In Brief

  • Recall of Buckyballs® leads to lawsuit filed by the CEO of company that produces magnetic desk toy, as Consumer Product Safety Commission aims to hold him personally responsible for alleged safety risks.

An officer of a defunct company is suing the government regulatory agency attempting to pin him with personal financial responsibility for a $57 million product recall. This lawsuit is the latest step in a public campaign waged by former Maxfield & Oberton CEO Craig Zucker against the Consumer Product Safety Commission, which recalled his company’s product Buckyballs® in 2012. The Commission’s unprecedented move to hold Zucker personally responsible for a non-criminal consumer safety violation broadly extends the responsible corporate officer (“RCO”) doctrine in a manner previously not seen. The action stems from a newly empowered Commission.

The Commission’s increased enforcement efforts

Since the enactment of the Consumer Product Safety Improvement Act of 2008 (“CPSIA”), the Commission has been actively engaged in enforcement efforts and product recalls. The CPSIA increased the maximum civil penalties for failure to report from $8,000 per violation to $100,000 per violation. Maximum total penalties for a series of violations increased from $1.825 million to $15 million. The CPSIA also increased criminal penalties, with the potential for up to five years in prison for “knowing and willful” violations. In the last year alone, the Commission announced eight settlements with civil penalties, ranging from $400,000 to $1.5 million, levied against companies for failure to report.

Increased penalties represent only one “stick” in the Commission’s enforcement arsenal. The Commission has also implemented extensive compliance program obligations, requiring companies in violation to maintain strict compliance policies and report to the Commission on their implementation.

Though the Commission can seek penalties for violations, it can also seek injunctive relief in administrative law courts if a company fails to recall a product with a “substantial product hazard,” as defined under the law. In the case of Buckyballs®, the Commission chose to do just that.

The Buckyballs® recall

In 2010, Maxfield & Oberton added warning labels indicating that the magnets were for adult use only, and recalled all Buckyballs® that were sold without the new label. In 2011, the Commission launched a campaign warning users not to give Buckyballs® to children. Finally, in 2012, the Commission decided warnings were insufficient to deter use by children and resorted to an administrative complaint to force withdrawal of the product. The Commission filed its complaint in July 2012 against Maxfield & Oberton. According to the Commission, it was only the second administrative complaint it filed in 11 years. Despite an aggressive public campaign against the Commission, the Commission continued to pursue its complaint against Maxfield & Oberton. The company eventually dissolved in December 2012, making the complaint moot. In February 2013, the Commission moved for leave to file a second amended complaint naming the former CEO, Craig Zucker, both individually and as an officer of Maxfield & Oberton. The Commission requested the same relief against Zucker as it had against Maxfield & Oberton – i.e., recall, refund, and compliance reports.

The Commission succeeds – so far – in applying the RCO doctrine

This past May, the Commission obtained an unprecedented ruling when an administrative law judge (“ALJ”) granted the request to add Zucker as a respondent in the administrative complaint.

Zucker argued that he could not be liable as he did not personally manufacture, distribute, or sell the product at issue, and that Maxfield & Oberton was the proper respondent. The ALJ agreed that, under the language of the CPSIA, Maxfield & Oberton was a manufacturer, distributor, or retailer subject to suit. In doing so, the ALJ implicitly acknowledged that Zucker was not a manufacturer, distributor, or retailer. However, the ALJ found this did not exclude Zucker as a proper respondent. The question was whether under the RCO doctrine Zucker could “be held individually responsible for the alleged CPSIA transgressions” of the corporation.

The RCO doctrine is derived from two Supreme Court decisions, United States v. Dotterweich, 320 U.S. 277 (1943) and United States v. Park, 421 U.S. 658 (1975). The RCO doctrine imposes liability on officers for the actions of the corporation, even in the absence of personal guilt on the part of the individual. The relevant inquiry is whether the individual’s position within the company gave him authority and responsibility to prevent the alleged violation. Dotterweich, Park, and their progeny have applied the RCO doctrine to statutes involving public health and safety. Because the CPSIA “relates to the public’s health and safety,” the ALJ reasoned that Dotterweich and Park controlled.

At this stage, the ALJ refrained from commenting on the merits of the Commission’s allegations against Zucker, but simply examined the sufficiency of the complaint. The ALJ found the complaint sufficiently alleged liability under the RCO doctrine: “Mr. Zucker was responsible for ensuring Maxfield’s compliance with applicable statutes and regulations . . . [and] personally controlled the acts and practices of Maxfield, including the importation of Buckyballs and Buckycubes.”

Fighting back against the Commission

The Commission’s target did not take the ALJ’s decision lightly. On November 12, 2013, Zucker filed suit in the U.S. District Court in Maryland against the Commission and Commission Chairman Inez Tenenbaum. Zucker seeks declaratory and injunctive relief to avoid being held personally liable in the Commission’s ongoing administrative action seeking a mandatory recall of high-powered magnet products, including Buckyballs® and Buckycubes™, which were sold by Maxfield & Oberton.

Zucker alleges that naming him personally in the administrative action violates the Administrative Procedure Act (“APA”) as well as his constitutional rights under the First and Fifth Amendments. The complaint alleges that the Commission acted arbitrarily and capriciously and outside the scope of its authority, in violation of the APA, because Zucker is not a manufacturer, distributor, or retailer as defined in the CPSIA. Zucker’s complaint criticizes the ALJ’s application of Park as an “unprecedented expansion” of the RCO doctrine.

Zucker further alleges that the Commission’s actions infringed on his First Amendment right to free speech and denied his Fifth Amendment due process rights. The complaint states that the Commission named Zucker in order “to punish him and to chill and deter him and other corporate officers from exercising their Constitutional rights to free speech, to free association, to publicly advocate for their companies, and to petition government officials for redress of their grievances.”

Zucker maintains that he has been singled out by the Commission for punishment, and that those efforts have been an attempt to “bleed first M&O and then Mr. Zucker to death.” The complaint slams the Commission as an “out-of-control bureaucracy” and its actions as unprecedented and an abuse of power.

Implications for consumer product manufacturers – particularly executives

The RCO doctrine has seen a recent resurgence in the pharmaceutical context, with pharmaceutical executives facing imprisonment and criminal fines in the absence of criminal intent – or, in some cases, in the absence of any knowledge whatsoever. Extension of this doctrine to the consumer products arena could add another powerful tool to the Commission’s enforcement toolbox, allowing the Commission to leverage the threat of personal liability against corporate officers. The import of that tool may be limited by the low number of administrative complaints historically brought by the Commission – though that could change at any time. While the Commission may have little to gain from individual liability where the corporation has the means to conduct a full recall and corrective action plan, the potential for individual liability could influence and pressure smaller companies that believe they cannot afford a recall.