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April 29, 2019

For the First Time, Executives Criminally Charged for Knowing and Willful Reporting Violations of the CPSA

Seller Beware: Consumer Protection Insights for Industry

On March 29, 2019, the Department of Justice announced a groundbreaking federal grand jury indictment of two California executives for conspiring to knowingly and willfully violate the reporting requirements under Section 15 of the Consumer Product Safety Act (CPSA). The executives, Simon Chu and Charley Loh, are part owners and the Chief Administrative Officer and Chief Executive Officer, respectively, of two undisclosed companies that imported and sold Chinese dehumidifiers in the U.S. According to the indictment, Chu and Loh conspired to knowingly and willfully fail to immediately report to the U.S. Consumer Product Safety Commission (CPSC) upon obtaining information that the dehumidifiers contained a defect that could create a substantial product hazard or an unreasonable risk of injury as required by Section 15 of the CPSA. Chu and Loh are also charged with conspiracy to commit wire fraud and to defraud consumers, retailers, and the CPSC. Although not specifically referenced, the indictments appear to be related to the Gree voluntary recall of 2.5 million dehumidifiers for fire and burn hazards, which was first announced by CPSC in September 2013, updated in October 2013, expanded in January 2014, and reannounced in May 2014 and November 2016.

Under Section 15 of the CPSA, manufacturers, distributors, and retailers of consumer products are required to "immediately" notify the CPSC upon the receipt of information that "reasonably supports the conclusion" that the product "contains a defect which could create a substantial product hazard" or "creates an unreasonable risk of serious injury or death." In addition to the risk of civil penalties for CPSA violations, Section 21 authorizes felony criminal penalties against a "director, officer, or agent of a corporation who knowingly and willfully authorizes, orders, or performs" a prohibited act under the CPSA, including late reporting.

According to the indictment, Chu and Loh were first made aware of issues with the dehumidifiers in July 2012 when they received a video of a consumer's burning dehumidifier. By September 2012, Chu and Loh had knowledge that when tested, the plastic used in the dehumidifier caught fire and apparently "did not meet the required UL safety standard for fire resistance." The indictment also charges that Loh sent emails to the management of an unindicted co-conspirator company stating that the dehumidifiers were defective, would catch fire, did not meet UL safety standards, and should be reported to the CPSC. The email also allegedly stated that if the company did not report to CPSC, Loh would do so himself. Despite allegedly knowing of their responsibility to notify CPSC, both Chu and Loh failed to report to CPSC and continued to sell the dehumidifiers. On April 30, 2013, when Chu and Loh's two undisclosed companies (along with a third company) reported the dehumidifiers to the CPSC, the report allegedly "falsely portrayed the Chinese dehumidifiers as safe and not defective."

Chu and Loh's indictment appears to be the first time individuals were criminally charged for CPSA violations related to the Section 15 reporting requirements. This case further demonstrates the need for manufacturers, distributors, and retailers regulated by CPSC to be vigilant in notifying CPSC of potential product safety issues in accordance with Section 15.

© Arnold & Porter Kaye Scholer LLP 2019 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.