May 25, 2016

In the last two years, the Commission has considered a dozen civil penalty settlements and all were approved by the Commission.  I voted to approve the settlement in three of the twelve cases and against approval in nine cases.[1]

One might think that I oppose civil penalties as a matter of course but actually my opposition has been for a variety of reasons. Virtually all of our civil penalty settlements arise from the staff’s enforcement of a remarkably vague statutory requirement, namely the defect reporting requirements of section 15(b)(3) of the Consumer Product Safety Act.  Under this provision, companies must report to CPSC when a product they make or sell “contains a defect which could present a substantial product hazard.”  15 U.S.C. § 2064 (b)(3)(emphasis added).   Trying to decide when a product defect “could” present a substantial product hazard is inherently subjective; there is no standard one can rely on in making that judgment.  Although CPSC’s regulations shed some light on the subject, they do not address the situation comprehensively nor could they realistically do so.  Instead, the regulations fall back on the same advice our staff has given over many years: “when in doubt, report.”  While that guidance may keep a company out of trouble in many cases, it also serves to highlight the inherent uncertainty of the matter.

Once the reporting obligation arises, the company must report “immediately.”  In many of the twelve settlement cases, the company did not fail to report entirely.  Rather, in the staff’s opinion, the company took too long to report a problem to the CPSC.  Often, the staff makes that judgment only after reviewing voluminous materials over a period of years.  In other words, the staff, unlike the company, has the benefit of 20/20 hindsight.

Another problem with the settlements is the difficulty of evaluating the appropriate penalty amount for failure to report immediately.  The statute sets out a number of factors to be considered, such as the gravity of the violation, the severity of the risk of injury, the occurrence or absence of injury, the number of defective products distributed, and the appropriateness of the penalty in relation to the size of the business.  The Commission has also promulgated a regulation interpreting the statutory factors and identifying others that it may consider in reviewing penalty amounts.  See 15 C.F.R. §1119.4(b).  Unfortunately, neither the statute nor the regulation says much about how these factors will affect a penalty.   All else equal, I would think that a company that reports before any serious injury has occurred should be subject to a lower penalty than a company that waits until an injury has occurred.  Similarly, I would think that a company with a history of noncompliance with reporting requirements would be subject to a higher penalty than one who has a perfect track record.  Yet when the Office of General Counsel sends up a recommendation for approval of a civil penalty settlement, it often seems as though the staff highlights the aggravating factors that support a higher penalty amount and ignores or downplays the mitigating factors.  There appears to be little or no consistency on how factors are treated from case to case. 

This problem is exacerbated by a lack of transparency—the OGC’s recommendations are classified “For Official Use Only” so the public sees little or no explanation for the penalty amount.  

There is another matter that contributes to my discomfort with these settlements.  More than a year ago, the CPSC Chairman stated his desire that the CPSC should be seeking higher penalties.  This year, he went further, stating that he was “hoping to see” some penalties in the seven figure range.  Just a few days later, the staff obliged, bringing the Commission a settlement for over $15 million, effectively the highest amount currently allowed by Congress.

The chairman’s statements suggest a view about the role of government that I find troubling, to say the least.  We should not be hoping for multi-million dollar penalties.  We should be hoping for zero penalties—that is, a world in which every company subject to the CPSA reporting requirements understands its reporting obligations and complies with them.  And until that day comes, we should be trying to do everything we can to help firms understand how we interpret the requirements.  There will be cases where penalties are entirely appropriate, but they should be more of a last resort.    Consumers will be safer if we help companies prevent violations rather than celebrating marquee penalties.


[1] Commissioner Mohorovic joined me in voting against the settlement in two of those nine cases.  He also voted against a settlement in one other case.