Recalls of defective products are costly undertakings, especially when potential adverse publicity is considered in addition to the money actually spent on returns, repairs, or exchanges of the products. As costly as a recall may be, however, it can be costlier still if the manufacturer or retailer neglects to advise the United States Consumer Product Safety Commission (CPSC) of the defective product if the defect poses a safety threat to the consumer.
In January, for example, the Hoover Co. agreed to pay a $750,000 penalty to settle allegations that the company had failed to report to the CPSC the sale of vacuum cleaners with defective switches that could cause the appliances to catch fire. Every proper risk-management plan, therefore, needs to include protocols for contacting the CPSC when the company learns one of its products may pose a risk of injury to a consumer.
The federal Consumer Product Safety Act requires every manufacturer, distributor, and retailer to report to the CPSC a product that fails to comply with an applicable consumer product safety rule, whether statutory or voluntary; contains a defect that could create a substantial product hazard; or creates an unreasonable risk of serious injury or death. Failure to do so can result in significant penalties.
The CPSC was formed with the passage of the Consumer Product Safety Act, which authorizes the commission to determine the penalty for any noncompliance. The act also authorizes the CPSC to pursue recalls for products that present substantial product hazards, establish standards to reduce or eliminate risks associated with consumer products, or ban products if there are no feasible standards. The CPSC also oversees enforcement of the Federal Hazardous Substances Act (which requires cautionary labeling on most household products that are toxic, corrosive, or flammable or are irritants or generate pressure, and bans toys or other articles for children that pose mechanical, electrical, or thermo hazards), the Poison Prevention Packaging Act (which requires child-resistant packaging for a number of household substances, including medications), the Flammable Fabrics Act (which establishes standards for flammability of clothing textiles, carpets, rugs, children’s sleepwear, and mattresses and mattress pads), and the Refrigerator Safety Act (which requires a mechanism that enables a refrigerator to be opened from the inside). In all, the CPSC oversees the safety of more than 15,000 consumer products.
The CEO of a company is required to report substantial product hazards, unless the company had previously filed a delegation of authority with the CPSC. The report must be made within 24 hours after the company has obtained information that reasonably supports the conclusion that a product violates a safety rule or a voluntary consumer standard, contains a defect, or creates an unreasonable risk of serious injury or death. Recognizing that it may take some time for knowledge of a defect to reach the officers of a company, however, the rules consider the company to have knowledge of a defect five days after an employee has received information of a potential safety issue with a product. The company may also conduct a reasonably quick investigation to determine whether, in fact, a substantial product hazard report should be made. That investigation should not ordinarily exceed 10 days.
The report may be made in writing or online at www.cpsc.gov. Whatever the medium, however, an initial report should contain an identification and description of the product; the name and address of the manufacturer or the importer; the nature and extent of the failure to comply; the nature and extent of the injury or risk of injury associated with the product; the name and address of the person informing the CPSC; and as much information as required in a full report as reasonably available. The information required in a full report is detailed in the U.S. Code of Federal Regulations, at 16 C.F.R. § 1115.13(d). A distributor or retailer may satisfy the reporting requirement by sending a letter addressing the noncompliance to the manufacturer with a copy to the CPSC. Further information may be required, unless the CPSC staff determines there is no substantial product hazard.
The CPSC has recently established a Special Investigations Unit in the Office of Compliance, to ferret out products that pose safety risks to the consumer. The stated mission of the unit is to discover and develop leads about hazardous products from a wide range of sources and enhance the CPSC’s compliance and recall activities. Because those leads will originate from sources other than the company’s own self-report, however, the CPSC can be expected to uncover, and fine, more violations for failure to report than it has in the past. Consumers can also report safety concerns directly to the CPSC, in a user-friendly, online format.
As of Jan. 1, 2005, the maximum penalty that may be imposed for a failure to report a nonconforming product was $8,000 for each violation. The Ninth Circuit has recently interpreted that penalty provision to mean that a penalty may be imposed for each unit in the stream of commerce. In other words, a penalty may be imposed for each product sold or waiting to be sold by the retailer, whether on the floor or in the stockroom.
While the stated maximum penalty for any related series of violations is $1,825,000, the CPSC reached a record $4 million settlement agreement in a failure-to-report case in 2005. In 1995, the average penalty meted out or reached by agreement with the CPSC was a little under $65,000; by 2005, the average penalty exceeded $1 million. Surprisingly, 2006 saw a reversal of this upward trend. Nonethless, any penalty, coupled as it must be with additional adverse publicity, is a high price to pay for failure to report a safety problem to the CPSC.
Seller (and manufacturer and distributor), beware.
Emilia L. Sweeney is a shareholder at Seattle-based law firm Lane Powell, where she focuses her practice on commercial litigation and regulatory advice.
Disclaimer: This is intended to be a source of general information, not an opinion or legal advice on any specific situation and does not create an attorney-client relationship with readers.