The Perfect Storm

Manufacturers and importers of consumer products already faced challenging legal and economic environments. Now there is a perfect storm on the horizon. This article cannot address the entirety of the Act's sweeping provisions, some of which only impact a narrow category of products. Instead, it discusses some of the litigation and compliance risks that all companies subject to the law will face. These risks include the prospect of new forms of litigation with private litigants, state attorneys general, and the CPSC; much higher civil penalties, felony liability and asset forfeiture; and increased exposure to traditional product liability litigation.

Several New Litigation and Discovery Burdens

The CPSIA creates new mechanisms for litigation by encouraging CPSC direct action over imminent product hazards, authorizing suits by state attorneys general, and providing whistleblower protections that are staggering in their breadth. Each of these promises to create new discovery burdens and risks for industry.

Imminent Hazard Actions

The CPSC has new powers to directly order product recalls and public notification in conjunction with the filing of an “imminent hazard action” in federal court. 15 U.S.C. ' 2064(c)(1). These “Section 12″ actions were previously permitted, but a court, not the CPSC, had to decide whether to order a product recall or other relief. Now, simply by filing an imminent hazard action, the CPSC can directly order the relief it previously could only obtain by court order (or after an administrative hearing). As a consequence of these actions, companies will face expedited discovery under the federal rules on short notice.

State Attorneys General

The new law also “deputizes” state attorneys general (“AGs”), and allows the AGs to deputize private law firms, thereby shifting substantial enforcement powers to the states. State AGs can seek injunctive relief in federal court to prevent the sale of products deemed “substantial product hazards,” including previously recalled products and any products that fail to comply with a standard or ban. AGs in Illinois, California and New York already have demonstrated that they will be very active on this front, which creates the potential for parallel litigation over the same issues in different forums.

For example, California's AG recently sued manufacturers of synthetic turf under Proposition 65 for civil penalties and injunctive relief, citing claims of toxic lead content. iThis directly conflicts with the CPSC's position that artificial turf is safe. In addition, expressing frustration over the Commission's alleged failure to enforce provisions of the new law that bans the sale of recalled products, the Illinois AG recently filed suit to stop post-recall sales of hazardous bassinets in secondary markets through online auctions and community resellers.

These reports demonstrate that manufacturers have reason for concern regarding the potential development of a patchwork of state and federal laws that impose conflicting obligations that will be enforced inconsistently by state and federal agencies. Of course, these state and federal enforcement proceedings will require companies to respond to discovery under applicable state and federal laws.

Whistleblower Actions

New whistleblower provisions cover employees of manufacturers, importers, private labelers (owners of a brand or trademark on the private label of a consumer product), distributors, and retailers. Terminated employees are protected by this law if they prove they were fired for raising what they “reasonably believe” to be a violation of any provision of the CPSA, or any order, rule, regulation, standard or ban under any Act enforced by the CPSC. How will the employee prove the claim? By seeking discovery under the federal rules designed to prove that the former employer's products are hazardous or violate a safety standard ' which will look nearly identical to the discovery companies face today in product liability actions. It also seems reasonable to expect that, upon learning of whistleblower filings involving imminent hazards or violations of safety standards, state attorneys general and the CPSC will be compelled to pursue independent investigations.

As a result of these new tools, judges frequently will be asked in the future to make public findings about product safety following expedited discovery. And despite aggressive use of protective orders and some confidentiality provisions in the law, it is reasonable to expect that sensitive internal information will end up in the public domain. Some commentators suggest this is no coincidence, noting that many provisions of the new law seem carefully orchestrated to benefit trial lawyers trolling for traditional product liability lawsuits and dubious consumer class actions.

Litigation, Not Cooperation

Dramatically higher civil penalties and new felony criminal provisions, including asset forfeiture, also will promote litigation with the government. In the past, the stakes were not as high, so civil and criminal penalty proceedings usually did not trigger litigation. Instead, they commonly resulted in voluntary settlements and plea agreements to avoid the risks and expenses associated with litigation, diversion of resources, and ongoing adverse publicity. Indeed, there is only one reported final civil penalty determination by a district court. United States v. Mirama Enters., Inc., 185 F. Supp. 2d 1148 (S.D. Cal. 2002).

Within the next year, however, the maximum civil penalty for violations of the CPSA will increase from $1.825 million to $15 million. The Congressional Budget Office estimates that the average penalty for larger cases will double under the new law, making multi-million dollar penalties the norm, rather than the exception. Faced with much higher proposed penalties, many companies may decide it is rational to invest more resources to litigate penalty disputes (resulting in yet more discovery).

On the criminal side, Congress removed the requirement that the CPSC must give written notice to corporations, and their officers, directors and agents, before imposing criminal liability. The elimination of this notice requirement places increased responsibility on corporate compliance departments to monitor their actions. The law provides for felony punishment of imprisonment up to five years, criminal fines up to $250,000 for individuals, and potential asset forfeiture, which may include disgorging of profits associated with an allegedly hazardous product the company failed to recall.

A surprising wrinkle in the new law is the possibility that corporations and their officers could face criminal liability for knowledge of reportable violations that existed before the CPSIA's enactment, but which have still not been reported under the new law. The law does not punish retrospective accumulation of information about reportable product hazards but, rather, criminalizes the ongoing failure to report that information after the CPSIA's enactment on Aug. 14, 2008. Because any criminal enforcement would be based on an ongoing failure-to-report after the law's enactment, it would not violate the Ex Post Facto Clause of the U.S. Constitution. United States v. Russell, 186 F.3d 883 (8th Cir. 1999).

Although criminal prosecutions have been rare in the past, political pressures and the DOJ's new ability to obtain felony convictions (and related media coverage) will produce more frequent prosecutions in the future. Also, the CPSC may decide to use the filing of criminal enforcement proceedings (or the mere threat of filing) to leverage higher civil penalties. Corporate officers and directors facing felony charges and imprisonment will aggressively defend these cases, which will result in still more discovery.

Impact on product liability actions

After companies have been “softened up” by litigation and formal discovery with the Commission, state AGs (supported by private firms), disgruntled employees, and the DOJ, they will face traditional consumer class actions and product liability suits. Plaintiffs' lawyers in these suits will have the benefit of the information obtained during discovery in prior enforcement and whistleblower proceedings, which they will use to construct a one-sided story designed to inflame juries and trigger punitive damage awards.

The CPSIA's enhanced disclosure provisions, which mandate the creation of a public database for product-related injuries and deaths, will aid them in their mission. The public database provisions provide little or no recourse for companies to verify reported information. Once activated, the database will be a repository of information that can be expected to further increase discovery burdens and battles over the admissibility of “other similar incidents.” Juries are very sensitive to evidence of repeat product safety violations, and some jurisdictions may allow juries to hear “evidence” from the new public database in support of punitive damages, even if the evidence does not necessarily relate to substantially similar incidents. Buell-Wilson v. Ford Motor Co., 160 Cal. App. 4th 1107 (Cal. Ct. App. 2008).

Conclusion

Since the passage of CPSIA, the media and many companies have focused on short-term compliance with new certification and third-party testing requirements. However, the long-term litigation risks created by the law merit every company's attention. The CPSC is in the process of extensive rulemaking on many important issues, and has invited interested parties to submit questions and comments. Impacted companies should seize this opportunity. In addition, companies should carefully consider conducting audits of existing product safety files to determine whether “abundance of caution” reporting may be in their best interests before the increased civil penalty provisions take effect. Finally, companies should conduct training on compliance with the new law and update existing policies and reporting structures, taking into consideration the new whistleblower provisions. Comprehensive planning is necessary to manage the many risks presented by the coming storm.

John W. Moss is a litigation partner in Winston & Strawn's Washington, DC, office. Michael Del Negro is a senior litigation associate in same office.

Congress passed the Consumer Product Safety Improvement Act (CPSIA) in August in response to a perceived product safety crisis arising from several recent high-profile recalls of imported children's products. Many viewed the legislation as a child protection law passed to prevent dangerous imports from hitting domestic store shelves before this year's holiday shopping season. It therefore enjoyed overwhelming bipartisan support, despite objections from industry, trade associations and the White House. The law gives the Consumer Product Safety Commission (“CPSC”) new enforcement powers to police violations related to consumer products, and other products and substances.

Unintended Consequences

When Congress passes new legislation in a crisis environment, the legislation typically has unintended consequences, and the CPSIA is no exception. The new law's reach extends far beyond children's toys and will impact manufacturers, importers, distributors, and retailers of more than 15,000 consumer products. But its reach goes further still ' the law explicitly broadens the CPSC's policing and enforcement powers to cover violations of the Federal Hazardous Substances Act (FHSA), the Flammable Fabrics Act (FFA), the Poison Prevention Packaging Act (PPPA), the Refrigerator Safety Act, the Children's Gasoline Burn Prevention Act and the (new) Virginia Graeme Baker Pool and Spa Safety Act ' making it a violation to sell, manufacture for sale, or import any consumer product, or other product or substance that fails to comply with any rule, regulation, standard or ban under the CPSA, or any other Act enforced by the CPSC.

Manufacturers and importers of consumer products already faced challenging legal and economic environments. Now there is a perfect storm on the horizon. This article cannot address the entirety of the Act's sweeping provisions, some of which only impact a narrow category of products. Instead, it discusses some of the litigation and compliance risks that all companies subject to the law will face. These risks include the prospect of new forms of litigation with private litigants, state attorneys general, and the CPSC; much higher civil penalties, felony liability and asset forfeiture; and increased exposure to traditional product liability litigation.

Several New Litigation and Discovery Burdens

The CPSIA creates new mechanisms for litigation by encouraging CPSC direct action over imminent product hazards, authorizing suits by state attorneys general, and providing whistleblower protections that are staggering in their breadth. Each of these promises to create new discovery burdens and risks for industry.

Imminent Hazard Actions

The CPSC has new powers to directly order product recalls and public notification in conjunction with the filing of an “imminent hazard action” in federal court. 15 U.S.C. ' 2064(c)(1). These “Section 12″ actions were previously permitted, but a court, not the CPSC, had to decide whether to order a product recall or other relief. Now, simply by filing an imminent hazard action, the CPSC can directly order the relief it previously could only obtain by court order (or after an administrative hearing). As a consequence of these actions, companies will face expedited discovery under the federal rules on short notice.

State Attorneys General

The new law also “deputizes” state attorneys general (“AGs”), and allows the AGs to deputize private law firms, thereby shifting substantial enforcement powers to the states. State AGs can seek injunctive relief in federal court to prevent the sale of products deemed “substantial product hazards,” including previously recalled products and any products that fail to comply with a standard or ban. AGs in Illinois, California and New York already have demonstrated that they will be very active on this front, which creates the potential for parallel litigation over the same issues in different forums.

For example, California's AG recently sued manufacturers of synthetic turf under Proposition 65 for civil penalties and injunctive relief, citing claims of toxic lead content. iThis directly conflicts with the CPSC's position that artificial turf is safe. In addition, expressing frustration over the Commission's alleged failure to enforce provisions of the new law that bans the sale of recalled products, the Illinois AG recently filed suit to stop post-recall sales of hazardous bassinets in secondary markets through online auctions and community resellers.

These reports demonstrate that manufacturers have reason for concern regarding the potential development of a patchwork of state and federal laws that impose conflicting obligations that will be enforced inconsistently by state and federal agencies. Of course, these state and federal enforcement proceedings will require companies to respond to discovery under applicable state and federal laws.

Whistleblower Actions

New whistleblower provisions cover employees of manufacturers, importers, private labelers (owners of a brand or trademark on the private label of a consumer product), distributors, and retailers. Terminated employees are protected by this law if they prove they were fired for raising what they “reasonably believe” to be a violation of any provision of the CPSA, or any order, rule, regulation, standard or ban under any Act enforced by the CPSC. How will the employee prove the claim? By seeking discovery under the federal rules designed to prove that the former employer's products are hazardous or violate a safety standard ' which will look nearly identical to the discovery companies face today in product liability actions. It also seems reasonable to expect that, upon learning of whistleblower filings involving imminent hazards or violations of safety standards, state attorneys general and the CPSC will be compelled to pursue independent investigations.

As a result of these new tools, judges frequently will be asked in the future to make public findings about product safety following expedited discovery. And despite aggressive use of protective orders and some confidentiality provisions in the law, it is reasonable to expect that sensitive internal information will end up in the public domain. Some commentators suggest this is no coincidence, noting that many provisions of the new law seem carefully orchestrated to benefit trial lawyers trolling for traditional product liability lawsuits and dubious consumer class actions.

Litigation, Not Cooperation

Dramatically higher civil penalties and new felony criminal provisions, including asset forfeiture, also will promote litigation with the government. In the past, the stakes were not as high, so civil and criminal penalty proceedings usually did not trigger litigation. Instead, they commonly resulted in voluntary settlements and plea agreements to avoid the risks and expenses associated with litigation, diversion of resources, and ongoing adverse publicity. Indeed, there is only one reported final civil penalty determination by a district court. United States v. Mirama Enters., Inc. , 185 F. Supp. 2d 1148 (S.D. Cal. 2002).

Within the next year, however, the maximum civil penalty for violations of the CPSA will increase from $1.825 million to $15 million. The Congressional Budget Office estimates that the average penalty for larger cases will double under the new law, making multi-million dollar penalties the norm, rather than the exception. Faced with much higher proposed penalties, many companies may decide it is rational to invest more resources to litigate penalty disputes (resulting in yet more discovery).

On the criminal side, Congress removed the requirement that the CPSC must give written notice to corporations, and their officers, directors and agents, before imposing criminal liability. The elimination of this notice requirement places increased responsibility on corporate compliance departments to monitor their actions. The law provides for felony punishment of imprisonment up to five years, criminal fines up to $250,000 for individuals, and potential asset forfeiture, which may include disgorging of profits associated with an allegedly hazardous product the company failed to recall.

A surprising wrinkle in the new law is the possibility that corporations and their officers could face criminal liability for knowledge of reportable violations that existed before the CPSIA's enactment, but which have still not been reported under the new law. The law does not punish retrospective accumulation of information about reportable product hazards but, rather, criminalizes the ongoing failure to report that information after the CPSIA's enactment on Aug. 14, 2008. Because any criminal enforcement would be based on an ongoing failure-to-report after the law's enactment, it would not violate the Ex Post Facto Clause of the U.S. Constitution. United States v. Russell , 186 F.3d 883 (8th Cir. 1999).

Although criminal prosecutions have been rare in the past, political pressures and the DOJ's new ability to obtain felony convictions (and related media coverage) will produce more frequent prosecutions in the future. Also, the CPSC may decide to use the filing of criminal enforcement proceedings (or the mere threat of filing) to leverage higher civil penalties. Corporate officers and directors facing felony charges and imprisonment will aggressively defend these cases, which will result in still more discovery.

Impact on product liability actions

After companies have been “softened up” by litigation and formal discovery with the Commission, state AGs (supported by private firms), disgruntled employees, and the DOJ, they will face traditional consumer class actions and product liability suits. Plaintiffs' lawyers in these suits will have the benefit of the information obtained during discovery in prior enforcement and whistleblower proceedings, which they will use to construct a one-sided story designed to inflame juries and trigger punitive damage awards.

The CPSIA's enhanced disclosure provisions, which mandate the creation of a public database for product-related injuries and deaths, will aid them in their mission. The public database provisions provide little or no recourse for companies to verify reported information. Once activated, the database will be a repository of information that can be expected to further increase discovery burdens and battles over the admissibility of “other similar incidents.” Juries are very sensitive to evidence of repeat product safety violations, and some jurisdictions may allow juries to hear “evidence” from the new public database in support of punitive damages, even if the evidence does not necessarily relate to substantially similar incidents. Buell-Wilson v. Ford Motor Co. , 160 Cal. App. 4th 1107 (Cal. Ct. App. 2008).

Conclusion

Since the passage of CPSIA, the media and many companies have focused on short-term compliance with new certification and third-party testing requirements. However, the long-term litigation risks created by the law merit every company's attention. The CPSC is in the process of extensive rulemaking on many important issues, and has invited interested parties to submit questions and comments. Impacted companies should seize this opportunity. In addition, companies should carefully consider conducting audits of existing product safety files to determine whether “abundance of caution” reporting may be in their best interests before the increased civil penalty provisions take effect. Finally, companies should conduct training on compliance with the new law and update existing policies and reporting structures, taking into consideration the new whistleblower provisions. Comprehensive planning is necessary to manage the many risks presented by the coming storm.

John W. Moss is a litigation partner in Winston & Strawn's Washington, DC, office. Michael Del Negro is a senior litigation associate in same office.