United States: Federal Court Makes No Exceptions For "Commodity Products" And Orders Zen Magnets To Stop Selling Previously Recalled Magnets

Last Updated: April 1 2016
Article by Matthew Cohen and Matthew R. Howsare

There have been many twists and turns over the past four years concerning the CPSC's regulation of certain high powered, rare-earth magnet sets and its litigation against various entities selling these magnets.  In the latest chapter of the magnets saga, a federal court in Colorado has permanently enjoined Zen Magnets (Zen) from selling magnets purchased from another distributor, Star Networks USA (Star Networks) who later recalled them to settle administrative litigation with the CPSC.

It is illegal to resell previously recalled products under the Consumer Product Safety Act (CPSA).  Zen asserted the products were "fungible commodities" and it had taken them out of the scope of the prohibition by repackaging and rebranding them.  In a victory for the CPSC, the court disagreed vehemently and ordered Zen to recall the magnets.  The court reasoned as follows:

"That Zen could lawfully sell other magnets it obtained elsewhere, even magnets that were identical in every single respect to the Star Magnets, is utterly irrelevant to the relatively simple issue before the Court, to wit: whether Zen sold particular magnets that were included in the Consent Agreement between Star and the CPSC....Zen's argument that its new packaging and warnings somehow rendered the "raw" Star Magnets to be "fundamentally different products" is ultimately a red herring: neither the CPSA nor section 2068 contain some sort of "loophole" or a "safe harbor" permitting the sale of "any consumer product that is subject to voluntary corrective action" so long as the seller purportedly addresses the hazard that led the CPSC to take action in the first place..."

By way of background, in 2012, the CPSC commenced administrative litigation against multiple rare-earth magnet companies, including Zen and Star Networks, who refused to voluntarily recall magnetic adult desk-toy products deemed to be defective by CPSC staff.  A number of those companies settled the CPSC litigation, including Star Networks in August 2014, and, as part of the settlement, Star Networks recalled its high-powered magnet products.

During the settlement negotiations between CPSC and Star Networks, Zen, who did not settle its administrative litigation with the CPSC, purchased from Star Networks a substantial amount of individual, small magnets (917,000 total units) at a substantial discount.  Importantly, these magnets were the same products recalled as a component of Star Network's forthcoming settlement agreement with the CPSC.

Zen's purchase of these magnets right before the settlement was finalized—and its comingling and repackaging of them with its own magnet inventory—led the government to file a second lawsuit against Zen, this time in Colorado federal court.  In March 2015, the CPSC sought and received a preliminary injunction enjoining Zen from selling the magnets purchased from Star Networks as the CPSA prohibits the re-sale of any recalled products.

In the current proceeding, in which the government sought a permanent injunction of the same activity, Zen argued primarily that the products purchased from Star Networks had been unbranded and converted into raw magnets, an alleged "fungible commodity," which Zen was still permitted to sell or incorporate into its products.  The court disagreed and concluded that the CPSA plainly prohibited the sale of Star Magnets because they had been recalled.

The court's ruling essentially holds that, once recalled, the products could never be rehabilitated or repackaged to where they could be sold again.  However, the court did leave a potential opening as to recalled products that are then "physically altered."  (See page 15 of ruling).

The court has now ordered Zen to take the following actions:

(1) conduct a consumer wide recall of Zen's products incorporating the previously recalled Star Networks magnets (the court found that it had the authority to order this);

(2) provide notification to consumers of the ordered recall, offer consumers a full or partial refund depending on the set possessed by the consumer;

(3) post the order on its website for a period of two years;

(4) notify certain current and future business associates of the order; and

(5) destroy or dispose of the recalled products in its inventory and distribution chain.

Finally, the court also granted summary judgment on the CPSC's claim that Zen "knowingly" violated the CPSA in continuing to sell the Star Networks magnets.  This ruling will allow the CPSC to recommend to the court that a civil penalty should be imposed and we expect that the CPSC will make such a recommendation.  Under the court's Order, the CPSC must do this by April 6.

Zen can appeal this ruling to the Tenth Circuit should it chose to do so.  The Tenth Circuit is the same appellate court that is currently considering the CPSC's safety regulation of high powered, rare earth magnets promulgated in September 2014) (see previous post here).

Following the ruling, CPSC Chairman Elliot Kaye stated:

"Today's decision puts the rule of law and the safety of children above the profits sought by Zen Magnets.  Far too many children have been rushed into hospital emergency rooms to have multiple, high-powered magnets surgically removed from their stomachs.  Young children have suffered infections and one child tragically died from swallowing loose magnets that often look like candy.  The ruling is a major victory for the safety of consumers.  Our pursuit of this case makes clear we will not tolerate the sale of recalled goods in any form."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Matthew Cohen
Matthew R. Howsare
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