August 14, 2009

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By Alan H. Schoem

The Consumer Product Safety Improvement Act of 2008 ("CPSIA" or "Improvement Act") gave the Consumer Product Safety Commission ("CPSC" or "Commission") increased authority and imposed new requirements for consumer products regulated by the Commission, particularly children’s products.  In conjunction with the new safety requirements, the CPSIA increases the amount of civil penalties the Commission can seek for, among other things, violations of mandatory safety standards, banning regulations and reporting requirements.  The maximum penalties increase from $1.825 million to $15 million for a related series of violations.  The new penalty amount takes effect no later than August 14, 2009.  

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In the Commission’s 36 plus year history, there have been only a handful of civil penalty actions filed in federal court.  Virtually all CPSC penalty enforcement actions have been settled without the need for the CPSC to file a lawsuit in federal court or even to refer the matter to the Department of Justice.  With the increased penalty amounts, however, some commentators opine that there will be increased penalty litigation.  Apparently, these commentators’ base this view on a fear that because CPSC will soon have authority to seek higher penalty amounts, CPSC will routinely seek penalties in amounts that are so high that it will make good business sense for companies to litigate rather than to settle allegations of violations of law.  In addition to this potential concern, the fundamental change in the wording of some CPSC press releases announcing civil penalty settlements presents an immediate concern to companies.   

For those who are unaware, the nature of civil penalty settlements at CPSC are such that in entering into a civil penalty settlement, the CPSC makes no determination of a violation of the law and the company entering into the settlement typically denies committing a knowing violation of law.    The specific settlement agreement language typically states 

"The Parties enter into the Agreement for settlement purposes only. The Agreement does not constitute an admission by [the Company], or a determination by the Commission, that [the Company] has knowingly violated the CPSA."

Editor's Note: Since publication of this article, CPSC changed the press release to add the word allegedly

Consistent with this civil penalty agreement language, until this year nearly all CPSC press releases announcing civil penalty settlements made clear that the settlement agreements were entered into to settle staff allegations of a knowing violation of the law without a finding by the Commission or acknowledgement by the company of a knowing violation.  (See, e.g., Press Release #09-188, April 7, 2009).  Companies enter into these settlement agreements expecting any CPSC announcements to reflect the language of the settlement agreements.  Earlier this year, however, CPSC press releases announcing civil penalty settlements to resolve staff allegations of violations of the law used language inconsistent with the plain language of the settlement agreements. For example, some recent press release language announcing settlements of staff allegations of violations of the lead paint banning regulation have claimed that the settling companies were paying a penalty "for violating the federal lead paint ban."  (See, e.g., Press Release # 09-264, July 7, 2009).  

The language in the press releases that are at odds with the settlement agreements is more than a difference of semantics.  It strikes at the heart of settlement agreements.  If the Commission is to continue its practice of settling civil penalty cases prior to the initiation of litigation, its press releases announcing settlements should accurately reflects the language in the settlement agreements.  If not, companies must determine whether entering into a civil penalty settlement agreement with the Commission is in their best interest. 

Alan Schoem is a Senior Vice President with Marsh Risk Consulting’s Global Product Risk Practice where he assists companies in preventing, preparing for, conducting and recovering from product recalls.  Mr. Schoem served as the CPSC’s Director of the Office of Compliance from 1997 until September 2004 when he joined Marsh.  He was employed by CPSC in a variety of capacities from 1973 until he became the Director of Compliance in 1997. Contact him at (202) 263-6783, alan.h.schoem@marsh.com.