Fortune Favors the Quick (to Report): Judge Slaps Spectrum Brands with $1.9 Million Penalty in DOJ/CPSC Tag-Team Enforcement Action

by Morrison & Foerster LLP - Class Dismissed
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A federal district court in Wisconsin recently hit Spectrum Brands Inc. (Spectrum) with civil penalties of $1.9 million for violations of the Consumer Products Safety Act (CPSA).[1]  The court’s 23-page opinion is a strong reminder of how devastating the impact can be for waiting to report violations and also shows the consequences of failing to implement robust CPSA compliance and recall programs.

This judgment provides insight into the costs and benefits of litigation versus settlement following a CPSC civil penalties investigation.  Companies may benefit from the court’s analysis of effective compliance programs when attempting to shore up their own product safety compliance and product recall procedures.  And for companies looking to acquire another company or its product line, this decision also provides strong incentives to double down on CPSA due diligence to make sure they are not acquiring a significant liability.

Case Background

In November 2014, Spectrum, a consumer products company, merged with Applica Consumer Products, Inc., which owned and sold a Black & Decker SpaceMaker line of coffee machines.  Applica began selling the SpaceMaker in 2008.  About a year later, customers started complaining to Applica that the SpaceMaker’s carafe handle was suddenly cracking and breaking.  By May 2009, Applica had received 60 reports of broken handles and 4 reports of burns.  CPSC contended that this triggered Applica’s obligation to “immediately” report a product hazard to CPSC within 24 hours.  16 C.F.R. § 1115.14(e).  Applica did not report for almost three years, until April 2012.  By that time, they had been sued in a consumer class action and had received over five dozen reports of injury.  In addition, Applica inadvertently sold an additional 641 units after recalling the SpaceMakers.

So where does Spectrum fit into all of this?  In the 2014 merger, Spectrum assumed all of Applica’s assets and liabilities.  So when CPSC and DOJ teamed up in 2015 to file an enforcement action against Applica, Spectrum was on the hook.

During the enforcement litigation, Spectrum admitted liability for the sale of recalled products but contested liability for failure to report timely. As we reported previously, the court ruled against Spectrum on the government’s failure-to-report claim, holding it liable for failing to submit a timely report to CPSC.  On September 29, 2017, after holding a hearing to determine the appropriate amount of civil penalties and injunctive relief for these reporting and sale violations, the Wisconsin federal court ordered Spectrum to pay the government $1.9 million in civil penalties and granted the government injunctive relief.  Here we walk through the court’s penalty calculation for key takeaways.

Penalty Calculation

Penalty Cap: $15 Million, Post-CPSIA Statutory Maximum Applied

The CPSA’s current statutory maximum penalty for “any related series of violations” is $15 million.  15 U.S.C. § 2069(a)(1).  And because Spectrum’s violations (late reporting to CPSC and sale of recalled products) counted as two separate “related series of violations,” the court held that the maximum penalty could not exceed $30 million (adjusted for inflation).

Notably, Spectrum did not persuade the court that the much lower $1.25 million penalty cap—which existed before the Consumer Product Safety Improvement Act of 2008 (CPSIA), and was in effect when Spectrum’s obligation to report arose—applied to the reporting violation.  The court dismissed this as a “thinly recast version of [Spectrum’s] unsuccessful argument” (which we covered previously) that the government’s claims were time barred.  Because Spectrum did not actually report until 2012, long after CPSIA was enacted, the post-CPSIA $15 million penalty cap applied.

Art, Not Science: CPSA and Regulatory Factors Applied

The court next considered the CPSA’s guidance to CPSC regarding an appropriate civil penalty.  Those congressionally identified factors are:  the nature, circumstances, extent, and gravity of the violation, including the nature of the product defect; the severity of the risk of injury; the occurrence or absence of injury; the number of defective products distributed; and the appropriateness of such penalty in relation to the size of the business.

The court also looked to the CPSA’s regulatory guidance about civil penalties, which exist to promote policies of deterring violations, providing just punishment, promoting respect for the law, and protecting the public, among others.

Finally, the court considered four specific regulatory factors:  (1) safety/compliance program and/or system relating to a violation; (2) history of noncompliance; (3) economic gain from noncompliance, and (4) failure to timely respond to CPSC’s requests for information or remedial action.

Limited Evidence on Penalty Factors Mitigated Damages

Interestingly, the court found that most of the factors weighed in Spectrum’s favor, due to the lack of sufficient evidence to substantiate the government’s position.

For example, although the carafe handles were clearly defective, the severity of the defect was unclear.  The government did not show how far the broken handles separated from the carafe, making it difficult to assess the risk of “catastrophic failure” that could lead to severe injuries from broken glass or hot coffee.

On injury, the government also provided “no evidence regarding any injuries that a customer actually sustained by virtue of a failed handle (as opposed to those self-reported by customers),” and the court pointed out that only “one customer indicated receipt of medical attention.”

Similarly, the government provided “no evidence” on whether Spectrum had a history of failing to comply with the CPSA or whether it responded appropriately to CPSC correspondence.

No Robust Compliance Program a Big Factor in the Penalty Phase

The biggest  issue for Spectrum related to its safety and CPSA compliance programs.  The court found that although Spectrum had systems in place, they were found to be inadequate.  The court noted that those systems failed to (a) flag the defect, (b) prompt Spectrum to report timely that information was accumulating on failed coffee makers, and (c) identify “the dangerous trend emerging from the sale of the defective carafes over time.”

The court specifically pointed out the disconnect between information being gathered by Spectrum’s engineers about quality, and the information being gathered by consumer complaint specialists about safety.

Penalties for Selling Recalled Products Exceed Those for Untimely Reporting

For untimely reporting, the court imposed a graduated penalty scale, with higher penalties per complaint received as time went on and complaints mounted.  For each complaint received in the first six months after Spectrum’s reporting obligation arose, the court set the per-complaint penalty at $10, which represented the “rough profit on the sale of [each of] those defective products.”  For complaints received in the next six months, the court increased the per-complaint penalty to $75, representing the defective product’s purchase price.  And for each six-month period after that, the per-complaint penalty doubled ($150 per complaint, then $300, then $600, and so on) to reflect the “increasingly egregious failure to report.” All told, the final penalty for the reporting violation was $821,675, broken down as follows:

For selling recalled products—which the court found to be the more egregious violation—the court imposed a $1,000 and $2,000 per-unit-sold penalty (the more expensive one for later shipments).  The final penalty for selling recalled products was $1,115,000, or 56% of the total penalty.  This more punitive per-unit amount was justified, the court said, given “Spectrum’s size and sophistication,” its lack of “defined procedures for executing the recall,” lack of “pro-active material oversight on recalled product,” and lack of “automation to prevent outbound shipments” of recalled coffee makers.

Injunctive Relief Focused on Compliance Programs and Education

 Spectrum was also ordered by the court to maintain “sufficient systems, programs, and internal controls to ensure compliance with the CPSA” and its regulations, including reporting requirements.  Spectrum was required to file a notice with the court indicating the improvements implemented.

Additionally, the court ordered Spectrum to send a copy of its civil penalty and summary judgment opinions and orders to its directors, officers, management-level employees, and in-house attorneys involved in the sale, manufacture, distribution, or importation of consumer products.

Conclusion

Spectrum’s $1.9 million penalty and injunctive order highlight the need for consumer products companies to regularly audit their safety, compliance, and recall procedures to ensure they quickly identify, escalate, report, and remediate potential consumer hazards.  This case also underscores the need for high-level company management and in-house counsel to be familiar and comfortable with CPSA requirements so they can quickly mobilize if the company identifies a product hazard, triggering a reporting obligation or recall.  Finally, Spectrum serves as a warning to consumer products companies involved in mergers or product line acquisitions.  Performing robust due diligence on a target product or company regarding CPSA compliance can prevent acquisition of a significant liability down the road in the event of a CPSC investigation and increasingly common enforcement action.

[1] United States v. Spectrum Brands, Inc., No. 15-CV-371-WMC, 2017 WL 4339677, at *9 (W.D. Wis. Sept. 29, 2017).

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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