On November 16, 2023, a federal jury in Los Angeles returned guilty verdicts against two corporate executives of a consumer product distributor for conspiracy to defraud the United States by obstructing the lawful functions of the Consumer Product Safety Commission (CPSC). The two executives from the distributor were found guilty of a substantive count of violation of the Consumer Product Safety Act (CPSA) for knowingly and intentionally failing to timely report to the CPSC the discovery of defective residential dehumidifiers linked to multiple fires. The executives also were charged with wire fraud, but the jury acquitted them on that count. The Department of Justice (DOJ) indicated this was the first prosecution of individuals for violations of the CPSA. This case underscores that companies confronted with consumer product safety risks need to consult with counsel promptly to ensure that they understand their duties to report to the CPSC and to reduce the possibility of a criminal investigation in egregious circumstances.
The defective dehumidifiers were manufactured overseas by Gree Electric Appliances Inc. of Zhuhai and marketed (and ultimately recalled) under various brand names. The recalled dehumidifiers were associated with more than 2,000 reported incidents, 450 reported fires, and four deaths. Due to the material misrepresentations made by the distributor Gree USA Inc. and its executives, the recall was delayed for months. Then, as more information came to light, the recall was expanded and re-announced multiple times. Indeed, internal communications showed the company knowingly and willfully continued to sell the dangerous products to avoid business losses, falsified safety certifications to mislead consumers into thinking the products were safe, and willfully and purposefully hid these facts from the CPSC. As a result of this willful and conspiratorial conduct, more consumers were allegedly injured by exposure to the products.
The CPSA requires manufacturers, importers, and distributors of consumer products to report "immediately" to the CPSC information that reasonably supports the conclusion that a product contains a defect that could create a substantial product hazard or an unreasonable risk of serious injury or death. 15 U.S.C. §§ 2068(a)(4), 2064 (b)(4). These recent convictions show that officers, directors, and agents of manufacturers, importers, and distributors can be held criminally liable for knowingly and willfully making misrepresentations to the CPSC about reported issues, hiding facts about known product safety risks, and choosing to continue to sell dangerous products with confirmed safety concerns. 15 U.S.C. § 2070 (a)(1), (b).
Evidence from a Prior Civil Case Admitted During the Criminal Case
Evidence key to the convictions of the two executives employed by the distributor was developed in an earlier civil action brought by the distributor against the manufacturer. According to a transcript from that civil case, admitted during the criminal trial, one executive from the distributor learned from the manufacturer that the dehumidifiers were defective, but the manufacturer insisted that the distributor wait to report the defects. After waiting four months while continuing to sell the dehumidifiers, the manufacturer eventually reported the defective products to the CPSA and recalled the dehumidifiers a year after discovery.1 This same executive from the distributor testified during the civil trial as follows:
Q: And did you feel at this time, based on what you knew, based on the YouTube video and any information you had about fire incidents, that a report should have been made to the Consumer Product Safety Commission, where [the manufacturer's representative] was suggesting delaying six to nine months?
A: Yeah, I think we should report.
Q: So you thought you should report, and [manufacturer's representative] is saying "delay six to nine months." Why didn't you report at this time?
A: Because we are really afraid, because we are a small company. If really you have the recall, [our business] is not here today.
Q: Why do you say that?
A: Because we already saw [the] meaning of dehumidifier if recall for us, [the manufacturer's] factory don't want to work with us, then we got to destroy [the products].
THE COURT: Just for my clarification, just so I'm clear, in September of 2012, you personally believed that there should be a recall?
A: Yes.
The government used this crucial admission years later during the criminal trial.
DOJ Has Increased Its Focus on Criminal Enforcement of Consumer Protection Issues
On June 5, 2023, the United States Attorney's Office in Los Angeles renamed its criminal environmental section the "Environmental Crimes and Consumer Protection Section" to reflect a formal broadening of its responsibilities to include consumer protection enforcement. Executives must take seriously their individual duties for reporting defects in consumer products matters. To discharge these duties and minimize risk of personal liability, executives should consider consulting counsel if responsible decisionmakers substantially delay reporting potential defects to the CPSC. Decisionmakers owe an independent duty and should take steps to ensure they perform their duties even when the company may decide not to timely report potential defects or product safety issues to the CPSC.
Here the Court instructed the jury that to timely inform the CPSC means to report the required information promptly and without unnecessary delay. The CPSC's regulations, which the jury was not required to follow in this criminal trial, defines "immediately" to mean within 24 hours, subject to a safe harbor provision applicable to individuals uncertain whether information is reportable. In that case, the reporting person may spend a reasonable amount of time investigating the matter, not to exceed 10 working days unless the person shows a longer time was reasonable under the circumstances.
Pressure from external business partners may not be sufficient to show reasonableness under the circumstances. Although the distributor and these executives were vindicated by the $42.5 million civil judgment that their company obtained against the manufacturer, their testimony in the civil matter played a key role in the government obtaining criminal convictions against them personally.
This changing prosecutorial environment requires careful consideration when investigating and reporting to the CPSC potential defects in consumer products. A fulsome compliance program should include processes to ensure all consumer products meet any applicable product safety regulations and the company promptly investigates and reports to the CPSC as required. Consultation with counsel in these circumstances is customary. Moreover, executives who knowingly and willfully delay reporting may also seek advice from separate counsel to ensure compliance with their duties individually, particularly when the company's actions are not aligned with the executive's view of the duties to report to the CPSC. Advice of counsel may provide a valuable defense to an executive who reasonably relied on the advice of counsel if charged with a crime that involves willful and unlawful intent. Williamson v. United States, 207 U.S. 425, 453 (1908)2 .
Footnotes
1 The manufacturer later civilly settled with the CPSC for $15.4 million and entered into a deferred prosecution agreement with DOJ resulting in a payment of $91 million.
2 In order to assert an advice of counsel defense, a defendant must have made a full disclosure to her attorney, received advice as to the specific course of conduct that she followed, and relied on this advice in good faith. United States v. Ibarra–Alcarez, 830 F.2d 968, 973 (9th Cir.1987).
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