Date: Oct 30, 2017
This article appears here on Law 360.
A Wisconsin federal court has resolved a rare legal challenge to the U.S. Consumer Product Safety Commission’s (CPSC) attempt to seek civil penalties against Spectrum Brands for violations of the Consumer Product Safety Act (CPSA). Each party can claim a victory of sorts. The judge agreed that CPSC had demonstrated that two violations occurred—a failure to report the existence of a defect that could cause a substantial product hazard and sales of recalled products. However, CPSC did not justify its proposed $30+ million penalty, and the judge reduced the civil penalty award to a fraction of CPSC’s requested amount. Because lawsuits involving CPSC statutes are extraordinarily rare, companies that make, distribute, or sell consumer products will find much food for thought in the decisions.
Background: The Liability Phase
The case arose after Spectrum’s predecessor-in-interest failed to report coffeemaker defects in a timely fashion and sold recalled products in violation of the law. The company’s former subsidiary, Applica Consumer Products, ultimately recalled the coffeemakers jointly with the CPSC in 2012.
The CPSC filed a complaint in 2015 against Spectrum Brands, alleging that Spectrum had not reported to the CPSC on time, and knew or should have known that the coffeemakers contained a defect that posed a substantial product hazard much earlier. CPSC also charged Spectrum with selling recalled products after the recall announcement, in violation of the CPSA. The judge bifurcated the case, ruling first on liability before getting to the matter of civil penalties.
In its 2016 liability decision, United States v. Spectrum Brands, Inc., 218 F. Supp. 3d 794, 817 (W.D. Wis. 2016), the court found that the company had committed two violations of the statute, and it rejected two of Spectrum’s key arguments. First, Spectrum contended that the 5-year statute of limitations began running in May 2009, so CPSC’s lawsuit, which was not filed until 2015, was a year too late. The judge, however, determined that the 5-year limitations period begins to run when the violation is complete, which is “when [the company] eventually reports or gains actual knowledge that the government is adequately informed.” The judge rejected Spectrum’s assertion that the Supreme Court’s decision in Gabelli v. Securities and Exchange Commission, 568 U.S. 442 (2013) started the statute-of-limitations clock when the obligation to report first arose, so CPSC’s filing was not time-barred.
Second, the judge supported CPSC’s view that reporting is required if there is a defect that could create a substantial product hazard, “even when the risk of serious injury is in doubt.” This sets an extremely low standard for reporting that could increase the risk of civil penalties for non-reporting, particularly when coupled with a position that the statute of limitations does not run until the CPSC is informed of the risk.
The Civil Penalty Phase
In his September 2017 decision assessing civil penalties (United States v. Spectrum Brands, Inc., Case 15-cv-371-wmc (W.D. Wis.)), federal district Judge William Conley assessed a civil penalty of just $1,936,675, but issued an injunction requiring Spectrum to implement a compliance program to ensure conformance with CPSA requirements. The court’s decision relied on a detailed analysis of factors related to the timeliness of reporting, the post-recall sale of products, and the effectiveness of the company’s compliance programs.
Based on the timing of the failure to report and post-recall sales, the court found that the maximum civil penalty possible was $30.30 million ($15.15 million for each violation). The company argued that the failure to report had arisen before the Consumer Product Safety Improvement Act of 2008 (CPSIA) increased penalty amounts from a maximum of $1.825 million to $15.15 million (in each case cost-adjusted for inflation). However, due to the court’s earlier conclusion on liability, the court applied the CPSIA’s civil penalty maximum for the failure to report. (Because post-recall sales were not illegal until after CPSIA’s adoption, only the CPSIA thresholds could have applied).
Nevertheless, the factors that the court found most persuasive in assessing actual civil penalties generally favored Spectrum. This included CPSC’s failure to provide admissible evidence on several points, such as the risk of severe injury, the nature of the defect, and defendant’s actions, sincerity, and motives in addressing non-compliance. These shortcomings substantially reduced the civil penalty amount relative to the maximum.
For the failure-to-report violation, the court calculated penalties based on the number of consumer complaints, aggregated in six-month periods from the date the court thought Spectrum should have reported. The civil penalty included the profit per unit complained about in the first six-month period ($10 each); the total price per unit complained about in the second period ($75 each); and multiples of the total price per unit for each successive period ($150 each in the third period, then $300 and so on, finally totaling $2,400 for each complaint in the last period). This yielded a total penalty of $821,675 for the reporting violation, approximately 5.4% of the $15.15 million maximum.
The company’s failure to stop post-recall sales—compounded by a litany of missed opportunities to do so—was particularly egregious in the court’s view. The judge levied penalties of $1,000 for units sold from the first incoming shipment that the company received after the recall, and then $2,000 per unit sold from the second incoming shipment the company received after the recall.
CPSC also sought a permanent injunction requiring Spectrum to (1) implement or overhaul its CPSA compliance programs and (2) certify that individuals responsible for compliance had been trained and made aware of the court’s summary judgment opinion. The company offered an independent expert’s assessment of its internal compliance program to demonstrate it already had sufficient policies and procedures in place to address CPSA compliance, but the court found the assessment inadequate. Significantly, the court found the expert’s review inadequate because it was only a “paper” review, rather than an audit of the implementation of the compliance plan in practice. There was also no evidence as to whether the compliance program was implemented before the non-compliance arose. Accordingly, the court found that CPSC had made an adequate showing of the need for permanent injunctive relief.
This is now the second court to reject the argument that the statute of limitations for failure to report under the CPSA arises when a company first obtains information reasonably supporting the conclusion that a product poses a substantial product hazard. See United States v. Michaels Stores, Inc., No. 3:15-cv-1203 (N.D. Tex. Mar. 21, 2016). Both courts agreed with CPSC’s contention that the failure to report violation continues until the company reports or actually knows the CPSC has obtained information about the alleged hazard.
The decision confirms CPSC’s position that any information suggesting the existence of a defect that could create a substantial product hazard should be reported. However, it is often extremely difficult to separate when information about a product—particularly in the absence of any injury or near-injury—implicates safety rather than simply quality or customer satisfaction. Setting an extremely low bar for reporting can make the quality/safety analysis extremely challenging, and raises another question: will CPSC will be flooded with many new reports, due to fear of civil penalty exposure, and if so, how will that affect CPSC’s resources and priorities?
Conversely, the relatively low level of penalties assessed by the judge compared with both CPSC’s demand and prior civil penalty agreements that have reached over $15 million validated Spectrum’s decision to fight CPSC’s demand. CPSC could not show the judge that the violations were as egregious as it asserted. CPSC has publicly stated that it will not negotiate its civil penalty demand, but its failure to provide key evidence on several points undermined its case. Spectrum’s success in substantially reducing the penalty may encourage other companies to similarly challenge excessive penalty demands by CPSC that it may be unable to support.
Finally, it is worth noting that the judge was not impressed by Spectrum’s compliance program, and was particularly concerned about the failure to stop new shipments of products after the recall was announced. Although the number of units sold was relatively small, that failure appeared to be significant in shaping injunctive relief as well as a portion of the civil penalty. The decision serves as a reminder that whatever the agency, compliance programs—however robust in text or principle—should be carefully observed and enforced in practice, and evaluated to confirm their effectiveness.