April 5, 2019Client Alert

Failure to Act Expeditiously in Recalling a Defective Product Has Civil and Criminal Implications

Under the Consumer Product Safety Act (“CPSA”), every manufacturer, importer, or distributor of a consumer product is obligated to immediately inform the Consumer Product Safety Commission (“CPSC”) when its leadership obtains information which reasonably supports the conclusion that its product contains a defect “which could create a substantial product hazard or creates an unreasonable risk of serious injury or death.” Under the CPSC’s regulations “immediately” requires the manufacturer, importer, or distributor of that consumer product to act within 24 hours after a company has obtained the requisite information regarding a defect or an unreasonable risk. Failure to act quickly when faced with such circumstances not only subjects a manufacturer, importer, or distributor of a consumer product to significant civil liability from injured parties, but also exposes the entity and its management to the risk of criminal prosecution.

In a criminal case of first impression, the chief executive officer (CEO) and chief administrative officer (CAO) of an importer and distributor of a foreign manufactured consumer product were recently indicted in the United States District Court for the Central District of California for failing to act quickly enough when in possession of knowledge that the company’s imported dehumidifiers were defective. See United States of America v. Chu, et al., Case No. 19-CR-00193, filed March 28, 2019, U.S.D.C. Cen. D. Cal. According to the allegations in the Indictment, CAO Cho and CEO Loh, also both part owners in the companies involved in the manufacturing and importation of defective consumer dehumidifiers, knew their products could cause fires yet they failed to report their concerns to the CPSA for more than ten months. The executives had earlier, actual knowledge of the defects as a result of the receipt of a video from a consumer showing a burning dehumidifier like the dehumidifiers they were importing and distributing in the United States. In addition, CAO Cho had tested plastic used in the imported dehumidifiers and determined that the plastic was indeed flammable, and that the materials used in the dehumidifiers did not met UL safety standards. The Indictment further alleges the executives delayed any recall of the defective dehumidifiers for six to nine months to avoid losing dehumidifier sales and to reduce the cost and effect of the recall. The allegations further state that the defective dehumidifiers were finally reported to the CPSC, leading to the eventual recall of more than 2.2 million dehumidifiers.

In addition to being charged with criminal violations under the CPSA, the executives were also charged with criminal conspiracy and wire fraud counts. They allegedly committed fraud by knowing of the dangers of the dehumidifiers and failing to report the dangers to the stores in which they were being sold, to the consumers who bought the products, and to the insurance companies that paid damage claims caused by dehumidifier fires. If convicted, the business executives face up to five years in prison for each of the conspiracy and failure to furnish information to the CPSC counts, and up to 20 years imprisonment for the wire fraud charges.

While the alleged facts in United States v. Chu may be considered as extreme circumstances, the U.S. Department of Justice’s decision to criminally prosecute the company’s executives for their failure to act immediately when defect information becomes known is a significant change in CPSC enforcement.

When faced with allegations of a defect in a product you are manufacturing, importing, or distributing, a prompt and thorough investigation should take place. If the allegations are substantiated, delaying immediate remedial efforts can have significant consequences.

Should you need assistance with such sensitive investigations and guidance on CPSA issues and recalls, please contact your Michael Best counsel.

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