The CPSC has issued proposed guidance to govern the assessment of civil penalties for alleged violation of product safety laws and regulations.
The CPSC is required by statute to consider certain factors in determining the amount of any civil penalty for violation of laws and regulations governed by the agency. These factors differ among the various CPSC administered laws (i.e., the CPSA, FHSA, FFA and CPSIA), but generally include the nature, circumstances, extent and gravity of the violation, the nature of the product defect, the severity of the risk of injury, the occurrence or absence of injury, the number of defective products distributed, and the appropriateness of the penalty in relation to the size of the business.
In July 2006, the CPSC published a proposed interpretative rule (71 FR 39248) that identified additional factors to be considered in assessing and compromising civil penalties under sections 20(b) and © of the CPSA. The factors identified in the proposed rule were in addition to those already required to be considered by statute in evaluating the appropriateness and amount of a civil penalty, and included: (1) a firm's previous record of compliance ; (2) timeliness of a firm's response; (3) safety and compliance monitoring; (4) cooperation and good faith; (5) economic gain from any delay or noncompliance; (6) a product's failure rate; and (7) any other pertinent factors.
The CPSC has withdrawn the July 2006 proposed interpretive rule, in favor of new guidance, which will govern CPSC’s penalty considerations. The new guidance illuminates the following factors that the CPSC must consider in determining a civil penalty:
- The nature, circumstances, extent and gravity of the violation. Under this factor, the CPSC will consider the totality of the circumstances surrounding a violation, including how many provisions of law were violated. The CPSC will continue to look at the enumerated statutory factors, as well as other factors (as described in subsection (b) below) that the CPSC may determine are appropriate, and consider all of the factors in determining the civil penalty amount.
- Nature of the product defect. The CPSC will consider the nature of the product hazard/substance for which a penalty is sought. A product defect under this factor includes violations for products that contain defects which could create substantial product hazards as referenced in the CPSA and defined and explained in 16 CFR 1115.4; regulatory violations of a rule, regulation, standard or ban; or product hazards presented by any other violation of the prohibited acts of section 19 of the CPSA.
- Severity of the risk of injury. Consistent with its discussion of severity of the risk at 16 CFR 1115.12, the CPSC will consider, among other factors, the potential for serious injury or death (and whether any injury required actual medical treatment including hospitalization or surgery); the likelihood of injury; the intended or reasonably foreseeable use or misuse of the product; and the population at risk (including vulnerable populations such as children, the elderly, or those with disabilities).
- The occurrence or absence of injury. The CPSC will consider whether injuries have or have not occurred with respect to any product associated with the violation.
- The number of defective products distributed. The CPSC will consider the actual number of products or amount of substances imported or placed in the stream of commerce to distributors, retailers, and consumers.
- The appropriateness of such penalty in relation to the size of the business of the person charged including how to mitigate undue adverse economic impacts on small businesses. The CPSC is required to consider the size of a business in relation to the amount of the proposed penalty. This factor reflects the relationship between the size of the business of the person charged and the deterrent effect of civil penalties. In considering business "size," the CPSC may look to several factors including the firm's number of employees, net worth, and annual sales. The CPSC may be guided, where appropriate, by any relevant financial factors to help determine a violator's ability to pay a proposed penalty including: liquidity factors; solvency factors; and profitability factors.
The CPSC is required by statute to consider how to mitigate the adverse economic impacts on small business violators only if those impacts would be "undue." What the CPSC considers to be "undue" will vary based upon the violator's business size and financial condition as well as the nature, circumstances, extent and gravity of the violation(s). When considering how to mitigate undue adverse economic consequences, the CPSC may also follow its Small Business Enforcement Policy set forth at 16 CFR §1020.5.
- Other factors as appropriate. In determining the amount of any civil penalty to be pursued when a knowing violation of the prohibited acts section of the CPSA, FHSA, or FFA has occurred, the CPSC may consider, where appropriate, other factors in addition to those listed in the statutes. Both the CPSC and the alleged violator are free to raise any other factors they believe are relevant in determining an appropriate penalty amount. Additional factors which may be considered in an individual case include, but are not limited to, the following:
- Safety/Compliance Program and/or System: The CPSC may consider, for example, whether a violator had at the time of the violation, a reasonable program/or system for collecting and analyzing information related to safety issues, including incident reports, lawsuits, warranty claims, and safety-related issues related to repairs or returns; and whether a violator conducted adequate and relevant premarket and production testing of the product(s) at issue.
- History of noncompliance: The CPSC may consider if the violator has a history of noncompliance with the CPSC and whether a higher penalty should be assessed for repeated noncompliance.
- Economic Gain from Noncompliance: The CPSC may consider whether a firm benefited economically from a delay in complying with statutory and regulatory requirements.
- Failure of the violator to respond in a timely and complete fashion to the CPSC’s requests for information or remedial action: The CPSC may consider whether a violator's failure to respond in a timely and complete fashion to requests from the CPSC for information or for remedial action should increase the amount of the penalty.
The CPSC penalty factors will be codified at 16 CFR Part 1119. The CPSC staff will be required to follow the guidance, but can deviate as circumstances warrant. The CPSC does not intend to adopt a specific penalty matrix. We do expect to see some internal civil penalty consistency among various categories of CPSC enforcement actions.
In all CPSC enforcement actions, the alleged violator will be placed on notice that the CPSC believes a penalty is warranted. The alleged violator will be allowed to submit evidence and arguments that it is not subject to such a penalty, or that such penalty should be mitigated.
If you are notified of a potential CPSC civil penalty, it would be prudent to seek counsel to assist in response to the agency. The penalty factors need to be carefully enumerated and conveyed to the agency to mitigate penalty exposure.