Saying It’s a Recall Doesn’t Make It So

With the CPSC’s blessing, a large furniture company recently sent out wall anchors for its children’s dressers to address a tipping hazard and the accompanying CPSC press release did not refer to the activity as a recall. Subsequently a child was killed when one of the dressers fell. Chaffing under criticism from its decision to allow the company to do a “non-recall recall”, the powers-that-be at the CPSC have now apparently decided that every corrective action or other announcement about a product must be labeled a “recall.”  Commissioner Buerkle has pointed out why this rigid adherence to labels is bad policy.  And this past week we have seen why her concerns are well-founded.

The issue involves the agency’s investigation of flooring made in China and sold by Lumber Liquidators, which allegedly emitted dangerous levels of formaldehyde. After the issue was described in a 60 Minutes segment in March, 2015, the company responded by agreeing not to sell the Chinese flooring and to test the flooring of those consumers who so requested. After over a year of extensive study, testing and investigation by several different agencies, no formaldehyde emissions above government guidelines were found.

Rather than announce this good news and put consumers’ minds at ease, last week the CPSC instead chose to cast the announcement in terms of a “recall.”  The “recall” that the agency announced is a first ever “recall to test”, with the company agreeing to continue what it has been doing from the beginning–that is, test for formaldehyde emissions the flooring of consumers who request that.  No promises of a refund, a repair or return of the flooring are made (although the release does hint that a consumer maybe, possibly could get some replacement flooring under undescribed circumstances at the company’s discretion). Buried in the press release is the admonition that consumers are not to pull up flooring they may be concerned about because that action could be dangerous.

I saw many press stories reporting that the investigation did not find a problem with the company’s product.  I did not see stories that discussed the fact that the company was doing a “recall” (although perhaps I may have missed some). This is a good thing since, by trying to unnaturally shoehorn the announcement of the investigation results into the concept of a recall, the release is both confusing and misleading to consumers.   And it belies the agency’s oft-stated notion that the press will ignore releases that do not include “recall” in the headline. It is an example of what happens when, like a myrmidon, the agency insists on rigid adherence to rules without concern as to appropriateness under the circumstances.  As Commissioner Buerkle notes, the CPSC should never say never.

Let’s Play Penalty Roulette

630139-casino-20-9-2004

Playing games at the CPSC

Commissioner Mohorovic has just issued a thoughtful statement discussing the black hole that the CPSC calls its civil penalty policy.  This statement follows another he filed this week discussing the $4.5 million penalty lodged against Sunbeam for a single-brew coffee maker that squirted out hot water when not used properly.

The Commissioner’s most recent statement precedes next week’s agency hearing on priorities for the upcoming year.  He outlines a number of ways to address the process for assessing penalties—a process that, at best, can be called veiled and perplexing and, at worst, seems like penalty roulette.  Those concerned about public policy and consumer protection should carefully review his suggestions for putting more discipline into an arbitrary process.

The CPSC Chairman has publicly stated his desire to see penalties increased.  While disagreeing with that view, I do believe that it could be achieved more effectively if the agency were up-front about how they calculate penalties.  It is not sufficient to say that this calculation is determined by applying the various factors set out in the regulation dealing with civil penalties.  The settlement agreements over the past several years have been decidedly uninformative about how various factors were applied.  As one who was directly involved in crafting that regulation, and as I have written before, I believe that the current practice is at odds with the underlying intent of the regulation—that is, to add more transparency to the process.

Commissioner Mohorovic is to be applauded for his persistence in highlighting the problem.  Not only has he accurately described the problem, he has come up with creative suggestions for solving it.  While Commissioner Buerkle has repeatedly expressed her dismay for the manner in which penalties are assessed, it will be interesting to see if the other commissioners pay any attention.

Last week it was $3.75 million for glass tumblers that can break. This week it is $4.5 million for coffee makers that can spill out hot water if not used according to instructions.  Can’t wait to see what next week brings—but, for sure, it will be a crap shoot.

Navigating An Unmarked Channel

 

Last week, Commissioners Buerkle and Mohorovic each issued a statement on a civil penalty settlement involving glass tumblers manufactured by Teavana.  Each is a thoughtful statement and both should be read by anyone interested in how the agency does its work.  They can be found here and here.  Both Commissioners address, in somewhat different ways, the subjective nature of the Consumer Product Safety Act’s reporting requirements and the opaqueness of the agency’s process for determining penalty amounts for violations of provisions of the Act that require product sellers to report potential safety issues to the agency.  Both are concerned about the secrecy of the criteria, if any, applied in assessing penalties by an agency that used to pride itself on its openness and transparency.

Commissioner Buerkle points out that–given the subjective nature of the statute– the regulations defining, first, what factors will affect a penalty amount and, second, how those factors will be applied, become critically important.  As one who was directly involved in developing that regulation, I agree that it is probably too general in nature, given that the agency has done little to flesh out its applicability in real cases.  Instead the agency has just nodded its head in the regulation’s direction to justify what appear to be arbitrary penalty amounts. The publicly-stated desire of Commission leadership for higher penalties leaves one thinking that the penalty policy of this commission is “get as much as you can” and not that “the punishment should fit the crime.” Consequently, one can only conclude that the penalty factors in the regulation are window dressing to justify whatever the enforcement staff demands.

Commissioner Mohorovic stated that the agency is falling down in its consumer protection duties by not putting out clear buoys to mark the legal channel.  As I have written before, the simplistic agency mantra—“when in doubt, report”—does not work so easily with today’s commission, which is more intent on punishment than on true safety.  Commissioner Mohorovic makes a persuasive case that the company did not have any obligation to report in the first place.  The products in question are glass tumblers and there is always a risk that glass will break, especially when holding hot liquids.  Apparently there were only minor injuries. There is no reason to believe the glass was inordinately thin or fragile.  Based on all this, Commissioner Mohorovic concludes that the company had no obligation to report, but agency enforcement staff reached a decidedly different conclusion.  The result was a $3.75 million penalty against the company, and we are left with no understanding as to how the agency got to that figure.

The agency has announced that it will hold a hearing this summer to consider its priorities for the upcoming fiscal year.  Here is a suggestion:  given the growing concern over the secrecy surrounding how penalties in ever-increasing amounts are assessed, a review of the agency’s penalty factors regulation is warranted.  The clarity the agency was seeking in 2010 when this regulation was issued has not happened; instead the process has become much less clear.  Perhaps it is time to consider a matrix approach to civil penalties—that is, putting a value on, and applying that value to different types of violations.  The practices of other agencies may also provide some learning here.  There are probably many ways to make the situation better and the agency should spend some time trying to figure this out.

EU-U.S. Regulatory Cooperation: Strides Made but More Should Be Done

Today the George Washington University Regulatory Studies Center released a significant report, “International Regulatory Cooperation:  Benefits, Limitations, and Best Practices.”  This report builds on earlier work done by the Center and examines opportunities to improve regulatory cooperation between the European Union and the United States.  The report is timely because negotiators from the U.S. and the EU this week are continuing their discussions to hammer out the Transatlantic Trade and Investment Partnership (TTIP) agreement.

The study examines the efforts of three federal agencies to foster regulatory cooperation, including a case study on the efforts of the CPSC, which I authored.   The case study builds on my experiences over an eight-plus year time span as a CPSC Commissioner, when I saw first-hand the need for collaborative efforts among jurisdictions internationally to address the issue of import safety. The study looks at the potential benefits of and the limits of and barriers to regulatory cooperation.  I also have made recommendations for changes that I believe would improve the agency’s ability to work with its foreign counterparts to improve safety.  The report identifies ways to reduce unnecessary regulatory divergences (and related wasteful regulatory costs) such as convergence on testing and standards, sharing of data and more active consideration of unnecessary differences when promulgating or reviewing regulations.

The CPSC has a good track record working with its foreign counterparts to enhance consumer safety. However, given the complexity of both consumer products and the global marketplace, consumer safety will demand even greater and more creative work among regulators but that work needs to minimize the unnecessary regulatory burdens that come from an unimaginative approach to regulation.

I would welcome feed-back to the recommendations made in this report.  Give me your comments here or at nnord@ofwlaw.com.

Such a Tiny Product; Such a Large Issue

On a recent overseas trip, in one of the trendiest shops in one of the trendiest Western European capitals, I saw a display of tiny spherical rare earth magnets (SREM’s) with signs extolling the coolness of the product.  I almost bought up the entire display but thought about the possibility, when I got back to the States, of CPSC investigators confiscating the whole batch and hauling me off as an importer of deadly banned products.  If only I were kidding.

Remember that, here in the U.S., SREM’s were once a very popular product, intended as an adult desk toy or for making remarkable sculptures and art works.  However, if children swallowed the tiny magnets, they could cause serious internal injury.  Therefore, the CPSC set out to force the product off the market–through a series of recalls aimed at individual importers together with strong pressure on retailers not to sell the product. The agency also issued a rule banning the sale of tiny powerful magnets when used as a manipulative.  Only one company—little Zen Magnets in Boulder, CO, whose CEO is not yet 30 years old—refused to knuckle under and decided to fight the government.

This past weekend, in a battle of David v. Goliath proportions, Zen finally got a win.  Here’s what happened.  When Zen refused to voluntarily recall the SREM’s he was importing and selling, the CPSC filed a lawsuit to force a mandatory recall.  A trial was held before an Administrative Law Judge (ALJ) to determine if the magnets, when sold, were defective and constituted a substantial product hazard and therefore must be recalled. After a long trial and much deliberation, the ALJ found what most of us, except the CPSC, already knew:  that ingesting SREM’s can create a risk of injury but that proper use of the magnets pose no threat and that, when sold with appropriate warnings and proper age recommendations, the magnets do not pose a substantial product hazard.  The ALJ rejected the agency’s argument that warnings cannot be effective because the spheres can become separated.  He also rejected the agency argument that the product was so inherently dangerous to children that proper use by adults must give way.  Significantly, this is the first judge to examine the underlying theory of the agency’s actions forcing recalls and he found the agency’s proof to be wanting.

Even though Zen won this battle, it has not won the war. The agency lawyers now have ten days to appeal the ALJ’s decision.  That appeal will be heard and decided by the five members of the CPSC—the same group who voted to sue Zen, who voted to issue the related rule banning the product, and several of whom have made public statements that suggest where they will come out on the appeal.  In other words, Zen doesn’t stand a chance before the Commission.  The Commission’s decision can then be appealed to the appropriate Court of Appeals.   If Zen has the resources and is scrappy enough to continue the fight, it will be a long one indeed.

Solving At Least One Magnet Issue

On a related matter, the Commission has stepped up to address a flaw in its rules governing trials before ALJ’s.  When the agency was trying to force the recall of SREM’s sold under the name “Buckyballs”, and when the company had the “hutzpah” to say “no” to the agency’s demand that it recall its magnet product, the agency voted to sue Buckyballs as well.  After the Commissioners voted to bring the action against the company, the agency staff took it upon itself to expand the complaint to sue the CEO of the company in his personal capacity.  While this case was ultimately settled, the settlement did not address whether the staff acted properly in expanding the complaint without an affirmative vote of the Commission.

The agency is currently updating its rules of practice for adjudicative proceedings and those proposed rules are now out for public comment.  Commissioner Mohorovic was able to get into the proposal – unanimously – an amendment that expressly requires the ALJ to refer to the Commission “any proposed amendment [that] would have the effect of adding or removing any person as a respondent to the complaint or adding or removing any count.” Just in case an ALJ tried to reason in such a way that an amendment that should come to the Commission didn’t actually add a party (by, say, reasoning that the CEO of a company is de facto on the complaint already, so it’s fine to add him by name) and thus could be done without Commission approval, the proposal also creates an interlocutory appeal right for any ruling on an amendment made without a Commission decision.

Admittedly, this language is overly broad since one would not want to capture situations where staff needs to add a DBA, for instance, nor should the agency give an interlocutory appeal for amendments that clearly are within staff’s administrative authority, but, for the handful of times in a decade that the agency actually litigates something, the burden of work from overbreadth seems to be insignificant compared to the risk to Commission authority from being too narrow. The staff’s action with respect to the Buckyballs situation demonstrates the need for this kind of correction.  Since the proposed amendments make a number of other changes to the adjudicative procedures, they should be carefully reviewed and comments provided the agency.

The proposed changes to the agency’s adjudicative proceedings are now out for public comment.  Those who practice before the agency and other interested parties should read them carefully and take the time to comment.  As we have seen from the Zen case, this stuff matters.

It’s Not Just Size That Counts

Today, the CPSC announced a civil penalty settlement agreement for an eye-popping $15.45 million.  The settlement involved dehumidifiers sold by Gree Electrical Appliances Inc.  The penalty is the statutory maximum that could be imposed and is well beyond any penalty imposed by the agency at any time in its history.

CPSC alleged that Gree:

  • knowingly failed to report a defect and unreasonable risk of serious injury to CPSC  with dehumidifiers sold under 13 different brand names (the dehumidifiers were recalled in 2013);
  • knowingly made misrepresentations to CPSC staff during its investigation; and
  • sold dehumidifiers bearing the UL safety certification mark knowing that the dehumidifiers did not meet UL flammability standards.

Given the size of the penalty, one should expect that the alleged misconduct to be off-the-charts in terms of the severity of injury to consumers.    Yet, even though the earlier related recall involved well over 2 million items and significant property damage from fires caused by the defective product, there are no reports of injury.  In fact, there is little to distinguish this hazard pattern from others involving defective appliances posing serious fire hazards where penalties have been fractions of the amount imposed in this case. Certainly there was potential for serious injury but the fact remains that there were no injuries.  While there was substantial property damage, presumably this was covered by insurance and it is not the purpose of the CPSC to protect insurance companies.

There is nothing in the agency’s press release or the settlement agreement itself to tell us why this case was so more egregious than other cases involving violations of the requirement to report hazards to the agency.  One has to assume then that it was the alleged misrepresentations to the government and the unauthorized use of the UL mark that bumped the penalty up to the limit.  But other than these general statements and based on what has been made public, it is not clear what actual conduct triggered such a huge penalty.  For those trying to stay on the right side of the law, the government has an obligation to be more transparent in describing the activity that warrants this type of penalty.

Certainly the allegations in the settlement agreement are very serious and, if true, warrant a significant penalty.  But it would be helpful to know whether this penalty is unique to a particular set of circumstances or is just a very large scalp from another “failure-to-report” case. As Commissioner Mohorovic points out in his statement, if the agency wants to change behavior through its penalties, it is important to more fully describe the behavior those regulated should avoid.

While this is a significant case because of the size of the penalty, its importance diminishes because of the agency’s opaqueness in describing the bad acts that occurred.  If you are not confused and troubled by all this, then I suggest you are not paying attention.

 

Does the CPSC See You as a “Bad Guy” or a “Good Guy”?

I believe that it was Albert Einstein who said “What you see depends on where you stand.”  The stands taken by senior managers of the CPSC on a number of topics have changed and that leaves those of us who care both about the agency and consumer safety seeing some concerning developments.

A good example is the way in which the agency seeks to impose and assess penalties.  At one point (dare I say the “good old days”) civil penalties were assessed after an honest negotiation between lawyers for the agency and the company. Only with the most intransigent company did the negotiation break down so that the agency was forced to refer the case to the Department of Justice for resolution.  And in the very rare instances when this happened, it was viewed not as a positive development but as a failure of the process to work well.

Things have changed.  Based on comments made by agency lawyers at a meeting in Washington this past week, what was once viewed as a failure now is viewed, if not quite as a positive development, as at least routine SOP. This conclusion is based on several developments.  First, look at the Enforcement Guidance recently published by the CPSC Office of General Counsel.  It suggests that any penalty negotiation is not a negotiation at all but almost a take it or leave it proposition.  When they say that you should anticipate getting only one meeting to make your case and then they will lock down their decision, how can you infer anything else?  Add to this statements that the penalty initially demanded by the agency already has been vetted with the DOJ and one has to wonder if arguments supporting a differing view will be listened to and considered.

This concern is exacerbated by statements made by senior officials at the same meeting that the agency is exploring ways to publicize referrals to the DOJ, likening them to “grand jury indictments.”   And what to think when another agency official states that penalties are justified because they always are imposed on the “bad guys” and not in “instances where good guys made honest mistakes. . . “.   Add to this a call by the agency chairman for civil penalties in the eight figures during the next year, and what you see is an agency that appears to be punitive rather than collaborative.

It is unfortunate that those regulated by the agency are being lumped into “good guy” and “bad guy” categories. From my experience in the private sector, in different capacities in government and now in private law practice, the vast majority of companies do care about making sure the products they sell are safe and they want clear rules so that they can stay on the right side of the legal line.  They also want a government that will work with them to solve problems when they come up, not just question their judgment and consider them “bad guys” when they protest.  But from my recent conversations, from where many are standing, that is what they are seeing.  For those of us concerned about product safety, that is not a positive development.


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