Take Your Customer’s Complaints Seriously
April 2002
U.S. Court Confirms Standard for Reporting Hazardous Products
The U.S. District Court for the Southern District of California recently found that a manufacturer failed to comply with a U.S. law that requires a consumer product manufacturer to advise the U.S. Consumer Product Safety Commission (CPSC) immediately upon learning that one of its consumer products may contain a defect capable of causing a substantial product hazard. The relevant statute, the Consumer Product Safety Act (the Act), has a broad reach since it defines "consumer product" to include any article, or its component, that is produced or distributed for sale to, or for the personal use of, a consumer in a residence, a school, in recreation or otherwise.
Section 15 (b) of the Act provides that a manufacturer’s obligation to report arises immediately upon learning information "which reasonably supports the conclusion" that its product could create a substantial product hazard or an unreasonable risk of serious injury or death. A filing obligation also arises from a failure to comply with a relevant consumer product safety rule promulgated by the CPSC or a voluntary product safety standard upon which the CPSC relied in promulgating such a product safety rule. The court emphasized that the statutory standard was based upon the conclusions of a "reasonable person," not a "reasonable expert." Although the defendant manufacturer eventually reported the product and commenced a recall, the court agreed with the CPSC that the company’s actions had not been timely under the Act. The manufacturer now faces civil penalties and negative publicity arising from its failure to report defective and possibly unsafe products to the responsible government agency.
The court’s ruling came in United States v. Mirama Enterprises, Inc., 185 F. Supp. 2d 1148 (S.D. Cal. 2002), a case filed against an importer of juice extractors (commonly known as juicers) from China. (The Act includes in its definition of "manufacturer" those who import consumer products.) During a period of approximately 30 days, Mirama received three telephone calls and two follow-up letters reporting that consumers’ juicers had shattered and pieces of metal or plastic had broken off the juicers, sometimes with great force. Injuries resulted in two of the reported incidents, one of which required 16 stitches. Mirama subsequently received reports of another 20 incidents of juicers shattering with injuries occurring in each. Several of these required stitches and one resulted in surgery. Nine months after the receipt of the initial complaints, Mirama filed the required report with the CPSC and initiated a voluntary recall of the juicers.
Despite Mirama’s eventual report, the CPSC argued that, within the 30-day period following the receipt of the first three reports of shattered juicers, the company had received information sufficient for it to conclude that the juicer contained a defect and possibly created a substantial risk to the public, thereby requiring a report to the CPSC. The district court agreed, further finding that Mirama had not taken the opportunity provided under the Act to investigate whether a defect existed. A manufacturer must file the requisite report with the CPSC "immediately," defined as within 24 hours of its receipt of information reasonably supporting the conclusion that a substantial product hazard existed. However, the Act permits a company 10 business days prior to the commencement of the 24-hour period to investigate whether the information the company has learned (regardless of the source) reflects a reportable situation.
In Mirama, the district court found that the manufacturer had not even initiated an investigation until long after receipt of the initial three reports. Mirama, however, argued that the government’s case failed because it had provided no expert testimony supporting that a report should have been made. The court flatly rejected this argument, finding that the Act’s language, legislative history and "plain common sense" were premised upon the conclusion of the "reasonable person," not the reasonable expert.
Companies subject to the reporting obligations of the Act frequently prefer to rely on the findings of independent testing laboratories prior to deciding whether to report to the CPSC. In Mirama, the district court recognized that there may be circumstances where determining the existence of a defect and, therefore, a substantial product hazard, may be beyond the abilities of a reasonable person. However, Mirama knew of several reports that its kitchen appliance had shattered, some of which involved serious injury. In these circumstances, according to the court, a reasonable person could easily draw the conclusion necessary for a reporting obligation to arise.
The implications of the Mirama discussion are clear. Investigations conducted by any manufacturer, importer, distributor or retailer upon receipt of information raising any question about the safety of its product require priority and deliberate speed. (The Act’s reporting obligations apply to distributors and retailers, although they are somewhat less comprehensive than those to which manufacturers are subject.) If Mirama had followed the guidance set forth in the CPSC regulations implementing the Act, the company would have evaluated whether a substantial risk of injury existed by examining several factors, including the following:
- whether a defect in the product existed, either in its manufacture, marketing, labeling, instructions or any other aspect of the product;
- the hazard created by the alleged defect;
- the pattern of the defect¾ whether it arises from the product’s design, construction, packaging, warnings or elsewhere;
- the number of defective products sold; and
- the severity of the risk, e.g., the number and severity of reported injuries, the intended or foreseeable use of the product and the population typically exposed to the product such as children, the elderly or the handicapped.
An evaluation of this type requires a significant amount of judgment. Obviously, not every consumer complaint about a product’s quality or performance is reportable. Conversely, procrastination– where the CPSC can easily assert that a reasonable person would have concluded that a substantial risk of injury could result from the product– will result in penalties and adverse publicity.
What Happens After the Report?
The Act and regulations for implementation suggest that, after a company files a report with the CPSC under Section 15(b), the company should design a voluntary corrective action program, which includes a recall, repair, retrofit, refund or reimbursement for the allegedly defective product. Alternatively, the company can await the CPSC’s decision as to whether the circumstances reported present a substantial product hazard, either on a preliminary or eventually a final basis. Most companies, upon filing a report, implement at least minimal corrective action even if not a full-fledged recall, e.g., placing a stop sale on the product and requesting the return of existing retailer inventory. Following the CPSC’s preliminary determination, companies typically design and obtain CPSC clearance for a more detailed and focused plan to obtain the maximum number of products from the marketplace and consumers.
In 1997, the CPSC created a "Fast Track Program" for a reporting company to implement voluntary corrective action plans. Under the program, a reporting company can generally avoid the CPSC’s preliminary determination of a substantial product hazard by undertaking corrective action on an expedited basis, with the approval of the CPSC. Such corrective action must be executed within 20 business days of the company’s initial report to the CPSC in order to qualify for Fast Track treatment.
The type of corrective action cleared by the CPSC in a Fast Track situation is similar to what the CPSC would otherwise ultimately require. However, many reporting companies choose the Fast Track because it largely eliminates the risk that the CPSC will make a preliminary determination of a substantial product hazard that may be revealed in subsequent product liability litigation. Also, companies typically have already determined to commence a recall effort of some level in order to get the potentially hazardous product off the market and minimize potential liability.
The corrective action undertaken by a company after clearance by the CPSC includes strategies to communicate the product risk to maximize notice to the consumers and subsequent return of the affected product. These include a joint press release issued by the CPSC and the reporting entity; direct consumer notification (such as letters to known purchasers); point-of-sale posters at retailers or distributors that sold the product; paid advertisements in publications likely to be read by consumers of the product; video news releases demonstrating the hazard created; and notice in locations frequented by the product’s consumers, such as doctors’ offices if a child’s toy or other product is involved.
Notwithstanding the initiation of a corrective action plan, the commission still investigates and seeks civil penalties from companies it believes have not complied in a timely fashion with the reporting obligations outlined above. The maximum civil penalty under the Act for failure to report is $1.6 million for a related series of violations. A "series of violations" is defined to be each product for which there is a failure to report and each day the failure to report continues. Last year, the CPSC sought its largest civil penalty ever, amounting to $4.5 million against Wal-Mart for the failure to report possible substantial product hazards in three different models of exercise equipment. The CPSC sought the maximum penalty (then $1.5 million) for each of the three different models. Criminal penalties can also be sought against a corporation, its director, officer or agent, including incarceration for a variety of offenses. These include knowingly and willfully failing to abide by final CPSC orders, product safety rules or standards.
Most penalties sought for failure to report in a timely fashion are resolved by a consent agreement between the offending party and the CPSC. Such a settlement will provide for the payment of civil penalties and is a matter of public record for comment. The allegations made by the CPSC that accompany such a settlement are, of course, available for the plaintiff’s use in product liability litigation, and the company will likely evaluate the need to disclose and explain any consent agreement in financial statements.
Simple and Practical Precautions
Manufacturers and sellers of consumer products can take some simple precautions to avoid finding themselves in the situation confronted in Mirama and the monetary penalties and additional negative publicity that will follow. Many CPSC enforcement actions reveal circumstances where a corporation’s executive personnel had little or no knowledge of consumer safety complaints, reports of product failure or failure to assess a possible product defect (or lack thereof.) Or, the executives may have had an awareness of the potentially unsafe products but were unclear on the company’s reporting responsibility or the manner in which to best undertake the necessary action. In both situations, basic internal systems could avoid adverse CPSC consequences.
In order to avoid potential liability, fines and negative publicity, we recommend that consumer product manufacturers, importers and retailers take the following steps:
Design and implement systematic company processes providing for receipt, organization, investigation, maintenance and follow up of consumer reports. Assign responsibility for making and ensuring periodic, yet timely, reports to appropriate corporate managers, e.g., the risk assessment manager, general counsel, chief financial officer or other "front office" executives. Recognize that merely establishing a "Consumer Service Department" to receive and organize consumer complaints is insufficient if the information accumulated is never communicated to a company’s legal department, executive personnel or those individuals most likely to take the appropriate action.
Establish a system for the immediate review of any other information, report or communication that asserts safety concerns about a company’s consumer product. Sources other than consumers, e.g., retailers, scientific and trade associations or court filings, frequently raise questions about the way in which a product may have been designed, manufactured, labeled, advertised or the instructions for use included with the product. A system needs to facilitate the quick detection of the volume or pattern of similar reports for a particular product.
Form a "swat team" that sanctions the quick yet thorough review, investigation and response to any information that could reasonably lead to the conclusion of a substantial product hazard and, therefore, a reportable situation. This group must be prepared and authorized to quickly suspend sale of the particular product, notify retailers to place a "stop sale" on the product and to potentially begin the development of a corrective action plan. If a corrective action plan is submitted to the CPSC and ultimately cleared, the agency then monitors the effectiveness of the corrective action program and may require additional steps if the number of products returned is not sufficient.
Establish a system and procedure for periodic, substantive testing of the company’s products or insist upon the same performance by their suppliers. Companies should ascertain which universal standards organizations, e.g., underwriters laboratories, establish standards covering their products and ensure compliance with any relevant standard including those relating to required labeling.
Ensure periodic confirmation that a product supplier has manufactured a product according to specifications. Include in this review questions as to whether requested parts and components have been utilized.
Review promptly and carefully any correspondence from the CPSC involving the company’s product(s) and take appropriate action expeditiously. The CPSC forwards to the manufacturer, importer or retailer any consumer complaint, letter, e-mail or other report alleging any problem with the product and any resulting injuries. The agency provides a period of time for a response by the company, primarily for the company to correct or explain any incorrect or misleading information. These CPSC letters should not be ignored. The agency views this as "placing the company on notice" as to information that might be relevant in concluding that a substantial product hazard exists and could necessitate a report to the CPSC. Retain an independent organization to conduct a "consumer safety audit" consisting of a review and evaluation of the manner in which the company has implemented the type of procedures and systems recommended above and what additional procedures the company should add. A law firm (such as McDermott, Will & Emery) or a consulting organization that participates in the design and implementation of product recalls can conduct such an audit.
Cost-Benefit Analysis
Mirama underscores the potential for consumer injury and commercial damage when a company delays in evaluating information that reflects upon the potential safety of its product. Waiting for an expert’s evaluation is an insufficient response if a reasonable person would conclude that a product might cause a substantial product hazard or an unreasonable risk of serious injury. Mirama’s failure to follow rudimentary procedures will potentially result in additional litigation, product liability claims and assessment of civil penalties, either by the CPSC in a consent degree or the district court after the next phase of this case.
Any civil penalties assessed or agreed to may not be as harmful commercially or financially as the adverse publicity for Mirama and its products that will result. Increasingly, more companies recognize that voluntary product recalls conducted in a timely and efficient fashion do not result in any significant level of negative publicity for their products or their companies’ reputation with consumers, distributors or investors. Quick action establishes consumer confidence in a company’s commitment to its customers.
In contrast, recent widely publicized recalls have been situations where the company arguably had information regarding the defective product (and possible resulting injuries) for some time and failed to take any action to report the defect or recall the product from the marketplace. In short, companies confronting circumstances that they must evaluate to determine whether a report to the CPSC is required are well-advised to look beyond the potential short-term costs of timely compliance and focus, instead, on the possible long-term implications resulting from their inattentiveness or delay.
