United States: Consumer Product Safety Commission Issues Largest Fines in History of Agency

New Initiative To Bring Product Sellers Into Compliance With Reporting Obligations

The Consumer Product Safety Commission (CPSC) has been flexing its regulatory muscles in recent weeks by levying severe fines against companies who have failed to report product hazards on a timely basis. CPSC Chairman Hal Stratton has stated publicly that the recent actions are intended to demonstrate the CPSC’s "commitment to protecting American families by holding companies accountable for keeping safety information from us."

The first eye-opening fine was publicized on March 22, 2005, when the CPSC issued a press release announcing that Graco Children’s Products Inc. was being hit with a $4 million penalty for the company’s failure to promptly provide the CPSC with information about products that posed a danger to children. This was the largest civil penalty levied in CPSC history. The fine resulted from the company’s decade-long failure to report defects in a variety of children’s products that the CPSC said could create substantial product hazards or unreasonable risks of injury or death to young children.

This was just one of the latest of a series of fines levied by the CPSC. On March 30, 2005, the CPSC announced that Hamilton Beach/Proctor-Silex Inc. had agreed to pay a $1.2 million civil penalty for failing to promptly report defects in countertop toasters, juice extractors and slow cookers. The company ultimately conducted a voluntary recall of these items, but because the company had received numerous complaints and did not report them to the CPSC in a timely manner, the CPSC still found that the company was subject to the fine.

More recently, on April 12, 2005, the CPSC announced that Bowflex maker Nautilus Inc. had agreed to pay a $950,000 fine in connection with its failure to report complaints of injuries related to defects in the design of the popular exercise equipment. In the CPSC’s press release, Chairman Stratton reiterated: "The recent penalties levied by CPSC send a strong message that failing to report potential hazards is illegal. Companies need to understand that the quicker they report product safety problems to CPSC, the quicker we can take action together and protect consumers from injuries." (For more details, go to the CPSC’s website at http://www.cpsc.gov/).

These types of fines are being levied by the CPSC with greater regularity and in greater amounts than at any time in the history of the CPSC. By levying such fines, the CPSC has demonstrated its intent to bring manufacturers, distributors and retailers into compliance with the requirements of the Consumer Product Safety Act, and particularly the requirements related to reporting.

Section 15(b) of the Act requires a manufacturer, distributor or retailer to report information about a product to the CPSC if the company receives information that reasonably supports a conclusion that the product: 1) fails to comply with a regulatory or voluntary consumer product safety standard; 2) contains a defect which could create a substantial product hazard; or 3) creates an unreasonable risk of serious injury or death. A company is also required to report under Section 37 of the Act if a product is the subject of at least three civil actions filed in State or Federal Court, each suit alleges death or grievous bodily injury, and at least three actions resulted in settlement or a judgment for the plaintiff over a two year period.

Companies are often confused about whether a defect constitutes a "substantial product hazard." Section 15(a)(2) of the Act defines "substantial product hazard" as "a product defect which (because of the pattern of defect, the number of defective products distributed in commerce, the severity of the risk, or otherwise) creates a substantial risk of injury to the public." The CPSC's regulations interpreting the Act state that when assessing whether information reasonably supports a conclusion that a product contains a "defect which could create a substantial product hazard," the company should evaluate information known by it such as whether there have been claims for personal injury, complaints from consumers or consumer groups, or requests from other firms (such as retailers) to return or replace the product or provide a credit.

The CPSC encourages reporting when in doubt. CPSC regulations at 16 CFR 1115.4(e) state: "If the subject firm determines that the defect could create a substantial product hazard, the subject firm must report to the Commission. Most defects could present a substantial product hazard if the public is exposed to significant numbers of defective products or if the possible injury is serious or is likely to occur. Since the extent of public exposure and/or the likelihood or seriousness of injury are ordinarily not known at the time a defect first manifests itself, subject firms are urged to report if in doubt as to whether a defect could present a substantial product hazard." Given the recent spate of fines for reporting failures, companies would be wise to heed this advice.

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