2016 – Already a Record Year for CPSC Civil Penalty Settlements

At only the halfway point in 2016, the U.S. Consumer Product Safety Commission (“CPSC” or the “Commission”) has already broken last year’s record for total amount of civil penalties. Thanks in part to the largest CPSC civil penalty ever ($15,450,000); the CPSC has already negotiated in excess of $23 million in civil penalty settlements. This is $5.3 million more than 2015’s $18,400,000, which was itself a record. In light of this, and in light of recent comments by CPSC Chairman Elliot Kaye, consumer product manufacturers really need to make sure that they have effective strategies in place for monitoring and, if necessary, promptly reporting potential hazards to the CPSC.

The basis for CPSC civil penalties is found in Section 15(b) of the Consumer Product Safety Act (CPSA), which requires manufacturers, retailers, and importers to report immediately (within 24 hours) to the CPSC if they obtain information that reasonably supports the conclusion that a product they sell: (1) fails as to an applicable CPSC safety rule; (2) contains a defect that could create a substantial product hazard; or (3) creates an unreasonable risk of death or serious injury. 15 U.S.C. § 2064 (2016). Failure to immediately report, amongst other things, can result in a civil penalty. 15 U.S.C. §2068 - § 2069 (2016).  

Failure to immediately report has been the predominant reason for the imposition of civil penalties in recent years and, indeed, all eight of the civil penalties issued in calendar years 2015 and 2016 were for alleged failures to immediately report. The CPSC has stated that the reporting threshold is low, and companies should err on the side of over-reporting. Indeed, the CPSC has been requiring reporting based on far less notice of a hazard than in previous years and for arguably less egregious product hazards. The Commission also appears to no longer be permitting manufacturers to conduct extended investigations into consumer allegations prior to filing a report.      

Civil penalties imposed by the CPSC can be very large, and have only been getting larger since passage of the Consumer Product Safety Improvement Act of 2008 (CPSIA). The CPSIA increased the amount of civil penalties the CPSC may issue.  Under the CPSIA, the CPSC may issue civil penalties of up to $100,000 per violation, with a $15,000,000 cap for a series of related violations (the pre-CPSIA amounts were $8,000 and $1,825,000 respectively). 15 U.S.C. § 2069 (2016). These penalty increases went into effect on August 14, 2009, and the average settlement amount and settlement ranges have been increasing since that time.  

Additionally, during his keynote address at the 2016 International Consumer Product Health & Safety Organization annual meeting, Chairman Kaye went out of his way to: reiterate his call for higher civil penalties; express his hope to see the first “double digit” million dollar penalty; warn that there would be public announcements of referrals to the U.S. Department of Justice when settlements with the Commission are not reached; and, let manufacturers know that criminal referrals to the DOJ were on the table.   

With the March 25, 2016 announcement of the record $15,450,000 civil penalty settlement with Gree, it became clear that Chairman Kaye’s timeline was quicker than many had thought. Although based upon the relatively few facts made available to the public, which included: the alleged failure to immediately report that a defect in Gree’s dehumidifiers could cause the machines to overheat and catch fire; knowingly making misrepresentations to CPSC staff during the investigation; knowingly selling the dehumidifiers with the UL safety certification mark, knowing they did not meet UL flammability standards; and, making design changes without reporting them to the CPSC, it is possible that this case will remain an outlier. Even if a maximum penalty remains rare, however, the other 2016 civil penalty settlements – $3,750,000 and $4,500,000 – make it clear that even in a close case (both were approved in a 3-2 vote by the Commissioners) garden variety failure to report case, manufacturers can now expect civil penalties approaching $5 million.  

In addition to these large dollar amounts, the Commission also recently made good on Chairman Kaye’s warning that the Commission would publicly announce referrals to the DOJ. The Commission recently announced that, by a 4-1 vote, the Commission voted in favor of asking the DOJ to seek civil penalties against a drug manufacturer for not reporting a possible hazard posed to children from non-child resistant drug packaging sold between 2008 and 2012. Previously, no announcements were made unless and until a lawsuit was filed by DOJ. These public announcements, along with the possibility of criminal referrals, put a lot of pressure on companies to settle penalties while the matter remains with the CPSC staff.

In order to avoid record civil penalties, public announcements of referrals to DOJ, and possible criminal prosecution, companies need to preemptively make sure that they have effective strategies in place for monitoring and, if necessary, promptly reporting potential hazards to the CPSC. By having in place things like written policies and procedures for reviewing consumer and retailer incident reports for safety issues, along with effective communication of the policies and procedures, and senior management responsibly, companies can make reasoned and conscious decisions on whether a reporting obligation has arisen. With policies and procedures in place in advance, companies may avoid the worst-case scenario of being blind-sided when the CPSC conducts its own inquiry.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.