The Case of the Quiet Recall: CPSC's 2004 Civil Penalty Cases Hit 'Do-It-Yourself' Corrective Actions

In 1997, a company named Sun-It (a subsidiary of E&B Giftware) manufactured and distributed some 47,000 citronella candles known as the “Money to Burn Torch.” As it happened, the wrapper surrounding the candle collected superheated melted wax. Some consumers reported to Sun-It that they had suffered serious burns when they blew on the candles or bumped into them. Others said that they had been burned when the candles unexpectedly flared. In all, over a period of 5 months, Sun-It received notice of 14 incidents in which consumers claimed to have suffered serious burns and permanent scarring after having been scalded by hot wax from the candles. Sun-It responded to these reports by stopping sale of the candles and recalling candles that remained in retail inventories. Nearly 17,000 candles, including roughly 3300 in unshipped inventory ' more than a third of the total production ' were recalled and destroyed.

In January 2004, almost 7 years after the recall, E&B Giftware ' without admitting any wrongdoing ' agreed to pay the U.S. Consumer Product Safety Commission (“CPSC”) a civil penalty of $100,000. Why was the company penalized? According to E&B Giftware, it did nothing wrong. (The facts of the E&B case, as well as the other cases referenced in this article, are based on the staff's allegations, as set out in the Federal Register notices reporting the civil penalty agreements. Each company denied that it violated the CPSA.) However, the CPSC staff disagreed, contending that the 14 incident reports “reasonably supported the conclusion that the candles … contained a defect which could create a substantial product hazard or created an unreasonable risk of serious injury,” and that E&B Giftware had a statutory obligation, under Section 15b of the Consumer Product Safety Act (“CPSA”), to report this information to the CPSC when it was received in 1997.

The January action was one of several CPSC cases announced in 2004 that targeted “do it yourself” corrective actions, in which companies attempted to fix problems without notifying the CPSC.

Failure to Report Substantial Hazards Carries Sanctions

Putting aside products subject to regulatory standards and products under order, the CPSC does not punish firms simply because their products turn up with safety problems. Rather, firms are punished for failing to report alleged product hazards. When products fail to meet mandatory standards, such as the Standard for the Flammability of Clothing Textiles, 16 CFR Part 1610, or are banned hazardous substances, such as certain fireworks, 16 CFR 1500.17(a)(3), or are otherwise subject to express restrictions on their manufacture and sale, such as a corrective action ordered by the CPSC 15 U.S.C. 2064(d), their distribution and sale in commerce is prohibited. Absent such considerations, the distribution and sale of allegedly “defective” products, without more, does not expose a firm to potential civil penalties under the CPSA, even though the firm risks potential products liability claims. (For a more complete discussion of the regulatory framework under the CPSA, see Brewster, “Five is Enough: Even a Few Complaints Can Trigger CPSA Reporting Requirements,” Product Liability Law & Strategy, Vol. XXI, No. 1, July 2002.) Indeed, although CPSC-sponsored recalls are frequent events, civil penalty actions are more rare. In FY 2002, for example, the CPSC assisted in the recall of 50 million units in nearly 400 recalls. By contrast, only 11 civil penalties were imposed.

In the case of E&B Giftware, the staff alleged that the company failed to notify the CPSC that it had received reports that its products were burning people, even as it stopped sale of the products and recalled retail inventory. This “quiet recall” gathered thousands of products from store shelves, but there is no evidence on the public record that the recall was ever announced to consumers, and the CPSC claims that E&B Giftware received notice of another three incidents after the recall, including one incident in which a consumer reported third-degree burns. In any event, the CPSC learned of the recall some 2 years after the fact, when it contacted the company in August 1999 after receiving consumer reports of two incidents. (Consumer complaints are one among several sources used by the Commission to identify potential product hazards.) Although the quiet recall had reclaimed more than a third of the inventory, the company still faced sanctions for failing to report.

'Immediate' Reporting Is Required

Under Section 15b of the CPSA, manufacturers, distributors, and retailers of consumer products are required to report to the CPSC “immediately” when they obtain information “which reasonably supports the conclusion” that a product 1) fails to comply with an applicable consumer product safety rule (or a voluntary consumer product safety standard relied upon by the CPSC), 2) contains a defect which could create a substantial product hazard, or 3) creates an unreasonable risk of serious injury or death. In United States v. Mirama Enterprises, Inc. 185 F. Supp. 2d 1148 (S.D. Cal. 2002) (hereinafter Mirama), the only federal court decision to date interpreting Section 15b, the Federal District Court for the Southern District of California noted that “[c]ertainty is not the reporting threshold. Companies are required to report upon receipt of information which 'reasonably supports' the conclusion that there is a defect,” which is “enough information for a reasonable person to conclude that the [product] contain[s] a defect … that create[s] a substantial risk to the public.”

When products fail regulatory standards, reporting is clearly required. Where regulatory standards are not involved, however, it may be difficult to discern a “bright line” for reporting product hazards. Consumer recalls may, and often are, undertaken on evidence that falls short of demonstrating a product defect ' and civil penalty agreements are routinely entered without any finding of fault. For its part, the agency has encouraged firms to “err on the side of over-reporting.” Statement of Enforcement Policy, 49 Fed. Reg. 13820 (1984). In fairness, hazard determinations are so often fact driven that it is difficult for the CPSC to do much more than lay down a rule of thumb for reporting. (While “a few defective products with no potential for causing serious injury and little likelihood of injuring in a minor way” will not “ordinarily” provide a basis for reporting, the Commission notes even one defective product can provide the basis for reporting if the injury that might occur is serious or if the injury is likely to occur. 16 CFR '1115.12(g)(1)(ii).) Nevertheless, while many firms are understandably reluctant to run the risk that “over-reporting” will encourage unwarranted product liability claims, it is difficult to demonstrate that there was insufficient evidence to require reporting when a company finds sufficient evidence to warrant stopping sale of its products and recalling and destroying retail inventories. (In the past several years, E&B Giftware is one of only two firms to have been prosecuted for failing to report a potential product defect after undertaking a “quiet” recall. The other, Hartman Products, recalled 8000 electric hair dryers from retail stores in 1992 after being notified by Underwriters Laboratories that the dryer presented a potential fire hazard, but never notified the CPSC. Two years later, following a CPSC investigation, the firm conducted a consumer-level recall. Without admitting any wrongdoing, the company agreed to accept a civil penalty of $60,000 in 1996.)

Redesign Can Also Be a Red Flag

A safety-related recall may be an obvious red flag that 15b reporting could be required; but the CPSC also pursued firms in 2004 that did not recall, but instead redesigned their products after receiving reports that consumers had sustained injuries ' all without reporting the injury claims to the CPSC. In the first 10 months of 2004, the CPSC charged several companies with failing to report product hazards, despite numerous attempts at fixing reported problems. In early October, the CPSC announced a $500,000 civil penalty against Johnson Health Tech Co., Ltd. (“Johnson”) and Horizon Fitness, Inc. (“Horizon”), the manufacturer and distributor of treadmills. The CPSC staff alleged that Johnson and Horizon had received 180 reports of incidents over a period of a year in which a component of the treadmill had overheated, causing the treadmills to accelerate suddenly and the safety stop key to fail. Fifteen of the reports involved injury claims. During this time, the staff reported that Johnson and Horizon made three attempts to correct the problem, but failed to notify the CPSC until the staff contacted Horizon to schedule an inspection. Johnson and Horizon agreed to the civil penalty but denied the charges, and said that their report to the CPSC and voluntary recall did not result from the staff's investigation, but was instead part of an ongoing effort to respond to consumer complaints. Johnson Health Tech. Co., Ltd. and Horizon Fitness, Inc., 69 Fed. Reg. Daily Ed. 60364-60366 (Oct. 8, 2004).

Staff Say Failures in Use Trump Successes in Lab Tests

Less than a week after the Johnson and Horizon settlements, the CPSC announced a $125,000 civil penalty entered in September against Battat, Inc., a toy manufacturer, for allegedly failing to report violations of the small-parts standard for children's products. The staff claimed that Battat had received more than 330 reports that caps, screws, and tips were detaching from their toy drumsticks, presenting a potential choking hazard. More than 300,000 of the drum sets had been distributed, and no injuries were reported. Nevertheless, the staff contended that Battat had “certainly” received sufficient information to warrant reporting when it modified the drumsticks after receiving 45 consumer complaints. Indeed, the staff alleged that Battat made six attempts to address the problem over a period of some 14 months, but did not notify the CPSC until the Commission (which had itself received 25 incident reports) directed the company to submit a full report. The drum sets were recalled in April 2003.

Interestingly enough, the CPSC was unable to replicate the product failure in laboratory testing. Moreover, Battat alleged not only that each of its shipments had been tested and passed federal standards, but also that outside laboratories employed by Battat's customers had tested the drum sets and the testing results always evidenced compliance. The staff said that reporting was nonetheless required because, according to consumer complaints, small parts had appeared “in actual use by young children.” Battat denied wrongdoing. Battat Incorporated, Provisional Acceptance of Settlement Agreement and Order, 69 Fed. Reg. 56202 (Daily Ed., Sept. 20, 2004).

Roughly a week after the Battat settlement, the CPSC announced a third penalty action, this one against a defunct power-saw manufacturer, RRK Holdings, Inc. (“RRK”), for failure to report safety hazards with its power saws, despite having received 235 reports of handles detaching from the saws in use, including 20 injury reports, and additional complaints that the handles were loose. RRK only reported the incidents after a CPSC investigation was opened, prompted by incident reports that the CPSC itself received from consumers. When the product was recalled, the CPSC says that RRK had received 360 reports of handle failures, but the staff charged that RRK had received sufficient information to require reporting “by the time it made design changes” in late March 2001, when it had accumulated 81 warranty claims for detached handles. RRK denied wrongdoing. RRK Holdings Inc., Provisional Acceptance of Settlement Agreement and Order, 69 Fed. Reg. 53049 (Daily Ed. Aug. 31, 2004).

These three actions followed a much larger settlement in March 2004, when the CPSC accepted an $800,000 civil penalty from Lifetime Products, Inc., a manufacturer and distributor of portable basketball hoops. In that case, the staff alleged that Lifetime had redesigned its product in 2000 after receiving reports of four basketball players with “serious lacerations” from exposed bolts, but did not report incidents to the CPSC. Thereafter, the staff contended, Lifetime received another 19 reports of players who had received lacerations from the bolts. The company agreed to a consumer recall in 2002, but denied that its products were defective or that it had violated the reporting requirements of the CPSA. Lifetime argued that the problem occurred because consumers overtightened the bolts, contrary to instructions, and that the hoop, if properly assembled, met relevant voluntary safety standards. The Lifetime Products, Inc., Provisional Acceptance of Settlement Agreement and Order, 69 Fed. Reg. 11389-11391 (Daily Ed. March 10, 2004).

Lifetime's defense that consumer misuse, not product design, was the cause of the problem recalls a similar (and unsuccessful) defense in the 2002 Mirama case. There, the court held that, even though a product may not be defective, “misuse by consumers is irrelevant” under the third basis for reporting ' 15 U.S.C. '2064(b)(3) ' which requires the reporting of information “which reasonably supports the conclusion that [a] product … creates an unreasonable risk of serious injury or death,” whether or not the product is defective. Moreover, the interpretive rules of the CPSC expressly provide that a reporting firm “need not admit, or may specifically deny, that the information it submits reasonably supports the conclusion” that a product contains a defect that creates a substantial product hazard, fails to comply with applicable regulations or standards, or creates an unreasonable risk of serious injury or death. The clear intent of the regulations is to collect hazard information as quickly as possible, and argue about its impact later.

Although reports will not always result in recalls or other corrective actions, the failure to report (when required) always carries the potential of civil penalties. (Many reports result in no further action, but Consumers Union claims that the CPSC negotiated 11,647 corrective actions short of recalls from 1990 through mid July 2004 “[t]o deal with what officials say are lesser violations too minor to merit a recall.” Examples cited include warning labels in 10-point, as opposed to 12-point type. “Hazard in Aisle 5,” Consumer Reports, November 2004, at 16.) In a decision handed down on Oct. 28, 2004, the U.S. Court of Appeals for the Ninth Circuit held that the sanctions for failing to report a potential defect extend to each individual consumer product distributed in commerce, whether or not the product ultimately proves to be defective: “Information about a possible defect triggers the duty to report, which in turn allows the Commission either to conclude that no defect exists or to require appropriate corrective actions. Congress's decision to impose penalties for reporting violations without requiring proof of a product defect encourages companies to provide necessary information to the Commission.” United States v. Mirama Enterprises, 2004 WL 2404773 (9th Cir. 2004) at 4.

Of course, not all recalls or redesigns of consumer products will require reporting to the CPSC. For example, if a shipment of garments is recalled because the dyes run, or because the care labels improperly advise washing the garments in hot water, no reporting to the CPSC is required because the recall does not implicate consumer safety. If a product is recalled because it fails in use due to a mechanical malfunction, but the malfunction presents no risk of injury to consumers, no reporting is required.

Similarly, in the absence of information evidencing a substantial product hazard, a product redesign that is simply intended to make a product safer is unlikely to warrant reporting to the CPSC, assuming that the product is not being redesigned because it fails to comply with applicable regulatory requirements. It is noteworthy that, in most cases where the CPSC argued that reporting should have preceded or accompanied redesign of a product, the incident reports that prompted redesign involved actual injuries to consumers. Nevertheless, not all reportable defects will be preceded by incident reports, especially where a problem is identified early. For example, in 1994, the CPSC accepted a $150,000 civil penalty from Gund, a toy manufacturer, even though no injuries had been reported. The CPSC claimed that the company had failed to report despite receiving test data showing that its product failed federal small-parts standards, together with numerous consumer reports of the product breaking in use. Although Gund stopped sale of the product and redesigned it, it did not notify the CPSC. The firm denied any wrongdoing and denied that its products failed federal safety standards.

Still, it is important to note that it is not the redesign of a product that triggers the reporting responsibility, but instead the evidence that compels redesign ' evidence that the product presents a “substantial product hazard” in its current state. It is, after all, well-established that “subsequent remedial measures” may not be admitted to prove negligence, see, Fed. R. Evid. 407, and public policy considerations militate against government directives that would discourage safety improvements in consumer products. Nevertheless, when a manufacturer has sufficient evidence of safety hazards to warrant redesign of a product, there may well be sufficient evidence to justify 15b reporting, even if negligence cannot be proven, and even if the product is arguably not “defective.” This is especially true when the evidence takes the form of actual injury reports. As the court observed in Mirama, “the standard for reporting is not whether the [product] actually contains a defect, but whether a reasonable person could conclude that the [product] had a defect.”

There is, of course, another consideration worth mentioning. It is recognized that a manufacturer has a duty to warn when it knows or has reason to know that its product is or is likely to be dangerous when used as intended. See, '388 Restatement (Second) of Torts. A manufacturer that elects to recall its products from retail shelves in response to safety hazards ' without alerting consumers of the potential hazard ' is at risk in product liability actions when and if consumers are subsequently injured. Consumer recalls can reduce the incidence of product claims by getting products out of the marketplace, and blunt subsequent claims by demonstrating that the manufacturer exercised “reasonable care” when it learned of the problem.

In recent years, the sanctions for failing to report under 15b have routinely topped $100,000, with some penalties in excess of $1 million. The 11 civil penalty actions in FY 2002, for example, totaled more than $4 million. In the fiscal year just concluded, civil penalties again topped $4 million. For this reason, it is prudent for firms to evaluate the need for 15b reporting in any case where a product generates safety complaints. In each of the cases cited above, the sanctioned firm may have thought that it “did the right thing” when it promptly initiated a corrective action, and few would disagree with this assessment. Nevertheless, when safety complaints are sufficient to warrant recall or redesign of a product, 15b reporting may also be required, and the firm that fails to report to the CPSC could be vulnerable to civil penalties in any subsequent enforcement proceeding.

In 1997, a company named Sun-It (a subsidiary of E&B Giftware) manufactured and distributed some 47,000 citronella candles known as the “Money to Burn Torch.” As it happened, the wrapper surrounding the candle collected superheated melted wax. Some consumers reported to Sun-It that they had suffered serious burns when they blew on the candles or bumped into them. Others said that they had been burned when the candles unexpectedly flared. In all, over a period of 5 months, Sun-It received notice of 14 incidents in which consumers claimed to have suffered serious burns and permanent scarring after having been scalded by hot wax from the candles. Sun-It responded to these reports by stopping sale of the candles and recalling candles that remained in retail inventories. Nearly 17,000 candles, including roughly 3300 in unshipped inventory ' more than a third of the total production ' were recalled and destroyed.

In January 2004, almost 7 years after the recall, E&B Giftware ' without admitting any wrongdoing ' agreed to pay the U.S. Consumer Product Safety Commission (“CPSC”) a civil penalty of $100,000. Why was the company penalized? According to E&B Giftware, it did nothing wrong. (The facts of the E&B case, as well as the other cases referenced in this article, are based on the staff's allegations, as set out in the Federal Register notices reporting the civil penalty agreements. Each company denied that it violated the CPSA.) However, the CPSC staff disagreed, contending that the 14 incident reports “reasonably supported the conclusion that the candles … contained a defect which could create a substantial product hazard or created an unreasonable risk of serious injury,” and that E&B Giftware had a statutory obligation, under Section 15b of the Consumer Product Safety Act (“CPSA”), to report this information to the CPSC when it was received in 1997.

The January action was one of several CPSC cases announced in 2004 that targeted “do it yourself” corrective actions, in which companies attempted to fix problems without notifying the CPSC.

Failure to Report Substantial Hazards Carries Sanctions

Putting aside products subject to regulatory standards and products under order, the CPSC does not punish firms simply because their products turn up with safety problems. Rather, firms are punished for failing to report alleged product hazards. When products fail to meet mandatory standards, such as the Standard for the Flammability of Clothing Textiles, 16 CFR Part 1610, or are banned hazardous substances, such as certain fireworks, 16 CFR 1500.17(a)(3), or are otherwise subject to express restrictions on their manufacture and sale, such as a corrective action ordered by the CPSC 15 U.S.C. 2064(d), their distribution and sale in commerce is prohibited. Absent such considerations, the distribution and sale of allegedly “defective” products, without more, does not expose a firm to potential civil penalties under the CPSA, even though the firm risks potential products liability claims. (For a more complete discussion of the regulatory framework under the CPSA, see Brewster, “Five is Enough: Even a Few Complaints Can Trigger CPSA Reporting Requirements,” Product Liability Law & Strategy, Vol. XXI, No. 1, July 2002.) Indeed, although CPSC-sponsored recalls are frequent events, civil penalty actions are more rare. In FY 2002, for example, the CPSC assisted in the recall of 50 million units in nearly 400 recalls. By contrast, only 11 civil penalties were imposed.

In the case of E&B Giftware, the staff alleged that the company failed to notify the CPSC that it had received reports that its products were burning people, even as it stopped sale of the products and recalled retail inventory. This “quiet recall” gathered thousands of products from store shelves, but there is no evidence on the public record that the recall was ever announced to consumers, and the CPSC claims that E&B Giftware received notice of another three incidents after the recall, including one incident in which a consumer reported third-degree burns. In any event, the CPSC learned of the recall some 2 years after the fact, when it contacted the company in August 1999 after receiving consumer reports of two incidents. (Consumer complaints are one among several sources used by the Commission to identify potential product hazards.) Although the quiet recall had reclaimed more than a third of the inventory, the company still faced sanctions for failing to report.

'Immediate' Reporting Is Required

Under Section 15b of the CPSA, manufacturers, distributors, and retailers of consumer products are required to report to the CPSC “immediately” when they obtain information “which reasonably supports the conclusion” that a product 1) fails to comply with an applicable consumer product safety rule (or a voluntary consumer product safety standard relied upon by the CPSC), 2) contains a defect which could create a substantial product hazard, or 3) creates an unreasonable risk of serious injury or death. In United States v. Mirama Enterprises, Inc. 185 F. Supp. 2d 1148 (S.D. Cal. 2002) (hereinafter Mirama ), the only federal court decision to date interpreting Section 15b, the Federal District Court for the Southern District of California noted that “[c]ertainty is not the reporting threshold. Companies are required to report upon receipt of information which 'reasonably supports' the conclusion that there is a defect,” which is “enough information for a reasonable person to conclude that the [product] contain[s] a defect … that create[s] a substantial risk to the public.”

When products fail regulatory standards, reporting is clearly required. Where regulatory standards are not involved, however, it may be difficult to discern a “bright line” for reporting product hazards. Consumer recalls may, and often are, undertaken on evidence that falls short of demonstrating a product defect ' and civil penalty agreements are routinely entered without any finding of fault. For its part, the agency has encouraged firms to “err on the side of over-reporting.” Statement of Enforcement Policy, 49 Fed. Reg. 13820 (1984). In fairness, hazard determinations are so often fact driven that it is difficult for the CPSC to do much more than lay down a rule of thumb for reporting. (While “a few defective products with no potential for causing serious injury and little likelihood of injuring in a minor way” will not “ordinarily” provide a basis for reporting, the Commission notes even one defective product can provide the basis for reporting if the injury that might occur is serious or if the injury is likely to occur. 16 CFR '1115.12(g)(1)(ii).) Nevertheless, while many firms are understandably reluctant to run the risk that “over-reporting” will encourage unwarranted product liability claims, it is difficult to demonstrate that there was insufficient evidence to require reporting when a company finds sufficient evidence to warrant stopping sale of its products and recalling and destroying retail inventories. (In the past several years, E&B Giftware is one of only two firms to have been prosecuted for failing to report a potential product defect after undertaking a “quiet” recall. The other, Hartman Products, recalled 8000 electric hair dryers from retail stores in 1992 after being notified by Underwriters Laboratories that the dryer presented a potential fire hazard, but never notified the CPSC. Two years later, following a CPSC investigation, the firm conducted a consumer-level recall. Without admitting any wrongdoing, the company agreed to accept a civil penalty of $60,000 in 1996.)

Redesign Can Also Be a Red Flag

A safety-related recall may be an obvious red flag that 15b reporting could be required; but the CPSC also pursued firms in 2004 that did not recall, but instead redesigned their products after receiving reports that consumers had sustained injuries ' all without reporting the injury claims to the CPSC. In the first 10 months of 2004, the CPSC charged several companies with failing to report product hazards, despite numerous attempts at fixing reported problems. In early October, the CPSC announced a $500,000 civil penalty against Johnson Health Tech Co., Ltd. (“Johnson”) and Horizon Fitness, Inc. (“Horizon”), the manufacturer and distributor of treadmills. The CPSC staff alleged that Johnson and Horizon had received 180 reports of incidents over a period of a year in which a component of the treadmill had overheated, causing the treadmills to accelerate suddenly and the safety stop key to fail. Fifteen of the reports involved injury claims. During this time, the staff reported that Johnson and Horizon made three attempts to correct the problem, but failed to notify the CPSC until the staff contacted Horizon to schedule an inspection. Johnson and Horizon agreed to the civil penalty but denied the charges, and said that their report to the CPSC and voluntary recall did not result from the staff's investigation, but was instead part of an ongoing effort to respond to consumer complaints. Johnson Health Tech. Co., Ltd. and Horizon Fitness, Inc., 69 Fed. Reg. Daily Ed. 60364-60366 (Oct. 8, 2004).

Staff Say Failures in Use Trump Successes in Lab Tests

Less than a week after the Johnson and Horizon settlements, the CPSC announced a $125,000 civil penalty entered in September against Battat, Inc., a toy manufacturer, for allegedly failing to report violations of the small-parts standard for children's products. The staff claimed that Battat had received more than 330 reports that caps, screws, and tips were detaching from their toy drumsticks, presenting a potential choking hazard. More than 300,000 of the drum sets had been distributed, and no injuries were reported. Nevertheless, the staff contended that Battat had “certainly” received sufficient information to warrant reporting when it modified the drumsticks after receiving 45 consumer complaints. Indeed, the staff alleged that Battat made six attempts to address the problem over a period of some 14 months, but did not notify the CPSC until the Commission (which had itself received 25 incident reports) directed the company to submit a full report. The drum sets were recalled in April 2003.

Interestingly enough, the CPSC was unable to replicate the product failure in laboratory testing. Moreover, Battat alleged not only that each of its shipments had been tested and passed federal standards, but also that outside laboratories employed by Battat's customers had tested the drum sets and the testing results always evidenced compliance. The staff said that reporting was nonetheless required because, according to consumer complaints, small parts had appeared “in actual use by young children.” Battat denied wrongdoing. Battat Incorporated, Provisional Acceptance of Settlement Agreement and Order, 69 Fed. Reg. 56202 (Daily Ed., Sept. 20, 2004).

Roughly a week after the Battat settlement, the CPSC announced a third penalty action, this one against a defunct power-saw manufacturer, RRK Holdings, Inc. (“RRK”), for failure to report safety hazards with its power saws, despite having received 235 reports of handles detaching from the saws in use, including 20 injury reports, and additional complaints that the handles were loose. RRK only reported the incidents after a CPSC investigation was opened, prompted by incident reports that the CPSC itself received from consumers. When the product was recalled, the CPSC says that RRK had received 360 reports of handle failures, but the staff charged that RRK had received sufficient information to require reporting “by the time it made design changes” in late March 2001, when it had accumulated 81 warranty claims for detached handles. RRK denied wrongdoing. RRK Holdings Inc., Provisional Acceptance of Settlement Agreement and Order, 69 Fed. Reg. 53049 (Daily Ed. Aug. 31, 2004).

These three actions followed a much larger settlement in March 2004, when the CPSC accepted an $800,000 civil penalty from Lifetime Products, Inc., a manufacturer and distributor of portable basketball hoops. In that case, the staff alleged that Lifetime had redesigned its product in 2000 after receiving reports of four basketball players with “serious lacerations” from exposed bolts, but did not report incidents to the CPSC. Thereafter, the staff contended, Lifetime received another 19 reports of players who had received lacerations from the bolts. The company agreed to a consumer recall in 2002, but denied that its products were defective or that it had violated the reporting requirements of the CPSA. Lifetime argued that the problem occurred because consumers overtightened the bolts, contrary to instructions, and that the hoop, if properly assembled, met relevant voluntary safety standards. The Lifetime Products, Inc., Provisional Acceptance of Settlement Agreement and Order, 69 Fed. Reg. 11389-11391 (Daily Ed. March 10, 2004).

Lifetime's defense that consumer misuse, not product design, was the cause of the problem recalls a similar (and unsuccessful) defense in the 2002 Mirama case. There, the court held that, even though a product may not be defective, “misuse by consumers is irrelevant” under the third basis for reporting ' 15 U.S.C. '2064(b)(3) ' which requires the reporting of information “which reasonably supports the conclusion that [a] product … creates an unreasonable risk of serious injury or death,” whether or not the product is defective. Moreover, the interpretive rules of the CPSC expressly provide that a reporting firm “need not admit, or may specifically deny, that the information it submits reasonably supports the conclusion” that a product contains a defect that creates a substantial product hazard, fails to comply with applicable regulations or standards, or creates an unreasonable risk of serious injury or death. The clear intent of the regulations is to collect hazard information as quickly as possible, and argue about its impact later.

Although reports will not always result in recalls or other corrective actions, the failure to report (when required) always carries the potential of civil penalties. (Many reports result in no further action, but Consumers Union claims that the CPSC negotiated 11,647 corrective actions short of recalls from 1990 through mid July 2004 “[t]o deal with what officials say are lesser violations too minor to merit a recall.” Examples cited include warning labels in 10-point, as opposed to 12-point type. “Hazard in Aisle 5,” Consumer Reports, November 2004, at 16.) In a decision handed down on Oct. 28, 2004, the U.S. Court of Appeals for the Ninth Circuit held that the sanctions for failing to report a potential defect extend to each individual consumer product distributed in commerce, whether or not the product ultimately proves to be defective: “Information about a possible defect triggers the duty to report, which in turn allows the Commission either to conclude that no defect exists or to require appropriate corrective actions. Congress's decision to impose penalties for reporting violations without requiring proof of a product defect encourages companies to provide necessary information to the Commission.” United States v. Mirama Enterprises, 2004 WL 2404773 (9th Cir. 2004) at 4.

Of course, not all recalls or redesigns of consumer products will require reporting to the CPSC. For example, if a shipment of garments is recalled because the dyes run, or because the care labels improperly advise washing the garments in hot water, no reporting to the CPSC is required because the recall does not implicate consumer safety. If a product is recalled because it fails in use due to a mechanical malfunction, but the malfunction presents no risk of injury to consumers, no reporting is required.

Similarly, in the absence of information evidencing a substantial product hazard, a product redesign that is simply intended to make a product safer is unlikely to warrant reporting to the CPSC, assuming that the product is not being redesigned because it fails to comply with applicable regulatory requirements. It is noteworthy that, in most cases where the CPSC argued that reporting should have preceded or accompanied redesign of a product, the incident reports that prompted redesign involved actual injuries to consumers. Nevertheless, not all reportable defects will be preceded by incident reports, especially where a problem is identified early. For example, in 1994, the CPSC accepted a $150,000 civil penalty from Gund, a toy manufacturer, even though no injuries had been reported. The CPSC claimed that the company had failed to report despite receiving test data showing that its product failed federal small-parts standards, together with numerous consumer reports of the product breaking in use. Although Gund stopped sale of the product and redesigned it, it did not notify the CPSC. The firm denied any wrongdoing and denied that its products failed federal safety standards.

Still, it is important to note that it is not the redesign of a product that triggers the reporting responsibility, but instead the evidence that compels redesign ' evidence that the product presents a “substantial product hazard” in its current state. It is, after all, well-established that “subsequent remedial measures” may not be admitted to prove negligence, see, Fed. R. Evid. 407, and public policy considerations militate against government directives that would discourage safety improvements in consumer products. Nevertheless, when a manufacturer has sufficient evidence of safety hazards to warrant redesign of a product, there may well be sufficient evidence to justify 15b reporting, even if negligence cannot be proven, and even if the product is arguably not “defective.” This is especially true when the evidence takes the form of actual injury reports. As the court observed in Mirama, “the standard for reporting is not whether the [product] actually contains a defect, but whether a reasonable person could conclude that the [product] had a defect.”

There is, of course, another consideration worth mentioning. It is recognized that a manufacturer has a duty to warn when it knows or has reason to know that its product is or is likely to be dangerous when used as intended. See, '388 Restatement (Second) of Torts. A manufacturer that elects to recall its products from retail shelves in response to safety hazards ' without alerting consumers of the potential hazard ' is at risk in product liability actions when and if consumers are subsequently injured. Consumer recalls can reduce the incidence of product claims by getting products out of the marketplace, and blunt subsequent claims by demonstrating that the manufacturer exercised “reasonable care” when it learned of the problem.

In recent years, the sanctions for failing to report under 15b have routinely topped $100,000, with some penalties in excess of $1 million. The 11 civil penalty actions in FY 2002, for example, totaled more than $4 million. In the fiscal year just concluded, civil penalties again topped $4 million. For this reason, it is prudent for firms to evaluate the need for 15b reporting in any case where a product generates safety complaints. In each of the cases cited above, the sanctioned firm may have thought that it “did the right thing” when it promptly initiated a corrective action, and few would disagree with this assessment. Nevertheless, when safety complaints are sufficient to warrant recall or redesign of a product, 15b reporting may also be required, and the firm that fails to report to the CPSC could be vulnerable to civil penalties in any subsequent enforcement proceeding.