Latham & Watkins Litigation Department. By Peter L. Winik, Julia A. Hatcher and Laura H. Neuwirth

Transcription

1 Number 642 November 2, 2007 Client Alert Latham & Watkins Litigation Department A Surge of Product Recalls and Investigations Serves to Remind Companies of the Need to Comply with Product Safety Rules Relating to Lead and Their Reporting Obligations By Peter L. Winik, Julia A. Hatcher and Laura H. Neuwirth Companies should assess their compliance with relevant product safety standards and should have mechanisms in place to investigate, report and address, through a recall if necessary, potential product safety issues. The recent surge of recalls involving products manufactured in China, particularly children s products containing lead or lead paint, has focused worldwide attention on the product safety matters. Companies involved in the recall of such children s products are encountering a host of class action lawsuits and are being closely scrutinized from various angles. Both the US Senate and House of Representatives are closely investigating the reasons for these recalls and the ability of the Consumer Product Safety Commission (CPSC) to regulate adequately and ensure the safety of consumer products. In addition to scrutiny by federal legislators, major retailers and consumer organizations are conducting safety testing on toys and increased inspections. Overall, consumer products and the companies that manufacture and distribute them are under close watch. The increasing scrutiny of the safety of consumer products provides an opportunity for companies to reaffirm their preparedness for complying with consumer product safety rules, particularly those relating to lead, and the requirements to report product safety matters to relevant regulatory authorities. Companies also should ensure that they have mechanisms in place to address product safety risks. In addition, companies should be aware of significant, pending legislative proposals that eventually could result in new laws that may alter their legal obligations and liabilities. The following summarizes the federal product safety rules relating to lead, the reporting requirements and the recent legislative activities. Certain Products That Contain Lead are Banned Pursuant to its authority under the Consumer Product Safety Act (CPSA) and the Federal Hazardous Substances Act (FHSA), the CPSC has banned specific products that contain lead. Specifically, the CPSC has banned lead-containing paint defined as paint and similar surface coating materials for consumer use that contain lead or lead compounds and in which the lead content (calculated as lead metal) is in excess of 0.06 percent of the weight of the total nonvolatile content of the paint or the weight of the direct paint film 1 as well as toys and other articles intended for use by children, Latham & Watkins operates as a limited liability partnership worldwide with an affiliated limited liability partnership conducting the practice in the United Kingdom and Italy. Under New York s Code of Professional Responsibility, portions of this communication contain attorney advertising. Prior results do not guarantee a similar outcome. Results depend upon a variety of factors unique to each representation. Please direct all inquiries regarding our conduct under New York s Disciplinary Rules to Latham & Watkins LLP, 885 Third Avenue, New York, NY , Phone: Copyright 2007 Latham & Watkins. All Rights Reserved.

2 and furniture for consumer use that bear such lead-containing paint. 16 C.F.R The FHSA further provides that any toy or other article that is intended for use by children and that contains a hazardous substance is banned if a child can gain access to the substance. 15 U.S.C. 1261(q)(1). Accordingly, items intended for use by children, such as children s jewelry, may fall within this ban if the lead content exceeds the toxic levels discussed in CPSC guidance. 2 Although not legally enforceable, CPSC has also issued a Guidance for Lead in Consumer Products which requests that manufacturers eliminate the use of lead that may be accessible to children from consumer products. To avoid the possibility of an enforcement action, the CPSC s Guidance recommends that manufacturers who use lead in a consumer product should perform the requisite analysis before distribution to determine whether the exposure to lead causes the product to be a hazardous substance. If it is a hazardous household substance but is not intended for use by children, it requires precautionary labeling. The Guidance further notes that any firm that purchases a product for resale is responsible for determining whether that product contains lead and, if so, whether it is a hazardous substance. Thus, CPSC recommends that companies obtain information, such as chemical composition or accessibility, relevant to this determination from manufacturers, or have such evaluations conducted themselves. Complying with Reporting Obligations Reporting of Products That Could Pose Safety Risks Although several regulatory agencies in the United States have jurisdiction over various products, the CPSC is the primary federal agency authorized to establish standards for consumer products. Section 15(b) of the CPSA requires manufacturers, distributors, importers and retailers of consumer products to immediately inform the Commission of information which reasonably supports the conclusion that a product either (i) fails to comply with an applicable consumer product safety rule or with a voluntary standard upon which the CPSC has relied; (ii) contains a defect which could create a substantial product hazard, 3 or (iii) creates an unreasonable risk of serious injury or death. Low Reporting Threshold Even if a product does comply with relevant safety rules and voluntary standards relied upon by CPSC, companies may still need to assess whether a potential safety risk presents a reporting obligation under the CPSA. Despite the issuance of extensive guidance in the form of interpretative regulations concerning these reporting requirements, there is no unambiguous or objective test to determine when a company is obligated to report a product hazard to the CPSC. Nonetheless, because Section 15(b) requires reporting of information which reasonably supports the conclusion that a defective product could pose a substantial product hazard, the CPSC considers the reporting threshold to be relatively low and potentially met even where the potential hazard is not sufficiently well-documented or serious to warrant suspension of product sales or recall of products distributed to consumers. The CPSC advises companies to report if in doubt as to whether a defect could present a substantial product hazard. Reporting of Information on Goods Manufactured or Distributed Outside the United States Companies involved in the international sale or distribution of consumer products should be aware that CPSC

3 guidance indicates that information concerning products manufactured or sold outside of the United States may be relevant to the existence of potential defects and hazards associated with products distributed within the United States Specifically, such information could include incidents with the same or a substantially similar product, or component of that product, sold in a foreign country or experience, performance, design or manufacture of the same or substantially same product, or component of that product, sold in a foreign country. Thus, although the CPSC has jurisdictional limitations, the reporting obligation could extend to foreign entities that fall within the jurisdiction of the United States (such as an importer or the subsidiary of a foreign manufacturer) and could be based on information obtained relating to products sold outside the United States. As discussed further below, such information could also give rise to reporting obligations in other countries. Reporting of Lawsuits Alleging Death or Grievous Bodily Injury In addition to the Section 15 reporting requirements, Section 37 of the CPSA requires that any manufacturer or importer (but not retailer or distributor) must report to the CPSC if a particular product has been the subject of at least three product liability suits within a two-year period. Section 37 requires the reporting of only product liability suits alleging death or grievous bodily injury which result in a final settlement or in a judgment in favor of the plaintiff. This reporting requirement is distinct from the reporting requirements under Section 15. In particular, a manufacturer or importer must comply with the Section 37 reporting requirements even if it has filed any of the Section 15 reports concerning the same product. Reporting of Choking Incidents In addition to the reporting requirements under the CPSA, Section 102 of the Child Safety Protection Act requires that companies report certain choking incidents involving marbles, small balls, latex balloons, or a toy or game that contains a marble, small ball, latex balloon or small part. Civil and Criminal Penalties Even in cases where a firm voluntarily reports and/or conducts a recall, the CPSC has the authority to seek both civil and criminal penalties for violations of reporting requirements. 4 Failure to comply with Section 15(b) reporting requirements can give rise to civil penalties of up to $1.8 million, an amount that is adjusted annually for inflation. CPSC has aggressively enforced the Section 15(b) notification requirements and has imposed penalties even absent any reported injuries. In addition to civil penalties, the CPSC may seek to impose criminal penalties up to $50,000 and/or a prison sentence not to exceed one year. Toxic Substances Control Act (TSCA) In addition to CPSA reporting, products containing lead or other chemicals known to cause serious adverse effects may trigger Toxic Substances Control Act (TSCA) obligations. Although substantial and unresolved legal questions exist regarding the application of TSCA to consumer products, the US Environmental Protection Agency (EPA) has taken the position that product manufacturers and distributors have various TSCA obligations, including the obligation to report substantial risk information about product contamination. Specifically, TSCA Section 8(e) requires manufacturers, importers and distributors to report immediately any new information which reasonably supports the conclusion that a substance they manufacture, import, process or distribute presents a substantial risk of injury to health or the environment.

4 EPA s guidance and other public statements indicate the agency s view that the 8(e) obligation extends to products containing a substance known to cause serious adverse effects (based on animal toxicology studies) if its presence in the product is previously unsuspected and widespread or significant exposure could occur to the substance due to its presence. EPA recently sent a letter to a number of toy, jewelry and other consumer products companies about the 8(e) obligation as part of a settlement of a lawsuit filed by Sierra Club over lead in products. As part of this same settlement, EPA has committed to promulgate a regulation adding lead and lead compounds to the TSCA Section 8(d) Health and Safety Data Reporting Rule. If and when EPA takes this action, producers, importers and processors would be required to conduct a comprehensive file search and to submit all unpublished health and safety studies contained in their files. It is expected in promulgating the regulation that EPA would make clear its view that 8(d) extends to distributors of lead-containing consumer products, although as noted above, unresolved legal questions exist on this point. Reporting Obligations in Other Countries Companies that manufacture, import and distribute products in other countries may also be subject to reporting obligations in those jurisdictions. Of particular note is the General Product Safety Directive (2001/95/EC) implemented by each of the Member States in the European Union (Latham analyzed this Directive in Client Alert No. 622, available at Numerous other countries worldwide have reporting obligations, as well. Just recently, Japanese authorities amended the Consumer Products Safety Law to require manufacturers, importers and retailers to disclose accident information. This amendment is described in Latham Client Alert No. 592, also available at Need for Coordination Companies that manufacture, import and distribute products worldwide need to recognize that information reported and recalls undertaken in one country may have implications for managing product safety risks and interactions with regulators in other countries where the same products are distributed. In addition, the CPSC has entered memoranda of understandings with several countries to exchange safety-related information, subject to the information disclosure limitations in the laws of each country. As a result, it is imperative that companies have systems in place to ensure an appropriate internal collection and sharing of product safety information, as well as a consistent and coordinated response to such information. Legislative Developments Several US legislative proposals are currently pending in Congress to address the concerns raised by the recent increase in recalls, particularly those involving products from China and children s products that have lead or lead-containing paint. On October 9, 2007, the House passed several consumer product safety bills, most notably H.R and H.R H.R would phase in an increase to the cap on civil penalties to $10 million. H.R would require recall registration cards for durable infant products such as cribs, beds and highchairs. 5 In addition, bills introduced in both the House and Senate would ban all children s products that contain lead, regardless of whether the lead is accessible. Although there are several bills on the Senate-side, the one that appears to have the most traction is S The most noteworthy provisions in S include the following:

5 an increase to the cap on civil penalties to $100 million; an increase of the criminal penalties under the CPSA and FHSA from a maximum of $50,000 and/or imprisonment up to one year for any person who knowingly and willfully violates, to imprisonment for up to one year for a knowing violation and imprisonment up to five years for a knowing and willful violation; the requirement for third party certification for children s products; the authorization to State Attorneys Generals to enforce the provisions of the CPSA; the elimination of several of the protections from disclosure of information concerning a manufacturer or private labeler of consumer products, including the prohibition from disclosure of information submitted by a firm pursuant to Section 15(b); and the establishment of whistleblower protection which provides, among other things, that employees shall receive between percent of any civil penalty assessed and collected for a violation if the enforcement action is based on information provided by such employee. Many of these provisions, if enacted, could have a significant impact on companies and potentially subject them to multiple enforcement actions and onerous penalties. S is expected to go to markup within the next few weeks. Conclusion Companies should assess their compliance with relevant product safety standards and should have mechanisms in place to investigate, report and address, through a recall if necessary, potential product safety issues. Companies also should evaluate EPA s position regarding the potential application of TSCA to their products and adjust their compliance procedures as warranted. All of these laws allow for civil and criminal penalties; moreover, compliance issues under these laws also can fuel litigation and other adverse actions. * * * Latham & Watkins LLP has one of the world s leading international product safety practices with attorneys in the United States, Asia and Europe. An international team of Latham & Watkins attorneys have managed worldwide recalls that have been implemented in more than 40 countries and that have involved numerous regulatory authorities around the world. Latham & Watkins attorneys counsel clients and handle regulatory and investigative actions, litigation, worldwide recalls, product liability lawsuits and class actions. If you have questions relating to product safety issues in the United States or more generally worldwide, please contact Peter L. Winik (peter. winik@lw.com), the global co-chair of our Product Liability and Mass Torts practice group, Julie Hatcher (julia. hatcher@lw.com), the global cochair of our Environment, Lands and Resources Regulatory Practice Group, or Laura Neuwirth (laura.neuwirth@ lw.com), a CPSC specialist all in our Washington, D.C. office. For EU product safety issues, please contact Jean Paul Poitras (jeanpaul.poitras@lw.com) in our Brussels office or John Colahan (john. colahan@lw.com) in our London office. Endnotes 1 16 C.F.R (a). 2 The CPSC s Interim Enforcement Policy for Children s Metal Jewelry Containing Lead indicates that if the total lead concentration of any component part of the jewelry exceeds 0.06 percent lead by weight and the accessible lead from the same component part exceeds 175 micrograms, then a toxic level may be present for FHSA purposes. 3 A substantial product hazard is defined as a hazard creating a substantial risk of injury, such as death, personal injury or serious or frequent illness, to the public.

6 4 It should be noted that civil and criminal penalties also may be imposed on companies for actions prohibited by the CPSA other than the Section 15(b) reporting obligations, including, among others, the manufacture, distribution or importation of products that fail to confirm with an applicable consumer product safety standard or that have been declared a banned hazardous product. 15 U.S.C. 2068(a). 5 In addition, H.R. 814 would require CPSC to issue regulations mandating child-resistant closures on gasoline caps and H.R would require the use of anti-entrapment drain covers and pool and spa draining systems. Office locations: Barcelona Brussels Chicago Frankfurt Hamburg Hong Kong London Los Angeles Madrid Milan Moscow Munich New Jersey New York Northern Virginia Orange County Paris San Diego San Francisco Shanghai Silicon Valley Singapore Tokyo Washington, D.C. Client Alert is published by Latham & Watkins as a news reporting service to clients and other friends. The information contained in this publication should not be construed as legal advice. Should further analysis or explanation of the subject matter be required, please contact the attorneys listed below or the attorney whom you normally consult. A complete list of our Client Alerts can be found on our Web site at If you wish to update your contact details or customize the information you receive from Latham & Watkins, please visit to subscribe to our global client mailings program. If you have any questions about this Client Alert, please contact Peter L. Winik, Julia A. Hatcher or Laura H. Neuwirth in our Washington, D.C. office or any of the following attorneys. Barcelona José Luis Blanco Brussels Jean Paul Poitras Chicago Janet Malloy Link Kenneth G. Schuler Frankfurt Bernd-Wilhelm Schmitz Hamburg Ulrich Börger Hong Kong Joseph A. Bevash London John Colahan Los Angeles Mark A. Flagel Robert W. Perrin Daniel S. Schecter Madrid José Luis Blanco Milan David Miles Moscow Mark M. Banovich Munich Jörg Kirchner New Jersey Alan E. Kraus New York James E. Brandt Blair Connelly Northern Virginia Eric L. Bernthal Orange County Jon D. Anderson Paris Christophe Clarenc Patrick Dunaud San Diego Michael J. Weaver San Francisco James K. Lynch Stephen Stublarec Peter A. Wald Shanghai Rowland Cheng Silicon Valley Patrick E. Gibbs Singapore Mark A. Nelson Tokyo Bernard E. Nelson Washington, D.C. Peter L. Winik Julia A. Hatcher Laura H. Neuwirth