Friday July 27, 2012
Will CPSC Civil Penalty Cases Support Policy Objectives?By Eric L. Stone
In the Consumer Product Safety Improvement Act of 2008 (CPSIA), Congress increased the civil penalty “cap” to allow the Consumer Product Safety Commission (CPSC) to seek penalties of up to $15 million. It also revised and broadened the penalty factors to be considered by the CPSC in seeking or compromising such penalties. Although the CPSC has issued implementing regulations the actual cases provide the most insight into CPSC application of these criteria and reveal whether its implementation strategy supports its policy objectives.
The CPSIA enumerated several factors the CPSC “shall consider” in determining civil penalties. Those include the nature, circumstances, extent, and gravity of the violation, including the nature of the product defect, the severity of the risk of injury, the occurrence or absence of injury, the number of defective products distributed, the appropriateness of such penalty to the size of the business charged and how to mitigate undue adverse economic impacts on small businesses, and such other factors as appropriate. 15 U.S.C. §§ 2068(b) & (c).
On March 31, 2010, CPSC issued regulations interpreting these criteria. CPSC said the goals of the penalty provision were to deter violations, provide just punishment, promote full compliance and respect for the law, reflecting the seriousness of the violation and an ultimate goal of protecting the public. 16 CFR § 1119.1. The Commission did not bind itself with a rigid formula for the calculation of penalties as some agencies have done, but rather allowed itself significant flexibility in considering these factors with an eye on its policy goals.
In raising the penalty cap for violations from $1.825 million to $15 million, Congress sought to give the CPSC the ability to seek larger penalties against big violators. Although there was robust debate at the time, Congress sided with those who were concerned that a penalty of under $2 million did not provide sufficient deterrent value for a multi-billion dollar firm. Most of the penalty settlements that have been announced since the rule involved conduct that occurred before the new statutory cap went into effect.
On January 19, 2012, the Commission provisionally accepted a civil penalty from Hewlett Packard Company (HP) in a case involving an alleged failure to report an overheating hazard with some 32,000 lithium-ion computer batteries. (In the Matter of Hewlett Packard Company, CPSC Docket No.12-C0006.) The CPSC staff (“staff”) alleged that HP knew of approximately 22 reports of overheating, flames, or fire involving those batteries including incidents of injury to consumers. Staff contended the firm failed to report under section 15(b) of the Consumer Product Safety Act (CPSA), 15 U.S.C. § 2064(b) a defect which could create a substantial product hazard or unreasonable risk of serious injury or death.
Although CPSC accepted the firm’s $425,000 settlement, Commissioner Robert Adler dissented because he believed that a higher penalty was necessary given the size of the firm involved and the potential harm from the defect. (Dissenting Opinion of Commissioner Robert S. Adler, January 19, 2012.) According to its 2011 Annual Report, Hewlett Packard had over $127.2 billion in revenue. Chairman Inez Tenenbaum wrote an opinion concurring in part with the dissent of Commissioner Adler supporting larger penalties going forward as needed to achieve the CPSC’s articulated penalty policy goals.
Aftermath of Hewlett Packard
For six months, the public has waited to see what impact these opinions would have on on-going penalty negotiations and new cases. During the past week, the first two of those cases emerged. (In the Matter of Battat Incorporated, CPSC Docket No. 12-C0007, and In the Matter of Burlington Coat Factory Warehouse Corporation, CPSC Docket No. 12-C0008.) More penalty case settlements are likely soon. While it is tempting to examine these cases for trends, it is a very small foundation to support any sweeping conclusions. However, both cases suggest an increase in the size of penalties acceptable to the Commission relative to the size of the firms.
In the case of Battat Incorporated, the staff settled an alleged failure to report hazards from magnets in toy sets. No injuries had occurred from that “defect” but the staff alleged that the severity of a potential injury was great and based on reported incidents of magnets coming out of the toys and existing recalls, the firm should have reported. (The firm’s response argued that the lack of injuries showed that it had made a valid decision not to report based on what it knew about differences between its products and other products that had been recalled.) Nevertheless, CPSC provisionally accepted a penalty of $400,000, just $25,000 shy of the Hewlett Packard settlement amount. The CPSC press release noted that Battat was a small business and that the statute forced consideration of that factor implying that a larger penalty might otherwise have been required to settle this matter.
In the other penalty matter, Burlington Coat Factory Warehouse Corporation agreed to pay $1.5 million in penalties. A retailer, Burlington had apparently sold garments with drawstrings before there was a CPSC binding drawstring hazard rule. After discovery that a few drawstring garments had evaded its safeguards and made their way to the sales floor, the firm did an extensive survey of products on its shelves, determined that some garments might violate the voluntary guidelines for drawstrings then in existence, and reported those garments to CPSC and recalled them. CPSC staff alleged the firm should have known that it was selling garments that had drawstrings and reported at an earlier date. The staff also alleged the firm sold some garments after it initiated its recall. Apparently, no actual injuries or deaths occurred with the firm’s garments.
Both of these penalties involve much smaller firms than Hewlett Packard, but much larger penalties in proportion to the size of the firm. Unlike Hewlett Packard, neither appears to have involved injuries, and both involved a moderately higher alleged number (over 100,000) of products, although the number of “defective” products was one of the matters apparently disputed in the Battat matter. Both cases involve the type of products (magnets, garments with drawstrings) that had been associated with serious injuries in the past, although the actual risk of injury per individual product appears very low.
Over the next several months, more penalty cases are likely to emerge. Will a consistent pattern of higher penalties emerge for small as well as larger firms? Or will cases reflect a raising of the penalty bar for larger firms to achieve additional deterrent effect for such firms?
The regulated community and public will also be watching to see how the CPSC applies the civil penalty factors and whether any consistent conclusions can be reached about the application of those factors. The statute requires CPSC to consider the gravity of a violation in determining appropriate penalties. Presumably this reflects not only an interest in fairness and consistency in determining penalty amounts, but also a determination to see that “the punishment fits the crime.”
The preamble to the civil penalty rule suggests that the gravity of a violation will be considered in seeking penalties that are designed to promote the underlying goals of the penalty provision and that larger penalties may be reserved for the more serious and extensive violations. (75 Fed. Reg. 15996) This approach makes sense because disproportionate penalties for firms that at least tried to do the right thing could undercut the CPSC policy goals. Such penalties could send a signal that there is no benefit—at least for penalty purposes--to better conduct.
Civil penalties ultimately send a message to firms about reporting and other compliance activities. Will CPSC penalties send a strong message about the need to comply with the law and punish most heavily the firms that fail to make efforts to comply? Or will they hit firms that report and take proactive safety measures—albeit imperfectly in the eyes of the CPSC—just as hard as those who make no such effort? If so, CPSC could unintentionally discourage firms from reporting or taking other actions to make their products safer.
Obviously, it is too early to reach any conclusions based on the very limited sample of cases. Members of the business community and the public will be watching future penalty cases for evidence of whether the CPSC applies the civil penalty criteria in ways that contribute to the policy goals of such penalties or undercut those goals and ultimately public safety.
Eric Stone is the principal in the Law Firm of Eric Stone, LLP. His practice includes health and safety regulatory law before CPSC, NHTSA and other state and federal agencies. He can be reached at email@example.com, phone: 301-424-0270, website: www.ericlstonelaw.com.