The Consumer Products Safety Commission (“Commission”) has drafted its final rule interpreting factors to be considered when seeking civil penalties under the Consumer Product Safety Act (“CPSA”), the Federal Hazardous Substances Act (“FHSA”), and the Flammable Fabrics Act (“FFA”).
Background. Section 217 of the Consumer Product Safety Improvement Act of 2008 (“CPSIA”) amended the statutory criteria the Commission must consider when determining the amount of civil penalties for knowing violations of the CPSA, FHSA, and FFA and required the Commission to issue regulations interpreting those statutory factors. Section 217 of the CPSIA also increased the maximum penalty for violations from $5,000 to $100,000. The Commission issued an interim final rule on September 1, 2009 and sought public comment. Following the public comment period, the Commission posted its draft notice of the final rulemaking on its website on February 25, 2010. This rulemaking establishes a new Part 1119 in Title 16 of the Code of Federal Regulations.
Statutory Civil Penalty Factors. The CPSA, FHSA, and FFA, as amended by the CPSIA, each contain a similar set of statutory criteria for the Commission to consider when assessing civil penalties. See 15 U.S.C. § 2069(b) (CPSA factors), 15 U.S.C. § 1264(c)(3) (FHSA factors), and 15 U.S.C. § 1194(e)(2) (FFA factors). The factors include:
(1) the nature, circumstances, extent, and gravity of the violation (including the nature of the product defect under the CPSA and the nature of the substance under the FHSA); (2) the severity of the risk of injury; (3) the occurrence or absence of injury; (4) the number of defective products distributed (factor under the CPSA only) or the amount of substance distributed (factor under the FHSA only); (5) the appropriateness of such penalty, in relation to the size of the business of the person charged, including how to mitigate undue adverse economic impacts on small businesses; and (6) such other factors as appropriate.
Commission Interpretation of Statutory Factors. The Commission rejected adopting a formulaic or matrix approach to assessing civil penalties under the CPSIA. Rather, the Commission stated that it will review the facts and circumstances surrounding violations and the assessment of penalties based on the factors and framework described in the final regulations.
1. Nature, circumstances, extent, and gravity of the violation. Under this factor, the Commission will consider the totality of the circumstances and all other facts concerning a violation. In addition to the statutory factors, the Commission will consider those promulgated in the regulation under the catchall “other factors as appropriate.”
As part of its totality of the circumstances analysis, the Commission will consider the nature of the product defect associated with a CPSA violation or the nature of the substance associated with an FHSA violation. Certain violations of the CPSA, however, do not necessarily require that there be a product defect. In those cases, the Commission will still consider the other civil penalty factors.
2. Severity of the risk of injury. The Commission will consider the potential for serious injury, illness, or death (and whether any injury or illness required medical treatment including hospitalization or surgery), the likelihood of injury, the intended or reasonably foreseeable use or misuse of the product, and the population at risk (including vulnerable populations).
3. Occurrence or absence of injury. The Commission will consider whether injuries, illnesses, or deaths have or have not occurred with respect to any product or substance associated with a violation, and, if so, the number and nature of injuries, illnesses, or deaths. When addressing this factor, the Commission will consider both acute illness and the likelihood of chronic illness.
4. Number of defective products distributed. The Commission will consider the number of defective products or amount of substance distributed in commerce. However, this factor will not be used to penalize a person’s decision to conduct a wider-than-necessary recall out of an abundance of caution. Recalls conducted due to a person’s uncertainty with how many or which products should be recalled, on the other hand, will not avoid application of this factor.
5. Appropriateness of such penalty in relation to the size of the business of the person charged, including how to mitigate undue adverse economic impacts to small businesses. In considering business size, the Commission may look at the number of employees, net worth, and annual sales. However, a business’s size and its ability to pay a penalty are separate considerations. Relevant financial factors to determine a small business’s ability to pay include liquidity, solvency, and profitability.
With respect to mitigation of “undue” adverse economic impacts, the Commission may consider the business’s size and financial factors relating its ability to pay. The Commission’s Small Business Enforcement Policy at 16 C.F.R. § 1020.5 may also provide guidance on how to mitigate undue adverse economic impacts.
6. Other factors as appropriate. In addition to the statutory factors, the CPSA, FHSA, and FFA authorize the Commission to consider other factors it finds appropriate when determining the amount of a civil penalty. In these new regulations, the Commission has established the following additional factors that it may consider: (1) whether a person had at the time of the violation a reasonable and effective program or system for collecting and analyzing information related to safety issues; (2) a person’s history of noncompliance with the CPSA, FHSA, FFA, and other laws that the Commission enforces; (3) whether a person has benefited economically from a failure to comply; (4) whether a person has failed to respond in a timely and complete fashion to requests from the Commission for information; and (5) the duration of a violation.
Effective Date. The Commission discussed the draft final rule at its public meeting on March 3, 2010, and the Commission planned to vote on the draft final rule the week of March 8, 2010. The regulations will become effective once published in the Federal Register.
Scott Peterkin is an Associate in the Regulatory Affairs Department at Dorsey & Whitney, LLP. Please see our web site at www.dorsey.com.