Archive for the 'Compliance' Category

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.

 

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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.

Killer Coffee Mugs?! Really?!

Did anyone else notice CPSC’s recall last week of ceramic mugs?  The agency is concerned about 4400 mugs with hairline cracks.  The hazard is not that they break and cut the user, or that there may be sanitary issues with germs being trapped in those cracks, but that hot liquids might seep through the cracks and cause a burn—not that any burns have been cracked holiday cupreported.

I am a potter.  I have a pottery studio and on most weekends you can find me at my pottery wheel.  But I am not a very good potter and I have made my share of ceramic mugs with hairline cracks.  The problem comes about when a pot that is not fully dried is put into the kiln or when the kiln temperature is either too low or too high for the type of clay and glaze being used.  And although, in those circumstances, it is possible to get small cracks in the surface, it is not possible for liquid to quickly flow out through those cracks. As the agency says in its press release, liquids can seep through, and by the time they get to the outer wall, it is just not possible for those liquids to be so hot as to cause a burn.  An annoying moisture ring on your table, yes, but a burn, no.

This is another example of the agency conflating product quality issues with product safety issues.  In this case, presumably the manufacturer reported the issue in an abundance of caution, probably under the agency’s Fast Track program. It used to be that not every report resulted in a recall and that the agency compliance staff was encouraged to exercise judgment and common sense in determining whether a recall was warranted.  But the position of Director of Compliance has gone unfilled for over three years so it is not surprising that leadership direction to the staff is lacking and staff may not feel empowered to make the sensible judgment calls without risking criticism.

As I have written before, when the agency turns a quality issue into a safety issue, it is wandering way outside its mandate.  Unfortunately, the agency has generated such confusion—and fear–in the regulated community with its enforcement policies that companies feel compelled to report things like mugs with hairline cracks.  That the agency compounds the problem by agreeing to a recall in such a case means that the definition of a safety hazard is totally unpredictable.  Apparently a hazard is whatever the agency says it is. Objective indicators, such as the existence of injuries, have no place in that calculation, replaced instead by speculative conjecture.

It is not clear how consumer safety is furthered by this result.  Perhaps it is time to change the agency’s name from the Product Safety Commission to the Product Quality Assurance Commission. It seems as if that is what the agency is trying to do.

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.

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.

Retailer Reporting: Something for Nothing?

Over ten years ago, the CPSC compliance staff negotiated an agreement with Wal-Mart that has grown over the years into what is now known as the retailer reporting policy. Under the agreement, Wal-Mart agreed to file weekly reports with the CPSC documenting safety issues reported to its stores about products it sold. This reporting gave the agency important insights into the range of safety issues the world’s largest retailer was seeing. It allowed the agency to get an early heads-up on potential safety issues before they matured into “substantial product hazards.” And Wal-Mart got some protection from allegations that it had failed to report substantial product hazards to the agency.

Because this was such a win-win for both the agency and the company, other large retailers and then several large manufacturers soon began asking to participate in the program as well. In response, the agency expanded the program over the years. However, several years ago, the retailer reporting program was put on hold.

The agency staff has now decided to revise the program. Only selected companies will be “invited” to participate. The revised program makes very clear that participation in the program does not provide a substitute for or otherwise impact any reporting requirements under Section 15(b) of the law. However “consideration” may be given to participating companies should they be faced with subsequent enforcement actions for failure to report. The confidentiality protections applying to Information submitted under Section 15(b) of the law would not apply to these reports.

The staff believes that these changes make the program more transparent and answer long-standing questions about how the program operates. That is certainly true. But the changes also raise several other questions as well. For example, the selective nature of the program and the “consideration”, if any, given to participants does raise troubling fairness issues,  A company wishing to participate and frozen out of the program will have little recourse in challenging the decision of some invisible staffer. What kind of consideration will be available to some but not others?

But more basically, the changes raise the question of why any company should bother to participate. When I raised that question, when I was still a Commissioner, the answer I got was “that it is the right thing for companies to do.” Perhaps there are companies who will find the CPSC staff “invitation” irresistible. (I assume that there will be no measure of bullying associated with these invitations.)  However, there may be others who believe that the effort involved and the benefits to be gained are not worth it. In this case the agency will lose out on an important source of information that could help it identify risks as they come up over the horizon.

However, the biggest concern is a process one. The program has been in place for over ten years. Although it was initiated by the staff, it has grown over the years and it has consumed considerable staff resources. Changes of this magnitude should be placed before the Commission for explanation and approval in a public meeting. The program’s role in gathering useful information should be better explained and it should be part of the agency’s annual operating plan. Regardless of what one thinks of the merits of the program and the changes being made, this is something that Commissioners should consider and approve, not delegate to staff.

Shopping the Global E-Mall, Round 2

In my last post, I discussed the growing phenomenon of e-commerce sales directly to consumers from foreign (Chinese) manufacturers. My concern is that the regulatory stance of the CPSC—asserting that a foreign manufacturer is legally responsible for compliance with all U.S. safety standards when a U.S. consumer buys a product directly from that manufacturer—is both naïve and unenforceable.

Therefore, I was interested to see the announcement last week from the CPSC that it has entered into a voluntary agreement with Alibaba, the Chinese e-commerce direct sales company, to work with the agency to try to monitor its platforms for dangerous products.  Kudos to the agency for negotiating this agreement, as modest as it is.

According to press reports, Alibaba handles more e-commerce business than Amazon.com and eBay Inc. combined and, as a platform for third parties, it controls as much as 80 per cent of the Chinese e-commerce business.  Obviously, Alibaba can be a potent ally in policing the marketplace for unsafe products.

Looking at the reported details of the agreement, it is not clear whether it will prove to advance consumer safety in the global e-mall or merely serve as a fig leaf to which the parties can point to show they are doing something.  Alibaba has apparently agreed to block sales of up to 15 recalled products upon request from the CPSC.  Since a substantial number of the over-400 recalls the CPSC does each year are of products from China, there should be no problem finding candidates for this list.  All concede that this agreement is not enforceable. It remains to be seen how aggressive Alibaba will be carrying it out over time.

More interesting is the company’s agreement to make available information about safety requirements to importers into the United States.  U.S. safety requirements are not easily understood, especially those issued since 2009 in response to the CPSIA—see the labyrinthine regulations dealing with testing and certification for examples. Any way to get information to those who are honestly trying to comply can do nothing but help.

Whether this agreement is a modest, but effective first step or just another counterfeit product remains to be seen.  Stay tuned.


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