The Dangers Of Partial CPSC Reports: The Kawasaki Penalty

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The Dangers Of Partial CPSC Reports: The Kawasaki Penalty

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Law360

Jonathan Judge

Consumer product companies who suspect that a product either contains a defect or poses an unreasonable risk of injury are required to report that fact to the U.S. Consumer Product Safety Commission (CPSC) within 24 hours of reaching that conclusion, or risk a civil penalty.

On that note, the CPSC announced earlier this month that Kawasaki had agreed to pay a $5.2 million civil penalty both for untimely reporting of safety hazards involving recreational off-highway vehicles (ROVs) and further for making a “material misrepresentation” to the CPSC about those ROVs in the report it eventually did file.

A “material misrepresentation” is what ordinary people call “lying.” Lying is a bad thing to do, particularly when a governmental agency is involved. Here, the CPSC contends that Kawasaki initially reported only a subset of injuries and incidents, and chose to report only one model when other similar designs were equally affected.

Kawasaki insists that it complied with the reporting rules and vehemently denied trying to mislead anyone. Kawasaki may be correct. But the reality is that if a government agency thinks your company has lied to them, you are in a world of trouble — in this case, $5.2 million worth.

This penalty raises several issues that confront many of our clients when it comes to CPSC regulatory compliance. We’ll first briefly review the rules governing CPSC hazard reporting, and then discuss two issues that appear to have driven this particular penalty: the inadequacy of the report that was filed, and design changes that suggested the company’s knowledge of a problem well before that report was filed.

CPSC Penalties, Generally

The CPSC has the statutory authority to level civil penalties for a wide range of prohibited acts. 15 U.S.C. § 2068. Prohibited acts include selling products that fail to meet specific CPSC safety standards, refusing to allow CPSC inspections of product records, refusing to cooperate with mandatory recall orders and trying to exercise undue influence on a testing laboratory.

As a practical matter, though, the majority of civil penalties are handed down for “fail[ing] to furnish the information required by section 2064 of this title,” which specifies a company’s duty to report any product that either “contains a defect which could create a substantial product hazard” or “creates an unreasonable risk of serious injury or death.” 15 U.S.C. § 2064(b)(3), (4).

Generally speaking, a responsible party must file a report when it “obtains information which reasonably supports the conclusion that” its product creates an unreasonable risk of serious injury or death ... even when no final determination of the risk is possible.” 16 C.F.R. § 1115.6(a). The definition of “serious injury” is fairly broad, typically encompassing any injury sufficient to require medical attention or miss more than one day from school or work. 16 C.F.R. § 1115.6(c).

Reports Must Be “Adequate”

The Kawasaki penalty underscores an often-unappreciated aspect of CPSC reporting regulations, namely that a safety hazard report to the CPSC needs to not only be timely, but also complete. In that vein, CPSC regulations prohibit not only the failure to file a substantial hazard report, but also the failure to file a report that is “adequate.”16 C.F.R. § 1115.22.

The adequacy of a report seems to have both a procedural and a substantive component. Procedurally, the CPSC has laid out the general information it prefers to see in 16 C.F.R. § 1115.13. An initial report, which it is understood will often be filed when the company is still investigating, needs to contain only six broad categories of information. Later on, an additional report is specified with an additional nine areas of interest. 16 C.F.R. § 1115.13(c), (d).

As a practical matter, a company typically provides an initial report containing only the information it currently has, and the commission usually then sends a letter requesting a so-called “Full Report” (typically including all 15 of these categories, plus usually some additional ones).

But the Kawasaki penalty underscores that the adequacy of a hazard report has a substantive component as well, particularly when multiple different products are affected. There can be a temptation for companies to just “get something on file” on the idea that a company can “check the box” of having filed a report, even if it is less than perfect.

This is not a good idea. When an issue has arisen across a spectrum of products, a company should not try to finesse compliance by reporting only some of the affected models or by reporting some incidents and not others. If there is true uncertainty as to whether additional models are affected, the company should report what it knows and supplement when it learns more.

There can be tough calls to make when multiple products are potentially involved, but in general, pursuing a “half a loaf” strategy is unwise. Under the law it is the CPSC’s job — not an individual company’s job — to decide what does and does not constitute a substantial product safety hazard. With the Kawasaki penalty, the CPSC has made clear that it considers an incomplete report to not only be inadequate, but the equivalent of a false report.

The Telltale Design Change

The Kawasaki penalty appears to have been driven by an additional factor that was not described in the press release. The settlement agreement between the CPSC and Kawasaki reveals that Kawasaki had made a design change that addressed the hazards at issue several months before notifying the commission.

This remains a huge no-no, and we cannot stress enough that safety design changes are tantamount to an admission of guilt in the eyes of the CPSC when it comes to awareness of a safety hazard. Actions speak louder than words, and it is difficult for a company to claim it saw no hazard when that same company spent the money to adopt a fix that just so happened to address the same issue.

Put another way, if the issue is important enough to fix, it’s probably important enough to report. Companies are entitled to make design changes, and certainly are entitled to make design changes that make their products safer. Certainly, if the safety benefit of a design change is entirely prospective, then there is nothing to report.

But otherwise, companies and their counsel need to have an honest discussion about whether safety-related design changes are being driven by a circumstance that may be reportable.

Conclusion

If this sounds like a no-win situation, remember that many hazard reports filed by companies do not result in a recall. Furthermore, there are many circumstances that, on further review, don’t require a report to the CPSC at all.

In all situations, though, the question of whether to report, and which information to include in such reports, can benefit substantially from the insight of experienced CPSC reporting and investigation counsel.