It is not unusual for the Consumer Product Safety Commission (CPSC) to seek agreements imposing significant civil penalties against manufacturers and importers for failure to report a defective consumer product in a timely fashion. Now, the CPSC has made clear that another factor in determining the amount of the civil penalty is the degree of candor and cooperation displayed to the CPSC by the manufacturer.
Recently, the CPSC announced a civil penalty of $3.5 million against a baby care products manufacturer not just because of its alleged knowing failure to report a defective product but also, and importantly, because of what the CPSC claimed was the company’s “material misrepresentations” to the CPSC regarding its investigation of the product.
The CPSC asserted that the manufacturer, phil&teds USA, did not timely or adequately report to the CPSC the fact that the clamp on its MeToo highchair could detach from the table and cause children to fall or have their fingers crushed between a safety bar and the clamping mechanism. Under Section 15(b) of the Consumer Product Safety Act (CPSA), manufacturers (including importers), distributors and retailers must report to the CPSC upon discovering that a consumer product contains a defect that could create a substantial risk of injury or death to the public, or violates a CPSC standard or rule. Since the Consumer Product Safety Improvement Act of 2008, the CPSC has had authority to impose penalties up to $100,000 per violation (from a previous $8000 per violation cap), with a maximum of $15 million for a series of violations (up from a previous cap of $1.8 million).
In the settlement agreement the CPSC alleges that the company received reports of the defective high chairs between September 2009 and October 2010 but did not inform the Agency of the incidents until January 2011. The CPSC further alleges that the manufacturer made several “inaccurate and incomplete” statements that resulted in “knowingly committ[ing] a material misrepresentation” during the CPSC’s subsequent investigation into the product, constituting a separate violation of the Act. The alleged misrepresentations included:
- Underreporting the total number of incidents and injuries involving the chairs by stating that it was aware of 10 "instances" with the product, but providing no details of them;
- Failing to notify CPSC staff that the chairs posed an amputation hazard or to make known two amputation injuries of which they allegedly were aware; and
- Withholding information that the chair had been redesigned to address the hazard and that the sample product supplied with the company’s report to the CPSC was manufactured differently from the chairs involved in the incident and injury reports.
In their settlement agreement, phil&teds agreed to implement and maintain an extensive compliance program and a related system of internal controls and procedures. In addition to normal compliance and internal control procedures, the agreement provides for imposition of standards and procedures to ensure the accuracy and completeness of information provided to the CPSC, and creation of a mechanism for “confidential employee reporting of compliance-related questions or concerns to either a compliance officer or to another senior manager with authority to act as necessary.” While compliance provisions increasingly are included by the CPSC in settlement agreements involving large civil penalties, the provisions in this agreement clearly are focused, in part, on the lack of forthrightness and truthfulness in the company’s previous reporting, according to the CPSC.
The CPSC suspended all but $200,000 of the fine based on the company attesting that it had no way to obtain funds to pay such a large penalty (including a statement that it was unable to receive such funding from its parent company). Therefore, it would have to cease business operations if it has to pay a larger amount. Nonetheless, the agreement provides that the total amount of the penalty will become due if the company breaches any of the agreement terms, including a requirement to comply with all CPSC laws and regulations for three years after settlement.
The CPSC’s $3.5 million penalty against phil&teds is a stark reminder of the importance of both timely and accurate reporting under the CPSA. With more than three months left in 2015, the CPSC has already broken its previous record for total penalty amounts issued in a calendar year. Failure to provide a complete report is too costly.