Measure Twice; Cut Once

A couple of years ago, I did an addition to my house.  Everyone who has done this knows the steps.  I sat down with an

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architect to discuss exactly what I wanted to accomplish with the project.   A rough design was done and then refined in a set of blueprints that was put out for bid.  Since my budget was limited, the plans had to be readjusted to fit both my needs and my resources before they could be finalized.  Only then did we go to the relevant regulatory bodies to seek the required permits and approvals to do the project.

I thought of this process last week while I listened to the CPSC Chairman and Commissioners describe their desire to greatly expand the agency’s import surveillance system at an oversight hearing before the Senate Commerce Committee.   In 2011, in response to Congressional direction, the agency initiated a pilot program to identify imports that violate safety standards.  The current pilot program subjects certain products from certain countries/suppliers to surveillance prior to import under a computer rule set that predicts the possibility of violations. In other words, the computer looks at what is coming in and, using the rule set, flags those products that should be further examined by CPSC personnel.  As a pilot, it has worked well.  The agency now seeks to extend the program to all imports under its jurisdiction.  Such a program will be expensive and the agency has asked Congress for a significantly increased appropriation to build out the program and the authority to impose user fees on importers as a way to fund the program on a continuing basis.

The agency has a great deal of regulatory housekeeping to do before such a system is feasible.  The program will only work if the agency has the statutorily-required certificates of compliance from importers available in an electronic form.  These electronic certificates will provide the basic information to allow both the CPSC and its sister agency, Customs, to make initial judgments about compliance.  In 2013, the agency proposed to update its rules governing the creation and filing of e-certificates (at 16 C.F.R. §1110).  Unfortunately, the agency, in a good example of “wants” exceeding “needs”, proposed a rule that goes well beyond what is required by the statute, and, if finalized, would require importers to redesign reporting systems and impose many new and costly requirements.  I looked at the cost of the proposed system when I was a Commissioner and using agency estimates, determined that it would cost annually over $400 million – that is almost $1/2 billion—for importers to compile the paperwork to document tests and generate the certificates that reflect those tests. That is a lot of money for paper!

This rule has been one of the most controversial in the history of the agency.  Many comments have been filed and most of them have been critical of the proposed rule.  The agency now proposes to establish a pilot program to see if the rule will work.  Unfortunately, rather than establishing a pilot based on the learning found in the comments to the rule, the pilot will look much like the proposed rule.  And because it is so tied to the expanded import surveillance system, this rule remains on the agency’s near-term agenda for completion.

At the hearing last week, several commissioners discussed the agency’s import surveillance activities.  Chairman Kaye argued that seeking authority to expand its import surveillance activities is consistent both with Congressional desires expressed in the CPSIA and with the Presidential direction for closer coordination among agencies that handle imports.  However, the ever-thoughtful Commissioner Beurkle pointed out that the agency has yet to undertake a requirements analysis to identify the capabilities of an expanded system.  Both she and Commissioner Mohorovic expressed grave concerns about the status and substance of the agency’s proposed rule on electronic certificates with Commissioner Mohorovic suggesting that the agency was greatly underestimating the number of certificates that it would have to process. He also argued that the agency has yet to demonstrate how the rule would improve targeting of violators and suggested that a “trusted trader” program should be part of any final program.    Commissioner Beurkle suggested that an “incremental” approach to building out the system was a more prudent one than what the agency proposed.

While the Senate Committee did not dwell on the subject of user fees, there were differences of opinion both on the Committee and among the commissioners.  Again, Chairman Kaye voiced strong support for the notion of user fees to fund import surveillance activities while Commissioner Beurkle expressed concerns about the wisdom and the constitutionality of such a system.

It seems pretty apparent that the agency has much more planning to do before it should get the permits to build out this addition to its regulatory house.  The fact that so much of the planning and preparatory work that needs to proceed such a program is still “under construction” should give policy makers pause.  And the issue of how to fund the program does raise many policy issues.  User fees have a certain attractiveness and have been used before.  But the policy and legal implications of such an option should be more fully explored.  In this regard, last month the George Washington University Regulatory Studies Center published a study looking at the on-budget cost of regulations.  Among other things the study found that “in general, agencies that are at least partially funded by fees on the entities they regulate continue to grow at a faster rate than those that depend on appropriations from general funding” and that “agencies with independent funding authority will have significant increases in their outlays over the two-year 2015-2016 period.”  While this may or may not be a bad or a good result, it is something that should be understood before Congress, the agency and its stakeholders go down this road.

Planning is important.  It appears that the agency needs to work on its blueprint before it jumps into this new undertaking, not matter how important.

Penalty Factors Ought to Mean Something

For some time the product safety bar has been concerned about the apparently arbitrary manner in which penalties are assessed at the CPSC.  In 2010 the Commission adopted a rule that set forth the factors that must be considered in determining how penalties are assessed.  Unfortunately, since then, the agency has given only the slightest head-nod to these factors and has not applied them in any kind of rigorous, disciplined, or transparent manner.  Yet such transparency is important in helping the regulated community better understand how the agency defines the concept of “substantial product hazard” which is at the center of most penalty matters.

The problem with the Commission’s approach is well-illustrated by the $3.4 million settlement recently negotiated with Office Depot.  This case involved 1.4 million office chairs sold by the retailer over a ten year period.  Over those ten years, the company received 153 incident reports with 25 reported injuries only some of which required medical attention.  Commissioner Mohorovic has written a thoughtful statement in which he does apply the Commission’s penalty factors to this case.  His conclusion is that had the penalty factors actually been properly applied, the resulting penalty should have been much lower.  His statement is well worth reading.

The current chairman and former acting chairman have made public statements that penalties should, as a matter of course, increase across the board to reflect their view of Congressional intent in increasing the agency’s penalty authorities.  If it is going to be agency policy to push for increased penalties, then the agency owes it to the public to have a more transparent process for imposing penalties.  As Commission Mohorovic notes, currently there is little coherence in the agency’s approach to penalties. As a consequence, parties before the agency are left to struggle with an opaque process where the rules are written after the fact.  Such a result is bad public policy.

Cleaning the Attic

Last week during its meeting, the CPSC amended its operating plan to direct agency staff to prepare a plan for retrospective review of its regulations to assure that rules that need to be updated, streamlined, changed or repealed receive such action.  The Commission’s action deserves both notice and praise.

Four years ago, President Obama, in Executive Order 13610, asked independent agencies like the CPSC to undertake such a review of its rules.  In response, in 2012, the agency came up with a plan that fell far short of the President’s objective of building a regulatory culture that included, as a central tenant, a meaningful regulatory look back.  At the time, I expressed my concern that this 2012 plan was a fig leaf pretending to count for something larger.  So why is what the Commission adopted last week different from that adopted in 2012?

First, in the 2015 plan, the Commission recognizes the need to formalize and institutionalize retrospective review and imbue the process with appropriate staff resources to assure a meaningful and independent process.  Second, the Commission also recognizes important factors that qualify rules for review, including not only the rule’s utility in saving lives and reducing injuries but also how it contributes to cumulative burdens, imposes unnecessary international differences and imposes economic and paperwork burdens on those regulated that could be alleviated.  Finally, the plan asks staff to consider ways to appropriately plan for retrospective review when regulations are being initially drafted.  If such a review is anticipated when the rule is first adopted, then it is likely that the rule will actually be reviewed and the needed data will be available to facilitate such a process.

The Administrative Conference of the United States, which looks at issues inherent in the regulatory process, has recognized the value of a robust retrospective review process and has made valuable recommendations for best practices for such reviews.  As ACUS points out:

Without a high-level commitment, any regulatory lookback initiative runs the risk of devolving into an exercise of pro forma compliance.  This might not be an inevitable outcome, however.  If the relevant agency officials, including both those conducting retrospective reviews and those drafting new rules, come to view regulation as an ongoing process whereby agency officials recognize the uncertainty inherent in the policymaking exercise and continually reexamine their regulations in light of new information and evolving circumstances, a durable commitment can emerge. Regulatory review should not only be a backward-looking exercise; rather, it should be present from the beginning as part of an on-going culture of evaluation and iterative improvement.  Planning for reevaluation and regulatory improvement (including defining how success will be measured and how the data necessary for this measurement will be collected) should be considered an integral part of the development process for appropriate rules.

When the agency developed its 2012 plan, it was like a less-than-enthusiastic effort to clean the attic in an old house.  Lots of dust was raised but little substance was accomplished.  That is why I objected to it.  The current Commissioners have given the green light to a different outcome. The CPSC staff drafting the review plan should consider using the ACUS recommendations as the foundation for a review effort that will mark the CPSC as a leader in drafting safety regulations that are well-founded, practical and have long-term vibrancy and relevance.

Shihan vs Goliath, Addendum

It is nice to know that folks out there read what I write.  When I started this blog I really wanted to have a conversation with people who are impacted by the actions of the CPSC, both positively and otherwise.  In response to my last blog post, I got a response from Shihan Qu, among others, and I thought I would share his comments.

Shihan takes issue with my notion that the magnets rule applies only to magnet sets that are intended to be used as adult desk toys and manipulatives.  He reminds me that the final rule blew a hole through this interpretation when the Commission added the phrase “commonly used” to the definition of magnet set.  The definition states “magnets sets are aggregations of separable magnetic objects that are marketed or commonly used as a manipulative or construction item.”  By expanding the definition this way, all powerful small magnet spheres may well end up within this definition since it is the end user, not the manufacturer, who determines whether the product is regulated or not.  One problem is that US based industrial magnet companies who never considered themselves within the definition may well be in for a nasty surprise if their products fall into the hands of the wrong user.

In response to my observation that magnets are easily available for sale online, Shihan responds, “Indeed you can still purchase magnet spheres easily by searching “neocube” or “buckyball” online. The rest of the companies are based in China, and are not easily targeted by the CPSC like we are. As long as there is demand, there will continue to be suppliers who will provide them. What can the CPSC do about them, if anything?”

Finally, I again emphasize that, in its latest action, the CPSC has targeted Mr. Qu personally, as it did when it went after Craig Zucker, in his individual capacity, in the Buckyballs matter.  It seems that the agency is really prickly when it comes to young entrepreneurs who still think that they can challenge the government.  Oh, when will they grow up?!

However, for those who are not willing to accept the notion that the government is always right, this is a troubling development.  And for CPSC attorneys who represent small companies, best let your clients know that, apparently if you want to fight the CPSC, be prepared to put your entire bank account on the line.

Shihan vs Goliath

As the saga of the magnets ban continues to unfold, last week another chapter was added when the CPSC brought yet another action against Zen Cartoon David and GoliathMagnets, the one company that has refused the CPSC’s demand to do a recall.  But this time the agency sued not only the company but also its young founder, Shihan Qu, in his personal capacity.  The CPSC alleges that Zen purchased, and then illegally resold, the inventory of a competitor, Magnicube, that was negotiating a recall with the CPSC.

The law is pretty clear—it prohibits the sale of a product which a manufacturer (including an importer) has recalled.  However, Mr. Qu argues forcefully in the attached newsletter that the products were totally fungible, one magnet being indistinguishable from another, and it was still legal for him to sell magnets identical to those sold by his competitor.  Mr. Qu argues that Magnicube could have sent its remaining inventory back to the factory in China to be comingled with other identical magnets and then shipped to Zen–a more complex transaction but achieving the same result.

In raising this latest action by the federal government against tiny Zen Magnets, it is not my purpose to argue the merits of the case being brought.  Instead, I raise it because, to me, it poses questions of proportionality and discretion. I have repeatedly expressed my concerns about the agency’s troubling willingness to disregard fair process in an “ends justifies means” mindset, at least with respect to this product.   This latest action seems to smack of a vendetta against the one company that did not give in to the agency’s demands, especially since the issue of whether Zen’s magnets should be recalled is well into the latter stages of litigation and, presumably, will be resolved soon.

The government is no doubt arguing that its latest action is needed to keep products it sincerely believes are unsafe out of the hands of consumers.  However, as noted above, the exact same magnets were easily available to Zen from China at the time so the agency’s action would not accomplish this purpose.   Further, with a ban on prospective sales of these products now going into effect (unless it is overturned by judicial review at some point down the road), consumers seem to be protected.

Recalls—the remedy the agency was originally ostensibly seeking from Zen—have been totally ineffectual in getting this product out of consumers’ hands. (It seems consumers like the product and do not want to hand it over, even for money.)  And remember, in spite of the CPSC’s rule banning magnet sets sold as adult desk toys, it is possible to go online to buy sets of magnets, like those at issue here.  I did so this morning.  As long as they are not advertised as having entertainment value, they can be sold.

I wonder whether this latest action, rather than making the government appear strong, makes it appear vindictive and petty, given the force the federal government can bring against a tiny company that dares to challenge it.  I wonder whether the government could not have advanced whatever safety purpose it had in a less Goliath-like way. I am curious what you think.

The Real World Speaks; The Government Does Not Hear

Last week I traveled to St. Louis University to speak to students attending the school’s Product Safety Managementst-louis-cityscape Course.  This executive education course is presented by the Center for Supply Chain Management Studies at the Cook School of Business at the University and is unique in presenting a concentrated focus on product safety-related issues.  I was asked to discuss how the CPSC is organized and how agency policy and decisions get made and I discussed my perspectives, as a former commissioner, on the agency’s seemingly more contentious and less collaborative approach to product safety.

The class was made up of professionals from small, medium and global businesses with backgrounds that included law, engineering, business and science. The joy of opportunities like this is not only having several hours with engaged and very smart professionals in the classroom, but also having time outside of class to interact informally.  While I hope I imparted knowledge, I know that I learned a great deal.

Boiling it down to a sentence, here was my message to the class:  The CPSC is moving to more aggressive and expansive regulations and more aggressive and punitive enforcement.  For companies that want to stay out of the agency’s sights, they should consider, among other things,

  • implementing strategies to update and fine-tune their compliance programs;
  • making sure that they have appropriate written procedures for addressing safety complaints and can demonstrate those procedures are followed;
  • having and being able to show good control over their supply chain;
  • keeping good records to show a testing program, test results and compliance with applicable regulations; and
  • registering for the Business Portal of the Public Database as one device to know what some consumers are saying about their products.

Of course, safety must always be a core value of the company, and at all levels, including senior management.  Unless that is true, none of these efforts will be truly effective in minimizing a company’s exposure.

I also learned a great deal from the students.  One message especially resonated since it came from several different class members from different types of companies.  These students described the importance their companies placed on regulatory compliance in the face of very constrained resources.  They described the challenges of complying with different regulatory approaches to addressing the same risks, on local, state, national and international levels.  They described different testing methods to measuring compliance—tests mandated by regulatory bodies in the U.S and abroad and by cautious retail customers who want to assure that the CPSC does not appear on their doorstep and have the market power to make those tests happen—with all these tests differing one from the other.  The complaint I heard was that there is an expectation of compliance with no realistic understanding of the level of resource needed for full compliance, given the complexity of the myriad rules that have now been issued.  Nor is there any effort, or feeling of responsibility, on the part of the government to simplify those rules to make them less burdensome so that compliance can be more realistically achieved.

Bottom line from my Midwest journey:  The real world speaks but the government does not hear.

Phthalates NPR: A No-Win for CPSC

Assuming that the Commission does not vote to again extend it, the period for filing comments on its proposal to permanently ban certain phthalates closes in a few days.  At that point the monkey will be really on the back of the agency and none of its choices are very good.

Because the way the statute was written, the Chronic Hazard Advisory Panel (CHAP) that Congress directed the agency establish to study the health effects of phthalates, without strong direction from the management of the agency, easily could move into policy issues and this is what has happened with its recommendations.  If the agency holds with the recommendations of the CHAP, it faces sure, and probably successful, litigation at the end of the process.  If it tries to walk back the CHAP recommendations, it gets accused of disregarding “scientific” recommendations protecting children. A real no-win for the agency.

I have written before in this blog about the serious regulatory policy issues that the phthalates rulemaking raises.  For those who are interested in this issue and those who are concerned about the use of cumulative risk assessments, I wanted to bring to your attention an article I authored that appeared today in The Hill Congress Blog publication.  You can find it here.

Should Congress decide to do oversight of the CPSC, there are a number of issues that need examining.  This issue should be added to the list.


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