Dangerous Goods

Parents across America reacted with shock and anger when Mattel Inc. yanked 9 million toys from store shelves in August 2007. Some Polly Pocket playsets and Batman action figures contained unsafe amounts of lead; others contained small magnets that were potentially deadly if swallowed by a child.

In the months that followed, the El Segundo, Calif.-based toymaker was by no means the only company to recall a children's product due to unsafe lead levels. American companies undertook more than 100 recalls of unsafe toys in 2007. The recalls set off a wave of news reports questioning the safety of products imported from China.

Amid growing public indignation, the federal agency charged with ensuring the safety of consumer products was nearly dormant. The Consumer Product Safety Commission (CPSC) had been operating with a stagnant budget and shrinking staff for nearly three decades. Its role had been reduced to merely supervising voluntary recalls undertaken by companies that self-reported safety hazards.

With political pressure for tougher federal standards and more stringent enforcement efforts steadily mounting, Congress passed sweeping amendments to the Consumer Product Safety Act with overwhelming bipartisan support in August. The Consumer Product Safety Improvement Act (CPSIA) will dramatically, and swiftly, change manufacturers' obligations for ensuring that the products on store shelves are safe. Concurrently, the new legislation will likely expose companies to a greatly increased risk of private civil lawsuits.

"Private plaintiffs piggyback whenever a company discloses that it has a dangerous product," says Joseph Beck, a partner at Kilpatrick Stockton in Atlanta. "The statute forces you to lay the groundwork for that lawsuit by self-reporting. And the amendments make it even easier for plaintiffs lawyers to get that information."

Tougher Standards
Before worrying about increased activity from the plaintiffs bar, manufacturers will first have to contend with significantly stronger regulatory enforcement. The CPSIA greatly increases the civil penalties the CPSC can impose on companies that fail to report potential product defects. The old statute provided a $5,000-per-violation fine, capped at a maximum of $1.25 million. The new law raises that to $100,000 per violation with a $15 million cap.

Along with its ability to assess higher fines, the CPSC will also get increased authority to demand companies undertake mandatory recalls and direct the manner in which such recalls are conducted--for instance, by requiring the notice to be issued in languages other than English or the company to provide a replacement or refund for the recalled item. The Act also calls upon the CPSC to develop a host of new mandatory standards governing everything from product labeling to safety standards for battery-operated toys.

To carry out this mission, the Act provides the agency with a big boost in staff and budget for the first time since the commission was created in the 1970s. It calls for the addition of 500 new full-time employees and increases the annual budget to $136 million over the next five years.

"For a long time, the CPSC had given up on creating mandatory safety standards and only dealt with violations retroactively by supervising recalls," says Kenneth Ross, of counsel at Bowman & Brooke and co-author of the Products Liability Prof Blog. "With the increase in personnel, we're likely to see more focus on enforcement and development of mandatory standards."

Even if the increased staff and budget do not make the CPSC more aggressive in the short term, the Act creates a second level of enforcement by authorizing state attorneys general to go after violators that the federal commission is not pursuing.

Information Overload
Companies are also concerned about a provision that requires the commission to develop a public, searchable Internet database about product safety. This database, which will go live in October 2010, will index the complaints consumers submit to the commission about unsafe products and the details of any voluntary corrective actions manufacturers take. Many products liability lawyers foresee this database becoming a plaintiffs attorney's playground.

"There's the potential for a great deal of mischief here," Ross says. "A lot of people complain to CPSC, so there's the potential that the information in this database will be inaccurate, premature and incomplete. It's unclear at what point a company can object to material that impacts its reputation."

At the same time, the database will serve as a reference guide for plaintiffs lawyers looking to recruit litigants for potential class action suits. Some observers are concerned that plaintiffs lawyers may actively encourage people to make complaints about products in order to inflame public sentiment or build a case that a company should have known its product was unsafe.

The Act also will give product recalls greater publicity. The new law requires companies that recall products to place "conspicuous" notices of the recall not only on their own Web sites but also on the those of any third-party companies that have sold or distributed the product.

Cracking Down
Companies also have to be prepared to react quickly to the new standards the CPSIA sets for the manufacture and sale of products intended for use by children under 12.

As most companies were expecting, the Act phases in tough new standards for reducing the presence of lead in children's products. The restriction phases in with three steps: Starting in November 2008, no product may contain more than 600 parts per million total lead content; in August 2009, that goes down to 300 parts per million; and in August 2011, it will be reduced to 100 parts per million. While the risks associated with lead are well known and companies are generally keeping it out of kids' products, experts see this as an area ripe for litigation.

"The very first thing manufacturers need to focus on is getting lead out of products," Beck says. "There's an extremely tight standard, and it's amazing how many products still contain some small amount of lead."

The Act also bans phthalates, a group of chemicals, in all children's products. Phthalates are a common substance in flexible vinyl items such as raincoats, medical devices, nail polish, fragrances and toys. Medical research suggests that the chemicals may pose a risk to children.

This ban goes into effect November 2008. As a result, companies may no longer manufacture, sell, distribute or import any product containing greater than 0.1 percent of three common phthalates. In addition to complying with the ban, companies have to brace for potential lawsuits over products that once were considered safe.

"Phthalates have been in use for 50-plus years," says R. Matthew Martin, partner at Paul Hastings in Atlanta. "The ban will attract attention to phthalates as a new area of litigation. We'll certainly be watching over the next year for class action filings."

Plan in Advance
For better or worse, the CPSIA does provide companies with some help in complying with the new standards it sets. The law requires that manufacturers of children's products submit all such products to testing by an independent third-party company before importing or distributing the product.

The commission will have to develop a procedure for accrediting testing facilities by July 2009 (November 2008 for facilities that will evaluate lead content). The testing requirement goes into effect 90 days after the CPSC publishes its requirements for accreditation of testing facilities. While the testing may pose an additional cost to companies, it also will provide assurance that the products that make it onto store shelves meet the strict new standards. And in the event of a lawsuit, it will serve as evidence of good faith efforts to comply with the law.

As the new standards of the CPSIA phase in over the coming months, the key to mitigating litigation risks will be early preparation. For many companies, this will likely mean hiring additional staff who can help with tracking products around the world.

"Understanding the timeline of the regulations as they are phased in will be key," Martin says.

Adele Nicholas

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