August was a busy month in the world of recalls. First, the end of August ushered in a hefty $5.7 million civil penalty against a major retailer in the United States. The retailer was allegedly selling and distributing recalled products and has agreed, in addition to the civil penalty, to maintain a compliance program and a system of internal controls and procedures. The CPSC voted 4 to 1 to accept the settlement, with Acting Chairman Buerkle voting to accept a lower civil penalty.

This is the CPSC’s fourth multimillion dollar civil penalty of 2017. The CPSC has now extracted a total of $21.35 million in civil penalties this year. For the sake of comparison, 2015’s total was $23.4 million and 2016’s total was $37.3 million. Thus, 2017 is the third highest year on record but, with four months to go in the calendar year, it could surpass one or both of these prior years.

Second, the CPSC recently indicated it will follow the President’s directive to remove bureaucratic red tape from federal agency regulations. The CPSC requires independent, third-party testing to certify compliance with mandatory phthalates prohibitions on children’s toys and child care articles. But the CPSC voted unanimously to remove seven plastics from this requirement after concluding that they would comply with the CPSC’s phthalates prohibitions with a high degree of assurance. Acting Chairman Buerkle released a statement along with the announcement, explaining that “[r]educing unnecessary regulatory burdens is a top priority for me” and characterizing this move as “one of the most significant burden reduction steps the CPSC has taken in recent years.”

The CPSC’s “high degree of assurance” in compliance may be derived from the knowledge that what the CPSC relinquished as “red tape” may instead materialize as terms of a consent decree for those who do not comply. In a case in point, the Department of Justice and the CPSC recently announced a settlement with three toy companies and five individuals for allegedly importing and selling children’s products containing lead, phthalates and small parts that posed a choking hazard. The CPSC collected over 150 samples of non-compliant children’s products during port inspections and sent dozens of letters notifying the companies of federal standards violations to no avail.

To resolve these claims, the parties entered into consent decrees for permanent injunctions that prohibit the named companies and individuals from importing and selling children’s products until a series of compliance mechanisms are implemented. The compliance mechanisms include (1) establishing a children’s product safety and testing program, (2) hiring a product safety coordinator, (3) having products tested by accredited testing bodies, and (4) submitting to monitoring by the CPSC. The consent decrees are unprecedented given their lengthy and detailed requirements and procedures for these compliance mechanisms. The moral of the story? The red tape exists, but it will be doled out on a case-by-case basis to transgressors.

Third, this month also continued a 2017 trend involving outdoor recreational vehicles. In January, the CPSC published its ATV Annual Report estimating that annually 650 deaths and 100,000 injuries involve ATVs. Since that report, the CPSC has stepped up its focus on all outdoor recreational vehicles, including ATVs, ROVs and snowmobiles. Indeed, outdoor recreational vehicles have been the subject of a staggering 20 recalls so far in 2017, including three recalls during August alone.

Lawyers from Hunton & Williams LLP’s Insurance Coverage practice group weigh in regarding a recent insurance coverage case involving product recall claims:

In Charter Oak Fire Co. v. American Capital Ltd., a federal district court in Maryland ordered an insurer to pay $87 million to a private equity firm for costs incurred by the firm in connection with lawsuits arising from contaminated blood thinner that was subject to a recall in 2008. The dispute centered around whether the portfolio company that produced components used in the contaminated blood thinner was insured under the firm’s commercial general liability policy because the firm held a “majority interest” in the portfolio company. The court construed the ambiguous “majority interest” provision broadly and in favor of the insured, holding that the insurers were required to defend the underlying product recall lawsuits. The American Capital opinion is significant for private equity firms seeking coverage for majority-owned portfolio companies in future recalls.

Total Recalls: 23

Hazards: Fire/Burn/Shock (8); Choke (6); Violation of Flammability Standards (2); Crash (2); Laceration (1); Chemical Exposure (1); Injury (1); Fall (1); Bacteria Exposure (1)

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