Children 12 and under are a key demographic for many consumer product manufacturers and retailers. Many franchise businesses—particularly those in the quick-service restaurant industry—have made a concerted effort to attract customers by offering kids' meals that feature toys or trinkets that appeal to children. While the sources for these toys may vary—and it is unlikely that the franchisor manufactures the toys itself—the franchisor and its franchisees are the ultimate distributors of these toys. As a result, franchisors (and their franchisees) are subject to federal laws governing the labeling and safety of toys and other consumer products. Since those laws were recently amended, franchisors that sell or give away products as part of a kids' offering need to be aware of substantial changes in their obligations.

In August, President Bush signed the Consumer Product Safety Improvement Act of 2008 (the Act) into law. The Act is the largest expansion of the Consumer Product Safety Commission's (CPSC) authority since 1972, when Congress initially created the agency. Among other things, the Act gives the CPSC increased staffing and funds, increased enforcement capabilities and increased oversight of imported goods. Of particular relevance to franchisors is the Act's imposition of significant new requirements for children's toys and products.

With respect to products that pose risks to children, the Act affords CPSC more authority than it previously had. In the past, CPSC has required franchisors to recall dangerous toys that have been distributed with kids' meals. For example, in December 1999, CPSC required Burger King to recall a kids' meal toy after a 13-month-old girl suffocated when the toy covered her nose and mouth. To encourage the return of the toys, Burger King restaurants offered a free order of small fries in exchange for the toy. For other recalls, franchisors have offered a replacement toy in exchange for the defective toy. Prior to enactment of the Act, a franchisor was often able to elect whether to offer a refund (or an item of comparable value, such as the free order of french fries) or to repair or replace the product. However, the Act eliminates the right of the company instituting a recall to elect the corrective action it will take. Under the Act, CPSC now may require a company to take the corrective action it deems to be in the public interest, whether that action is a refund or repair and/or replacement of the product. The Act also requires CPSC to establish requirements for the content and dissemination of recall notices by February 10, 2009, which could limit the flexibility companies have had in the past to negotiate more favorable language for recall notices. In addition, CPSC may now require that companies issue recall notices in more than one language, which would create additional expense.

Potentially of more concern to franchisors are the specific guidelines the Act establishes regarding the manufacture and importation of children's toys and products. The Act defines a "children's product" as "a consumer product designed or intended primarily for children 12 years of age or younger" and "children's toys" as products "designed or intended by the manufacturer for a child 12 years of age or younger for use by the child when the child plays." For such toys and products, the Act establishes new limits for the allowable amounts of lead and phthalates-limits that could impact toys imported from other countries that do not have comparable requirements. These limits begin taking effect on February 10, 2009. The Act also makes the voluntary toy standard ASTM F963-7 a mandatory one—the violation of which can result in seizure or recall of products. This standard relates to hazards that are not readily apparent and may be encountered in the normal use of the toy or after reasonably foreseeable abuse.

The Act also requires all imported toys to be tested by a third-party lab and certified as being compliant with all CPSC requirements. This requirement falls not only on the manufacturer and importer of the toy, but even upon franchisors that did not themselves import the toys. These franchisors would be subject to CPSC enforcement if they failed to ensure that the imported toys they purchased from third-parties were tested and certified. The testing and certification provisions of the Act will take effect 90 days after CPSC has published the requirements for accreditation of third-party labs. Additionally, the Act requires the placement of permanent tracking labels on toys and children's products by August 14, 2009. These labels must include the source, manufacture date and batch information for the toy. Again, the failure of a franchisor to ensure that the toys it distributes includes this mandatory labeling could result in potential liability for the franchisor.

Finally, the Act mandates that choking hazard warnings be included in Internet advertising and other print materials promoting the toys, rather than just on the packaging itself.

For those franchisors that offer or sell children's toys or products, these provisions raise a host of issues. Franchisors must be proactive in ensuring that the toys and children's products they distribute comply with the Act, particularly given that liability for violations may extend to franchisees that purchase the toys from an approved supplier at the franchisor's direction. Franchisors must start working with their suppliers and toy manufacturers and reviewing their current product safety risk management practices to ensure that children's products they plan to distribute fully comply with all CPSC requirements.