Hunton Retail Law Resource

October ushered in a case that might, on one hand, provoke a sigh of relief for manufacturers, distributors and retailers concerned about the upward trend in multimillion dollar civil penalties from the CPSC or, on the other hand, raise some eyebrows of concern about the extent of a court’s authority to prospectively impose auditing, compliance and training measures. See United States v. Spectrum Brands, Inc., No. 15-CV-371-WMC, 2017 WL 4339677 (W.D. Wis. Sept. 29, 2017).

Civil penalties are rarely litigated in federal court because manufacturers more typically resolve CPSC enforcement actions by agreement than by litigation. However, one manufacturer recently tested the waters in court rather than through settlement, revealing at least one court’s view of an appropriate measure of civil penalties. The result was a mixed bag. In the enforcement action, the U.S. Department of Justice (“DOJ”) prosecuted the CPSC’s allegations that the manufacturer of defective coffeemakers violated the Consumer Product Safety Act (“CPSA”) by (1) failing to timely report the defects and (2) selling recalled coffeemakers. Allegations such as these have resulted in agreed civil penalties that, on average, amounted to $2.6 million in 2015, $6.22 million in 2016 and $5.34 million in 2017 thus far. In this litigated case, the DOJ pressed for the maximum civil penalty of $30.3 million, or $15.15 million per allegation. The federal court bifurcated the trial into a liability phase and a civil penalty phase. For the liability phase, the court agreed that the evidence supported both allegations against the manufacturer. See United States v. Spectrum Brands, Inc., 218 F. Supp. 3d 794 (W.D. Wis. 2016). For the civil penalty phase, the court evaluated “the nature, circumstances, extent, and gravity of the violation” using the following statutory factors:

1. the nature of the product defect;
2. the severity of the risk of injury;
3. the occurrence or absence of injury;
4. the number of defective products distributed,
5. the appropriateness of such penalty in relation to the size of the business of the person charged; and
6. such other factors as appropriate.

15 U.S.C. § 2069(b). After doing so, the court announced an $800,000 penalty for the failure-to-report claim and a $1.1 million penalty for the sold-recalled-products claim. The court observed that the DOJ failed to provide conclusive evidence on the second, third and fourth factors. Thus, the court arrived at the much lower civil penalty amount compared to the $30.3 million sought by the DOJ, not to mention lower than many recently agreed civil penalties mentioned above.

In addition to the civil penalties, the court also issued a permanent injunction against the manufacturer to address auditing, compliance and training to prevent either violation from reoccurring, citing its power under 15 U.S.C. § 2071(a)(1)—the CPSA’s enforcement provision. See United States v. Spectrum Brands, Inc., No. 15-CV-371-WMC, 2017 WL 4339677 (W.D. Wis. Sept. 29, 2017). This section authorizes district courts to restrain violations of the CPSA, though it does not expressly and specifically authorize auditing, compliance and training programs. The opinion references the manufacturer’s challenge to the court’s authority to issue this injunctive relief, which the court rejected without discussion in this opinion. See id. at *7 n.16. Perhaps an appeal will follow on this question of the scope of the court’s injunctive authority.

As reported last month, consumers filed a class action lawsuit against a major online retailer for allegedly advertising, marketing and distributing “unfit, extremely dangerous, and/or defective” solar eclipse sunglasses. This month, the online retailer moved to either dismiss the lawsuit and compel arbitration or stay the lawsuit pursuant to the Federal Arbitration Act. The online retailer asserted that it imposes “Conditions of Use” on the order screen, those conditions contain an arbitration agreement, and the members of the potential consumer class are bound by the arbitration agreement by placing an order. The arbitration agreement includes two noteworthy provisions. First, it precludes class action lawsuits altogether. Second, it states that the online retailer will pay all arbitrator fees and costs for claims under $10,000 and will not seek recovery of attorneys’ fees and costs unless the arbitrator determines that the claims are frivolous. The motion remains pending before the U.S. District Court of South Carolina. Watch for updates here on this class action allegation.

Children’s products continued as a focus in the month of October in the world of recalls. First, five children’s products were recalled this month, representing nearly one-third of October’s recalls. Second, the CPSC voted in favor of issuing a final rule to ban children’s toys and child care articles containing more than 0.1 percent of five phthalate chemicals. Phthalates are used to make soft and pliable plastics, such as vinyl, and ingestion can have harmful health effects on children. The Consumer Product Safety Improvement Act of 2008 already bans children’s toys and child care articles containing more than 0.1 percent of three phthalate chemicals. The new rule expands that list to eight chemicals and will take effect 180 days after publication in the Federal Register.

Attorneys from Hunton & Williams LLP’s Insurance Coverage practice group weigh in regarding recent insurance coverage issues involving product recall claims:

Although October was a slow month for retailer-insurer litigation, the month was busy for those seeking to rebuild after the seventh most active hurricane season on record. Retailers in locations like Florida and Texas suffered not only physical damage to brick-and-mortar operations, but also business income losses due to short- and long-term closures. Even retailers who were not in the storms’ paths have experienced losses for supply-chain interruptions, which are insured under many commercial policies. For those who want to recover from insurance for such losses, the first 30 to 60 days after the hurricanes (i.e., right now) are important. November will be a good time for retailers to double-check they are taking the steps necessary to maximize coverage for hurricane claims – steps which Walter Andrews and Andrea DeField discuss here.

Total Recalls: 18

Hazards: Fire/Burn/Shock (5); Choke (3); Injury (2); Fall (2); Suffocation (2); Crash (2); Laceration (1); Drowning (1)

Click on the below chart for additional information.