Recalls of defective products are costly undertakings, especially when potential adverse publicity is considered in addition to money actually spent on returns, repairs, or exchanges of the products. As costly as a recall may be, however, it can be costlier still if the manufacturer or retailer neglects to advise the United States Consumer Product Safety Commission (the Commission) of the defective product, when the defect poses a safety threat to the consumer.
In January, for example, the Hoover Company agreed to pay a $750,000 penalty to settle allegations the company failed to report to the Commission the sale of vacuum cleaners with defective switches that could cause the vacuum cleaners to catch fire. Every proper risk management plan, therefore, needs to include protocols for contacting the Commission when the company learns one of its products may pose a risk of injury to a consumer.
The federal Consumer Product Safety Act requires that every manufacturer, distributor and retailer report to the Commission a product that fails to comply with an applicable consumer product safety rule, whether statutory or voluntary, or contains a defect that could create a substantial product hazard, or creates an unreasonable risk of serious injury or death. Failure to report a substantial product hazard can result in significant penalties. The Commission was formed with the passage of the Consumer Product Safety Act, which authorizes the Commission to determine the amount of penalty for any noncompliance.
Substantial product hazard reports must be made by the chief executive officer of a company, unless a delegation of authority has been filed previously with the Commission. The report must be made within 24 hours after the company has obtained information that reasonably supports the conclusion that a product violates a safety rule or voluntary consumer standard, contains a defect, or creates an unreasonable risk of serious injury or death. Recognizing that it may take some time for knowledge of a defect to reach the officers of a company, however, the rules consider the company to have knowledge of a defect five days after an employee has received information of a potential safety issue with a product. The company may also conduct a reasonably quick investigation to determine whether, in fact, a substantial product hazard report should be made. That investigation should not ordinarily exceed 10 days.
The report may be made in writing or on line at www.cpsc.gov. Whatever the medium, however, an initial report should contain an identification and description of the product, the name and address of the manufacturer or importer, the nature and extent of the failure to comply, the nature and extent of the injury or risk of injury associated with the product, the name and address of the person informing the Commission and as much information as required in a full report as reasonably available. The information required in a full report is detailed in the U.S. Code of Federal Regulations, at 16 C.F.R. § 1115.13(d). A distributor or retailer may satisfy the reporting requirement by sending a letter addressing the noncompliance to the manufacturer with a copy to the Commission. Further information may be required, unless the Commission staff determines there is no substantial product hazard.
Special Investigations Unit
The Commission has recently established a Special Investigations Unit in the Office of Compliance, to ferret out products that pose safety risks to the consumer. The stated mission of the unit is to discover and develop leads about hazardous products from a wide range of sources and enhance the Commission's current compliance and recall activities. However, because those leads will originate from sources other than the company's own self-report, the Commission may be expected to uncover, and fine, more violations for failure to report than it has in the past. Consumers may also report safety concerns directly to the Commission, in a user-friendly, on-line format.
Beginning January 1, 2005, the maximum penalty that may be imposed for a failure to report a nonconforming product is $8,000 for each violation. The Ninth Circuit has recently interpreted that penalty provision to mean that a penalty may be imposed for each unit in the stream of commerce. United States v. Mirama Enterprises, 387 F.3d 983, 987 (9th Cir. (Cal.) 2004). In other words, a penalty may be imposed for each product sold or waiting to be sold by the retailer, whether on the floor or in the stockroom.
While the stated maximum penalty for any related series of violations is $1,825,000, the Commission reached a record $4 million settlement agreement in a failure-to-report case in 2005, following the Mirama decision. In 1995, the average penalty meted out or reached by agreement with the Commission was a little under $65,000. By 2005, however, the average penalty exceeded $1,000,000. Surprisingly, 2006 saw a reversal of this upward trend. However, any penalty, coupled as it must be with additional adverse publicity, is a high price to pay for failure to report a safety problem to the Commission.
Seller (and manufacturer and distributor), beware.
Disclaimer: This is intended to be a source of general information, not an opinion or legal advice on any specific situation, and does not create an attorney-client relationship with our readers. If you would like more information regarding whether we may assist you in any particular matter, please contact one of our lawyers, using care not to provide us any confidential information until we have notified you in writing that there are no conflicts of interest and that we have agreed to represent you on the specific matter that is the subject of your inquiry.
Emilia L. Sweeney is a shareholder at Seattle-based law firm Lane Powell, where she focuses her practice on commercial litigation and regulatory advice. She can be reached at (206) 223-2000 or [email protected].