco,” and finding “the Director Defendants liable for breaching their fiduciary duty of loyalty to Costco.”
Further, Smith and Lobdell ask the court to order the defendants “to ensure that, henceforth, all applicable laws and regulations regarding the treatment of animals (including the Iowa and Nebraska laws detailed herein) are followed; permanently enjoining the Individual Defendants and their successors, agents, representatives, employees, and any party acting in concert with them, from engaging in conduct that causes Costco to violate Nebraska’s animal neglect laws;” with an identical enjoinment from “engaging in conduct that causes Costco to violate Iowa’s animal neglect laws.”
Seeking right to do surprise inspections
The individual defendants would be ordered “to take, on behalf of Costco, all necessary actions to reform and improve Costco’s policies, procedures, and practices to comply with applicable laws,” and to allow Smith, Lobdell, “and each of their chosen representatives to conduct random and unannounced inspection of any property where Costco’s birds are kept, to ensure compliance with this Court’s orders.”
Persuading the Superior Court of the State of Washington, King County/Seattle division, to do any such thing will require Bellingham, Washington animal rights attorney Adam Karp, representing plaintiffs Smith and Lobdell to clear several high legal hurdles.
Karp, in effect, is asking a lower court in Washington to both interpret and enforce state laws in Nebraska and Iowa, which the courts of Nebraska and Iowa have so far not enforced, either against Costco and Lincoln Premium Poultry, or any other major agricultural producer.
Precedent suggests that even though Costco and almost all of the Costco directors reside within King County, the King County court will find that the initial complaints about cruelty and neglect should be brought in Nebraska and Iowa, where agricultural producers enjoy broad exemptions from cruelty and neglect laws.
Precedent also suggests that any case involving multi-state issues is likely to end up in federal court.
There are established legal mechanisms for pursuing cases in federal court in which a corporate entity allegedly pursues criminal activities in a jurisdiction where the local authorities are unwilling or unable to enforce laws. The 1970 Racketeer Influenced and Corrupt Organizations Act, better known as the RICO Act, is probably the best known such mechanism; others exist in civil rights law.
The Legal Impact for Chickens case against Costco is structured somewhat like a RICO Act case, but differs both in being pursued as an action among shareholders, internal to the company, and in having been filed at the state level, making no allegations pertaining directly to interstate commerce.
The language of the case, however, spells out allegations against Costco which might stick in the “court of public opinion,” even if not advancing in a court of law.
Explains the pleading, “A widely-known and prominent feature of Costco’s business model is to use low-priced rotisserie chickens as a loss leader, to lure foot traffic to its store. Public reports show this loss-leader strategy resulted in 106 million rotisserie chickens sold” in 2021, up from 64 million sold five years earlier, in 2016.
“To execute this prominent feature of its business model and hold firm on the $4.99 price its rotisserie chickens have been sold at for over a decade, despite rapidly rising input costs and general inflation,” the lawsuit charges, “Costco set up a vertically integrated poultry production business to supply itself with a large quantity of cheap chicken meat.”
In that connection, the case contends, “Costco’s directors and officers have violated their fiduciary duty by knowingly causing Costco to neglect and abandon chickens in violation of state laws,” as “an integral part” of the Costco “poultry production strategy.”
“Illegal in Nebraska and Iowa”?
Like other major poultry producers, “Costco knowingly propagates chickens bred to grow so fast that many of them cannot stand under their own weight,” Legal Impact for Chickens alleges.
“Costco then sends millions of these fast-growing birds to dirty, crowded factory farms, where “disabled birds slowly die from hunger, thirst, injury, and illness,” the lawsuit summarizes.
“Despite Costco’s directors’ and officers’ knowledge of the Company’s illegal animal neglect and abandonment, the directors and officers have caused and allowed Costco to continue its current treatment of chickens, in violation of their fiduciary duties.”
Asserts the lawsuit, “Costco’s practices—which cause birds to suffer and die without proper care—are illegal in Nebraska and Iowa,” though Nebraska and Iowa courts have yet to so rule.
The part of the Legal Impact for Chickens lawsuit that may be most damaging to Costco is a succinct summary of business practices that appear to amount to corporate sharecropping:
“Costco, working through Lincoln Premium Poultry, encourages its growers to sign 15-year contracts. The factory farms and equipment within them are built according to Costco’s specifications. As a result, as a practical matter, it would be nearly impossible for a contract grower to profitably repurpose his or her barn, should the grower end his or her relationship with Costco.
“Costco’s recruits typically must take out large loans in order to finance the building of the new factory farms according to Costco’s specifications.
“As a result of the debt growers must take on, the fifteen-year contracts they sign, the fact that they end up with expensive factory farms which are hard to profitably repurpose, and the fact that the contract growers often have no prior chicken growing experience, the contract growers are vulnerable to Costco’s decision making and virtually incapable of ending their relationship with Costco.”
360,000 chickens at a time
In consequence of all of this, the lawsuit details, “A single grower may have as many as 360,000 chickens at a time. Given these birds’ health problems,” plus “the immense financial pressure placed on contract growers, it is essentially impossible for a single Costco contract grower to take proper care of 360,000 birds—many of whom are severely injured or wounded. Costco is aware of this impossibility.
“By leaving tens of thousands of its birds at a given contract-grower factory farm in Nebraska or Iowa where Costco knows the birds will not receive adequate care, Costco is both abandoning and neglecting its birds in violation of the law.”
This contention may be difficult to prove in a Washington court, let alone to the satisfaction of a Nebraska, Iowa, or federal court.
National Chicken Council
On the other hand, according to a 2021 Costco Wholesale Statement Regarding Broiler Welfare, “With respect to our dedicated suppliers: all broilers are raised uncaged, in barns where they are free to move about without restriction. The minimum standards followed in these barns are based on those developed by the National Chicken Council,” which “represents companies that account for approximately 95% of broiler chicken production in the United States. For our dedicated suppliers,” Costco said, “compliance with National Chicken Council standards is tested by third-party auditors, who are independent of Costco and the producers.”
However, contends the Legal Impact for Chickens case, “Even the National Chicken Council has sought to distance itself from the description of Costco’s chicken neglect,” published on February 6, 2021 by New York Times columnist Nicholas Kristof, based on the Mercy for Animals video.
“The National Chicken Council responded by saying, ‘[t]he conditions described in the article are not an accurate representation of the health and welfare of today’s broiler chickens.’
“Contrast this,” the lawsuit says, “with Costco’s response to the undercover investigation, which stated that much of the investigation footage simply depicts ‘normal and uneventful activity.’”
Even if the Legal Impact for Chickens case is quickly dismissed, shareholder activism has reportedly changed Costco corporate practice at least once before.
“As the biggest competitor with Whole Foods, selling $4 billion in organic foods, Costco has been wooing shoppers who care about the source of their food for years,” recounted Civil Eats on December 11, 2018. “In fact, the company just announced that it would tighten its standards around antibiotic use in all the meat it supplies thanks in part to an ongoing effort by shareholder activists.”
On the other hand, a Civil Eats update mentioned that “In September 2019 a coalition of 10 local groups called calling for a moratorium on ‘concentrated animal feeding operations (CAFOs) and the extreme vertical integration of animal agriculture,’” in direct opposition to Costco expansion plans in Nebraska.
Instead of complying, Felix Behr of Mashed.com reported on February 22, 2021, the Costco subsidiary Lincoln Premium Poultry “expanded its workforce from 600 to over 1,100,” while “Local contractors tasked with raising the chickens built 440 out of 520 [planned] barns.”
H5N1 is biggest threat to Costco
Meanwhile, the most imminent threat to the Costco business model centering on $4.99 rotisserie chickens remains the H5N1 avian influenza. Both Iowa and Nebraska experienced outbreaks in March 2022.
Recalling that a 2015 H5N1 outbreak “led to nearly 5 million laying hens being euthanized at six farms in Dixon County, Nebraska,” Lincoln Journal Star reporter Matt Olberding observed that “An outbreak now could be even more devastating in Nebraska, as the state has since added dozens of operations raising millions of broiler chickens for the Costco processing plant in Fremont,” which by itself supplies more than a third of all the $4.99 rotisserie chicks that Costco sells.