What You Don't Know CAN Hurt You – and Could Destroy Your Business

What do the Federal Trade Commission (FTC), Consumer Product Safety Commission (CPSC), Federal Drug Administration (FDA), Department of Agriculture (USDA), and Environmental Protection Agency (EPA) have in common? Each is, of course, a U.S. government agency with myriad regulations, but each also can impose millions of dollars in fines and civil penalties for violations and completely disrupt business and customer relations. These product regulations apply to both U.S.-made and products that are imported to the U.S., and include requirements for labeling, advertising, product registration and certification, and reporting. Many obligations, particularly the mandatory reporting of product defects, apply to manufacturers, importers, distributors, and retailers.

Among the many statutes and regulations, and accompanying implementing regulations, guides, and standards, are:

  • Federal Hazardous Substances Act
  • Federal Insecticide, Fungicide and Rodenticide Act
  • Fair Packaging and Labeling Act
  • Organic Foods Production Act
  • Textile, Fur, and Wool Products Labeling Acts
  • Hazard Communication Standard
  • Toxic Substance Control Act
  • Resource Conservation and Recovery Act

If you don’t know what these laws address, you’re in good company. Unfortunately, many businesses learn the hard way, as illustrated by these examples:

Product Labeling

In 2013, Amazon, Macy’s, Sears, and Leon Max, Inc., agreed to pay $1.26 million in civil penalties for violating the Textiles Products Identification Act by claiming that textile products were made of bamboo when, in fact, they were made of rayon. The FTC found such claims deceptive even though bamboo was the primary or sole source of the cellulose that was processed into rayon.

There are many such seeming anomalies in product regulations. For example, “made in USA” claims, whether explicit or implied, may only be made when “all or virtually all” of the product’s components are from the U.S., and “all or virtually all” of the manufacturing, processing, packaging, or assembly took place in the U.S. too. The site of final assembly or processing must be in the U.S., and the cost of the foreign parts or processing must not be a majority of the total manufacturing cost. Claims that products are organic or environmentally-friendly face similar requirements as well.

Product-specific labeling requirements also include warnings (hazardous materials, allergens, flammability), ingredient lists (food, drugs, pesticides, cosmetics), tracking information, such as the date and place of production or batch number (children’s products), storage and first aid instructions, preparation for use (medical devices), fiber content, and care and use instructions (textiles).

Advertising

In December 2015, LifeLock, an identity theft protection company, agreed to pay $100 million for violating an FTC order that prohibited the company from engaging in deceptive advertising regarding the security of consumer data, among other things. The FTC claimed that LifeLock falsely advertised that it would send alerts “as soon as” it received a report of identity theft and that it used the same high-level safeguards used by financial institutions to protect consumer data. Both of these claims were found to be deceptive.

Often, whether a product claim goes too far (“as soon as”) is not always intuitive, and companies need to be aware of the guidance and precedent of the agencies with authority over marketing specific products. The FTC, the FDA, and even the Federal Communications Commission (FCC) have authority to propose and enforce regulations covering product and services advertising. The FTC most frequently investigates whether advertising is truthful and not deceptive, i.e. it must not contain a statement or omit information that is material and likely to mislead a reasonable consumer. Advertising claims must also be supported by evidence, such as testing or scientific or consumer studies. The FCC oversees advertising on radio and television network broadcasting, and enforces regulations requiring disclosures of paid product placements, subliminal advertising, and obscene or indecent material. Special regulations apply to advertising aimed at children, as well as advertising of tobacco and alcoholic beverages.

Certification and Reporting

In March 2016, a Chinese company agreed to pay a record $15.45 million fine to CPSC for knowingly failing to report to the Commission (within 24 hours) a defect in its dehumidifiers that posed an “unreasonable risk of serious injury” due to the dehumidifiers overheating and catching fire. And the EPA recently shut down an Oregon company’s sales of a product called “Mold Manager” that prevents the growth of mold, mildew, algae, and moss. Not only was “Mold Manager” not labeled properly, but the product, which qualifies as a pesticide, had not been registered with the EPA under the Federal Insecticide, Fungicide, and Rodenticide Act.

The costly consequences in each of these examples could have been avoided with timely consultation about the applicable rules. Product defects and consumer injuries generally must be disclosed right away to the relevant government agency. In addition, several categories of products, such as pesticides, require advance registration or certification. Safety products, such as fire extinguishers, automatic sprinkler systems, scaffolding, and hoisting machines, must receive a Nationally Recognized Testing Laboratory certification if used in a workplace. A wide range of children’s products, from infant carriers to sleepwear, require third-party safety testing at accredited laboratories. Other products require instead a General Certificate of Conformity certifying compliance with various FTC Safety Standards, including adult bicycle helmets, bunk beds, lawn darts, certain apparel, and rugs and carpets.

Although these enforcement examples may seem extreme, there are thousands of similar stories of lesser fines and near-misses. Those cases nevertheless generate significant costs to the company in time spent responding to these enforcement actions, and the wasted spending on non-compliant labeling and advertising, which might have been avoided with regulatory guidance prior to product launch.