Over the weekend, the AP published a damaging article linking VeriChip's (NASDAQ:CHIP) implantable chip technology in animals to cancerous tumors. According to the story, three separate studies between 1996 and 2006 found malignant tumors developing near implanted radio frequency identification (RFID) chips. In one German study, the authors even wrote that the tumors were "clearly due to the implanted microchips."

Innocent until proven guilty ... mostly
It's important to note that the findings are preliminary. They don't definitively prove that RFID chips cause of cancer in animals. Even if they do, there's no evidence that the same chips would cause cancer in people. (Mice are apparently more susceptible to cancer than humans.)

This is an important distinction. As fellow fool Tim Beyers noted, VeriChip enjoyed considerable publicity last year after it received FDA approval for the chips to be used in people, and then successfully implanted RFID chips in two security guards in Cincinnati. Since that time, the company has implanted its chips in more than 2,000 other individuals.

Three concerns
Nevertheless, there are several reasons why this development could prove very troubling, both to VeriChip and to parent company and majority shareholder Applied Digital Solutions (NASDAQ:ADSX).

First, this issue will stain the company's image until it's resolved. At a minimum, it is hard to see how the company -- which is hoping to use the chips for patient identification and infant protection in hospitals, and for "wander protection" in elderly patients -- will be able to make good on its long-term goal to have the devices implanted in millions of people any time soon.

Second, the issue is already a public relations fiasco for the company. Fairly or not, some consumers now link RFID chips and cancer. If future studies bear out this relationship, it could be a death knell for a significant portion of VeriChip's business. If not, the company will still have to wage a costly advertising campaign to undo the story's negative effects.

To a lesser extent, this PR issue might also be a problem for companies such as IBM (NYSE:IBM), 3M (NYSE:MMM) and Intel (NASDAQ:INTC), which are developing noninvasive RFID technology. The general public might not understand the significant differences between the kind of RFID chips implanted in people, and those that are simply inserted onto products or pallets to help with logistics.

Finally, after reading the story, it struck me as odd that VeriChip officials claimed they weren't aware of any of these studies. The article quotes a spokesperson for the company as saying VeriChip was "not aware of any studies that have resulted in malignant tumors in laboratory rats, mice and certainly not dogs or cats."

Under the best scenario, this shows an appalling lack of due diligence (even though the animal studies somehow also escaped the FDA's notice). The company only went public in February, and it would have behooved the company's lawyers to thoroughly scour and vet all health and medical journals for any information that could have portrayed the company in a negative light, then deal with it in advance. If an AP reporter could find the studies, surely someone within the company should have dug up the same information.

Let the chips fall
The worst-case scenario, of course, is that someone within the company was aware of these studies. Whether or not that's the case, you can bet that scores of lawyers around the country are now trolling the Internet and the blogosphere in search of both the 2,000 patients with implanted RFID devices (and possibly cancer), and any aggrieved pet owners who might have lost their beloved four-footed creature to cancer, and are looking to lay the blame at VeriChip's feet.

Bad PR, a suspicious public, and loads of litigious lawyers make for a powerful triumvirate. Like Michael Vick and his animal-cruelty scandal, it will be some time before VeriChip can put this matter behind it. In the meantime, I don't see VeriChip's stock going anywhere soon.

We've chipped with with further RFID Foolishness:

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