Recent settlement announcements from the Consumer Product Safety Commission (CPSC) emphasize the essential need for effective risk management and regulatory compliance programs. In two recent penalty settlements, the CPSC, in addition to imposing sizeable civil fines, required companies to develop and implement improved internal controls and compliance systems. The CPSC also expressed its expectation that all companies have these programs in place.

In the first settlement, announced on March 11, 2013, Kolcraft Enterprises Inc. agreed to pay a $400,000 penalty for allegedly failing to timely report instances of improper latching on the sides of portable play yards for children. According to the CPSC, as early as 2005, Kolcraft hired experts who identified the latching issue, and product improvements were made in 2006. The CPSC alleged that Kolcraft knew of more than 300 reports of play yards collapsing but failed to report the issue until January 2009. In July 2009, more than one million play yards were recalled. In addition to payment of the hefty fine, Kolcraft’s settlement required it to “maintain and enforce a system of internal controls and procedures” to ensure prompt and accurate reporting to the CPSC; to provide CPSC staff documentation of its improvements, and to establish a program to ensure it remains compliant with all CPSC-enforced regulations. A joint statement of Chairman Inez Tennenbaum and Commissioner Robert Adler approving the Kolcraft settlement, noted that

While we certainly understand that even the most responsible companies can make mistakes, the failure of a company to have in place an effective compliance program and internal controls is irresponsible. Thus, going forward, we expect those companies that lack an effective compliance program and internal controls to voluntarily adopt them. If not, we will insist that they do so.

Similarly, in the second settlement announced on May 6, 2013, Williams-Sonoma, Inc. agreed to pay a $987,500 civil penalty for allegedly failing to timely report instances of hammock stands breaking due to deterioration from exposure to outdoor elements. After voluntarily recalling the products, Williams-Sonoma also agreed to pay the fine and to implement and maintain a compliance program. Williams-Sonoma agreed to document the improvements and controls and to make available documents deemed necessary by CPSC staff to evaluate the company’s compliance with the settlement. As Commissioner Nancy Nord noted in her statement provisionally accepting the settlement but questioning its breadth,

In this case, the scope of the compliance program included in the agreement addresses actions well beyond those that are subject to the penalty;” and instead “demands a comprehensive compliance program to assure compliance with all our rules and statutes with a variety of related requirements.

In noting the similarity of these provisions to the Kolcraft settlement, Nord expressed some concern about what appears to be “backdoor rulemaking” by the Commission, stating, “This suggests this is not merely a solution crafted for two particular programs but rather represents a shift in agency policy that will stretch across all of our enforcement activity.”

Indeed, these far-reaching penalty provisions exceed the scope of authority previously exercised by the CPSC by explicitly requiring companies to develop and implement risk management and compliance programs. The CPSC not only expects companies to have effective programs in place but also to be able to properly document them.