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Pink Slime Lawsuit Could Cost Disney $6 Billion

Disney (NYSE: DIS) may be about to get slimed. Not the neon-green gelatinous sort associated with its Nickelodeon kids TV show, but rather the pink sort that oozed out of its ABC News division five years ago.

The lawsuit is arising from a now infamous broadcast on the merits of lean finely textured beef (LFTB), or what the news program called "pink slime." Manufacturer Beef Products Inc. (BPI) is alleging that the segment defamed and financially harmed the company. It's seeking not only actual damages of up to $1.9 billion, but also statutory damages that, under South Dakota's Agricultural Food Products Disparagement Act, could multiply the actual amount and push the total bill to almost $6 billion. And that's before the punitive damages that BPI wants to kick in.

Image source: Getty Images.

Where's the beef?

In March 2012, ABC News aired a "startling news investigation" on a ground-beef additive that a former U.S. Department of Agriculture (USDA) scientist was quoted as calling "pink slime." The report said the trimmings -- which ABC helpfully noted had previously only been used in dog food and cooking oil -- was found in 70% of all ground beef. It further pointed out that it was sprayed with ammonia to make it safe to eat.

The fallout from the report was immediate. Within days of its airing, major supermarket chains like Food Lion, Safeway, and SUPERVALU announced they would stop selling ground beef that contained LFTB, while Wal-Mart and Kroger said they would begin offering shoppers options on ground beef that didn't contain any pink slime. Consumers also began demanding action, filing petitions to have the beef product removed from school menus.

The news program was devastating to Beef Products Inc., which says 80% of its sales were wiped out in the aftermath of the program, and net profits went from more than $115 million to a net loss of $368,000. It then began losing $568,000 per week, and lost over $400 million over a five-year period. BPI closed three of its four processing plants, and hundreds of employees lost their jobs.

Image source: Beef Products Inc.

BPI wasn't the only company that was hurt, as other manufacturers also took a gut punch from the news report. AFA Foods sought bankruptcy protection within weeks of the program's airing as a result of "an immediate and unanticipated liquidity crisis" that left it unable to pay vendors. It was the supplier of what it called "boneless lean beef trimmings" to Safeway and Walmart, as well as fast-food chains like Burger King, Carl's Jr., and Wendy's.

What is "pink slime?"

"Lean finely textured beef" is simply beef that has been separated from the fat in trimmings, or the chunks of meat left over after carcasses are cut up into steaks, roasts, and other cuts. MeatSafety.org says the trimmings previously used to be wasted because it was difficult to recover them, but modern processing techniques now allow butchers to do so.

The USDA also has signed off on the use of LFTB for over two decades because the product is safe for human consumption. Moreover, while much was made of the use of ammonium hydroxide gas to kill bacteria and make the meat safe, other meat products also use processes like that to make them consumable, such as chicken processors who spray bird carcasses with chlorinated water. Following the news segment, the USDA reiterated its stance saying: "The process used to produce LFTB is safe and has been used for a very long time. And adding LFTB to ground beef does not make that ground beef any less safe to consume."

Image source: Beef Products Inc.

The problem for Disney and its ABC News division is that the current climate of rhetorical resistance to so-called "fake news" may cause a backlash. According to the latest Gallup survey, if it wasn't for big corporations and politicians, TV news programs and newspapers would hold the lowest public-approval ratings.

While news organizations rightly enjoy broad First Amendment protections, the inflammatory and sensationalized nature of the pink slime report may undermine ABC News' standing in court. Arguments that it will be vindicated because "people deserve to know what's in the food they eat" may fall flat with a jury.

While there will likely be appeals no matter the verdict, the reputations of ABC News and Disney may get slimed, regardless.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool has a disclosure policy.