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July 19, 2009
Beware of New Increased Civil Penalties for Consumer Product Violations – Are You Vulnerable?
By Alan H. Schoem, Senior Vice President, Marsh Risk Consulting
Effective no later than August 14, 2009, the maximum civil penalty that the U.S. Consumer Product Safety Commission (CPSC) can seek for violations of the laws it enforces will increase from $8,000 per product with a maximum penalty of $1.825 million to $100,000 per product with a maximum penalty of $15 million. This increase, a new Chairman, and presumably a reinvigorated Commission, could pose a challenge for companies that 1) do not have processes and procedures in place to know when to report a product defect or potential product defect to CPSC, or 2) do not understand their reporting obligations under the law, particularly with respect to defect reporting.
With respect to defect reporting, the Consumer Product Safety Act (CPSA) requires that every manufacturer, importer, distributor, and retailer:
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To read more stories, see the archives | “who obtains information which reasonably supports the conclusion that [a consumer] product ... contains a defect which could create a substantial product hazard ... shall immediately inform the Commission ... of such defect unless [the company] has actual knowledge that the Commission has been adequately informed....”
15 U.S.C. 2064(b)
In the one court decision to interpret this reporting requirement, the U.S. Court of Appeals for the 9th Circuit found:
“Where a manufacturer fails to report a potential defect, but it turns out that no actual defect exists, the Commission may decide not to seek a penalty. That does not mean, however, that there was no violation of section 2064(b).
It makes sense for Congress to have imposed fines for reporting failures even when a product turns out not to be defective. Information about a possible defect triggers the duty to report, which in turn allows the Commission either to conclude that no defect exists or to require appropriate corrective action. Congress's decision to impose penalties for reporting violations without requiring proof of a product defect encourages companies to provide necessary information to the Commission.”
United States v. Mirama Enterprises, Inc. dba Aroma House-wares C., 387 F3rd 983 (9th Cir. 2004), emphasis added.
The CPSC Record on Defective Product Reporting
If the record of recent CPSC-announced recalls is any indication of the approach companies have taken to date in complying with this reporting requirement, then many manufacturers, importers, distributors, and retailers could be subject to increased penalties for reporting violations occurring after August 14, 2009. Levying these penalties, however, would require the CPSC to pursue civil penalties for alleged reporting violations. With new leadership, aggressive pursuit of civil penalties to achieve timelier reporting is a distinct possibility.
CPSC’s track record on pursuing civil penalties for reporting violations over the past three years is not extensive. Not counting the 15 firms that paid civil penalties to settle allegations that they failed to report defective drawstrings on children’s outerwear, so far in fiscal year 2009 (October 1, 2008 through June 26, 2009), CPSC has announced only three civil penalties to settle allegations of reporting violations (i.e. fans, magnets, and candles).
In its fiscal year 2008 (October 1, 2007-September 30, 2008), CPSC announced only five reporting penalties (again not counting 17 reporting penalties in fiscal year 2008 because of drawstrings on children’s outerwear) and during its fiscal year 2007 (October 1, 2006-September 30, 2007), CPSC announced only four reporting penalties (i.e. toys, vacuum cleaner, gas grills, and sweatshirts).
If one looks at the information included in CPSC’s recall notices for the three-month period of April-June 2009, it would appear that numerous companies soon could face civil penalties for late reporting. The following information from CPSC recall announcements for April, May, and June 2009 demonstrates this point:
Coffeemakers - 235 reports of hot water overflowing and contacting consumers, including 10 reports of second-degree burns.
Coffeemakers - 17 reports of incidents, including six reports of minor personal injury involving first degree burns to the hands, arms and abdomen.
Coffeemakers - 23 reports of coffeemakers igniting, resulting in property damage.
Coffee grinders - 176 reports of grinders that failed to turn off or that turned on unexpectedly, including three reports of hand lacerations.
Diving wings - 15 reports of inner bladders breaking.
Cribs - 42 incidents of crib slats and spindles breaking. Four children became entrapped.
Floor cleaners - 40 reports of overheating.
Fitness balls - 47 reports of fitness balls unexpectedly bursting, including reports of a fracture and multiple bruises.
Ranges - 47 reports of overheated wiring, including 33 reports of wiring that caught fire.
High chairs - 320 reports of seatbacks detaching or reclining unexpectedly, resulting in 19 reports of bumps and bruises to the head and 35 reports of other injuries.
Gym play sets - 17 reports of hangers breaking.
Bicycles - 25 reports of the handlepost hinge on these bicycles cracking.
Heat guns - 9 reports of the heat guns overheating after being turned off.
Refrigerators - 57 reports of doors detaching, including four reports of injuries.
Strollers - 121 reports of the stroller’s brakes failing.
Trampolines - 250 reports of straps breaking.
Teacup/coffeemakers - 10 reports of the drawer opening unexpectedly.
Bassinets - 10 reports of infants rolling to one side, including 6 that had their faces pressed against the side or the bottom of the bassinet.
Log splitters - 59 reports of leaking cylinders and/or rod retention failure. There have been 26 additional reports of failure thought not to have been involved previously.
In the Mirama case referred to above, Mirama d/b/a Aroma had received 23 reports of juice extractors failing, including allegations of shards of glass and the razor sharp separator screen being forcefully expelled. If the Mirama decision is any indication of how other courts might approach CPSA reporting violations, based on the number of incidents/injuries and the severity of those injuries/incidents reported in the recall notices referred to above, each of the companies involved could be subject to civil penalties for late reporting. Of course, there may be other nonpublic information in CPSC’s possession that would mitigate any penalty. Regardless, after August 14, 2009, the potential civil penalties may be substantial—up to $15 million—and firms that do not report in a timely manner may face not only damage to their brands and reputation, but may suffer financially due to amounts that were not possible in the past.
Why Is Section 15 Reporting Seen as Difficult?
Over the years, some firms and commentators have complained that the reporting criteria in CPSC’s interpretive regulation are vague or unclear. However, if the CPSC admonition, “if in doubt report,” is taken to heart, fewer firms would potentially be subject to civil penalties by the CPSC. Historically, the fear that if one reports, CPSC will always require a recall, has been unfounded. In the past, only about 50% of the non-Fast Track reports (under Fast Track, firms report and offer to conduct a recall) have led to a recall. Thus, in cases where a company reports out of caution to avoid potential civil penalty but does not offer to conduct a recall, CPSC may not necessarily seek a recall.
Conclusion
With the increase in the civil penalty levels and new leadership at CPSC, firms that have procedures in place to know whether their products are involved in incidents, injuries, or complaints, and that understand their reporting obligations may be less likely to be involved in civil penalty matters with CPSC. Firms are recommended to have a method to collect all product safety-related information in one place to be able to review safety information regularly to determine whether a reporting obligation is triggered.
Alan Schoem was the Director of CPSC’s Office of Compliance from October 1997 until September 2004 when he joined Marsh. From 1973 through 1997, he held a variety of positions at CPSC. Contact him at (202) 263-6783, alan.h.schoem@marsh.com
AUTHOR'S NOTE: This article provides only a general overview of subjects covered, is not intended to be taken as advice regarding any individual situation and should not be relied upon as such. Statements concerning legal matters should be understood to be general observations based solely on the author's experience as a risk consultant and should not be relied upon as legal advice, which the author is not authorized to provide. All such matters should be reviewed with your own qualified legal advisors.
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