A Historic First in Consumer Product Safety Act Enforcement: Corporate Criminal Penalties for Late Reporting Under Section 15
On October 29, the status quo fundamentally changed for consumer product safety enforcement. On that date, the Department of Justice (DOJ) announced the resolution of criminal charges against a Chinese manufacturer and its two subsidiaries under the Consumer Product Safety Act (CPSA). This was the very first corporate criminal enforcement action brought under the CPSA, which resulted in a guilty plea from the US subsidiary, a deferred prosecution agreement (DPA) for the Chinese parent and its Hong Kong subsidiary, and $91 million in monetary penalties and forfeitures. This development makes clear that an intentional delay in reporting a consumer product safety defect, hazard, or risk to the Consumer Product Safety Commission (CPSC) has the potential to lead to both civil and criminal corporate liability under the CPSA.
DOJ charged Gree Electric Appliances, Inc. of Zhuhai (Gree Zhuhai), Hong Kong Gree Electric Appliances Sales Co., Ltd. (Gree Hong Kong), and Gree USA, Inc. (collectively, the Gree Appliance Companies) with knowingly and willfully failing to furnish information required by Section 15(b) of the CPSA to the CPSC, in connection with the manufacture, distribution, and sale of dehumidifiers that were later subject to a 2013 recall over concerns about overheating and catching fire. Under Section 15(b), a manufacturer, importer, distributor, or retailer of a product subject to the CPSC’s jurisdiction that is distributed in commerce must inform the CPSC “immediately” upon receiving information that “reasonably supports the conclusion” that the product “contains a defect [that] could create a substantial product hazard” or “creates an unreasonable risk of serious injury or death.” 15 U.S.C. § 2064(b)(3) and (4). Here, DOJ alleged that the Gree Appliance Companies had information in September 2012 that their dehumidifiers were defective and posed a risk to consumers but that the companies “knowingly and willfully failed to inform” the CPSC until June 2013.
Gree USA agreed to plead guilty to knowingly and willfully failing to report information regarding consumer product safety defects, hazards, and risks to the CPSC, while Gree Zhuhai and Gree Hong Kong entered into a DPA. In addition, Gree USA’s Chief Executive Officer and Chief Administrative Officer have pleaded not guilty to related CPSA and federal wire fraud charges and are awaiting a March 2022 trial in Los Angeles.
In connection with the DPA and plea agreement, the Gree Appliance Companies admitted the existence of internal communications about reports of fire hazards as early as July 2012 as well as subsequent internal communications about concerns over the costs of addressing the overheating defect and reporting it to the CPSC. The companies also admitted that their initial reports to the CPSC in early 2013 failed to disclose the extent of the safety issues. Ultimately, in September 2013, Gree Zhuhai and CPSC announced a voluntary recall of dehumidifiers for a fire hazard; the recall was subsequently expanded over the years. The companies also admitted that consumers have reported more than 2,000 incidents involving the dehumidifiers, including 450 fires and more than $19 million in property damage.
In 2016, the Gree Appliance Companies also paid a record $15.5 million civil penalty to resolve the CPSC’s allegations under Section 15(b) that the companies knowingly failed to report the fire hazard and had made misrepresentations to CPSC staff during their investigation. Under the recent criminal resolution, the companies’ civil penalty payments will be credited against the $91 million now imposed in criminal penalties and forfeitures. However, the companies must also provide restitution to any uncompensated consumers whose recalled dehumidifiers caused physical injury or financial loss due to the overheating defect.
The DPA and plea agreement also impose compliance-related audit and review obligations including:
- establishing (or updating) a compliance program with standards, policies, and procedures for investigating and documenting allegations of potential product hazards and CPSA violations;
- creating (or updating) a confidential non-retaliation employee reporting program for product safety concerns;
- requiring compliance program training for directors, officers, and employees;
- retaining an outside compliance expert for a three-year term to advise the companies on product safety and regulatory compliance issues; and
- submitting annual reports and certifications to the government regarding remediation and implementation of the compliance program.
In announcing the criminal resolution, the DOJ Civil Division’s Acting Assistant Attorney General Brian M. Boynton warned companies and executives that if they “purposefully delay reporting [product defects] to maintain profits,” they “will be prosecuted.” However, because this is the first example of corporate criminal penalties under the CPSA for failure to report under Section 15, it remains unclear exactly where CPSC and DOJ would draw the line between seeking civil penalties for a knowing failure (i.e., under a “knew or should have known” standard) and seeking criminal penalties and asset forfeiture for a knowing and willful failure to report. Still, this new criminal front in CPSA enforcement drives home that companies must be vigilant in assessing their Section 15 compliance policies, procedures, and internal controls, and in training their directors, officers, and employees, in order to ensure timely and accurate disclosures of relevant information to the CPSC.
© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.