Following a year of unprecedented product recalls, Congress recently enacted the Consumer Product Safety Improvement Act of 2008 (the “CPSIA”). The CPSIA, enforced by the Consumer Product Safety Commission (“CPSC”), affects all manufacturers, retailers, importers and distributors of children’s products, toys and child care articles by mandating sweeping new safety standards, compliance requirements and enforcement mechanisms. While well-intentioned, the Act’s broad scope and ambiguous provisions have created substantial uncertainty and near panic in the manufacturing and retail communities, driving a need for informed legal advice. Additionally, the financial exposure for noncompliance places elevated importance on contractual risk-shifting mechanisms and insurance requirements for all parties in the manufacturing/distribution chain.

1. The new standards

The CPSIA lowers the permissible concentration of lead in paint and other surface coatings, and sets new standards for prohibited lead concentrations in children’s products (whether or not they contain paint). As of February 10, 2009, it is illegal to introduce into interstate commerce any children’s product that contains more than 600 parts per million (“ppm”) of lead. Excluded from this lead substrate requirement are certain inaccessible component parts, certain electronic devices, and specific products that the CPSC excludes by regulation. Specific products that the CPSC has excluded so far include books printed after 1985, textiles, and products made solely of wood, cotton, wool or other specified materials that rarely, if ever, contain lead.

The Act’s other significant prohibition is on specified concentrations of certain phthalates in “children’s toys” and “child care articles.” Phthalates are chemicals that impart flexibility and resilience in plastics, which are popular features in many children’s toys. Recent studies have linked certain types of phthalates to hormonal abnormalities, birth defects and reproductive problems. Although there are many types of phthalates, six are identified in the Act as being the most harmful. Congress has directed the CPSC to appoint a panel to study the effects of all phthalates and phthalate alternatives on children’s health, and, if necessary, to promulgate further prohibitions.

2. The far-reaching effects

The impact of the CPSIA on manufacturers and importers in particular is enormous. Accompanying its sweeping substantive changes are expensive compliance requirements. Regulated products must be tested by a third party testing laboratory, certified for compliance, and permanently marked with tracking labels. Congress and the CPSC have created a rolling timetable for the effective dates for these requirements. Unless specifically exempted by the CPSC, manufacturers will be compelled to incur these costs even if the product is known to be safe, is made of a material not likely to contain a prohibited substance, and/or is made of materials that have already been tested and certified by the manufacturer’s suppliers.

Compounding the financial hardship associated with assuring compliance is the fact that the new lead and phthalate restrictions have been interpreted to apply retroactively. This means that unsold products on store shelves must comply with the new regulations even if manufactured long before the CPSIA became law. Unable to confirm compliance, many retailers are pulling perfectly safe products from shelves and demanding that distributors take them back. This is likely to affect lines of credit secured by inventory and present legal issues surrounding contractual responsibility for these losses.

Unwilling, or sometimes financially unable, to assume these costs and risks, many manufacturers would rather modify their product or advertising slightly to remove it from the category of “children’s products.” A “children’s product” is defined as a “consumer product designed or intended primarily for children 12 years of age or younger.” Since inclusion in this definition is dependent upon the age of the consumer that a particular product is “primarily” designed for, manufacturers and retailers could seemingly manipulate their product’s age ratings by removing pictures of children under 12 from advertisements and/or labeling their products as being intended only for children over 12. There have even been suggestions that simply inflating the upper range of the age rating (e.g., from “ages 8-12” to “ages 8-80”) removes the product from the definition of a “children’s product” because the majority of “intended” users are now over the age of 12.

Manipulating advertising and packaging labels to exempt products from the CPSIA is contemplated to some extent, as indicated by two of the factors that Congress established for determining whether a product is intended primarily for children 12 or under:

  • A statement by the manufacturer about the intended use of the product, including a label on the product if such statement is reasonable.
  • Whether the product is represented in its packaging, display, promotion or advertising as appropriate for use by children 12 years of age or younger.

But the other two factors make it clear that manipulative advertising has limits:

  • Whether the product is commonly recognized by consumers as being intended for use by a child 12 years of age or younger.
  • The Age Determination Guidelines issued by the Commission staff in September 2002, and any successor to such guidelines.

Unfortunately, neither Congress nor the CPSC has given much guidance on the relative weight to be afforded to these factors, how the CPSC or a court should determine a consumer’s “common recogni[tion],” or what exactly is meant by “primarily intended.” Needless to say, applying these guidelines can be a daunting task.

For many businesses with questionable products, the stakes in making these predictions correctly are high. Consequences of noncompliance can include product recall costs, litigation costs, reputational damage, civil fines and even criminal penalties. And the consequences of unnecessary compliance can be even greater if competitors are not taking the same precautions. The increased expenses of using different materials, hiring third party laboratories to test products and instituting tracking programs may result in products being priced out of the market.

Facing this dilemma, thousands of businesses have sought guidance from the CPSC when applying these definitions to specific products. While the CPSC has generally declined to issue advisory opinions on specific products, it has published more general responses to numerous “frequently asked questions,” which can give practitioners helpful insight on how the CPSC might apply these factors to a specific product. CPSC staff members have also given lectures and presentations that can provide further interpretative assistance.

Any degree of comfort from these “informal” CPSC interpretations, however, should be tempered by the risk of “quasi-regulators” taking different approaches. For instance, Congress has deputized state attorneys general to also enforce federal consumer product safety laws in federal court. Also, because retailers are subject to the same liabilities as manufacturers, retailers with buying clout are likely to be overly cautious when requiring vendors to comply with the CPSIA. Any legal advice, therefore, must bear in mind marketplace demands as well. Consumer class action lawsuits arising out of noncompliance with the Act are also likely on the horizon, and consumer advocate groups have already taken legal action against the CPSC for issuing a ruling in favor of manufacturers. Future decisions are likely to prompt more challenges.

These heightened risks that noncompliance will be enforced enhances the need for retailers, distributors, manufacturers and importers to revisit their contractual relationships with others in the manufacturing chain. Representations and warranties clauses should be updated. Indemnification clauses should be revisited and strengthened. Consequential damages waivers or limitations should be reconsidered. Insurance policies should be reviewed for adequacy of coverage and limits. Also, special precautions should be taken when doing business with foreign companies that may not utilize testing sufficient to satisfy the new standards imposed by the CPSIA.

3. A moving target

Although the CPSIA was signed into law six months ago, its exact scope is constantly changing. The aggressive timelines established by Congress have already proven unworkable. Within a week of the February 10 effective date for many of the new restrictions and enforcement requirements, the CPSC announced a stay in the testing and certification requirements for the lead and phthalate restrictions. The CPSC is issuing interpretative bulletins, advisory opinions, and federal regulations on a weekly basis to implement and clarify the Act. Consumer groups are actively lobbying for increased enforcement, while manufacturing and retail groups are lobbying for exceptions and stays of enforcement. Indeed, in the days preceding the February 10 effective date for the lead and phthalate restrictions, new bills were introduced into the House and Senate that would wholly exempt certain industries, give the CPSC the power to delay enacting certain restrictions and create good faith exemptions for small businesses. Many more changes can be expected.

4. Conclusion

While the final scope and effect of the CPSIA are still in flux, it is clear that the legal landscape has changed for all businesses involved with children’s products. It is critical for practitioners to stay abreast of this developing area to properly advise their manufacturing, retailing, distributing and importing clients, and to avoid the potentially crippling effects of noncompliance.