DOJ Criminally Charges Executives for Failure to Timely Report Under CPSA
Government Enforcement/CPSC Update
Date: April 09, 2019
On March 29, 2019, the Department of Justice (DOJ) indicted two corporate executives in what it is publicizing as the first-ever criminal prosecution for failing to timely report a safety hazard (in this case, the fire hazards posed by certain Chinese dehumidifiers) to the Consumer Product Safety Commission (CPSC). The executives, Simon Chu and Charley Loh, are charged under the Consumer Product Safety Act (CPSA) for “failing to furnish information about a substantial product hazard that created a substantial risk to the public” and for conspiracy to commit wire fraud and defrauding the CPSC.
Section 15(b) of the CPSA requires every manufacturer, importer or distributor of a consumer product to notify the CPSC “immediately” (i.e., within 24 hours) upon receipt of information that a product may contain a defect that could create a substantial product hazard or an unreasonable risk of serious injury or death. This duty also applies to individual directors, officers and agents of those companies. Typically, the CPSC has handled untimely reporting violations administratively by requiring companies to pay hefty fines or conduct recalls and other corrective actions. Although the CPSA authorizes criminal penalties, including fines, forfeiture of assets and imprisonment, criminal charges are rarely brought, much less against corporate executives. This is what makes the alleged conduct and charges in the indictment so significant.
The criminal indictment, though naming only Chu and Loh, relates to an earlier CPSC administrative matter involving Gree Electric Appliances, a Chinese company that announced a recall of 2.2 million dehumidifiers in the United States in September 2013. In March 2016, Gree and others agreed to pay a record $15.5 million civil penalty and improve internal compliance for failing to timely report the defective dehumidifiers to the CPSC.
The indictment against Chu and Loh, whose companies distributed the Chinese dehumidifiers in the United States, alleges that the executives knew that the dehumidifiers could cause fires and did not comply with UL standards, yet they failed to report their conclusions to the CPSC as required by the CPSA. The indictment contains the following allegations against one or both executives:
- In July or August 2012, the executives saw a customer’s video showing a burning Chinese dehumidifier; they then tested the plastic used in the dehumidifier and confirmed the plastic would burn.
- In early September 2012, the executives sent emails to and met with the Chinese manufacturer’s managers and engineers to discuss that the plastic did not meet UL safety standards for fire resistance; the executives continued to receive reports of fires relating to the dehumidifiers.
- In late September 2012, the Chinese manufacturer’s manager told the executives that the company could not manufacture improved dehumidifiers before the end of 2012 or early 2013, and that the executives’ companies should delay a recall for six to nine months to avoid losing dehumidifier sales and reduce the recall’s cost and effect.
- The executives then sent emails to high ranking officials of the Chinese manufacturer stating that there were additional reports of fires, that the dehumidifiers were defective and would catch fire, and that the plastic did not meet UL safety standards. The executives also advised that they intended to report the hazards posed by the Chinese dehumidifiers to “competent authorities” and urged the manufacturer to report the defect because the issue was “super urgent and important.”
Despite knowing of the defect and fire hazard, the executives never reported the safety issue to the CPSC. The indictment alleges that the executives committed fraud because they knew the dangers the dehumidifiers posed, yet they failed to report those dangers to the retail stores they continued to sell them to, customers who bought the products, and insurance companies that paid for damage caused by the dehumidifier fires.
Manufacturers, importers and distributors of consumer products – and their executives – should monitor this development closely. It is noteworthy that, despite entering into a civil settlement with Gree and its distributors over three years ago, the government now has chosen to pursue criminal charges against the distributors’ executives. It is also significant that the DOJ is publicizing these charges as the “first-ever” prosecution for failure to report under the CPSA. It is reasonable to conclude that the government intends to use the CPSA’s criminal enforcement provisions in egregious cases where it sees a strong deterrent value in bringing a criminal case against individual executives or officers. Now, more than ever, companies must establish – and publish to their executives – robust procedures to evaluate potential defects and hazards and report them to the CPSC as soon as they first become aware of product incidents and risks to ensure compliance with their Section 15(b) timely reporting requirements under the CPSA.
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Gary M. Glass
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