CPSC Approves Final Rule on Civil Penalty Factors

On March 31, 2010, the U.S. Consumer Product Safety Commission (CPSC) announced a Final Rule that identifies and interprets factors the CPSC will consider when seeking civil penalties for knowing violations of the Consumer Product Safety Act (CPSA), Federal Hazardous Substances Act (FHSA), and Flammable Fabrics Act (FFA). As required by section 217(b)(2) of the U.S. Consumer Product Safety Improvement Act (CPSIA), this rule ​“provides the Commission’s interpretation of the civil penalty factors found in” section 20(b) of the CPSA, section 5(c)(3) of the FHSA, and section 5(e)(2) of the FFA. The Commission voted 4-1 to approve the Final Rule as amended. Chairman Tenenbaum and Commissioners Nord, Adler, and Moore voted to approve the Final Rule as amended, and Commissioner Northup voted not to approve the Final Rule.

This Final Rule has particular significance because the CPSIA expanded the actions subject to civil penalties, and increased the maximum civil penalty amounts from $8,000 to $100,000 for each ​“knowing” violation^[1] and from $1.825 million to $15 million for any related series of violations. The statutory factors the Commission must consider include: the nature, circumstances, extent and gravity of the violation, including the nature of the product defect or of the substance; the severity of the risk of injury; the occurrence or absence of injury; the number of defective products distributed or the amount of substance distributed; the appropriateness of the penalty in relation to the size of the business, including how to mitigate undue adverse economic impacts on small businesses; and such other factors as appropriate. The Final Rule provides the Commission’s interpretation of those statutory factors and identifies four additional factors: (1) safety/compliance program and/or system relating to a violation; (2) history of noncompliance; (3) economic gain from noncompliance; and (4) failure to respond in a timely and complete fashion to the Commissions requests for information or remedial action. Companies should review these factors carefully now to identify procedures, such as a safety compliance program, to implement or enhance so as to be prepared in the event of a civil penalty investigation in the future.

Commission’s Previous Interim Rule

In August 2009, the Commission had announced an interim Final Rule that provided immediate guidance to industry and allowed for a comment period for interested parties, prior to the Commission’s adoption of the Final Rule^[2]. The interim rule provided only four additional factors for consideration: existence of a safety or compliance program; compliance history; economic gain from noncompliance; and failure of the company to respond to information requests. In its Final Rule, the Commission retained these four factors and provided some additional clarification.

Final Rule

In its Final Rule, the Commission elaborated on the statutory factors as follows:

The nature, circumstances, extent and gravity of the violation, including the nature of the product defect or of the substance. The CPSC will consider, for example, whether the defect arises from the product’s design, composition, contents, construction, manufacture, packaging, warnings, or instructions, and will consider conditions or circumstances in which the defect arises. According to the statement issued by Chairman Tenenbaum and Commissioners Adler and Moore, the Commission will also consider the duration of the violation.

The severity of the risk of injury. The Commission will consider, among other factors, the potential for serious injury, illness, or death (and whether any injury or illness required medical treatment including hospitalization or surgery); the likelihood of injury; the intended or reasonably foreseeable use or misuse of the product; and the population at risk.

The occurrence or absence of injury. This factor will include a review of whether injuries, illnesses, or deaths have or have not occurred and, if so, the number and nature of injuries, illnesses, or deaths.

The number of defective products distributed or the amount of substance distributed. The CPSC will make no distinction for those defective products distributed in commerce that consumers never received, although a company will not be penalized for conducting a wider-than-necessary recall out of an abundance of caution.

The appropriateness of the penalty in relation to the size of the business, including how to mitigate undue adverse economic impacts on small businesses. The Commission will consider several factors such as the number of employees, net worth, and annual sales. For small businesses, the Commission will also consider liquidity, solvency, and profitability.

The Commission added only four other factors as appropriate.

• Safety/compliance program and/or system relating to a violation: If a safety/compliance program and/or system as established is relevant to a violation, the CPSC may consider whether the company had at the time of the violation a reasonable and effective program or system for collecting and analyzing information such as incident reports, lawsuits, warranty claims, and safety-related issues related to repairs or returns. The Commission may also consider whether the company conducted adequate and relevant premarket and production testing and had a program for continued compliance with all relevant mandatory and voluntary safety standards. Although comments on the Interim Final Rule suggested that companies receive credit for having a previous record of good compliance, Chairman Tenenbaum and Commissioners Adler and Moore stated that a record of good compliance may not be very probative of good behavior because it could simply mean that the Commission has not discovered previous violations.
• History of noncompliance: Past violations of the CPSA, FHSA, FFA, and other laws that the CPSC enforces could lead to an increase in the amount of a civil penalty. The Commission could consider the number of previous violations or how recently a previous violation occurred.
• Economic gain from noncompliance: The CPSC may consider whether a company benefited economically from a failure to comply, including a delay in complying, but did not elaborate on how it would calculate any economic benefit.
• Failure to respond in a timely and complete fashion to the Commission’s request for information or remedial action: A company’s failure to respond in a timely and complete fashion to information requests or for remedial action could increase the amount of the penalty. The Commission did not provided detail on what might be considered ​“untimely” or ​“incomplete.”

“It makes sense for Congress to have imposed fines for reporting failures even when a product turns out not to be defective. Information about a possible defect triggers the duty to report, which in turn allows the Commission either to conclude that no defect exists or to require appropriate corrective action. Congress’s decision to impose penalties for reporting violations without requiring proof of a product defect encourages companies to provide necessary information to the Commission.”^[3]

The Commission will continue to consider previous violations as it has in the past when determining the amount of penalties to seek or compromise. ​“We voted to delete the examples of violations that the Commission would consider as we saw no need to try to capture all of the types of violations that the Commission has traditionally recognized, fearing that if we inadvertently left something off the list it would take on unintended significance.”

A Critic’s Perspective

Commissioner Anne Northup had initially abstained from voting due to the recent start of her tenure, voted against the Final Rule, and released a statement on March 10, 2010, criticizing the rule and the CPSAI as a whole.

“The CPSIA imposes so many new requirements all at once – including arbitrary lead and phthalates limits (not based on risk), third-party testing, certification, tracking labels, etc. – that it challenges the capacity of both small and large consumer product companies to comply. Even the largest entities, like Mattel, have indicated how difficult it is to decipher the law’s requirements.”

Many of those critical of the rule feel that the rule:

(1) fails to treat technical violations differently enough,

(2) gives limited credit for good faith and good effort, and

(3) uses language that is too vague and noncommittal to reassure good actors.

In an economic environment where many companies are feeling the need to cut back on employees, products and diversification, Northup and others fear that markets will continue to shrink and thus, jobs and product innovation will suffer, in the face of more severe civil penalties and increased regulation.

Broader, more stringent regulatory requirements pursuant to the CPSIA make compliance increasingly difficult, even for the most sophisticated and well-intentioned companies. In light of this Final Rule and the new civil penalty cap of $15 million, a company should take the opportunity now to review all aspects of its current product safety practices, including product development, vendor requirements, compliance with the conformity certificate and other technical requirements of the CPSIA, and how the company interfaces with the Commission. Such proactive steps now could drastically improve the company’s position in the event of a civil penalty investigation later.

Kelley Drye & Warren LLP

Kelley Drye & Warren’s Consumer Product Safety practice group is experienced in providing advice on the difficult issues of how and when potentially hazardous consumer products must be reported to the CPSC. If product recalls are necessary, we work with our clients and CPSC staff to quickly develop and implement cost-effective communications programs that satisfy product liability concerns and minimize potential penalties. When the CPSC threatens or brings enforcement actions, we advise our clients on appropriate strategies. For more information about this Client Advisory, please contact:

Christie Grymes Thompson
(202) 342-8633
cgthompson@​kelleydrye.​com

^[1] The CPSA defines ​“knowingly” as actual knowledge based on knowledge attributed to a reasonable person acting in the circumstances, including knowledge obtainable upon the exercise of due care to ascertain the truth of representation. The knowledge requirements in the CPSA, FHSA, and FFA include presumed knowledge, as well as actual knowledge.

^[2]See Interim final interpretative rule, 74 Fed. Reg. 45,101 (Sept. 1, 2009).

^[3] Statement of The Honorable Thomas H. Moore, The Honorable Robert S. Adler, and the Honorable Inez M. Tenenbaum on the Final Interpretative Rule on Civil Penalty Factors at 2 (Mar. 10, 2010), available here (citing United States v. Mirama Enterprises, Inc., 987 F.3d 983, 988-89 (9th Cir. 2004) (emphasis added)).