Enforcement Update: U.S. and Canadian Developments

1. Enforcement Update:U.S. and Canadian Developments Georgia C. Ravitz, Esq., Partner Arent Fox LLP Washington, DC | New York, NY | Los Angeles, CA

2. Enforcement Focus: Update on U.S. Developments

3. Historically, the Commission considered the following factors in determining the amount of a civil penalty (and will continue to do so): • Nature of the product defect; • Severity of the risk of injury; • Occurrence or absence of injury; • Number of defective products distributed; and • Appropriateness of such penalty in relation to the size of the business of the person charged. • The CPSIA authorized the Commission to also consider how to mitigate undue adverse economic impacts on small businesses and other factors as appropriate.

4. September 1, 2009: CPSC published an Interim Final Interpretative Rule on Civil Penalty Factors to provide immediate guidance to industry and to offer a comment period prior to issuing a final rule. • Depending on the situation, CPSC may consider the following additional factors in determining an appropriate penalty amount: • Whether the violator had a safety/compliance program or system in place at the time of the violation; • History of noncompliance; • Economic gain from noncompliance; and/or • Failure of the violator to respond in a timely and complete fashion to the Commission’s requests for information or remedial action. • Both the Commission and the violator may raise any other factors they believe are relevant in determining an appropriate penalty amount.

5. Do penalties require companies to have actual knowledge? • No. The CPSA defines “knowingly” as actual knowledge or presumed knowledge attributed to a reasonable person acting in the circumstances.

6. CPSC Enforcement Activities Have Increased over Past Year • CPSC is accelerating its penalty enforcement process. • Example: A company recently received a pre-penalty notice alleging a failure to file a timely report only two months after announcing and implementing a recall. In the past, penalty cases would typically be issued after a recall was concluded. • CPSC is accelerating its recall verification process. • Example: A company recently received notice that a CPSC field investigator would conduct an on-site audit of recall effectiveness and verification of recordkeeping within the first month of the recall.

7. Penalties Increased Under Section 217 of the CPSIA • Civil Penalties: Increased from $8,000 to $100,000 per violation and from $1,825,000 to $15,000,000 for series of violations. • Increased penalty amounts took effect on August 14, 2009; Likely only applies to violations that occur after that date. • CPSC is required to issue a final regulation providing its interpretation of the statutory civil penalty factors to be considered in determining the amount of a penalty. • Criminal Violations: Increased imprisonment terms from 1 to 5 years for knowing and willful violation; increased maximum fines from $50,000 to an amount to be determined pursuant to factors specified in 18 USC 3571; and, authorizes forfeiture of assets.

8. Enforcement Focus: New, Additional Specific Prohibitions Under the CPSIA

9. Selling, distributing, manufacturing, or importing a product subject to a voluntary or CPSC-ordered recall or a “banned hazardous substance” as defined in the Federal Hazardous Substances Act.

10. Failing to issue a General Conformity Certificate (GCC) or to furnish a GCC to each distributor or retailer of the product or, upon request, to the Commission (if not currently stayed). • Furnishing a false GCC if the person, when exercising due care, has reason to know that the GCC is false or misleading.

11. Failing to affix tracking labels to a children’s product (effective August 14, 2009). • This applies to all “children’s products”, not just toys.

12. Selling, distributing, or importing any consumer product containing an unauthorized third party certification mark. • Example: Affixing a “UL” certification mark where UL certification was not obtained.

13. Misrepresenting to Commission officers or employees about the scope of consumer products subject to a recall or making a material misrepresentation during a CPSC investigation. • Important: CPSC is becoming more vigilant about verification of representations made by companies in recalls and other CPSC matters.

14. Exercising, or attempting to exercise, undue influence on a 3rd party conformity assessment body with respect to the testing, or the reporting of test results, for children’s products.

15. Exporting from the U.S. for purposes of sale any product that is subject to a voluntary or court- or CPSC-ordered recall or that is banned under the FHSA. • Permission to export is required for any recalled product, and must be obtained from CPSC prior to making export arrangements. • CPSC has recently designated an email address for companies involved in recalls to request exportation or other disposition of recalled products. (RecalledProductDisposal@cpsc.gov) • CPSC may refuse to permit exportation in some cases, or if foreign country refuses to allow re-importation.

16. Enforcement Focus: Bill C-6 – Canadian Consumer Product Safety Act

17. Biggest impact of proposed Canadian legislation • Imposes an affirmative obligation on manufacturers and importers to report to Health Canada within 10 days after becoming aware of an incident or defect that resulted, or could result, in a death or serious injury. • A general prohibition against the manufacture, importation, advertisement, or sale of consumer products that pose an unreasonable danger to human health or safety. • Legislation covers the manufacture of consumer products, not just the sale and importation. • Ministerial orders for test and study results – Requires manufacturers or importers to provide information on products requested by the government.

18. Biggest Impact of proposed Canadian legislation • Packaging and labeling – Provides prohibition on deceptive and misleading labeling or advertising as it relates to health or safety. • Document retention requirements that facilitate product tracing throughout the supply chain. • Authority for inspectors and government to order corrective action, including a recall. • Increased fines and penalties (e.g., CAD$250,000 (approx. US $240,000) and/or prison sentence of 6 months for 1st offence and CAD$500,000 (approx. US $480,000) and/or prison sentence of 18 months for subsequent offense on summary conviction)

19. Definition of “danger to human health or safety” been changed to read “any unreasonable hazard – existing or potential – that is posed by a consumer product during or as a result of its normal or foreseeable use…and that may reasonably be expected to have an adverse effect on that individual’s health – including an injury…

20. What type of incidents will industry have to report under the new proposed legislation? • Any occurrence that resulted or could reasonably be expected to have resulted in death or serious adverse health effects; • Any defect or characteristic that may reasonably be expected to result in death or serious adverse health effects; • Inadequate labeling or instructions with such results; or • Recall order or other corrective measures initiated for human health or safety reasons elsewhere (including outside of Canada).

21. February 17, 2010 recall of Quercetti™ “Fanta Color Junior” toy by Pierre Belvedere • Hazard: Health Canada testing determined that the product contains small components. • February 12, 2010 recall of Vancouver-themed decorative glazed ceramic wall plates • Hazard: Health Canada’s sampling and evaluation program revealed excessive lead and cadmium used in the glaze.

22. Enforcement Update: When International Product Standards Differ

23. While U.S./Canadian statutory frameworks harmonize intent, problems occur because they have not harmonized the standards. • What’s a company to do? • Follow Best Practices • Global consumer product company should design its products to meet the most stringent, mandatory safety standards that apply wherever their products are sold. • This means that products must be designed with these requirements in mind, as retrofitting may not be possible.

24. What could happen if different standards not followed for each jurisdiction the product is marketed in? • Recall in one country but not another (e.g., hairdryers, certain toys) but information about corrective action in one jurisdiction may be reportable to another • Additionally, there may be product liability implications if a standard is followed in one location but not in another.

26. Hairdryers • U.S. requires an immersion protection device to protect against potential electrocution if the product is dropped in water. • Canada does not require this device.