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From Products Liability Law Daily, October 4, 2017

$1.9M civil penalty assessed against Spectrum Brands for late reporting of coffeemaker defect

By Susan Engstrom

Spectrum Brands, Inc. was ordered to pay a civil penalty of $1,936,675 for failing to promptly inform the Consumer Product Safety Commission (CPSC) that the glass carafes distributed as part of its Black & Decker SpaceMaker line of coffeemakers could suddenly break at the handle, and for continuing to sell the coffeemakers after they had been recalled. The Wisconsin federal court overseeing the case also entered a permanent injunction requiring the company to improve its programs and internal controls to ensure compliance with federal statutory reporting requirements and the prohibition on post-recall sales (U.S. v. Spectrum Brands, Inc., Opinion and Order, September 29, 2017; Judgment, October 3, 2017; Conley, W.).

In a prior decision, the court determined that Spectrum Brands violated the Consumer Product Safety Act (CPSA) by failing to report the defect in the carafes until several years after its obligation to do so had arisen, and by continuing to sell or distribute coffeemakers after they had been recalled [see Products Liability Law Daily’s November 21, 2016 analysis]. The court also found that the imposition of a civil penalty pursuant to the CPSA would not violate the company’s statutory or constitutional due process rights. In the current case, after determining that the maximum available penalty that could be assessed against the company was $30.30 million, the court considered the factors set forth in the CPSA and its accompanying regulations to establish the appropriate amount.

Reporting violation. With respect to the penalty for Spectrum’s reporting violation, the court found that the CPSA’s first factor—the nature of the product defect—weighed slightly in the company’s favor. Although the record established that the carafe handles were defective, the severity of any defect was unclear. The second and third CPSA factors—the severity of the risk of injury and the occurrence or absence of injury, respectively—weighed more strongly in the company’s favor. The government provided no admissible evidence regarding any injuries that a customer actually had sustained by virtue of a failed handle (as opposed to those self-reported by customers), and even the reported instances of broken carafes reflected relatively infrequent, minor injuries. The fourth CPSA factor, i.e., the number of defective coffeemakers distributed before they were recalled, appeared to weigh slightly in the company’s favor. The fifth factor—"the appropriateness of such penalty in relation to the size of the business"—was largely neutral. Although Spectrum is a large, global company with about 15,000 employees in 53 countries and net sales of $5 billion in fiscal year 2016, it sold the coffeemakers at a fairly modest profit margin.

The court also found that two of the factors set forth in the regulations—whether Spectrum had a history of failing to comply with the CPSA and whether it responded appropriately to the CPSC’s correspondence—did not militate toward imposing a substantial penalty. However, two other factors, which relate to safety compliance programs and financial gain, weighed strongly against the company. First, Spectrum’s safety compliance programs failed to raise red flags that the carafes presented a safety issue. According to the court, one of the most significant problems that certainly contributed to the company’s failure to report in a timely manner was a disconnect between the information being gathered about the potentially defective carafe handles by its engineers versus the information being gathered by individuals receiving actual consumer complaints. Second, Spectrum could not dispute that it enjoyed a substantial economic gain by selling off its inventory before belatedly reporting the product’s serious defect.

Because the company’s failure to report became more egregious as time went on and consumer complaints mounted, the court increased the penalty for every new complaint received during six-month increments, using a starting point of $10 per complaint received on or before June 30, 2009, representing the rough profit on the sale of the defective products; then $75, representing the product’s purchase price; and doubling the penalty for each six-month period thereafter until Spectrum finally fulfilled its reporting obligation in April 2012. This came to a total of $821,675.

Post-recall sale violation. After Spectrum reported the carafe defect to the CPSC and requested an expedited recall through the agency’s fast-track program, the agency issued a press release announcing the recall in June 2012. Despite those actions, and despite the company having put into place in March 2012 an internal "Notice of Product Hold," Spectrum sold or distributed 641 recalled coffeemakers between June 2012 and June 2013. In the court’s view, the egregious nature of these post-recall sales warranted a higher, more punitive per-violation amount, particularly for the batch of sales from the second shipment, which had occurred after the company discovered that the coffeemakers in the first shipment had been erroneously received into available inventory.

The court imposed a penalty of $1,000 for each of the 167 recalled coffeemakers Spectrum sold from the first shipment and $2,000 for each of the 474 sold from the second, reflecting that the sales from the second shipment were even more egregious than the first. Thus, the appropriate civil penalty for Spectrum’s sale of recalled products was $1,115,000.

Permanent injunction. Finally, the court entered a permanent injunction requiring Spectrum to maintain sufficient systems, programs, and internal controls to ensure compliance with the CPSA and its regulations, including the reporting requirement (15 U.S.C. §2064(b)(3)) and the prohibition on the sale of recalled products (15 U.S.C. §2068(a)(2)(B)). The company was ordered to implement appropriate improvements within six months of this order.

The case is No. 15-cv-371-wmc (Opinion and OrderJudgment).

Attorneys: Alan Phelps, U.S. Department of Justice, for the United States. Timothy Leffard Mullin, Jr. (Miles & Stockbridge PC) for Spectrum Brands, Inc.

Companies: Spectrum Brands, Inc.

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