(FORTUNE Magazine) – The worst day in the history of the Food Lion supermarket chain had to be November 5, 1992. That night, ABC News' PrimeTime Live broadcast a devastating hidden-camera expose charging that Food Lion stores knowingly sold rotting meat, fish dipped in bleach, cheese nibbled on by rats, even produce removed from fly-infested dumpsters.

Talk about the power of television: During the week of the broadcast the company's market value plummeted by $1.3 billion. And the show helped hammer Food Lion's profits, which fell from $178 million in 1992 to a mere $3.9 million the following year, as the chain curbed its expansion plans and eventually closed 88 stores.

Food Lion counterattacked. The company sued ABC for $2.47 billion, charging that it had been smeared by unscrupulous TV producers working in cahoots with a hostile labor union. Now, this December, some four years after the broadcast, Food Lion will finally get its day in court. Its suit against ABC is scheduled to go to trial in North Carolina, the state where the chain has a third of its 1,100 stores.

But this is more than a story about contaminated food, the press, and a bitterly contested lawsuit. From the moment PrimeTime's Diane Sawyer showed up with a hidden camera in the company's Mocksville, North Carolina, supermarket, Food Lion had a crisis on its hands, and from a management point of view, it handled that crisis badly. The company, for instance, spent more time attacking ABC than trying to calm jittery shoppers by assuring them that they were buying food that was fresh, clean, and safe to eat.

When faced with a crisis, it pays for a company to be open and proactive. That's what Johnson & Johnson proved when in 1982 it spent $100 million to pull Tylenol off the shelves after seven people died from pills that had been tampered with. Tylenol's sales quickly bounced back. More recently Texaco offered a $115 million settlement to its minority employees days after accusations of racism hit the press. Texaco's fast action--arguably even an overreaction--has taken some of the sting out of the charges.

Food Lion, by contrast, blamed the messenger and went to court. Now, after its customers have come back and profits have recovered, the retailer will revisit its nightmare. Worse than that, when the trial opens, customers will surely be exposed to an instant replay of ABC's charges (and the yucky-looking hidden-camera footage) that sent the supermarket chain reeling four years ago.

Some critics suggest that corporate pride--or stubbornness--is trumping common sense. Leslie Dach, vice chairman of Edelman Public Relations Worldwide, says that companies must respond aggressively to bad publicity, but they also need to know when to let an unpleasant story die. " 'Sue the bastards' is sometimes an emotional, not a rational, response," Dach says. "You don't want to put bravado ahead of good business sense." Steve Friedberg, a public relations director with the D'Auria Emmons Morris & Co. agency in Cincinnati, says, "Only in political campaigns do you score points with negative tactics. You win nothing by blaming."

True enough. But take a closer look at Food Lion's grievances, and you can understand why the company is hopping mad--mad enough to sue and take the consequences. The company says it was victimized by unethical conduct and one-sided reporting by ABC News. It claims that ABC's producers told lies and induced others to lie. That ABC worked closely with a union that detests Food Lion, while keeping the company in the dark. Worse, that it ignored evidence that would have undermined its story.

FORTUNE went back and talked to key participants and examined thousands of pages of sworn testimony, court documents, and internal ABC memos. Food Lion may have a point.

THE INVESTIGATION

"Something is rotten at the grocery store, and it just may be the food you're buying."

With those words, Susan Barnett, an associate producer at ABC News, pitched a story about Food Lion and its unsanitary food-handling practices to PrimeTime in March 1992.

Coincidentally--or so it seemed--Barnett's story idea surfaced just as Lynne Dale, an ABC producer, proposed her own Food Lion story to PrimeTime. Dale had a different take on Food Lion. She promised to deliver "a tale, told by employees, of a pressured, stressful environment filled with harassment and intimidation." PrimeTime had barely begun to investigate, but the supermarket was already cast as the villain in this morality play.

This sudden interest in Food Lion at ABC News was no accident. Both story proposals had originated with the United Food and Commercial Workers Union (UFCW), which was waging an aggressive campaign against non-union, fast-growing Food Lion. The UFCW had supplied the names of disgruntled workers to Barnett through a Washington public-interest group that acted as a middleman. And Neel Lattimore, then a UFCW spokesman, now press secretary to Hillary Clinton, had urged his friend Dale to look into Food Lion.

The UFCW saw Food Lion as a threat. The chain had grown rapidly, mostly in the Southeast, by keeping costs down, using a non-union labor force, and guaranteeing "extra-low prices." Much of its growth came at the expense of unionized supermarkets--and UFCW jobs.

Into this war stepped PrimeTime, armed with its favorite weapon: the hidden camera. Hidden-camera investigations were then a trademark of the show, which had won awards for undercover reports about racism, inadequate day care, and patient neglect in veterans' hospitals. Undercover footage can make great TV because audiences can literally see wrongdoing.

Officially, though, ABC News has a policy of using hidden cameras only if less intrusive methods of reporting are unavailable. Some viewers, after all, don't like seeing a TV network operating as Big Brother. As Rick Kaplan, then executive producer of the program, once said, "It reeks a little of the KGB."

In the Food Lion case, ABC could have first checked state or federal health inspection reports to see whether Food Lion had food safety problems. Or producers could have tested groceries purchased at Food Lion for contamination.

Neither was done. Instead, ABC opted to shoot first and ask questions later. This rush to deploy hidden cameras suggests that they were used for voyeuristic, not journalistic, purposes. What's more, going undercover required ABC to concoct an elaborate chain of lies.

That spring Dale, Barnett, and three others working for ABC News submitted false resumes to Food Lion. The UFCW provided false references for Dale, Barnett, and an ABC photographer from friendly supermarket owners (and Food Lion competitors) who agreed to lie. The UFCW also arranged for Dale and Barnett to observe the operations of a deli and meat market so that they could pass as experienced workers.

On her application, Dale laid it on thick: "I love meat wrapping. I have heard Food Lion is a great company. I would like to make a career with the company." Food Lion was fooled. Dale worked almost two weeks as a meat wrapper. Barnett spent a week as a deli clerk. Both had microphones in their underwear and tiny cameras hidden in their wigs--setting the stage for some very bad hair days for Food Lion.

There's no consensus among journalists about whether such lying is ethical. Most major newspapers don't permit it, but television's prime-time magazine shows periodically allow reporters to misrepresent themselves. Rem Rieder, editor of American Journalism Review, says there are practical as well as ethical reasons to avoid lying: "If a reporter tells not only one lie but a pattern of lies to get a story, how do you know the reporter is telling the truth about other things?"

That's precisely the argument made by Food Lion lawyers, who say ABC can't be trusted. Speaking about Dale, Food Lion lawyer Andrew Copenhaver says, "She's lied to get in there. She's lied to her fellow employees. Who can say whether she's going to tell the truth about the dates on a piece of meat?"

THE CONFRONTATION

Food Lion executives knew they were in trouble the day Diane Sawyer arrived at their supermarket in Mocksville. She hadn't come all that way for a carton of milk. Striding down the aisles, Sawyer was accompanied by Jean Bull, a former Food Lion meat wrapper, and by a man armed with a hidden camera. The store manager, Donnie Dwiggins, recalls, "She just said a quick hello and kept on walking. It was more or less a sneaking and spying routine."

Food Lion did some checking and found that Bull had supplied a reference for Dale. The company also ran a credit check and learned that Dale worked for ABC News. This was August 1992--a critical moment when Food Lion still had time to influence ABC's story. Veteran spin doctor Frank Mankiewicz, vice chairman of Hill & Knowlton, says, "If you know somebody's planning a bad story, get your own story out ahead. It wouldn't have hurt if they'd fired a bunch of people from the bad stores and explained why."

Alternatively, Food Lion could have hired an independent expert--say, someone like former Surgeon General C. Everett Koop--to give the company a Good Housekeeping seal. Says Bob Druckenmiller, president of Porter Novelli public relations: "What people want to see is concern."

Instead Food Lion hired John Walsh, a combative New York libel lawyer, who led a contingent of lawyers to a meeting at ABC headquarters, where they tried to persuade the network's executives and lawyers to turn over videotapes made inside Food Lion stores. They failed, then headed for court. The meeting left senior executives at ABC with the impression that Food Lion cared more about its corporate image than its customers' health. "It made me angry," said one network honcho.

Food Lion had a history of hostile dealings with critics in the press. When a string of free weekly newspapers in North Carolina published a hard-hitting investigation of the company, Food Lion asked shopping centers where it had stores to remove them from the shelves. Eric Bates, who investigated Food Lion for the journal Southern Exposure, says, "They were out of touch with the modern approach to public relations, where reporters get massaged."

With positions hardening, one last battle remained to be fought between ABC and Food Lion before the broadcast. ABC wanted to interview Tom Smith, Food Lion's CEO. Food Lion insisted that the interview be live or unedited. ABC declined, saying it needed to retain control over its airtime. Food Lion, through a public relations consultant, had also offered to make its executives available for a background briefing. Once again, ABC declined.

The result was that after consulting for months with the union and disgruntled workers, PrimeTime had nothing to air but a written statement from Food Lion denying wrongdoing.

THE BROADCAST

The 27-minute PrimeTime story was even worse than Food Lion executives had expected. Former Food Lion workers described a litany of unsavory practices: soaking rotten fish in baking soda, rewrapping old chicken in barbecue sauce, removing "sell-by" dates on eggs and yogurt with fingernail polish.

The hidden-camera tapes appeared to buttress their claims. They showed workers rewrapping chicken and beef. One complained about lamb: "The damn stuff's old when it comes in." A deli worker advised, "Sell the bad stuff first."

Food Lion executives watched at corporate headquarters in Salisbury, North Carolina. Bill McCanless, a senior vice president, said they were appalled--not at the alleged unsanitary practices but at ABC's slanted reporting. "We were just numb," he recalls. "We were in shock."

But how can pictures lie? That's a question that Food Lion and its lawyers have struggled with and one that, significantly, they have not put directly before the court. Their lawsuit accuses ABC and its employees of fraud, trespass, and breach of fiduciary duty, all charges that grow out of the undercover news-gathering operation. The company did not sue for defamation or ask the court to decide whether the broadcast itself was misleading.

That's crucial, ABC's lawyers say. Food Lion, they told the court, "conspicuously fails to dispute the truth of the broadcast. The reason is simple: The broadcast was true, and Food Lion knows it has no basis to say otherwise."

Not so, replies Food Lion. The company's lawyers say they opted not to sue for defamation because the claims of fraudulent news gathering are easier to prove. PrimeTime, says Food Lion, was grossly unfair, and it can prove it.

For starters, the company points to state and federal health inspection reports. Generally, they say, Food Lion scores well. PrimeTime ignored these favorable reports on the show.

The supermarket chain then points to the outtakes from the undercover tapes, which its lawyers obtained after a hard-fought battle with ABC. An analysis of the tapes shows that some of the broadcast material was taken out of context--and other pictures weren't what they seemed to be.

Pictures of workers rewrapping meat, chicken, and fish, for example, don't prove that the goods are old or rotten. Other outtakes show Dale and Barnett trying to coax Food Lion workers to discuss spoiled food and not getting the answers they want.

One worker says, "Man, I could feed the dorm at [college] where I live with all the food I throw away."

Another says the store manager told her to throw away any bad food, and that she does so.

Food Lion also makes a commonsense argument. No supermarket could sell such rotten food and grow as rapidly as it did.

The company was so upset with the show that it quickly produced its own videotape called PrimeTime Lies and asked workers to show it to their friends--perhaps along with snacks from Food Lion's deli.

ABC vigorously disputes the notion that its news is as tainted as Food Lion's meat.

More unpleasantness for both companies surely lies ahead. While Food Lion lawyers have been investigating ABC, the ABC attorneys have been digging into Food Lion's sanitation records--turning up, for instance, a 1989 memo that offers this advice to store managers: "We need to look in the dumpsters, get the good product out of it back into the store, and sell it." Yum. Food Lion's lame response: "The memo doesn't mean what it says."

Hill & Knowlton's Mankiewicz expects the case to turn ugly. "You're asking for it if you sue," he says. "People can take depositions. They can make them public. They can make your life hell."

So what's a company under attack to do? "We have three simple rules here," he says. "Tell the truth. Tell it all. Tell it now." Then put the crisis behind you.

REPORTER ASSOCIATE Henry Goldblatt