Despite imposing onerous new compliance terms, the recently announced Vornado civil penalty was criticized by three commissioners as too low amid their urgent calls for larger penalties in the future. On July 7, the U.S. Consumer Product Safety Commission (CPSC) announced a $7.5 million civil penalty settlement with manufacturer of air circulation products, Vornado Air (Vornado). Vornado agreed to pay the civil penalty to resolve charges that the Company knowingly failed to immediately report allegedly defective electric space heaters to the CPSC under Section 15(b) of the Consumer Product Safety Act (CPSA). The Commission voted 4-0-1 to provisionally accept the settlement. Notably, three of the agency’s five commissioners published individual statements alongside the agency’s announcement of the penalty, which is atypical. The statements provide product safety stakeholders with insights on how the “new” Commission views civil penalties and its enforcement authority.
The publicly available facts of this case are sparse. The CPSC staff alleged that Vornado failed to report immediately to the Commission that it had information which reasonably supported the conclusion that the space heater could overheat and catch fire. It is unclear from the face of the official settlement agreement how long it took Vornado to report to the agency after having received reportable information; however, a close read of the Commissioners’ statements about the settlement suggests that the CPSC believed that the Company knew about the potential fire risk as early as 2014, three years before learning of a death of a 90-year-old WWII war veteran. The Company allegedly reported shortly after learning of that death, which was purportedly linked to the product.
Alongside the agency’s regular press release announcing the civil penalty, CPSC Chairman Alexander Hoehn-Saric and Commissioners Richard Trumka Jr. and Peter Feldman issued pointed statements regarding Vornado’s alleged actions and the civil penalty itself. These statements paint a clear picture of where the Commission is headed over the months ahead with respect to future civil penalties and its compliance and enforcement function.
Chairman Alexander Hoehn-Saric (statement here): In his statement, CPSC Chairman Hoehn-Saric warns that “companies should be on notice that the agency will be even more aggressive in the future” when it comes to the agency’s pursuit of civil and potentially criminal penalties. Hoehn-Saric’s statement is eerily reminiscent of then-Chairman Elliot Kaye’s pronouncements in 2015 and 2016 that he was directing staff to seek significantly higher civil penalties against companies for violations of the CPSA and that he wanted to see eight-figure civil penalties based on certain fact patterns. Hoehn-Saric’s recent statement confirms that the risk of the imposition of substantial civil penalties for failing to report to the Commission remains significant and will only increase under his leadership and the Democratic (3-2) majority in the months and years ahead.
Commissioner Richard Trumka Jr. (statement here): Similar to Chairman Hoehn-Saric, Commissioner Trumka states it is time to “wipe the slate clean” and up the civil penalty numbers. He opines that the agency “must seek penalties that are high enough to deter bad actors in the first place,” “reject penalties that can be written off as a cost of business,” and adds that future civil penalties “will be multiples higher than they have been in the past.” However, Trumka, in his statement, also appears to be calling for a criminal investigation of Vornado and its company officials to determine if they “knew about the defect and chose to hide safety information from CPSC.” Criminal investigations conducted by the Department of Justice (DOJ) for alleged violations of the product safety statutes are rare thus highlighting Commissioner Trumka’s view of the seriousness of the alleged underlying conduct here and his willingness to refer matters for criminal prosecution to the DOJ.
Commissioner Peter Feldman (statement here): Finally, Commissioner Feldman’s statement blasts the adequacy of the civil penalty agreement altogether stating that the alleged conduct involved “some of the most serious charges [he had] seen during [his] time as a commissioner.” Commissioner Feldman states that the settlement was a missed opportunity to send a message “to the entire product safety community – that when companies endanger consumers and fail to report, they will pay a steep price.” Feldman believes that the inadequacy of the civil penalty “will embolden companies to continue to ignore their reporting obligations and jeopardize [the Commission’s] ability as a Commission to fulfill [their] mission to keep consumers safe.” Commissioner Feldman continues to emphasize the need for aggressive civil penalties for late reporting in his public statements—a departure from past Republicans on the Commission.
The settlement agreement imposes more stringent compliance processes than prior agreements. For example, the agreement includes a requirement to report to the CPSC annually describing its compliance program; affirming that it reviewed its compliance program for effectiveness; describing any non-compliances; and attesting to any changes to the compliance program in the prior year. These enhanced compliance requirements will give the CPSC even more leverage should the Company violate reporting requirements in the future and may signal where CPSC could be headed under Chairman Hoehn-Saric’s more aggressive leadership on penalties. While Vornado is a private entity, public companies should take note, as these terms could impact liability risks related to the management of recall and reporting obligations if imposed on a public company in the future.
Finally, reading between the lines of this penalty announcement, a takeaway lesson is that a low incident rate is not always a defense. When the recall was originally announced in April 2018, the CPSC press release indicates that the Company was aware of 15 reports of fire out of approximately 350,000 products, which calculates out to an infinitesimally low incident rate. And yet, even in the face of an extremely low incident rate, Commissioners are calling for higher penalties and criminal investigations as to whether the Company covered up a known risk. That Commission position is consistent with the fact that the reporting threshold is lower than the threshold for recalling a product. Two Commissioners emphasized what the Company knew about the product safety risk in 2014, years before the total number of incidents reported in the 2018 recall. This serves as a good reminder that the root cause of potential safety risks needs to be investigated immediately and monitoring for patterns of incidents over time, while important, may not always be enough to satisfy compliance requirements.
For further information, please contact:
Cheryl A. Falvey, Partner, Crowell & Moring
cfalvey@crowell.com
