In Precedent-Setting Case, Two Senior Corporate Executives Indicted for Failure to Report Under the Consumer Product Safety Act

by Jonathan J. Rusch

On March 29, the U.S. Department of Justice announced that on March 28, a federal grand jury in the Central District of California indicted two senior corporate executives with two corporations on multiple counts for their roles in a scheme involving defective and dangerous dehumidifiers made in China.  Simon Chu and Charley Loh, who served respectively as part owners, chief administrative officer, and chief executive officer of the same two corporations in California, were charged with (1) conspiracy (a) to commit wire fraud, (b) to fail to furnish information under the Consumer Product Safety Act (CPSA), and (c) to defraud the U.S. Consumer Product Safety Commission (CPSC); (2) wire fraud; and (3) failure to furnish information under the CPSA.  The Department indicated this was the first time that any individual had been criminally charged for failure to report under the CPSA.

Under section 15 of the CPSA, a manufacturer, importer, distributor, and/or retailer of consumer products, and an individual director, officer, or agent of such companies, has a legal obligation to immediately report certain types of information to the CPSC.  Those include a defective product that could create a substantial risk of injury to consumers or a product that creates an unreasonable risk of serious injury or death.  Under sections 20 and 21 of the CPSA, failure to fully and immediately report this information may warrant, respectively, a civil penalty (effective January 1, 2017) [1] up to $16.025 million for a related series of violations, and criminal penalties including up to 5 years’ imprisonment and a fine under Title 18 of the United States Code for a knowing and willful violation.

According to the indictment in this case,

as early as September 2012, Chu, Loh, and their companies received multiple reports that their Chinese dehumidifiers were defective, dangerous, and could catch fire. They also allegedly knew that they were required to report this product safety information to the CPSC immediately. Despite their knowledge of consumer complaints of dehumidifier fires and test results showing problems with the dehumidifiers, the indictment alleges that Chu and Loh failed to disclose their dehumidifiers’ defects and hazards for at least six months while they continued to sell their products to retailers for resale to consumers.

The indictment also alleges “that as part of their scheme, Chu and Loh deliberately withheld information about the defective and dangerous Chinese dehumidifiers from the retail companies that bought the dehumidifiers; the insurance companies that paid for damage caused by the fires resulting from the dehumidifiers; and the CPSC.”  In addition, Loh and Chu

allegedly continued to sell the Chinese dehumidifiers to retailers with false certifications that the products met safety standards; caused a company employee to solicit materials that would falsely portray to an insurance company that the dehumidifiers were safe and not defective; and sent an untimely report to the CPSC that falsely stated that the dehumidifiers were not defective or hazardous.

This indictment is significant for consumer products-related companies because the Justice Department has chosen for the first time to indict individuals under the CPSA’s “failure to report” provisions.  Since 2002, when it first secured a court-imposed civil penalty for failure to report,[2] the CPSC at various times has used its civil authority to obtain substantial civil penalties.  Last year, for example, Polaris Industries Inc. agreed to pay a $27.25 million civil penalty for failure to report immediately that certain recreational off-road vehicles (ROVs) that Polaris manufactured and distributed contained defects that could create a substantial product hazard or that the ROVs created an unreasonable risk of serious injury or death.[3]

Although the merits of the case have yet to be decided, chief compliance officers at companies that manufacture, import, distribute, or retail consumer products should use this case to remind company executives (including officers and directors) and employees, as well as outside agents, of their companies’ obligations to comply with the CPSA’s reporting requirements.  It is important to recognize that the duty to report under the CPSA attaches to each company in the chain of manufacturing, importation, distribution, and retailing.

In other words, an importing firm that becomes aware of substantial product hazards in a product it has received from a manufacturer cannot remain silent on the assumption that the manufacturer will report those hazards.  Nor can a retailer who becomes aware of such hazards remain silent on the assumption that someone farther up the supply chain will report.  Moreover, even if the retailer were to receive false certifications from the manufacturer that the product in question was safe and not defective, the retailer cannot rely on those false certifications once it becomes aware that the product is in fact unsafe and must immediately report.

Because the lack of prior criminal enforcement of the CPSA reporting requirements may have made some companies less than attentive to them, corporate compliance teams should also review the elements of their CPSA compliance program.  CPSA compliance managers and employees must have uniform processes in place to identify situations that may require CPSA reporting, and clear authority to prepare and submit such reports promptly as appropriate.  The indictment in this case sends a strong signal that criminal prosecution is no longer a speculative risk for companies or corporate officials who withhold or suppress information about serious product hazards that the CPSA requires to be reported.

Footnotes

[1]   See 81 Fed. Reg. 84559 (November 23, 2016).

[2]   See Consumer Product Safety Commission, Press Release 02-194 (2002)

[3]   See Consumer Product Safety Commission, Press Release 18-134 (April 2, 2018).

Jonathan J. Rusch is Principal of DTG Risk & Compliance, a consulting firm specializing in corporate-compliance issues, and Senior Fellow in the Program on Corporate Compliance and Enforcement at New York University Law School.

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