If you are on the board of manufacturing company or a retailer, you might not have noticed that this week the Department of Justice announced that Electrolux Home Products Inc. (Electrolux) of Charlotte, North Carolina, agreed to pay a civil penalty of $750,000 in a settlement on May 14, 2014. This resolves allegations against Electrolux that it knowingly failed to report immediately to the U.S. Consumer Product Safety Commission (CPSC) a safety hazard associated with certain wall ovens sold to consumers. Additionally, Electrolux also agreed to establish and maintain a compliance program with internal recordkeeping and monitoring systems to keep track of information about product safety hazards.
It is not unusual for the CPSC to pursue civil penalties against a manufacturer for failing to report a safety hazard in a timely manner that can be as short as 24 hours. Indeed, based on history, it is far more likely that a manufacturer or retailer will be pursued for civil penalties associated with failure to report a hazard than for manufacturing a product with an hazard that actually and severely harmed consumers. A quick review of CPSC news releases in the past year reveals the following settlements with civil penalties:
- Forman Mills Agrees to Pay $600,000 Civil Penalty for Failure to Report Drawstrings in Children’s Upper Outerwear
- Ross Stores Agrees to $3.9 Million Civil Penalty, Internal Compliance Improvements for Failure to Report Drawstrings in Children’s Upper Outerwear
- Williams-Sonoma Agrees to $987,500 Civil Penalty, Significant Internal Compliance Improvements for Failure to Report Defective Pottery Barn Wooden Hammock Stands
- Kolcraft Agrees to $400,000 Civil Penalty, Significant Internal Compliance Improvements for Failure to Report Defective Play Yards The company failed to report a defect involving its play yards sold nationwide from January 2000 through January 2009
- Whalen Furniture to Pay $725,000 Civil Penalty for Failing to Report Defective Children’s Beds
Indeed, the CPSC has been known to pursue civil penalties for failure to report even when not a single injury was reported by a consumer. This was the case of Battat Inc. in which the CPSC alleged that the company did not self-report as required by law and went about fixing a defective product without the involvement of the commission. Battat ultimately agreed to pay a modest civil penalty of $125,000 in October 2004 to settle allegations that it did not give the government a timely report of a safety hazard involving a toy. The civil penalty was sought specifically because Battat had modified its toy model six times to eliminate a small parts problem. Small parts are a major concern as they can cause choking. In other words, it is reasonable to infer that Battat was endeavoring to fix a model with a small parts problem but was selling it throughout the time that the various fixes were being designed and implemented. There were no reported injuries. The CPSC media releases made it clear that the civil penalty was assessed for failure to report, not for selling a product that with a substantial safety hazard that violated the Consumer Product Safety Act which might seem, to some, to be the worst of the two activities.
Manufacturers, importers, and retailers can learn some old and new lessons from the Electrolux settlement. Everyone in manufacturing, importing and retailing of consumer products should know that the Consumer Product Safety Act sets forth some very specific requirements for reporting substantial safety hazards to the CPSC. Know the requirements and ensure you can meet them. As the CPSC says, “when in doubt, report.”
The newer lessons are, perhaps, more subtle yet your company should sit up and take notice. It is interesting to find that the Department of Justice announced this settlement on May 14, while the CPSC announced it on May 19, 2014. Who is in charge? Perhaps just the sequencing of the media staff at two different agencies? Or, has the Department of Justice started to take a more active role in enforcement? Starting in 2013, new language emerges in the settlement documents. The defendant manufacturer does not just pay civil penalties, it agrees to establish and maintain a compliance program with internal recordkeeping and monitoring systems to keep track of information about product safety hazards. Look familiar? Here we see that the defendant company is agreeing to a settlement in a format similar to when the Department of Justice achieves a settlement on behalf of the Securities and Exchange Commission. It is entirely possible that as the Department of Justice enforces product safety matters it will stumble into your company’s compliance program as a whole.
With relatively rare exception, the civil penalties assessed manufacturing and retailer companies is not as expensive as some might expect or hope. However, there is reputational harm associated these Department of Justice and CPSC announcements. Product safety compliance must be an integral part of your corporation’s overall compliance program, reportable up and through the Audit Committee and the Board. If these reports are not already a part of your board reviews, they should be.
As indicated in the Department of Justice news release: “During the relevant time period, Electrolux’s principal place of business was in Augusta, Georgia. A recall of the ovens was announced in 2008. In agreeing to settle this matter, Electrolux has not admitted that it knowingly violated the CPSA.