Product Safety Recalls Create New Breed of Compliance Concerns

Automakers, airbag manufacturers, and even ice cream companies have suffered regulatory wrath and reputational damage over product safety concerns and inadequate recall procedures. Those in the crosshairs, especially when the Consumer Product Safety Commission is involved, are finding that their missteps can come with hefty fines and rigid compliance demands.

While other government agencies, such as the National Highway Traffic Safety Administration, also oversee safety issues and recall notices, the CPSC is emerging as the toughest cop on the beat, one with a broad reach that extends to manufacturers, distributors, and retailers.

“Companies that aren’t paying attention to the CSPC do so at their own risk,” says Nancy Nord, of counsel at the law firm Olsson Frank Weeda Terman Matz Nord and a former commissioner and acting chairman at the agency. “It is becoming much more aggressive and punitive. Where there once was a more collaborative attitude at the agency, and a sense that it had to work with companies to resolve problems, it is now much more of an ‘us versus them’ mentality.”

The change in attitude harkens back to 2008 and the passage of the Consumer Product Safety Improvement Act. That law granted the agency greater authority and increased penalty amounts. [See sidebar for more on the agency’s enforcement actions.] Then in 2013 the CPSC announced that previously voluntary recall agreements negotiated with companies what would become legally binding, and company-specific compliance programs would be required in enforcement actions.

Product safety compliance must be built on a foundation of quality data, says John Moss, a partner at the law firm Winston & Strawn who specializes in product liability issues. Retailers, often on the front line of recall notices, want assurance from the manufacturer that they have access to all the information necessary to ensure they are selling safe products. Manufacturers, meanwhile, face the longstanding problem of possessing bits of that information sprinkled among silos of operation, without anybody coordinating the activities needed to ensure safe products and efficient recalls.

“Companies that aren’t paying attention to the CPSC are doing so at their own risk.”
Nancy Nord, Former Commissioner, Consumer Product Safety Commission

The key for compliance officers is to adapt the core demands the CPSC has detailed in civil litigation and settlements to company-specific risks and processes. “There is a natural desire to have a plug-and-play compliance program, but taking that approach can often lead to more problems than it solves,” says Christie Grymes Thompson, a partner at law firm Kelley Drye and chair of its consumer product safety practice. “The compliance program has to mirror the realities of the business. If you are the retailer, your program may look very different than what a manufacturer’s will.”

Nord stresses the importance of ensuring that a company has appropriate written procedures for addressing safety complaints and can demonstrate that those procedures are followed. Other best practices: maintaining good records on testing programs, test results, compliance with applicable regulations, and registering with the CPSC’s public complaint database to better understand what some consumers are saying about your products.

Like many areas of regulation, companies are finding supply chain risk management to be a growing concern for product safety compliance. “As your supply chains become more and more complex, you have to make sure that you have procedures in place, and keep them updated, to exercise control over them,” Nord says.

CPSC Nitty Gritty

While other regulators stress self-reporting as a means to gain cooperation credit if an enforcement action is likely, the CPSC requires cooperation, period. “If you become aware that a product you are selling could—not does, but could—present a hazard, you have to immediately inform the agency,” Nord explains. “The bulk of the penalties the agency imposes on companies are not for violating safety standards, but for not coming to the agency quickly enough. If you think you might have a problem, you are expected to immediately inform the agency.”

The emphasis on “could” and “might” makes the self-reporting threshold a difficult judgment call.  “When you are sitting with an agency lawyer three years after the fact, hindsight is 20/20,” Nord says. “They may say you should have understood that you had a problem and reported to them three months earlier than you did. But if you are a manufacturer and you make a million products, is that first complaint just an aberration or a real problem?”

FINES & COMPLIANCE AGREEMENTS

The following is a rundown of notable litigation, settlements, and enforcement actions involving the Consumer Product Safety Commission.
June 2015: The Department of Justice and CPSC file a complaint in federal court against Spectrum Brands, alleging that it and a former subsidiary, Applica Consumer Products, failed to report in a timely fashion a hazardous defect with Black and Decker brand SpaceMaker coffee pot handles. The CPSC cited 1,600 consumer complaints regarding easily detached handles that posed a burn hazard.
April 2015: The Justice Department and CPSC jointly announce a federal lawsuit against Michaels Stores and its subsidiary, Michaels Stores Procurement, alleging that the companies failing to timely report that the glass of certain vases they sold was defective and too fragile to withstand normal handling, posing a laceration hazard.
February 2015: General Electric agreed to pay a $3.5 million civil penalty to resolve CPSC charges that it knowingly failed to report defects and an unreasonable risk of serious injury concerning two models of Profile freestanding dual-fuel ranges and various models of Profile and Monogram dishwashers.
January: 2015: Gerber Legendary Blades agreed to pay a $2.6 million civil penalty to resolve charges that it knowingly failed to immediately report to the CPSC a safety hazard associated with an axe it manufactured, notably a loose handle that could dislodge during use.
April 2014:  New Jersey-based clothing retailer Forman Mills agreed to pay a $600,000 fine and implement a CPSC-mandated compliance program over its failure to promptly report dangerous drawstrings on a children’s’ clothing line.
June 2013: National retailer Ross Stores agreed to pay a $3.9 million civil penalty to settle allegations that it failed to report its sale of banned children’s clothing containing potentially dangerous drawstrings. 
May 2013: Williams-Sonoma agreed to pay a $987,500 civil penalty and implement and maintain a compliance program designed to ensure compliance with the safety statutes and regulations enforced by the CPSC. The settlement involved defective hammock stands that were imported and sold by the company.
Source: CPSC.

That ambiguity is what makes compliance with the CPSC regulatory regime difficult. “The Securities and Exchange Commission certainly has a complex regulatory structure, but in that world there are at least more concrete rules,” Thompson says. “It might be difficult to navigate them, but they are at least more defined and are easier to follow once you have cracked the code.”

To facilitate company reporting and remove potentially hazardous products efficiently from the marketplace, the CPSC does offer a “fast track” recall program. Companies must implement a recall within 20 business days and issue a “stop sale” notice asking retailers and distributors to cease sales and distribution. The CPSC, in turn, will prioritize its mandatory approval for the recall plan, prompt attention that could defuse class-action lawsuits.

Taking up the agency on this offer has both pros and cons, say Matthew Howsare and Charles Samuels of the law firm Mintz Levin. For starters, companies must be prepared to meet all CPSC requirements. Among them: agreeing to an agency-approved remedy for consumers; issuing a joint press release with the CPSC; distributing point-of-purchase posters; submitting a proposed website recall notification; sending notifications to the distribution chain; and submitting proposed social media announcements.

The 20-day deadline can be problematic if (as often happens) the CPSC takes longer to approve the submitted recall announcements as it scrutinizes proposed corrective action plans. There is also the risk that the CPSC and the company will not agree on a recall remedy, the wording of a press release, the timing of the announcement, or other details.

The CPSC does not have a rewards program for tipsters akin to the SEC or numerous other agencies. It does, however, require similar reporting mechanisms and anti-retaliation measures. “Recent civil penalty agreements include specific statements about making sure the lowest level employees have a mechanism for confidentially reporting up the chain to a senior compliance officer or senior manager any information they think is relevant to product safety,” Moss says.

Looking forward, the CPSC plans to implement a new reporting protocol that will “profoundly affect” the consumer products landscape, Nord says. The agency is nearing completion of a proposed regulation that will require that all manufacturers of consumer products certify that their products meet applicable safety standards. Certifications for products that are manufactured outside of the United States must be electronically filed with customs and border protection officials prior to their importation. The rule applies to importers of record—a role often served by FedEx and other shipping companies—and not just the actual manufacturer.

“That is going to be incredibly expensive and people are just pulling their hair out about this,” Nord says. It is just going to be a nightmare to comply with. If you are the importer of record how would you possibly know what you are being asked to certify?”