Under section 15(b) of the CPSA [15 U.S.C. § 2064(b)], manufacturers, importers, distributors, and retailers are required to report to CPSC if, among other things, they obtain information that reasonably supports the conclusion that a product: (1) contains a defect that could create a substantial risk of injury to the public, or (2) creates an unreasonable risk of serious injury or death. Companies have an ongoing obligation to report to CPSC. Thus, if this obligation arose in 2004, for example, and continues into 2005, the company may be subject to the increased penalty amount of $1.85 million (as opposed to $1.65 million prior to January 1, 2005).

Although most CPSC investigations of reporting violations result in a "voluntary" settlement, CPSC will litigate if it cannot reach agreement on a penalty with the company. Even after litigation is commenced, virtually all cases are settled before there is a court determination. One notable exception occurred in 2002 when a U.S. district court assessed a penalty of $300,000 against a manufacturer of juice extractors for violating the reporting requirements of the CPSA. On October 28, 2004, the U.S. Court of Appeals for the Ninth Circuit unanimously upheld the penalty.



"...[the CPSA] establishes a complex regulatory framework for keeping dangerous consumer products out of the marketplace—and away from the fingers, hands and other body parts of consumers..."
U.S. Court of Appeals for the Ninth Circuit, 10/28/04

Since October 2002, CPSC and the courts have assessed over $11 million in penalties against 15 companies for violating statutory reporting requirements. In addition to the $4 million dollar penalty, in the past few months, CPSC has assessed:

• A $950,000 penalty settlement against an all-terrain vehicle manufacturer
• A $500,000 penalty settlement jointly against two exercise equipment manufacturers
• A $500,000 penalty settlement against a retailer that failed to report problems of gas leaking from a riding mower it sold, and a $350,000 penalty settlement against the manufacturer of the mower
• A $1.4 million penalty against a manufacturer to settle allegations that it failed on multiple occasions to report defects in its mountain bicycles, including defective forks and pedals

The $500,000 reporting penalty against the retailer is the second such penalty against a retailer functioning as a retailer, rather than as a manufacturer or importer (the first was in April 2003). Undoubtedly, other retailers risk paying civil penalties if they fail to meet their reporting obligations. The CPSC's aggressiveness in seeking penalties affects the way companies track and maintain safety-related information about their products, as well as the way they sell their products.

Each day, safety-related information flows into companies dealing with consumer products. The information may be in the form of product safety-related consumer complaints, insurance claims involving product-related injury, in-house engineering analysis, post-production testing, warranty claims, or lawsuits. If companies do not have procedures and people in place to quickly collect and analyze safety-related information, and report to regulatory agencies where required, they put their companies in jeopardy.

Businesses concerned with the new levels of penalties and the CPSC's increased activism against violators of reporting requirements should ask themselves the following questions:

• Do I understand the CPSC's product defect reporting requirements?
• Am I aware of the penalties for notification failure?
• What systems do I currently have in place to track and analyze product safety-related information? What additional steps do I need to take to improve these systems?
• What training do my employees need?
• What are my company's internal policies regarding non-compliance?
• Do I know the compliance level of my suppliers and business partners? How does this affect my company's level of compliance?
• Does my company have the necessary expertise in house, or are outside resources required to ensure compliance and timely reporting to the CPSC?
• Do I have a product recall plan in place? Is it current and has it been tested?
• Have I evaluated what, if any, product recall coverage I have?
• Am I exposed to possible litigation from either the CPSC or my customers? Am I prepared to manage it?

While the fine involved [against the maker of juvenile consumer products] is relatively low by the standards of many federal regulatory agencies, it signals an effort by the safety commission to take a harder line on safety disclosures… The fines are aimed in part at trying to wield a bigger stick, in an effort to get companies to step up their cooperation with the agency.
The Wall Street Journal, 3/22/05

To avoid the imposition of civil penalties or to lessen their severity, companies must establish and follow procedures to ensure they meet their reporting obligations to CPSC, as well as to other federal regulatory agencies. This includes establishing a safety team that: regularly reviews safety-related information; has the authority to report to regulatory agencies and to recall dangerous products; tracks consumer safety-related complaints, warranty returns, engineering reports, and the like; establishes methods for tracing products their company puts in the stream of commerce; and establishes procedures for conducting recalls.

In cases where a product comes under scrutiny by regulators, using information gleaned from these processes, companies should seek to build a constructive and cooperative relationship with CPSC and other agencies, which can lead to reduced fines and more manageable voluntary product recalls. By taking these and additional steps to prepare for and eliminate safety-related problems, companies can mitigate the impact of product defect events and ensure compliance with the law.

Marsh's experts in product recall, product liability, supply chain risk management, business continuity, crisis consulting, and litigation support can assist companies to identify, prioritize, and manage the risks associated with possible violations of CPSC's statutory reporting requirements and product failure. Working with Marsh, organizations can act before a reporting obligation arises or a product recall is required, so that they can protect themselves, as well as their brand reputation and bottom line.

If you have any questions or would like additional information, please contact us.