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January 10, 2000

An Examination Of The Refund Remedy Under The CPSA And The FHSA

Product Safety & Liability Reporter

The Consumer Product Safety Commission can order the recall of dangerous consumer products. However, the Commission cannot order a particular type of recall. Instead, the responsible company can choose among replacing or repairing the product or refunding its purchase price.[1]

The refund is reduced by a "reasonable allowance for use" if the consumer has had the product for a year or more. More than 25 years after creation of the Commission, it remains unclear how Congress intended this calculation to be made. This article briefly outlines the history of the refund remedy in the CPSA and FHSA, examines other federal statutes with similar remedies, and identifies some of the potential interpretations of "reasonable allowance for use." I propose that the underlying safety objectives of the CPSA (and FHSA, if applicable) must guide the selection from among the competition interpretations.

The CPSA Framework

Section 15(d) gives manufacturers the three-part option of repairing or replacing the harmful product or refunding its purchase price. Section 15(d)(3) states the refund option as follows:

(3) [R]efund the purchase price of such product (less a reasonable allowance for use, if such product has been in the possession of a consumer for one year or more (A) at the time of public notice under subsection (c), or (B) at the time the consumer receives actual notice of the defect or noncompliance, whichever first occurs).

As discussed below, a number of federal laws enacted from the late 1960s to the early 1980s incorporated a refund remedy for defective products of various types. Virtually all of these statutes now provide for a refund reduction on account of product use. However, none define how that use is calculated.

Federal Refund Provisions Predating CPSA

The National Commission on Product Safety issued its final report to the President and Congress in June 1970. That report proposed model legislation which formed the basis for the Consumer Product Safety Act. The model legislation included the refund option, but did not require a reasonable allowance for use. Instead, it provided that the manufacturer could "refund the purchase price of such product upon tender of the product by the owner."[2] The report observed that "[f]ederal safety legislation does not ordinarily authorize an agency to compel a recall of nonconforming products."[3] It noted two exceptions: the Radiation Control for Health and Safety Act of 1968 and the 1969 amendments to the Federal Hazardous Substances Act.[4]

In 1969, the FHSA had been amended to provide that manufacturers of banned hazardous substances were required to repurchase those items from the purchaser and to "refund that person the purchase price paid for such article or substance."[5] The language did not require an allowance for use; presumably, Congress intended a complete refund, even if the product had been used.[6] (As discussed below, Congress changed this provision of the FHSA in 1981; I know of no cases construing the language prior to its alteration.)

The Radiation Control for Health and Safety Act was similar. Enacted in 1968, it provided that certain defective electronic products could be recalled, and that the manufacturer could choose to repair or replace the product, or "make a refund of the cost of the product."[7] (This statute still provides for a refund remedy with no deduction for product use.)[8]

In addition to these acts, the National Traffic and Motor Vehicle Safety Act of 1966 had a refund provision for defective automobiles. However, that act required only that the manufacturer repurchase the vehicles from the distributor or dealer. Because the vehicles would not have been used at that point, it is not surprising that there was no "allowance for use" provision.[9]

Federal Refund Provisions Following CPSA

CPSA followed quickly on the heels of these three statutes. CPSA appears to have been the first federal statute that both (i) included a refund remedy, and (ii) made that remedy subject to a use allowance. As noted, CPSA does not itself describe how to calculate that use allowance, and the legislative reports provide to illumination. Once the "allowance for use" concept took root in federal law via the CPSA, it soon spread to other statutes.

In 1974, Congress enacted three pieces of legislation with refund provisions. The first 1974 legislation was the Housing and Community Development Act of 1974.[10] In certain circumstances, Section 615(i) required a mobile home manufacturer to refund the full purchase price "less a reasonable allowance for depreciation based on actual use if the home has been in the possession of the owner for more than one year."[11] Key legislative reports do not discuss this provision, nor have there been reported cases construing it, although the provision remains in effect.[12]

Next came the 1974 amendments to the National Traffic and Motor Vehicle Safety Act. The manufacturer was given the option of repairing or replacing the vehicle or of "refunding the purchase price of such motor vehicle in full, less a reasonable allowance for depreciation."[13] I have not found any cases construing this language.

Although Congress used a familiar term in these 1974 amendments-"depreciation"-the legislative history cautions against a formulaic application of that term.

Concerning a reasonable allowance for depreciation if the manufacturer elects to refund the purchase price of a motor vehicle, your Committee does not intend that the wholesale and retail values, or similar classifications, for used automobiles which are published as a guide for the marketing of used motor vehicles should be the sole criterion for establishing a reasonable allowance for depreciation. The manufacturer is expected to take into account the condition of the motor vehicle involved in the recall campaign, the number of miles registered on the odometer, and other relevant indicators of the value of such vehicle.[14]

Finally, in that same 1974 session, Congress enacted the Magnuson-Moss Warranty-Federal Trade Commission Improvement Act.[15] That act refers to a refund remedy in several places, most prominently in Section 104, which requires a warrantor to remedy a defective or malfunctioning product and, in certain circumstances, allows the consumer to choose a refund for the product. Section 101(12) defined "refund" to mean "refunding the actual purchase price (less reasonable depreciation based on actual use where permitted by rules of the Commission)."[16] The legislative history added that, "[u]ntil the Commission establishes rules permitting deduction for depreciation based upon actual use, the warrantor is prohibited from making such deduction from the purchase price when fulfilling his obligation to refund."[17]

In 1976, the Federal Trade Commission proposed a rule to implement Section 101(12).[18] The proposed rule would have used a depreciation schedule covering the "average service life expectancy" of the product.[19] This was defined as "the arithmetic mean of the number of years or other appropriate measure of life that the class or model of consumer product(s) remains in personal, family or household service under all owners."[20]

After reviewing comments, the FTC withdrew the proposed rule.[21] It was not possible to formulate a "comprehensive Rule . . . which would be both practicable and consistent with the statute."[22] The FTC identified "[f]our basic meanings" of the word "depreciation."[23] Some of these were inconsistent with the language of the Magnuson-Moss Act; others had practical problems.[24] The FTC's experience illustrates that there is not single way to calculate a use allowance, and that each approach may present its own set of difficulties. I have found no cases construing the refund language of the Magnuson-Moss Act.[25]

In 1976, Congress amended the Food, Drug, and Cosmetic Act to provide for the recall of medical devices.[26] A manufacturer of a defective device could be ordered to repair or replace the device or "refund the purchase price of the device (less a reasonable allowance for use . . . .)."[27] There are no reported cases construing this language, which is still in effect.[28] Except to note that the recall provisions were modeled on the FHSA and the CPSA, the legislative history sheds no light on the meaning of the critical phrase.[29]

Finally, in 1981, Congress amended the FHSA's recall provision (first enacted in 1969 and discussed above) so that it became substantively identical to the CPSA.[30] Congress revised the 1969 refund remedy and added the "reasonable allowance for use" language. The legislative history of this 1981 amendment casts some light.[31] After nothing that the manufacturer has the right to elect remedies, the report comments on the statutory language (found also in the CPSA) requiring that the manufacturer's plan for implementing the remedy be "satisfactory" to the Commission. The report states, "To be satisfactory, the plan must demonstrate that it will reasonably protect the public."[32]

Conclusions

Oliver Wendell Holmes famously wrote that "a page of history is worth a volume of logic."[33] However, in this case, the history of federal refund provisions provides little illumination as to their meaning. We are left to draw inferences about meaning from the underlying purposes of the statutes themselves.

The CPSA and FHSA refund provisions seem to assume a relationship between the length of time a consumer holds a product and the product's value. The refund is not reduced at all for the first year of ownership, but it is reduced thereafter. Thus, the time a consumer holds a product is a surrogate for the use of the product. On this view, depreciation methodologies may provide useful tools for measuring the relationship between the time period of ownership and the product's value. However, the policy concerns that prompt selection of a particular depreciation formula as a way to allocate costs (say, for tax purposes) are not necessarily the same policy concerns that undergird an assessment of the product's value for purposes of a safety refund. Thus, a reflexive application in the safety context of a depreciation schedule used for other purposes may be inappropriate.

Economists and accountants measure depreciation in a variety of ways, including the straight-line method, the diminishing-value method, and the sum-of-the-digits methods.[34] As already noted, the Federal Trade Commission announcement withdrawing its refund rule, discussed above, described "four basic meanings" to the term "depreciation." These were "impaired serviceableness," "difference in value between an existing old asset and a hypothetical new asset," "decrease in value," and "amortized cost."[35]

Aside from these (and other) depreciation methods, there are at least two additional ways to calculate the appropriate refund under Section 15(d)(3). First, one might simply survey the used-product market for products of the age and type to be remediated and identify what willing sellers and buyers have determined the product to be worth.[36] Assuming that enough data is available to support reliable conclusions, this interpretation may be viable. Second, Section 15(d)(3) might be interpreted to require that the refund be calibrated to achieve the same recall effectiveness as could be achieved with the repair or replacement options. However, assessing the relative efficiencies of the remediation options would be speculative in many cases. More importantly, this interpretation is divorced from tenure of ownership, and thus may be inconsistent with the statute, which uses a time period-one year-as the threshold for a use allowance.

Is there anything in the CPSA to guide the choice between these competing interpretations of "less a reasonable allowance for use"?[37] Yes: the statute states that the allowance for use must be "reasonable." This can fairly be read to mean "reasonable" in light of the overall statutory purpose.[38] Congress enacted the CPSA because too many dangerous consumer products were made and consumers could not fully protect themselves due to product complexities.[39] The statute aims "to protect the public against unreasonable risks of injury associated with consumer products."[40] If a particular interpretation would yield a result inconsistent with this statutory purpose, that approach must be seriously questioned. For example, if selection of a depreciation method in a particular case left a large proportion of consumers with no refund at all-even while still holding the defective product-it is unlikely the Commission or a reviewing court would endorse such a method.[41]

In addition to the admonition that the "allowance for use" be reasonable, there is other language in Section 15(d) that would support the Commission in evaluating competing interpretations in light of the safety policies underlying the CPSA. That language states that a manufacturer must "submit a plan, satisfactory to the Commission, for taking action" under the selected remedy option (emphasis added). This language may not necessarily empower the Commission to force a manufacturer to select a different remedy (for example, choose to replace instead of repair) by conditioning its acceptance of a particular plan on draconian conditions. However, the language does grant the Commission some flexibility, to be exercised reasonably and with wise discretion, to require adjustment of a chosen remedy based on safety considerations. The legislative history of the identical provision added to the FHSA in 1981, quoted above, supports this conclusion.[42]

The Commission has not formally interpreted "less a reasonable allowance for use," and it may never need to do so. Manufacturers have incentives apart from the actions of the Commission to ensure that adequate opportunity is provided for the recall of harmful products. These incentives include preserving customer goodwill and brand value, avoiding private tort actions and the regulatory actions of state and local agencies. Consequently, most companies that are subject to a Section 15 investigation will continue to opt for a negotiated resolution. Absent a definitive interpretation of the refund option, the Commission staff and private industry will continue wrestling with the meaning of this remedy in determining the proper and fair resolution of disputes over product safety.

[1] 15 U.S.C. § 2064(d) (Consumer Product Safety Act) (CPSA); 15 U.S.C. § 1274 (Federal Hazardous Substances Act) (FHSA).

[2] Proposed Consumer Product Safety Act, § 16(h)(3) (appended to Final Report of the National Commission on Product Safety (June 1970)).

[3] Id. at 96

[4] Id.

[5] Child Protection and Toy Safety Act of 1969, Pub. L. No. 91-113, § 2 (adding a new Section 15 to the FHSA), 1969 U.S. CODE CONG. & ADMIN. NEWS (USCCAN) (83 Stat. 187) 211, 214.

[6] See H. Rep. No. 91-389, 91st Cong., 1st Sess., reprinted in 1969 USCCAN 1231, 1240 (describing refund option with no discussion of allowance for use). Citations to and discussions of legislative history in this article are largely limited to that available in the U.S. Code Congressional and Administrative News. Although USCCAN does not contain comprehensive legislative history, it does provide key legislative reports.

[7] Radiation Control for Health and Safety Act of 1968, Pub. L. No. 90-602, § 359(f), 1968 USCCAN (82 Stat. 1173) 1352, 1360.

[8] See 21 U.S.C. § 36011(f).

[9] National Traffic and Motor Vehicle Safety Act of 1966, Pub. L. No. 89-563, § 111(a), 1966 USCCAN (80 Stat. 718) 856-57; S. Rep. No. 1301, 89th Cong., 2d Sess., reprinted in 1966 USCCAN 2709, 2718 ("These obligations apply only between the manufacturer and the dealer or distributor who purchases a vehicle or item of equipment from the manufacturer, and only during the period before such distributor or dealer has sold such vehicle or item of equipment to a customer.")

[10] Pub. L. No. 93-383, 1974 USCCAN (88 Stat. 633) 713.

[11] 1974 USCCAN at 807.

[12] See 42 U.S.C. § 5414(i).

[13] Motor Vehicle and Schoolbus Safety Amendments of 1974, Pub. L. No. 93-492, § 102 (adding, inter alia, a new Section 154(a)(2)(A)(iii)), 1974 USCCAN (88 Stat. 1470) 1960. (In similar language, that provision is codified today at 49 U.S.C. § 30120(a)(1)(A)(iii) ("by refunding the purchase price, less a reasonable allowance for depreciation")).

[14] H. Rep. No. 93-1191, 93d Cong., 2d Sess., reprinted in 1974 USCCAN 6046, 6060 (emphasis added).

[15] Pub. L. No. 93-637, 1974 USCCAN (88 Stat. 2183) 2534.

[16] 1974 USCCAN at 2535.

[17] Conf. Rep. No. 93-1408, 93d Cong., 2d Sess., reprinted in 1974 USCCAN 7755, 7756

[18] Calculation of Depreciation Deduction for Refunds Under Full Warranties on Consumer Products, 41 Fed. Reg. 22099 (June 1, 1976).

[19] Id. (proposed § 704.1(j)).

[20] Id. (proposed § 704.1(k)).

[21] Calculation of Depreciation Deduction for Refunds Under Full Warranties on Consumer Products, 43 Fed. Reg. 4054 (Jan. 31, 1978).

[22] Id. at 4062.

[23] Id. at 4055.

[24] Id. at 4055-57.

[25] 15 U.S.C. § 2301(12).

[26] Medical Device Amendments of 1976, Pub. L. No. 94-295, 1976 USCCAN (90 Stat.) 539, 563.

[27] Id. § 2 (adding new Section 518(b)(2)).

[28] 21 U.S.C. § 36011(f).

[29] S. Rep. No. 94-33, 94th Cong., 2d Sess., reprinted in 1976 USCCAN 1070, 1085-86.

[30] Omnibus Budget Reconciliation Act of 1981, Pub. L. No. 97-35, Title XII, § 1211 (amending FHSA § 15), 1981 USCCAN (95 Stat.) 357, 722.

[31] H. Conf. Rep. 97-208, 97th Cong., 1st Sess., reprinted in 1981 USCCAN 1010.

[32] Id. at 1249 (emphasis added).

[33] New York Trust Co. v. Eisner, 41 S. Ct. 506 (1921).

[34] The Mcgraw Hill Dictionary of Modern Economics 159 (2d. ed. 1973).

[35] 43 Fed. Reg. at 4055.

[36] In this approach, it should be assumed that the product had no defect; if a market assessment is made based on products with defects, the value of the used product would be lower. Inappropriately, the consumer would thus "pay" (in the form of a reduced refund) for the product defect.

[37] Where Congress has provided any legislative commentary at all, it has recognized the complexity of the issue either by specifically warning against formulaic approaches (Motor Vehicle and Schoolbus Safety Amendments) or delegating the issue to an agency for a considered rulemaking (Magnuson-Moss).

[38] See, e.g., Crandon v. United States, 110 S. Ct. 97, 1001 (1990) ("In determining the meaning of the statute, we look not only to the particular statutory language, but to the design of the statute as a whole and to its object and policy."); Pilot Life Ins. Co. v. Dedeaux, 107 S. Ct. 1549, 1555 (1987) ("In expounding a statute, we must not be guided by a single sentence or member of a sentence, but look to the provisions of the whole law, and to its object and policy") (quoting earlier Supreme Court cases); National Labor Relations Bd. v. Lion Oil Co., 77 S. Ct. 330, 334 (1957) (same).

[39] CPSA, § 2(a).

[40] Id. § 2(b)(1).

[41] A depreciation schedule based on "average product life" could yield this undesirable result if the recall occurred just at the end of this period. In that case, the refund would be zero, but many products would remain in use (those whose longer life spans had been balanced against short-lived products to derive the "average product life"). Advocates of an "average product life" schedule might assert that consumers whose products outlasted the "average useful life" already reaped a windfall because the product outlasted their expectations at the time of purchase. Accordingly, any refund to them on account of the defect in their product would be an unjust enrichment. However, if consumer expectations are to be used in calculating the refund, the existence of the defect should be considered. Consumers holding a defective product, even one that has outlasted the "average life," probably do not consider themselves recipients of a windfall. Rather, they may well expect some remedial action, notwithstanding their product's age.

[42] H. Conf. Rep. 97-208, 97th Cong., 1st Sess., reprinted in 1981 USCCAN 1010, 1249 (noting that "[t]o be satisfactory, the plan must demonstrate that it will reasonably protect the public").

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