July 20, 2016

Introduction

In recent weeks, the Commission’s civil penalty policies have drawn considerable interest and comment from our fellow Commissioners and some members of the regulated community.[1]  This comes as little surprise, as the Commission is now negotiating civil penalty settlements pursuant to its enhanced authority under the Consumer Product Safety Improvement Act of 2008.[2]  Under this enhanced authority, civil penalties have increased in size in the past two years – as Congress clearly intended.[3]

As the Commission has sought and obtained higher penalties, we have heard numerous complaints that the agency’s approach suddenly suffers from significant defects, including a lack of transparency, indifference to due process, and unclear settlement terms.  Moreover, CPSC staff has been criticized for inappropriately judging firms’ allegedly reasonable behavior from the perspective of hindsight.  Based on these allegations, agency critics have urged an enormous undertaking by the Commission to prioritize exploring and redesigning its civil penalty system, effectively displacing work intended to save lives and prevent injuries.

We do not claim that the Commission’s policies and operations cannot be improved. But we believe that many of these complaints, upon further scrutiny, prove unpersuasive.  Our concern is that these sudden calls for “transparency” and increased “due process” are really just calls for lower civil penalties and a decreased responsibility on behalf of companies to report unsafe products in a timely manner.  Our concern seems particularly warranted considering these calls are not coming from consumer advocates but rather from those who have or might have to pay higher civil penalties.[4] 

 

 

Civil Penalties at CPSC: Few and Far Between

Most civil penalties at CPSC arise as timeliness cases under section 15(b) of the Consumer Product Safety Act, i.e., the failure by a firm to notify the agency immediately upon obtaining information that a firm’s product presents a potentially serious safety hazard.[5]  In order to fulfill our safety mission, we must rely on the commitment of the regulated community to comply with this provision of the law.  We believe that civil penalties, thoughtfully applied, provide critical incentives for companies to meet their legal obligations.  Civil penalties cannot be the only mechanism for promoting compliance, but they play an important role.

Each year, CPSC receives roughly 500-600 15(b) reports.  And, as our colleague, Commissioner Robinson, has noted, CPSC actually has levied a very small number of civil penalties.[6]  In fact, for the past ten years, the number of civil penalty settlements approved by the Commission is barely more than two percent of the number of 15(b) reports filed with the agency – hardly the measure of an agency running amok.[7]

 

 

Critical Policies Behind Civil Penalties

As noted in the Commission’s regulation on civil penalties, the policies and purposes behind such penalties include deterring future violations and protecting the public from dangerous consumer products.[8]  We are particularly concerned that these goals be met because protecting the public from dangerous consumer products is our primary mission.  And, one important way to do that is to make sure that calculating the costs and benefits of ignoring the law weighs heavily towards compliance.

We have often heard (and occasionally made) statements to the effect that firms should not coldly look at compliance simply as a cost of doing business because there is a moral component as well as a legal one to complying with the law.  That said, we understand that reputable firms may assess the costs of compliance in order to produce and price their products appropriately.  Our task is to ensure that the costs of violating the law are to be strongly avoided rather than willingly embraced.[9]

It is clear that Congress had this in mind in the CPSIA when it substantially boosted the amount of civil penalties the Commission could seek.  For example, the report accompanying the House Bill, HR 4040, states:

The CPSC also needs better enforcement tools, including the power to impose higher penalties, so that the penalty for manufacturing or selling an unsafe product will act as a real deterrent to wrongdoing and not be simply dismissed as a cost of doing business.[10]

Similarly, the Senate report accompanying Senate Bill, S.2045, describes the bill’s intent to raise civil penalty caps “in recognition that the previous penalties had been insufficient to motivate compliance and had not kept pace with inflation.”[11] 

An obvious corollary of raising civil penalties in the CPSIA is that behavior that merited a particular penalty prior to the Act’s passage henceforth should draw a substantially higher penalty.[12]  That is, facts similar to those in cases before the enactment of CPSIA should now result in higher penalties.[13]  Thus, it should have come as no surprise when one of us (Chairman Kaye) alerted the agency’s various stakeholders in a speech at the International Consumer Product Health and Safety Organization (ICPHSO) in 2015 that higher civil penalties were in the offing.[14]  Of course, we were not surprised to see the negative reaction from some of our friends in the product safety community.  What disappointed us was the distortion of Chairman Kaye’s remarks to suggest an embrace of higher civil penalties simply for the sake of having higher penalties.[15]   

 

Transparency and Clarity Concerns

Perhaps the most frustrating criticism leveled against the Commission is that the agency operates in a non-transparent manner when we assess civil penalties.  We are told that CPSC needs to share more information about the facts and factors that enter into our valuations of civil penalties in order to permit the regulated community to understand the agency’s rationale in penalty cases. 

The most polite response we can offer is that our critics want it both ways.  When firms file section 15(b) reports, they unhesitatingly avail themselves of a provision in section 6(b) of the CPSA, which was added to the agency’s law in 1981 and which generally bars the agency from disclosing any information in these reports.[16]  Moreover, when the agency’s staff then negotiates a civil penalty settlement, firms invoke 6(b) provisions in the CPSA that set roadblocks to the agency’s disclosing information about their wrongdoing.[17]  Our colleague, Commissioner Mohorovic, has suggested that the Commission “anonymize” salient facts from settlements in order to provide greater detail about the Commission’s reasons for insisting on certain settlements.  While we are open to exploring this concept, we suggest that this might be easier said than done.  The problem is that additional critical facts from most of our recent settlements might well have to be made so vague that they would provide little guidance or so detailed that members of the public could readily ascertain the identity of the firm involved, thereby running afoul of the provisions of section 6(b).  We would add that nothing in the law prevents any firm from voluntarily agreeing to the release of case details to assist future parties in understanding how and why settlement amounts have been set, and we would support negotiating to provide additional details to the public when settling civil penalty cases.[18]

When we read complaints about the agency not providing sufficient information for the public to know the factors that went into the agency’s determination about proper civil penalties, we cannot help but feel frustrated.  Our critics’ calls for greater transparency ring hollow when contrasted with their refusal to release such information when they are the party involved in a civil penalty case.[19]  

Coupled with the criticism that CPSC’s approach to civil penalties lacks transparency is the charge that our governing statute and implementing rules are overly vague and unclear, thereby undermining the regulated community’s ability to comply with the law.  While the concept of a substantial product hazard is one broadly stated in the law, we believe that firms  have ample regulatory guidance to determine whether or not to file 15(b) reports with the agency. 

We point out the obvious: when it comes to firms making the judgment call about filing a 15(b) report, there are no omniscient CPSC guidelines that address every nuance of every product safety concern – nor could there ever be.  That said, we believe that CPSC has provided sufficient clarity in its rules regarding when companies should file 15(b) reports, including a lengthy set of examples illustrating when firms need to report and when there is no such need.[20]  In fact, these rules have been on the books for almost 40 years without significant complaints regarding their clarity.  Even more to the point, CPSC has been seeking civil penalties for timeliness violations for decades with less written guidance regarding the assessment of penalties than we have currently – again, with little or no complaint regarding a lack of clarity in our assessments.  The only significant change we can see is that the amount of potential civil penalties has increased,[21] hardly a reason for the sudden discovery of numerous deficiencies in CPSC rules and practices.[22] 

Perhaps the most common criticism of CPSC’s civil penalty approach is the alleged failure of the agency to provide clarity on which factors play a role in our assessment of civil penalties and how much weight is given to each factor in determining the amount of penalty to seek or compromise.  For example, critics point to cases in which products associated with few injuries or relatively minor injuries have paid penalties substantially similar to those assessed against firms with products that have caused numerous injuries or relatively serious injuries.  To them, such results demonstrate the need for greater clarity and guidance from CPSC regarding what is important and what is not in civil penalty assessments.

As a threshold matter, we note that the Commission considered this issue in 2006, 2009 and 2010, and approved the current rule interpreting the factors to be considered when seeking civil penalties.[23]  At that time, many industry groups, while advocating for increased transparency in the process generally, advocated against a matrix or formulaic approach to interpreting the factors, presumably because they understood that both CPSC and the respondent must have flexibility when negotiating civil penalty settlements on a case-by-case basis.[24] 

Even taking into account this need for flexibility, we are skeptical about the charge that similar cases have produced significantly different civil penalties at CPSC.  We are particularly unmoved by claims that cases with different injury patterns automatically deserve different civil penalties.  To be clear, we have no problem with the notion that all else being equal, differing injury patterns should result in differing penalties.  The problem with this argument, however, is that rarely, if ever, is all else equal.  One need look only at the variety of factors that the Commission considers in assessing civil penalties to realize that cases with some surface similarities often have extremely divergent fact patterns and different factors at play, including the unique settlement negotiations that occur in each case.[25]

With respect to the need for more guidance for the regulated community, we stand willing to consider thoughtful proposals from our stakeholders, including proposals to make public additional facts underlying specific settlement agreements – but with one major reservation.  We are unwilling to agree to any methodology that will simply depress civil penalty settlement amounts.  Such an approach is inconsistent with Congressional intent as well as consumer safety.  Greater predictability does not necessarily mean smaller penalties and greater uniformity may well mean uniformly higher settlements.[26]  Here, we repeat the old adage about being careful about what one wishes for.

While we acknowledge the strong feelings of some parties regarding the need for fuller guidelines, we find ourselves unpersuaded by their arguments.  Despite the rote invocation that providing detailed rationales and expanded guidelines for our civil penalties will benefit consumers, we very much doubt the claim.  To our knowledge, no consumers or consumer groups have joined the latest round of criticisms about civil penalties.  It has been quite the opposite, actually.  Groups whose mission is to advocate for the safety of consumers (which we note also is the primary statutory mission of our agency) have publicly supported our efforts to push for more appropriate civil penalties.[27]  In our opinion, the prime beneficiaries of such an approach will likely be firms that would lack the incentive to follow the law and report unsafe products in a timely fashion.

 

Due Process Concerns

Among the other criticisms leveled at CPSC is the agency’s alleged failure to afford respondents due process when we seek civil penalties.  As a matter of law and policy, such criticisms are entirely misplaced. 

The hallmark of due process is that government must afford affected parties notice and an opportunity to be heard.[28]  The following procedures – which more than satisfy due process concerns – apply in every civil penalty case: (1) the firm is notified that the Commission plans to investigate it for possible civil penalties; (2) the agency transmits an investigatory letter to the firm requesting information relevant to the possible violation of law; and (3) in the event that the Commission staff concludes that the firm has committed a violation, staff transmits a detailed “show cause” letter explaining the law,  detailing the facts regarding the firm’s failure to meet its statutory obligation and setting forth staff’s recommended settlement amount.  The firm is directed to respond to the staff’s letter and is invited to meet with staff in the event that they wish to present mitigating evidence or arguments contrary to the staff’s analysis.  All of this information is provided to the Commissioners when they vote on a recommended civil penalty settlement.

Should negotiations to settle on an appropriate civil penalty amount reach an impasse, staff will then notify the firm that it intends to refer the case to the Department of Justice (DOJ) with a recommendation that DOJ file suit against the firm in a federal district court.  Should DOJ do so, the firm will be fully able to contest the action in court under the Federal Rules of Civil Procedure, with all attendant and exhaustive due process rights, including the right to a jury trial. 

Given the extensive procedural rights that the Commission affords to respondents, we find it difficult to see how anyone could seriously argue that the agency has denied them due process when we seek civil penalties.[29] 

 

Hindsight Concerns

Yet another criticism directed at CPSC is that agency staff relies on hindsight regarding companies’ obligation to file 15(b) reports.  According to this complaint, companies often analyze potential safety concerns at a time when the scope of the problem, if any, is unclear.  If, at a later point, the problem emerges as more serious than when the firm first examined it, CPSC staff allegedly holds the firm accountable as though the firm knew about significant later-acquired information.  In particular, if injuries or fatalities occur that could not have been predicted at the time, the staff allegedly applies hindsight reasoning to demand substantial civil penalties.

Having examined a number of civil penalty packages in our years at the agency, we strongly disagree with this criticism.  Anyone who has read as many “show cause” letters as we have would clearly see that the staff methodically and carefully tracks the information available to firms at each and every step in time, pointing out what a firm knew and when the firm knew it. 

Of course, longer periods of time in which firms knowingly fail to report – with the potential for more injuries or fatalities – may also occur.  We believe that such delays warrant higher penalties, but that has nothing to do with making judgments from hindsight.  To the contrary, it is the firms who are in fact in the best position to make real time judgments regarding the safety of their own products.

Another point conveniently omitted from the criticisms of the agency is the use of hindsight reasoning by firms to counter Commission assessments of civil penalty amounts – which we believe to be fairly common.   We often see firms vigorously contesting timeliness claims by arguing that, notwithstanding the serious risks posed by a product’s defect, hindsight reveals that few injuries resulted from the defect, thereby removing any reason for a civil penalty.  While we rejoice at the lack of injuries or fatalities in these cases, we find it hard to see why a civil penalty should be reduced simply because good fortune smiled on a company’s dangerous product.[30]  In other words, the test for civil penalties should rest more on the risk of injury associated with a product than from the number of injuries arising from the product’s hazards.[31]

 

Conclusion

Supreme Court Justice Oliver Wendell Holmes, Jr. once said, “A penalty … is intended altogether to prevent the thing punished.”[32]  We concur.  We believe that, done right, the use of civil penalties promotes greater safety for America’s consumers.  Congress has handed us a mandate in the form of higher penalties to ensure that justice for those at risk from dangerous products is applied fairly and appropriately.  We think the Commission – and most particularly its staff – does not deserve the criticism that has been directed our way lately.  That said, we hope to continue the dialogue, as long as it is an honest one.


[1] See, e.g., Statement of Commissioner Marietta S. Robinson on the Appropriateness of Civil Monetary Penalties Generally and the Recent Settlements with Teavana Corporation and Jarden Consumer Solutions (June 10, 2016); Statement of Commissioner Joseph P. Mohorovic Regarding the Commission’s Annual Agenda and Priorities Hearing and the Opportunity for Reform of the Commission’s Civil Penalty Policies and Practices (June 9, 2016); Statement of Commissioner Joseph P. Mohorovic Regarding the Commission’s Provisional Civil Penalty Settlement with Sunbeam Products, Inc. (June 6, 2016); Statement of Commissioner Joseph P. Mohorovic Regarding the Commission’s Provisional Civil Penalty Settlement with Teavana Corporation (May 26, 2016); Statement of Commissioner Ann Marie Buerkle on the Commission’s Growing Civil Penalty Settlements (May 25, 2016); and various submissions at the CPSC Annual Priorities Hearing (June 15, 2016).

[2] Specifically, the CPSIA increased the maximum amount of civil penalties the Commission could seek for any related series of violations from $1.825 million to $15 million.  See 15 U.S.C. § 2069.

[3] Although the higher penalty amounts went into effect on August 14, 2009, the majority of civil penalty settlements entered into from 2009-2013 involved conduct that occurred prior to enactment of the CPSIA and, therefore, were subject to a maximum penalty of only $1.825 million.  See infra notes 10-11 and accompanying text.

[4] As noted, we have also heard from Commissioners Mohorovic and Buerkle, who have voiced various reservations about our current civil penalty policy.  See supra note 1.

[5] Specifically, section 15(b) of the CPSA (15 U.S.C. § 2064) requires firms to notify the agency whenever they obtain information reasonably supporting the conclusion that such product: (1) fails to comply with an applicable consumer product safety rule or with a voluntary consumer product safety standard upon which the Commission has relied under section 9 of the CPSA; (2) fails to comply with any other rule, regulation, standard or ban under the CPSA (or any other act enforced by the Commission); (3) contains a defect which could create a substantial product hazard; or (4) creates an unreasonable risk of serious injury or death.

[6] Robinson Statement at 3.

[7] In this period, firms filed a total of roughly 5,300 15(b) reports, of which 120 resulted in civil penalties.  Even this number substantially overstates the magnitude of civil penalty cases since almost 40 percent of the civil penalty settlements during this period were for selling garments with drawstrings – often settled for relatively small amounts against relatively small firms.

[8] The full set of factors include deterring violations, providing just punishment, promoting respect for the law, promoting full compliance with the law, reflecting the seriousness of the violation, and protecting the public.  See 16 C.F.R. § 1119.1. 

[9] There is little doubt that some firms have done this calculation and concluded that their financial interest pointed towards continuing to distribute violative goods rather than report to CPSC.  We believe that such behavior should be severely punished.

[10] See U.S. House Committee Report No 110-501, available at https://www.gpo.gov/fdsys/pkg/CRPT-110hrpt501/pdf/CRPT-110hrpt.pdf.

[11] See U.S. Senate Committee Report 110-265, available at https://www.gpo.gov/fdsys/pkg/CRPT-110srpt265/pdf/CRPT-110srpt265.pdf.

[12]  In fact, given that Congress increased the maximum penalty by a factor of roughly eight, one might easily conclude that penalties post-CPSIA should jump by at least a corresponding amount.  

[13] In making this point, we are well aware of the language added to section 20 of the CPSA (15 U.S.C. § 1069(b)) by the CPSIA that directs the Commission to consider how to mitigate undue adverse impacts on small businesses when it determines the amount of any civil penalty.  While that may mean that the Commission will waive a portion of the civil penalty, it should not prevent us from officially assessing an amount that reflects the firm’s wrongdoing.

[14] This point was reiterated in a speech at the same forum in 2016. 

[15] Chairman Kaye’s remarks very clearly indicated that the agency would seek higher penalties only where the underlying facts justified them.  Here is some of what he said:

I get it from a business perspective.  You’re talking about potentially making tens of millions of dollars from these products, and then having to live with the civil penalty of $1.5 million.  That’s where it is, and if that is a factor, we want to try to get rid of that factor …. So, my directions to CPSC staff are when it’s deserved, we want to see higher civil penalties ... .  We want to make sure that when the government speaks that the industry understands … and whenever they get a case that falls under the new amount, they are pushing as hard as the facts allow and the law permits for a civil penalty that is much more reflective of what Congress intended ….  I have a real concern from some of the fact patterns that I’ve seen that civil penalties are seen as nothing more than the cost of doing business …. You can see that especially when you’ve got companies that say, “[G]et through the season,” and then report and live with the civil penalty.  I don’t think, from my perspective as the Chairman of the CPSC that we are seeing civil penalties that are reflective of what Congress expected and demanded of us in the [CPSIA] (emphases added).

[16] Section 6(b)(5).  Under this provision, the only basis upon which information in 15(b) reports may be disclosed is (i) when the Commission has filed a complaint in an administrative proceeding seeking a recall, (ii) the Commission has accepted a remedial settlement in such a proceeding, or (iii) the firm has agreed to the information’s release.  This bar on information release was added at the behest of industry lobbyists who claimed that keeping this information confidential would encourage more firms to file 15(b) reports.  Of course, the exact opposite occurred – the number of 15(b) reports dropped by 20 percent the year after the provision was added.  See T. Schwartz & R. Adler, Product Recalls: A Remedy in Need of Repair, 34 Case W. Res. L. Rev. 401, 433 n. 221 (1983).

[17] The restrictions in 6(b) exist only for CPSC.  No other health and safety agency faces such obstacles to protecting the public.  These provisions are anti-consumer safety and, as we note, anti-transparency and should be fully repealed by Congress. 

[18] To be clear: we strongly oppose the negotiation tactic of agreeing to disclose additional facts adverse to the company in return for a lower civil penalty.  Similar to our view of the inclusion of compliance program provisions, the inclusion of additional facts explaining the conduct that triggered the civil penalty is a separate and distinct aspect of any agreement.  The staff has rightly resisted any such tradeoffs and should, in our opinion, continue to do so. 

[19] We recognize that section 6(b) does not absolutely bar the agency from releasing information, but it sets so many procedural hurdles that the agency often finds it advantageous to settle for less than optimal disclosure simply to get information to the public in a more expeditious manner than would otherwise occur.  

[20] We would particularly direct attention to the carefully and comprehensively drafted examples in 16 C.F.R. § 1115.4 of what constitutes a “defect” for purposes of reporting to the agency.

[21] In fact, despite hand-wringing to the contrary, the increase in civil penalties in CPSIA is fairly modest.  At one point, the Senate contemplated raising the limit to $100 million.  See U.S. Senate Committee Report 110-265,available at https://www.gpo.gov/fdsys/pkg/CRPT-110srpt265/pdf/CRPT-110srpt265.pdf.  For many of the billion dollar corporations with whom we negotiate, $15 million is merely a rounding error.

[22] We have read – and agree with – Commissioner Buerkle’s wish to live in a world of zero penalties because all companies subject to CPSA reporting requirements comply with the law.  We, however, have an even stronger wish for a world in which there are zero serious injuries, especially to children, because companies focus on catching risks of injury (and reporting them to CPSC) rather than waiting for injuries to accumulate.

[23] See Supplementary Information on Final Interpretative Rule on Civil Penalty Factors, 75 Fed. Reg. 15,993 (Mar. 31, 2010).

[24] Id. at 15,996 (noting that almost all the comments received opposed a formulaic approach to penalty determinations).

[25] Again, to the extent there is concern over not enough disclosure of relevant facts, companies facing civil penalties can agree to have those facts disclosed as part of any settlement with the agency. 

[26]  We note, for example, that the nation’s attempt in the mid-1980s to enact a law to reduce the disparity in federal sentences through detailed guidelines not only failed to significantly reduce sentencing disparities, but also seemed to produce “a one-way upward ratchet, in which sentences [were] raised easily and often and lowered only rarely and with difficulty.”  See, e.g., Frank O. Bowman, III, The Failure of the Federal Sentencing Guidelines: A Structural Analysis, 105 Colum. L. Rev. 1315 (2005); Albert Alschuler, Disparity: The Normative and Empirical Failure of the Federal Guidelines, 58 Stanford L. Rev. 85 (2005).  In United States v. Booker, 543 U.S. 220 (2005), the Supreme Court struck down two statutory provisions in the Sentencing Reform Act that made the guidelines mandatory.   

 

[27] See, e.g., Submission of Consumer Federation of America at the CPSC Annual Priorities Hearing (June 8, 2016) (noting that civil and criminal penalties “serve an important deterrent effect to non-compliance” and urging CPSC to “continue to collect significant penalties when the violations represent problematic disregard for the CPSC’s laws”).

[28] See, e.g., Mullane v Central Hanover Trust Co., 339 U.S. 306 (1950); Richards v. Jefferson County, 517 U.S. 793 (1996); Goldberg v. Kelly, 397 U.S. 254 (1970); Armstrong v. Manzo, 380 U.S. 545 (1965); and Fuentes v. Shevin, 407 U.S. 67 (1972).

[29] We understand that firms might wish to have CPSC provide more exhaustive and lengthy guidance on how we assess civil penalties, but such a concern has more to do with convenience for the firms than with due process rights.

[30] See also infra note 31.  We cannot stress enough that firms should not wait for a body count before reporting nor should they be rewarded for the good luck of having no injuries yet from their dangerous products.  Although not original with us, we agree with the argument that merely because no one has yet stepped on a mine does not mean that a minefield is safe.

[31] We, of course, understand that one of the factors that the Commission assesses in analyzing civil penalty cases is the occurrence or absence of injury.  16 C.F.R. § 1119.4(a)(i)(C).  Our point is that the nature and severity of the risk of injury should weigh more in assessing civil penalties.  Otherwise, firms will be too tempted to wait and see whether injuries actually occur – the “body count” approach, which we abhor.

[32] Compañía General de Tabacos de Filipinas v. Collector of Internal Revenue, 275 U.S. 87, 100 (1927) (Holmes, J., dissenting).