On Friday, a federal grand jury in California returned an indictment against two business executives, Simon Chu and Charley Loh, for their alleged roles in distributing defective dehumidifiers and, critically, failing to report required information to the U.S. Consumer Product Safety Commission (CPSC). In announcing the indictment, the U.S. Department of Justice proclaimed that this is the first criminal prosecution of an individual or firm for failing to report to the Commission under 15 U.S.C. § 2064(b), commonly referred to as “Section 15(b)” of the Consumer Product Safety Act (CPSA). This is a newsworthy development that deserves attention across the product safety community.
The Consumer Product Safety Act (CPSA): As many of our readers know, Section 15(b) of the CPSA requires that every manufacturer, importer, or distributor of a consumer product who obtains information that its product(s) “may contain a defect which could create a substantial product hazard,” has a duty to furnish certain information to the CPSC immediately. The same holds true for products that are non-complaint with mandatory federal safety standards or could create “an unreasonable risk or serious injury or death.” Failing to furnish such information to the Commission is a “prohibited act” under Section 19 of the CPSA.
Historically, “failure to report” cases have been handled civilly by the agency and/or DOJ. For example, the CPSC has announced numerous civil penalties levied against firms over recent years for failing to report. However, Section 21 of the CPSA provides that knowing and willful violations of Section 19—a list of prohibit acts including failure to furnish information required by Section 15(b)—may be punishable criminally. In other words, the product safety laws provide the Government with the option of seeking criminal penalties for knowing and willful violations.
The Indictment: Although the indictment does not name companies or conspirators (in addition to defendants Chu and Loh), the operative facts underlying the indictment appear to stem from the Gree matter before the CPSC—recalls involving Chinese dehumidifiers in the 2013-2014 time period that ultimately led to a (then record) $15.4 million civil penalty agreement between the Commission and various foreign and domestic Gree entities, including Gree USA Sales, Ltd. of California.
Here, in sum, the DOJ’s indictment alleges that from July 2012 through April 2013, defendants Chu and Loh received multiple consumer reports that their Chinese-made dehumidifiers were catching on fire. Despite these reports, and subsequent test results that showed the material used in the dehumidifiers did not meet the UL safety standard for dehumidifiers and/or fire resistance, defendants did not contact the CPSC until March 2013. And even when defendants and their unindicted and unnamed co-conspirators did notify the Commission, they made representations that they had not concluded that the dehumidifiers were defective or that a recall was necessary. One report made on April 30, 2013 went as far as stating that the dehumidifiers were “safe for use as intended.” Ultimately, the unindicted companies and CPSC announced a joint recall of approximately 2.2 million of these Chinese humidifiers in the U.S.
What This Means: Consumer product companies, and their officers and executives, should pay close attention to this development—up until Friday, the most egregious violations of the consumer product safety laws seemed to be resolved through civil channels—penalties and occasional lawsuits commonly filed to enjoin certain bad actors from continuing to sell defective or otherwise violative products. This indictment, however, demonstrates a willingness on behalf of the Government to prosecute individuals or firms criminally for, at a minimum, the most egregious violations of the product safety laws. Companies and executives in consumer product industries must remain aware and cognizant of their legal obligations to report and otherwise under the CPSC, as defined through the CPSA, Federal Hazardous Substances Act, and other product safety laws.
For additional analysis that focuses on the import angle of this matter, please see my colleague Frances Hadfield’s post here.