Reaching New Heights

When it comes to civil penalties, 2016 has proven to be a record year for the U.S. Consumer Product Safety Commission (CPSC). Earlier this year, the CPSC issued the largest civil penalty ever ($15.45 million for Gree Electric Appliances). This dramatic fine followed on the heels of CPSC Chairman Elliot Kaye’s remarks that the CPSC intended to issue “double-digit” million-dollar penalties to deter noncompliance and promote product safety.

Common Theme: Duty to Submit 15(b) Report

The failure by consumer product manufacturers to submit timely Section 15(b) reports to the CPSC has been a common theme in recent civil penalty settlements. CPSC regulations require consumer product manufacturers to report product safety issues to the CPSC “immediately” (i.e., within 24 hours) whenever the manufacturer receives information that reasonably supports the conclusion that a product (i) fails to comply with an applicable consumer product safety standard, (ii) contains a defect that could create a substantial product hazard, or (iii) creates an unreasonable risk of serious injury. Manufacturers must “not delay reporting in order to determine to a certainty the existence of a reportable noncompliance, defect or unreasonable risk.” 16 C.F.R. § 1115.12(c). This is consistent with the CPSC’s oft-repeated warning: “When in doubt, report.” See our previous bulletin and article on the importance of submitting timely Section 15(b) reports.

Broken Fishbowls, Broken Compliance Program

A recent illustration is the $4.25 million civil penalty the CPSC imposed against PetSmart for failing to immediately report defects in its fishbowl products. The CPSC found that PetSmart received at least 19 reports of its fishbowls shattering during normal use, causing serious injuries in at least 12 cases between August 2011 and January 2014; however, PetSmart waited until January 2014 before alerting the CPSC. The CPSC also found that PetSmart misrepresented the number of defective bowls and required PetSmart to expand the recall it eventually conducted. As part of the settlement, the CPSC also required PetSmart to maintain an improved compliance program and system of internal controls. See our previous article about the importance of implementing robust CPSC compliance programs.

Affirmed by the Courts

Another recent case involving the failure to timely report is United States v. Spectrum Brands, Inc., 15-CV-371-MV (W.D. Wisc. Nov. 17, 2016). Spectrum Brands, Inc. and its former subsidiary, Applica Consumer Products, Inc., imported and distributed under-the-cabinet coffeemakers. From 2009 to 2012, the company received hundreds of complaints from consumers that the plastic handle on the coffeemaker’s glass carafe could detach suddenly during use, posing burn and laceration hazards to consumers. However, the company waited until April 2012, a month after being served with a class action complaint alleging a product defect, to submit its first 15(b) report to the CPSC. By then, the CPSC found that the company had received approximately 1,600 reports of broken handles, 66 reports of burns and three reports of lacerations since November 2008.

The Department of Justice and the CPSC filed a complaint against the company, seeking civil penalties and injunctive relief for failing to immediately report and to prohibit the sale, distribution or importation of the recalled products. In response to the complaint, the company asserted, among other arguments, that the Consumer Product Safety Act’s reporting requirements are “unconstitutionally vague,” and that the CPSC’s late-reporting determination was “arbitrary and capricious.” The Wisconsin federal district court rejected this and all other arguments, and expressly endorsed the CPSC’s refrain of “when in doubt, report.” In rejecting the company’s claim that it had legitimate doubts about whether to report the safety issue to the CPSC earlier, the court stated, “Contrary to defendant’s suggestion, the statute, the CPSC and the courts are not talking about existential doubt, but rather about concrete, quantifiable doubt born out of the existence of the factors identified in the statute and regulations, including the potential hazard created, the number of reported defects and injuries, and the number of potentially defective products that are in commerce.” The court also rejected the company’s vagueness argument, stating that the congressional intent behind not imposing a more concrete, specific reporting requirement was likely due to the fact that “manufacturers and distributors [are] the ones with inexpensive and ready access to the information that is required for a meaningful analysis of [these] factors.” This decision is significant and undoubtedly will bolster the CPSC’s regulatory authority and broad discretion to impose significant civil penalties going forward.

To avoid civil penalties, companies should ensure they have effective policies and procedures in place for monitoring and promptly reporting potential product safety hazards to the CPSC. Our firm can assist companies in complying with CPSC laws and regulations and, more importantly, given the CPSC’s recent enforcement activity, in proactively establishing effective compliance programs and training employees on product safety reporting obligations.