CPSC Gets Aggressive About Failure to Report

In the last few years, the compliance staff of the U.S. Consumer Product Safety Commission has sought a number of significant civil penalties for failure to report or for late reporting. It is instructive to look at recent civil penalty cases to see what is important to the CPSC staff in assessing the appropriateness and level of penalties. First, however, let's examine the reporting requirements.

Reporting Requirements

The Consumer Product Safety Act ('CPSA'), '15(b) (also referred to as '2064(b)) independently requires manufacturers, importers, distributors, and retailers to notify the Commission immediately if they obtain information that reasonably supports the conclusion that a product distributed in commerce: 1) fails to meet a consumer product safety standard or banning regulation, 2) contains a defect which could create a substantial product hazard to consumers, 3) creates an unreasonable risk of serious injury or death, or 4) fails to comply with a voluntary standard upon which the Commission has relied under the CPSA.

The most important basis for reporting to the Commission is '15(b)(2), which requires both a defect and the possibility of a substantial product hazard. The regulations accompanying the CPSA provide some guidance on how to analyze the need to report. The first question is whether there is a defect. Under this section, a product without a defect is not subject to the reporting requirements even if injuries occur. Many products are reasonably safe and not defective and people still get hurt.

To help a company decide whether its product has a defect, the Commission's regulations say:

At a minimum, defect includes the dictionary or commonly accepted meaning of the word. Thus, a defect is a fault, flaw, or irregularity that causes weakness, failure, or inadequacy in form or function. A defect, for example, may be the result of a manufacturing or production error; that is, the consumer product as manufactured is not in the form intended by, or fails to perform in accordance with, its design. In addition, the design of and the materials used in a consumer product may also result in a defect. *** A design defect may also be present if the risk of injury occurs as a result of the operation or use of the product or the failure of the product to operate as intended. A defect can also occur in a product's contents, construction, finish, packaging, warnings, and/or instructions. With respect to instructions, a consumer product may contain a defect if the instructions for assembly or use could allow the product, otherwise safely designed and manufactured, to present a risk of injury. 16 CFR '1115.6.

The Commission distinguishes products that hurt people but are not defective by saying, 'Not all products that present a risk of injury are defective. A kitchen knife is one such example. The blade has to be sharp to allow the consumer to cut or slice food. The knife's cutting ability is not a product defect, even though some consumers may cut themselves while using the knife.' CPSC Recall Handbook.

The Commission encourages manufacturers to report even when in doubt about whether the product is defective. It says:

If the information available to a company does not reasonably support the conclusion that a defect exists, the firm need not report to the Commission under the defect reporting provision of Section 15(b)(2). However, since a product may be defective even when it is designed, manufactured, and marketed exactly as intended, a company in doubt as to whether a defect exists should still report. CPSC Recall Handbook.

The next question to be answered is whether this 'defect' could create a 'substantial product hazard.' The Commission starts this analysis by saying:

Generally, a product could create a substantial hazard when consumers are exposed to a significant number of units or if the possible injury is serious or is likely to occur. However, because a company ordinarily does not know the extent of public exposure or the likelihood or severity of potential injury when a product defect first comes to its attention, the company should report to the Commission even if it [sic] in doubt as to whether a substantial product hazard exists. CPSC Recall Handbook.

Then the regulations provide factors a manufacturer must consider in determining if there is a substantial product hazard: pattern of defect, number of defective products in commerce, severity of risk, and likelihood of injury.

There is an additional reporting responsibility that applies even if there is no defect. Section 15(b)(3) requires a report if there is an unreasonable risk of serious injury or death. The critical term is 'unreasonable,' which is defined as follows:

The use of the term 'unreasonable risk' suggests that the risk of injury presented by a product should be evaluated to determine if that risk is a reasonable one. In determining whether a product presents an unreasonable risk, the firm should examine the utility of the product, or the utility of the aspect of the product that causes the risk, the level of exposure of consumers to the risk, the nature and severity of the hazard presented, and the likelihood of resulting serious injury or death. In its analysis, the firm should also evaluate the state of the manufacturing or scientific art, the availability of alternative designs or products, and the feasibility of eliminating the risk. The Commission expects firms to report if a reasonable person could conclude given the information available that a product creates an unreasonable risk of serious injury or death. 16 CFR '1115.6

Furthermore, the Ninth Circuit U.S. Court of Appeals has confirmed that this section does not require that a defect exist in the product for there to be a reporting requirement. See United States v. Mirama Enterprises, Inc., 387 F.3d 983 (9th Cir. 2004).

Lastly, if there is the threshold for reporting, either under '15(b)(2) or (3), the CPSA requires companies to report immediately. The Commission defines this requirement as follows:

A company must report to the Commission within 24 hours of obtaining reportable information. The Commission encourages companies to report potential substantial product hazards even while their own investigations are continuing. However, if a company is uncertain whether information is reportable, the firm may spend a reasonable time investigating the matter. That investigation should not exceed ten working days unless the firm can demonstrate that a longer time is reasonable in the circumstances. (emphasis in original). CPSC Recall Handbook.

In order to encourage manufacturers to report even when they are not sure if they are required to do so, the Commission has said:

Reporting a product to the Commission under section 15 does not automatically mean that the Commission will conclude that the product creates a substantial product hazard or that corrective action is necessary. The CPSC staff works with the reporting firm to determine if corrective action is appropriate. Many of the reports re-ceived require no corrective action because the staff concludes that the reported product defect does not create a substantial product hazard. CPSC Recall Handbook.

Given all of the above to consider, manufacturers and others in the chain of production and distribution need to make some critical decisions so they can meet their statutory obligations and avoid being charged with violating these requirements.

Civil Penalties

In the last 2 fiscal years, the CPSC has significantly increased the number of cases where civil penalties are being sought. Because a few of these cases have been around a while, it is, in part, a matter of timing. However, manufacturers should assume that the CPSC will continue to seek out cases where late reporting or failure to report might justify civil penalties.

Section 2069 of the Consumer Product Safety Act provides for civil penalties. Moreover, in 2005 the maximum allowable fines were increased to $8000 per violation and a maximum of $1.825 million for any related set of violations. It has been held that there is a violation for each product sold and not just those that caused injury or that failed. See United States v. Mirama Enterprises, Inc., 387 F.3d 983 (9th Cir. 2004). Thus, the fines can be significant where there have been thousands of products sold.

The Commission is supposed to consider the following in determining the amount of penalties sought:

[t]he Commission shall consider the nature of the product defect, the severity of the risk of injury, the occurrence of [sic] absence of injury, the number of defective products distributed, and the appropriateness of such penalty in relation to the size of the business of the person charged. 15 U.S.C. '2069(b).

With this in mind, the Commission recently settled many civil penalty cases and obtained penalties well in excess of $1 million.

• In the 2002-2003 fiscal year, there were five manufacturers or retailers that were fined. Fines ranged from $30,000 to $885,000.
• In the 2003-2004 fiscal year, 10 manufacturers or retailers were fined, ranging from $100,000 to $1 million.
• In the 2004-2005 fiscal year, 8 manufacturers were fined with fines ranging from $300,000 to $4 million. The difference with the fines in this year is that many of them involved multiple violations (eg, late reporting or no reporting for different products over different periods of time).

Simply dividing the number of different products involved into the fines where multiple violations occurred results in an approximate fine of between $300,000 and $400,000 per product problem.

It is now much easier to review the publicly available information concerning civil penalties. The CPSC Web site (www.cpsc.gov/businfo/businfo.html) conveniently has organized the civil and criminal penalty cases by company, fiscal year, and product. Therefore, anyone can review the facts surrounding each of these cases.

This author reviewed all of the penalty matters for the last 5 years and came up with some common threads. In many of the penalty cases, one of the following things occurred:

1) The manufacturer made a design or manufacturing change (sometimes several times) because of a safety issue (in the eyes of the Commission, it was fixing a defective product) and did not report to the CPSC or notify prior customers about the change.

2) The manufacturer issued a dealer alert (sometimes several) concerning a safety problem and did not report to the Commission or alert its customers.

3) The manufacturer supplied incomplete or inaccurate information to the CPSC when it investigated a safety issue.

4) The CPSC had to request the manufacturer to provide information.

Furthermore, during this time period, there were even several penalty cases where there were no injuries associated with the defect.

Despite these common threads, there are significant variations in the facts of each case involving the number of products versus the number of product failures and injuries and the time gap between the failures and injuries and the report by the manufacturer or the request from the CPSC for information.

Conclusion

Given the significant number of fines being levied and the increase in the potential for fines, it is clear that manufacturers and others in the chain of distribution should, when in doubt, err on the side of reporting.

As the CPSC has said over the years, a significant percentage of reports (last year, reportedly more than 40%) to the Commission do not result in any remedial action. As a result, it makes sense for the company seriously to consider reporting to the Commission, even if there is a possible defect and a small chance of a serious injury. In that case, you can report, deny that it is a substantial product hazard, and argue that no corrective action program is necessary.

Of course, it is possible that the CPSC will disagree and will encourage or try to force (by litigation) the manufacturer to undertake a remedial program. However, these actions are very rare and very difficult to sustain. Therefore, the prudent course of action may be, when in doubt, to report early and cut off any chance of a late reporting fine.

Kenneth Ross is of counsel to Bowman and Brooke LLP in Minneapolis. He has counseled manufacturers on CPSC issues for 30 years.

In the last few years, the compliance staff of the U.S. Consumer Product Safety Commission has sought a number of significant civil penalties for failure to report or for late reporting. It is instructive to look at recent civil penalty cases to see what is important to the CPSC staff in assessing the appropriateness and level of penalties. First, however, let's examine the reporting requirements.

Reporting Requirements

The Consumer Product Safety Act ('CPSA'), '15(b) (also referred to as '2064(b)) independently requires manufacturers, importers, distributors, and retailers to notify the Commission immediately if they obtain information that reasonably supports the conclusion that a product distributed in commerce: 1) fails to meet a consumer product safety standard or banning regulation, 2) contains a defect which could create a substantial product hazard to consumers, 3) creates an unreasonable risk of serious injury or death, or 4) fails to comply with a voluntary standard upon which the Commission has relied under the CPSA.

The most important basis for reporting to the Commission is '15(b)(2), which requires both a defect and the possibility of a substantial product hazard. The regulations accompanying the CPSA provide some guidance on how to analyze the need to report. The first question is whether there is a defect. Under this section, a product without a defect is not subject to the reporting requirements even if injuries occur. Many products are reasonably safe and not defective and people still get hurt.

To help a company decide whether its product has a defect, the Commission's regulations say:

At a minimum, defect includes the dictionary or commonly accepted meaning of the word. Thus, a defect is a fault, flaw, or irregularity that causes weakness, failure, or inadequacy in form or function. A defect, for example, may be the result of a manufacturing or production error; that is, the consumer product as manufactured is not in the form intended by, or fails to perform in accordance with, its design. In addition, the design of and the materials used in a consumer product may also result in a defect. *** A design defect may also be present if the risk of injury occurs as a result of the operation or use of the product or the failure of the product to operate as intended. A defect can also occur in a product's contents, construction, finish, packaging, warnings, and/or instructions. With respect to instructions, a consumer product may contain a defect if the instructions for assembly or use could allow the product, otherwise safely designed and manufactured, to present a risk of injury. 16 CFR '1115.6.

The Commission distinguishes products that hurt people but are not defective by saying, 'Not all products that present a risk of injury are defective. A kitchen knife is one such example. The blade has to be sharp to allow the consumer to cut or slice food. The knife's cutting ability is not a product defect, even though some consumers may cut themselves while using the knife.' CPSC Recall Handbook.

The Commission encourages manufacturers to report even when in doubt about whether the product is defective. It says:

If the information available to a company does not reasonably support the conclusion that a defect exists, the firm need not report to the Commission under the defect reporting provision of Section 15(b)(2). However, since a product may be defective even when it is designed, manufactured, and marketed exactly as intended, a company in doubt as to whether a defect exists should still report. CPSC Recall Handbook.

The next question to be answered is whether this 'defect' could create a 'substantial product hazard.' The Commission starts this analysis by saying:

Generally, a product could create a substantial hazard when consumers are exposed to a significant number of units or if the possible injury is serious or is likely to occur. However, because a company ordinarily does not know the extent of public exposure or the likelihood or severity of potential injury when a product defect first comes to its attention, the company should report to the Commission even if it [sic] in doubt as to whether a substantial product hazard exists. CPSC Recall Handbook.

Then the regulations provide factors a manufacturer must consider in determining if there is a substantial product hazard: pattern of defect, number of defective products in commerce, severity of risk, and likelihood of injury.

There is an additional reporting responsibility that applies even if there is no defect. Section 15(b)(3) requires a report if there is an unreasonable risk of serious injury or death. The critical term is 'unreasonable,' which is defined as follows:

The use of the term 'unreasonable risk' suggests that the risk of injury presented by a product should be evaluated to determine if that risk is a reasonable one. In determining whether a product presents an unreasonable risk, the firm should examine the utility of the product, or the utility of the aspect of the product that causes the risk, the level of exposure of consumers to the risk, the nature and severity of the hazard presented, and the likelihood of resulting serious injury or death. In its analysis, the firm should also evaluate the state of the manufacturing or scientific art, the availability of alternative designs or products, and the feasibility of eliminating the risk. The Commission expects firms to report if a reasonable person could conclude given the information available that a product creates an unreasonable risk of serious injury or death. 16 CFR '1115.6

Furthermore, the Ninth Circuit U.S. Court of Appeals has confirmed that this section does not require that a defect exist in the product for there to be a reporting requirement. See United States v. Mirama Enterprises, Inc., 387 F.3d 983 (9th Cir. 2004).

Lastly, if there is the threshold for reporting, either under '15(b)(2) or (3), the CPSA requires companies to report immediately. The Commission defines this requirement as follows:

A company must report to the Commission within 24 hours of obtaining reportable information. The Commission encourages companies to report potential substantial product hazards even while their own investigations are continuing. However, if a company is uncertain whether information is reportable, the firm may spend a reasonable time investigating the matter. That investigation should not exceed ten working days unless the firm can demonstrate that a longer time is reasonable in the circumstances. (emphasis in original). CPSC Recall Handbook.

In order to encourage manufacturers to report even when they are not sure if they are required to do so, the Commission has said:

Reporting a product to the Commission under section 15 does not automatically mean that the Commission will conclude that the product creates a substantial product hazard or that corrective action is necessary. The CPSC staff works with the reporting firm to determine if corrective action is appropriate. Many of the reports re-ceived require no corrective action because the staff concludes that the reported product defect does not create a substantial product hazard. CPSC Recall Handbook.

Given all of the above to consider, manufacturers and others in the chain of production and distribution need to make some critical decisions so they can meet their statutory obligations and avoid being charged with violating these requirements.

Civil Penalties

In the last 2 fiscal years, the CPSC has significantly increased the number of cases where civil penalties are being sought. Because a few of these cases have been around a while, it is, in part, a matter of timing. However, manufacturers should assume that the CPSC will continue to seek out cases where late reporting or failure to report might justify civil penalties.

Section 2069 of the Consumer Product Safety Act provides for civil penalties. Moreover, in 2005 the maximum allowable fines were increased to $8000 per violation and a maximum of $1.825 million for any related set of violations. It has been held that there is a violation for each product sold and not just those that caused injury or that failed. See United States v. Mirama Enterprises, Inc., 387 F.3d 983 (9th Cir. 2004). Thus, the fines can be significant where there have been thousands of products sold.

The Commission is supposed to consider the following in determining the amount of penalties sought:

[t]he Commission shall consider the nature of the product defect, the severity of the risk of injury, the occurrence of [sic] absence of injury, the number of defective products distributed, and the appropriateness of such penalty in relation to the size of the business of the person charged. 15 U.S.C. '2069(b).

With this in mind, the Commission recently settled many civil penalty cases and obtained penalties well in excess of $1 million.

• In the 2002-2003 fiscal year, there were five manufacturers or retailers that were fined. Fines ranged from $30,000 to $885,000.
• In the 2003-2004 fiscal year, 10 manufacturers or retailers were fined, ranging from $100,000 to $1 million.
• In the 2004-2005 fiscal year, 8 manufacturers were fined with fines ranging from $300,000 to $4 million. The difference with the fines in this year is that many of them involved multiple violations (eg, late reporting or no reporting for different products over different periods of time).

Simply dividing the number of different products involved into the fines where multiple violations occurred results in an approximate fine of between $300,000 and $400,000 per product problem.

It is now much easier to review the publicly available information concerning civil penalties. The CPSC Web site (www.cpsc.gov/businfo/businfo.html) conveniently has organized the civil and criminal penalty cases by company, fiscal year, and product. Therefore, anyone can review the facts surrounding each of these cases.

This author reviewed all of the penalty matters for the last 5 years and came up with some common threads. In many of the penalty cases, one of the following things occurred:

1) The manufacturer made a design or manufacturing change (sometimes several times) because of a safety issue (in the eyes of the Commission, it was fixing a defective product) and did not report to the CPSC or notify prior customers about the change.

2) The manufacturer issued a dealer alert (sometimes several) concerning a safety problem and did not report to the Commission or alert its customers.

3) The manufacturer supplied incomplete or inaccurate information to the CPSC when it investigated a safety issue.

4) The CPSC had to request the manufacturer to provide information.

Furthermore, during this time period, there were even several penalty cases where there were no injuries associated with the defect.

Despite these common threads, there are significant variations in the facts of each case involving the number of products versus the number of product failures and injuries and the time gap between the failures and injuries and the report by the manufacturer or the request from the CPSC for information.

Conclusion

Given the significant number of fines being levied and the increase in the potential for fines, it is clear that manufacturers and others in the chain of distribution should, when in doubt, err on the side of reporting.

As the CPSC has said over the years, a significant percentage of reports (last year, reportedly more than 40%) to the Commission do not result in any remedial action. As a result, it makes sense for the company seriously to consider reporting to the Commission, even if there is a possible defect and a small chance of a serious injury. In that case, you can report, deny that it is a substantial product hazard, and argue that no corrective action program is necessary.

Of course, it is possible that the CPSC will disagree and will encourage or try to force (by litigation) the manufacturer to undertake a remedial program. However, these actions are very rare and very difficult to sustain. Therefore, the prudent course of action may be, when in doubt, to report early and cut off any chance of a late reporting fine.

Kenneth Ross is of counsel to Bowman and Brooke LLP in Minneapolis. He has counseled manufacturers on CPSC issues for 30 years.