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HOW TO AVOID A $15 MILLION HEADACHE
Author: Eric L. Stone

Headline, March 25, 2016: "Gree Agrees to Pay Record $15.45 Million Civil Penalty…" The Gree civil penalty, was the realization of long promises— or threats, depending on your position—by Commissioners of the Consumer Product Safety Commission "CPSC") to significantly increase the size of civil penalties. In the wake of Gree and other cases, CPSC's Commissioners have engaged in a robust debate regarding whether the CPSC's civil penalty process furthers the CPSC's policy goals or new approaches are needed. While this debate has been of interest to those of us who follow CPSC legal and policy issues, it has added little to our understanding of when a report is required or our ability to predict future penalty amounts.

To help firms meet CPSC's expectations, minimize the risk of being pursued for civil penalties, and reduce any future liability, we must look both at the law and the CPSC's penalty practice for more practical insights.

The Reporting and Penalty Law
Section 15(b) of the Consumer Product Safety Act ("CPSA"), 15 U.S.C. § 2064(b) requires "every manufacturer [and every distributor, and retailer] of a "consumer product," or other product or substance over which the Commission has jurisdiction. . .who obtains information which reasonably supports the conclusion that such product—(3) contains a defect which could create a substantial hazard . . or (d) creates an unreasonable risk of serious injury or death."

"CPSC has written two interpretive rules that provide insight into the CPSC's views affecting penalties: the Commission's rules governing "Substantial Product Hazard Reports", 16 CFR 1115, and "Civil Penalty Factors," 16 CFR 1119."

A failure to "furnish information" under section 15(b) of the CPSA is considered a "prohibited act" under section 19(a)(4) of the CPSA, 15 U.S.C. § 2068(a)(4) and a "knowing" violation can result in civil penalties ranging up to $100,000 per product or $15 million (adjusted periodically based on the rate of inflation) for any "related series of violations." Section 20(a)(1) of the CPSA, 15 U.S.C.§ 2069(a)(1). The term "knowing" may mean actual or "presumed knowledge" that a firm should have had.

CPSC has written two interpretive rules that provide insight into the CPSC's views affecting penalties: the Commission's rules governing "Substantial Product Hazard Reports", 16 CFR 1115, and "Civil Penalty Factors," 16 CFR 1119.

Since 1978, the Commission's reporting rules have provided guidance about the meanings of statutory terms such as "defect", "unreasonable risk", and the definition of "substantial product hazard." Those rules also discuss how firms should evaluate safety information, and provide insight into CPSC's expectations about the timing and details of any report. In applying this rule, the CPSC has always advised firms that they should "err on the side of reporting" when faced with difficult reporting calls.

The more recent rule, "Civil Penalty Factors," provides CPSC guidance about factors that the statute says the CPSC is supposed to consider when it seeks to assess, or to compromise a penalty. Those factors include the "nature, circumstances, extent, and gravity of the violation, including the nature of the product defect, the severity of the risk of injury, the occurrence or absence of injury, the number of defective products distributed, the appropriateness of such penalty in relation to the size of the business of the person charged, including how to mitigate undue adverse economic impacts on small businesses, and such other factors as appropriate." [Section 20(b) of the CPSA, 15 U.S.C. § 2069(b)]. CPSC interprets the term "other factors" to include the existence or absence of safety/compliance programs, history of non-compliance, economic gain from non-compliance, and the failure of the firm to respond in a timely and complete fashion to requests from the CPSC for information or remedial action. [16 CFR 1119.4(b).]

Practical Considerations
In the internal CPSC debate, the majority has made pretty clear that they are unlikely to provide greater reporting and penalty guidance. They believe the reporting criteria are already sufficiently clear and provide sufficient guidance to allow firms to make reporting decisions. Nor are they inclined to adopt a formula that governs how the penalty criteria will be weighted in future cases or to otherwise fine tune the process to better achieve their policy goals. We must look to CPSC practice, including settled and litigated cases, to help us predict what the CPSC might consider to be a fair penalty in various circumstances.

"Every firm should insure that it has a good safety system(s) that allows it to collect and regularly evaluate safety information and comply with the law."

Since our space is limited, lets focus on a few basic points that every manufacturer, distributor, and retailer of a CPSC regulated product should consider as they seek to comply with the law and avoid penalties for failure to report or late reporting.

Good systems: In its penalty settlements, the CPSC staff has insisted that firms agree to maintain "compliance programs" that reflect elements the CPSC believes are necessary for a firm to have a "good system" for managing safety information and reporting.

Every firm should insure that it has a good safety system(s) that allows it to collect and regularly evaluate safety information and comply with the law. Firms should look at the most recent CPSC penalty cases for guidance about what the CPSC considers necessary in such a system. To date, CPSC expectations include that such systems be in writing, that firms will advise their employees of the system, that they will provide employees with a way to confidentially bring safety information to the attention of responsible officials, that high level officials of the firm will have oversight over reporting decisions, and that the firm will document its system, maintain records for at least 5 years, and provide information to the CPSC upon request.

While not expressly addressed in these settlements, firms should attempt to review safety data without structural or attitudinal biases that might minimize the perception of risk. An employee involved in the design or marketing of a product may be an important resource in understanding the product, but not be the best person to evaluate whether an incident is due to unusual consumer behavior rather than design or warning choices. Use of internal or external experts who are able to provide an unbiased view of incident and other safety data reduces the risk of mistakes—or later differences of opinion with the staff--that can lead to civil penalties.

Reporting
Reporting threshold: Everyone who has looked at safety data as it comes in knows that it is often difficult at early stages to evaluate whether a defect or a significant risk exists. Incident reports may not include much detail about what happened, the product may not be available, conclusions and patterns may be difficult to identify. The CPSC staff often looks at evidence of the accumulation of product incidents—whether they involve actual injuries—as a sign that a firm should have recognized the existence of a reportable defect even if such defect was not identified.

When possible, firms should review incidents for patterns or indications of a defect or patterns of failure. Unless a firm has the ability to assess those incidents and show that they do not relate to a particular defect or unreasonable risk in the product, or can show that the risk of injury is so low it could not create a substantial product hazard, a firm must consider reporting.

Firms cannot rely solely on probabilistic risk assessments in making low risk determinations. In both penalty cases and statements, the staff and Commissioners have argued that the absence of actual injuries does not mean the risk of injury was not substantial. For this reason, firms with an accumulation of incidents that might—but are not likely to--result in a future injury will have to decide whether to "err on the side of reporting" or risk possibly being second-guessed later if the CPSC disagrees with their analysis. At the least, a firm that is convinced it does not have a reportable situation, should consider documenting its analysis to document their careful consideration of the available data and the statutory criteria so in any future investigation the staff can see that a good faith effort was made to determine whether a report was needed.

CPSC often look for evidence beyond incidents as evidence a firm should have reported. Product issues that cause a firm to think about changes to their design, manufacturing process, warnings, or instructions should also lead to a serious consideration of reporting. CPSC will often look at such "product improvements" as indicia of "guilty knowledge." Firms that wish to improve their product must consider whether a report is necessary to avoid future penalties. Once again, firms that do not believe they have a reporting obligation must carefully consider whether it is necessary to create a clear record of their decision-making process.

"At the least, a firm that is convinced it does not have a reportable situation, should consider documenting its analysis to document their careful consideration of the available data and the statutory criteria so in any future investigation the staff can see that a good faith effort was made to determine whether a report was needed."

Program Review
Re-evaluate, re-evaluate, re-evaluate: Any compliance program should include constant re-evaluation of data about a product as new information comes in or new understanding of the use and function of the product develops. A new incident might shed light on a problem, an expert report or evaluation may disclose more about the failure mode of a product, a supplier might mention something that indicates the existence of a previously unrecognized or unknown manufacturing problem or product variation, a customer might test a product, or raise a question about its performance. New incidents may disclose that what looked like unusual consumer behavior is more likely than initially expected. Periodic re-evaluation of what is known about each product is critical to being able to identify reportable issues.

Don't get caught up in lengthy analysis or deliberation: The CPSC reporting rule requires a report within 24 hours of "obtaining" reportable information. CPSC recognizes that a short period of time may be needed for product safety information to make its way to a responsible official, [up to 5 days, 16 CFR 1115.14(b)]. The rule also recognizes that at first it may not be clear whether product information meets the reporting thresholds and allows firms some time to investigate and evaluate the data. [up to 10 days, 16 CFR 1115.14(d)]. However, firms should hear the ticking of the reporting time bomb. Their—not always easy task--is to determine whether to report before it detonates.

This applies not only to internal investigations. An importer, distributor, or retailer may learn about product incidents or failures and follow-up by asking their supplier or the original manufacturer questions. While firms are wise to raise issues with a more knowledgeable party, the CPSC will expect that a firm will use its own judgment in evaluating the information it is receiving back, and to independently make a determination whether a report is necessary.

Attempting to get your supplier to address concerns, and when necessary to report and recall the product, can fulfill many of your obligations. However, if this process drags out too long, the CPSC may secondguess whether a report, when ultimately filed, was "timely." In cases where the staff believes it was not, they may seek a substantial penalty even from a firm that was essentially doing the CPSC's work by pushing for a resolution, a report, and a recall.

The CPSC reporting rule allows distributors and retailers to meet their initial reporting obligations by sending the manufacturer a letter identifying their concern and copying the CPSC staff. [16 CFR 1115.13(b). It would not be unusual for the CPSC to follow-up to seek whatever additional information the firms have about the issue.] While this may lead to unnecessary or premature disclosure of what may not be a reportable issue to the CPSC, one needs to weigh the risk of a penalty along with other relevant factual and legal factors.

Regulatory Relationship
Show your best face: CPSC usually knows little about firms, their ethics, culture, and their desire to comply with the laws and produce safe products. It often makes judgments—at least in part—based on how firms behave during their interactions with staff. It is, therefore, critical that firms show the CPSC that they are responsible corporate citizens attempting to do the right thing. This means being as straightforward and honest as possible with the staff in addressing the product and any problems.

The defensiveness one might apply to an opponent in a litigation situation will not charm the staff or demonstrate to them your commitment to product safety. In addition, as noted above, the completeness and timeliness of the firm's responses to the staff will be considered as an "other" factor affecting penalties. [16 CFR 1119.4(b)(4)] False or misleading statements, or mis-statements of fact, may—and have in fact--provided the basis for higher penalties or even criminal prosecution in some cases.

Firms may not always agree with the staff about the potential defect and risk, and may wish to educate them or get them to reconsider. The methods used can make a difference in how the firm is perceived. Lengthy delays, failure to acknowledge the obvious, and misunderstanding of the staff position and goals will not help your cause. While it is difficult to give guidance that fits every case, a firm's positions are often best communicated through in person communications that allow give and take with the technical staff to answer all of their questions, and allow the firm's interest in safety and candor to be communicated. But the staff is busy, and will resist meetings or calls that appear unnecessary or intended to delay, rather than to assist. Each case is different and careful consideration of the options with a knowledgeable product safety representative or consultant is necessary.

I've received a timeliness investigation or show cause letter, now what do I do? Every case is different and the correct approach requires careful consideration with your representative or consultant. Generally, firms should attempt to cooperate with all reasonable requests, engage with the staff counsel as much as she or he allows, and make certain to explain issues in a way that allows a technical novice to understand the product and the reasonableness of the firm's actions. If the staff indicates it intends to seek a penalty, a firm's strategy will be more successful if it is based on a forthright consideration of the facts and legal issues in the case and the potential strategic approaches to resolving the matter.

"False or misleading statements, or mis-statements of fact, may—and have in fact--provided the basis for higher penalties or even criminal prosecution in some cases."

That being said, while engaged in any discussion or negotiation with the staff, it is important to remember a few things. As noted above, despite a firm's best efforts, the staff may not seem to understand the product or the actions of the firm or may infer motivations or reasons for actions that appear unfair. Even though it may seem that the legal staff is not interested in understanding—or even hearing--a firm's position, and appear not to be giving credence to valid factual or legal arguments, it is often the case that behind the scenes the staff is actually considering the arguments made and adjusting its position accordingly.

Of course, the CPSC investigation and even an attempted negotiation of a settlement are not necessarily the end of the process. CPSC cases must be referred to the Department of Justice for prosecution, and making your record before the staff may allow the Commissioners, and ultimately the Justice Department attorney, to ask the staff the correct questions, put the case in some perspective, and provide the basis for an eventual fair resolution.

Conclusion
While there is no way under the current system to insure that the staff will always agree with your decision- making, trust your motives, and refrain from demanding penalties, applying these tips may limit your exposure and place you in a better position to limit the damage that might result from any disagreement.

 

Eric L. Stone is a principal in the Law Offices of Eric Stone, LLC. Eric spent over 33 years at the Consumer Product Safety Commisssion serving as an attorney, Director of the Legal Division, and Acting Director of the Recalls and Compliance Divsion with the CPSC's Office of Compliance.
Email: [email protected]


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