CPSC Civil Penalties and Small Businesses
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One of the most important sections of the Consumer Product Safety Act (CPSA) is 15 (b) [15 U.S.C. §2064]. It requires manufacturers, distributors, importers and retailers of a consumer product that contains a defect, which could create a substantial product hazard or creates an unreasonable risk of serious injury or death, to immediately report the relevant information to the Commission.
Through the years, including the twenty year period when I was Director of Compliance and Enforcement, the reporting obligation has proven to contribute enormously to public safety. The Commission receives four to five hundred reports a year; more than half of them result in the reporting company recalling products that can create serious injuries.
The Unique Nature of a Small Company
No one knows more about the safety of their product than the manufacturer, importer, distributor or retailer. Failure to report relevant safety information is a violation that the Commission should, and does take very seriously. That does not mean that the Commission’s staff investigating a civil penalty for violations for failure to report should not give appropriate weight to the impact that the investigation itself can have on a small business.
I represented a small business that was notified that it was distributing a defective product. My client voluntarily recalled the product. Because there were very few products distributed, the recall only cost my client approximately $25,000; however, $25,000 was a significant amount of money, considering my client’s size and financial situation.
The investigation itself was, in my opinion, far more detailed than necessary to determine if the Commission should pursue a civil penalty and in what amount. I had to spend over a hundred hours not trying to convince the General Counsel’s office to waive the civil penalty, but to respond to a very detailed request for information.
Because of my client’s financial position, unless I made a special arrangement, it would have been impossible to present an adequate defense.
Small Business Remedies
In considering the appropriate civil penalty, the Commission’s regulations regarding small business enforcement policy at 16 CFR 1 020.5 states that the Commission will waive or reduce penalties for violations of a statutory or regulatory requirement and consider a small business’s ability to pay in determining a penalty assessment. The Commission may decline to waive civil penalties based on the seriousness of the violations and other factors. My client clearly fell within the Small Business Administration’s small business category.
The Commission’s regulations in determining civil penalties states that among the factors to be considered are:
- The appropriateness of such penalty in relation to the size of the business of the person charged
- How to mitigate undue adverse economic impacts on small businesses
- The relationship between the size of the business of the person charged and the deterrent effect of civil penalties
In considering business “size” the Commission may look to several factors including the firm’s number of employees, net worth, and annual sales, and where appropriate, the Commission may be guided by any relevant financial factors to help determine a violator’s ability to pay a proposed penalty including: liquidity factors, solvency factors, and profitability factors.
Mitigating “Undue” Adverse Economic Impact
The Commission is required to consider how to mitigate the adverse economic impacts on small business violators only if those impacts would be “undue.” What the Commission considers to be “undue” will vary based upon the violator’s business size and financial condition as well as the nature, circumstances, extent and gravity of the violation(s). When considering how to mitigate undue adverse economic consequences, the Commission may also follow its Small Business Enforcement Policy set forth at 16 CFR 1 020.5.
Civil penalties for violations of Section 15 (b) are an important deterrent to prevent companies from violating the requirements of that important Section. However, in this economic climate, when small businesses represent such an important part of our economy, including the generation of jobs, the Commission should seriously consider the impact of the investigation on the company and whether the amount of the civil penalty is causing an undue hardship on a small business.
In my small business client’s case, I was able to convince the Commission to waive the civil penalty, which I understand is a rarity.
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David Schmeltzer is a childrenswear and children’s products industry colleague of Phillips Nizer attorney and frequent Giggle Guide contributor, Jeremy D. Richardson. Dave is a special consultant to Phillips Nizer for consumer products safety compliance matters.
For over 20 years, prior to his role as a consultant, Dave was the Director of Compliance and Enforcement for the U.S. Consumer Products Safety Commission (CPSC). As a product safety consultant Dave advises manufacturers, importers and retailers on CPSC issues, laws and regulations, and negotiates and manages safety recalls. He joined the CPSC in 1973 shortly after the U.S. Congress authorized the agency. For four years, he served as an Assistant General Counsel and then Deputy General Counsel, where he was instrumental in most aspects of the CPSC’s rule-making activities and interpretations of the new law.
Dave is also a consultant for Stericycle ExpertSOLUTIONS, a global leader in providing product recall, retrievals, returns, audit and marketing services. ExpertSOLUTIONS delivers a suite of offerings to protect consumers, brands and the environment while reducing corporate risk.
Dave can be reached at or (301) 656-8377.
