September 12, 2008

Background

The Consumer Product Safety Improvement Act of 2008 stands to expand not only the staffing, funding, authority and reach of the Consumer Product Safety Commission at the federal level, but also increases the ability of State Attorneys General to enforce consumer product safety laws at the state level. Introduced in November 2007 following several high-profile toy and other product recalls, earlier versions of the legislation had broad bipartisan support. The bill is expected to be signed by the president shortly.

The act is intended to update and give added muscle to the Consumer Product Safety Commission by ultimately doubling funding, adding 500 new employees, equipping the agency with a new laboratory, and updating computer systems to assist in data compilation, analysis of incidents and enforcement activities.

Impact on Industry

Specific aspects of the act that will affect the businesses involved at every level of the distribution chain of consumer products include:

• Lead Levels Lowered: Over the next three years, permissible limits for lead content in products manufactured for children aged 12 or younger will be incrementally reduced, starting with 600 parts per million within 180 days of the act’s passing, 300 parts per million after one year, and 100 parts per million after three years. Any children’s product that contains lead exceeding these limits will be deemed a banned hazardous substance under the Federal Hazardous Substances Act. The commission will periodically review and revise downward the lead content limits, at least every five years.
  
  The ban on lead paint also is made more stringent under the act, reducing permissible levels from 600 parts per million to 90 parts per million.
  
• Prohibition on Phthalates: The act prohibits, within 180 days of enactment, the sale of children’s toys or child care articles that contain more than 0.1 percent of three phthalates: di-(2-ethylhexyl) phthalate (DEHP), dibutyl phthalate (DBP), or benzyl butyl phthalate (BBP). Three additional phthalates (diisononyl phthalate (DINP), diisodecyl phthalate (DIDP), and di-n-octyl phthalate (DnOP)) are temporarily prohibited in children’s products small enough to be put into a child’s mouth (i.e., one dimension of the toy is smaller than five centimeters), pending a review of those and other phthalates by a Chronic Hazard Advisory Panel.
  
• ASTM Toy Safety Standard Becomes Mandatory: After 180 days, the currently voluntaASTM toy safety standard (F963-07) will become mandatory during an interim period of evaluation of the standard by the Commission. Within one year after completing its evaluaof the ASTM standard, the Commission is required, under the Act, to promulgate its own regulations conerning standards.
  
• Nursery Product Standards: Within one year and every six months thereafter, the CPSC must begin to establish new mandatory safety standards for 12 categories of durable infant or toddler products, including cribs, highchairs, strollers and infant carriers.
  
• Testing by Independent Labs Required: Manufacturers will be required to submit children's products to testing by independent laboratories certified by the CPSC prior to placing the products on the market. The commission must publish notice requirements for accreditation for third-party laboratories to test particular classes of products; these requirements apply to any children’s product manufactured more than 90 days after the commission’s publication of accreditation requirements for the particular children’s product. CPSC also will have authority to inspect foreign and domestic certified laboratories.
  
• Tracking Labels for Children’s Products: Within one year, the commission must promulgatregulations requiring manufacturers to (i) ascertain the location and production of the product (likely by having consumers register products) to facilitate product identification and recalls, and (ii) clearly label the products for the consumer’s ready access to information including the manufacturer’s name and contact information, and identifying characteristic numbers, such as batch/item numbers.
  
• Whistle-blower Protections: The act contains certain protections for employees of retailers, private labelers, manufacturers and distributors preventing the employers from discriminatinating against employees who provide information about violations of any law enforced by CPSC.
  
• Civil Penalties Increased: The maximum civil penalties that may be assessed as a result of violations of laws enforced by the commission (e.g., the Consumer Product Safety Act, the Federal Hazardous Substances Act and the Flammable Fabrics Act) is increased from $1,825,000 to $15,000,000 for a related series of violations. The civil penalty for individual violations is increased from $8,000 to $100,000.
  
• Reduced Time for Review of Confidential Commercial Information: Companies will now be required to review and claim confidential status of information within 15 days of CPSC ntoice.
  
• Enforcement Authority of State Attorneys General and Preemption: The act provides for State Attorneys General to enforce consumer product safety standards and regulations, in an effort to ensure the expeditious removal of potentially dangerous products from the market. The act also clarifies that requirements under the laws enforced by the commission shall not be construed to preemtp or affect state warning requirements under state laws (such as California's Proposition 65) that were enacted prior to August 31, 2003.

Impact on CPSC

• CPSC Budget: Increased budget authorization to $118.2 million as of 2010 and to $136.4 million by the year 2014, subject to appropriation.
  
• Temporary Quorum: For a period of one year following enactment, two members of the commission, as long as they are not affiliated with the same political party, shall be adequate tconstitute a quorum for the purposes of the transaction of business. The commission can now initiate lawsuits and administrative actions that have been on hold since February 3, 2008.
  
• Enhanced Reporting and Recall Authority: The commission’s authority to require reports substantial product hazards and recalls, and to review and approve corrective action plans, is expanded by the act. Specifically, the act:
  
• Expands circumstances under which Section 15(b) reports are required to include products that fail to comply with any current rule or regulation enforced by the commission.
  
• Following an administrative hearing, allows the commission to compel manufacturers to cease distribution of products for which a substantial product hazard has been determined to exist; to ensure that all immediate distribution and sales cease, and allows for notification of the substantial product hazard determination to all distirbutors and retailers in the distribution chain, as well as local and state authorities.
  
• Allows a stop distribution order without an administrative hearing for products deemed imminently hazardous, provided that the commission has filed a district court action for seizure of such products as provided under Section 12.
  
• Requires the commission to establish, within 180 dyas of enactment, specific requirements for recall notices.
  
• Import Safety Management and Sharing Information with Other Agencies: Requires the commission to, within two years of enactment, develop a risk assessment method for identifying shipments of potentially violative products; permits the commission to make information about unsafe products available to other agencies, such as U.S. Customs and Border Protection.
  
• Substantial Product Hazard List: Permits the commission to promulgate rules identifyfor any consumer product or for a given class of consumer products, characteristics that automatically result in the determination that such product poses a substantial product hazard under the Consumer Product Safety Act.  This may result in better guidance for Section 15(b) reporting purposes.
  
• Public Hazard Database: The act requires the commission to establish and maintain a public and searchable database regarding the safety of consumer products. The type of information that would be included is unclear, but could increase liability claims.
  
• Export Control by CPSC: Allows the commission to prohibit U.S. companies from exporting products that do not comply with the laws and standards enforced by the commission, absent the prior consent of the importing country.

This new law will be felt broadly by the industry, including manufacturers, distributors, contract manufacturers, importers and retailers. The increased budget and resources will result in a much more active commission staff that is able to move quicker to investigate, test and demand corrective action by companies. The increase in penalty amount will provide the commission with additional leverage in connection with each reporting investigation; the enhanced imminent hazard authority may be used to force stop orders and/or recalls on manufacturers by the mere filing of an action in district court. Finally, the authority given to the State Attorneys General will likely result in increased enforcement actions, especially if they provide a revenue stream for states. Strategies to obtain federal action once a product problem arises may be necessary to avoid multiple different approaches through State Attorneys General.

The increased cost of doing business under the new act could have an effect on the types of consumer products and the cost of those products. Commercial entities that cannot sustain the higher cost of doing business may compromise their downstream partners (e.g., retailers), as every entity in the chain of distribution is equally eligible for conducting a corrective action. Consequently, due diligence of business partners and suppliers will be critical.

The enhanced availability of product safety information and the likely increase in enforcement actions will also fuel liability claims. Continued cooperation between CPSC and the plaintiffs bar is expected.

From a litigation perspective, the CPSC’s increased budget and staff will likely mean more industries and products will become the focus of the CPSC’s attention and as a result, private litigation—from class action products liability lawsuits to “private attorney general” consumer protection actions—may also increase. Just as the plaintiffs’ pharmaceutical bar monitors FDA action and new scientific studies and often responds accordingly with private litigation, it should also be expected that the plaintiffs’ bar will monitor the new CPSC databases and product lists for litigation opportunities.

Some of the changes in business practices likely to be necessary as a result of this new law include:

Manufacturing and Distribution Changes

• Establishing robust internal systems for ensuring compliance with new standards, especially for children’s products (ASTM, lead, phthalates).
  
• Creating due diligence checklists for suppliers.
  
• Identifying, selecting and retaining third-party testing laboratories certified by CPSC in accordance with the act; negotiating protocols for testing (size and scope of samples, location of testing, frequency, etc.).
  
• Ensuring adequate systems for tracking, and revising labeling to provide for tracking of products and their component parts at each stage of manufacture and distribution, beginning from manufacture, through distribution, storage, potential private labeling, and ultimate sale at the retail level.
  
• Ensuring that all product documentation and information provided to the Commission is properly labeled as proprietary to prevent inadvertent disclosure.
  
• Instituting standard practices and procedures for compliance with new lead standards, which likely will require the purchase of additional equipment and/or revision of inspection and testing processes currently in place.

Contractual Changes

• Negotiating product testing contracts in the United States and abroad; revising standard agreements and purchase orders at every level of product manufacture and distribution to ensure that representations and warranties regarding compliance with required standards are included and current.
  
• Negotiating specific provisions regarding indemnification for failure to comply with new and more stringent standards required by the CPSC.
  
• Determining identification reporting and recall responsibilities for each product, in advance of ordering a product, so that the responsibility for control and administration of regulatory obligations is clearly delineated in writing between the various parties.
  
• Reviewing and, if necessary, revising insurance provisions related to coverage and recalls.

Internal Process Changes

• Monitoring new CPSC standards and regulations, assessing resource and budget expectations for developing data, and otherwise participating in rulemaking.
  
• Monitoring consumer blogs and other public forums for possible product complaints, and developing and implementing systems to quickly determine patterns of product problems, and to be able to respond promptly to consumers, customers, and CPSC. Consequently, it is prudent for safety committees to meet routinely to review data compiled from public and internal databases, and for companies to develop criteria for decision-making concerning reporting, recalling and other new obligations.
  
• Training of employees to address litigation-related issues that could arise from increased CPSC activity, including: (1) document creation and preservation; (2) use of email when discussing product safety issues or potential problems; and (3) appropriate response and attention to employees who raise product safety concerns.
  

For further information on the new act or strategies for compliance, please contact either of the following Morgan Lewis attorneys:

Washington, D.C.
Kathleen M. Sanzo 202.739.5209 [email protected]
Alexis Reisin Miller 202.739.5390 [email protected]

For further information on the litigation implications of the new Act, please contact the following Morgan Lewis attorney:

Philadelphia
Emily J. Lawrence 215.963.5241 [email protected]

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