Wednesday, March 11, 2009

CPSIA - Letter of Etienne Veber to Rep. John Dingell

Dear Chairman Emeritus Dingell,

Thank you very much for showing true political leadership in asking that many serious CPSIA issues be addressed urgently. I hope that your recent letter to the CPSC will lead to prompt action to correct the excessive reach of this law and to reinvigorate a productive dialogue with the children’s product industry.

I am the President/CEO of Learning Resources, Inc. and Educational Insights, Inc., global leaders in hands-on learning educational toys and educational materials for children between the ages of 2-13. At our companies, we create engaging products in the subject areas of Reading/Language Arts, Math, Science and Social Studies for use at home and at school. Our products are used in almost every pre-K – 5 classroom in the United States, as well as in more than 80 countries around the world. While our main focus is on the school market, we also sell into the Toy market. I recently joined the Board of the Toy Industry Association (May 2008).

As a senior executive of a small educational products business (less than 150 employees), I am deeply concerned about the many unintended and devastating consequences of the CPSIA. Our Chairman, Rick Woldenberg, has taken a public stance on this issue for several months. For that reason, I would like to offer a different perspective based upon my own professional experience of 20+ years. Before joining Learning Resources in 2005, I worked for a number of years in the food industry, first as the President of NutraSweet (a subsidiary of the Monsanto Corporation) and later as CEO of Merisant, Inc. (maker of the Equal/Canderel brand sweetener). As a leader within that industry, I gained first-hand management experience of how highly-regulated (artificial sweeteners, biotechnology) as well as mass market-driven industries function.

The CPSIA imposes a regulatory burden on the children’s product industry that is as unmerited as it is excessive. While health issues related to biotech or food products are rather obvious, the risk of injury from the use of children’s products is not nearly so clear. Owing to the breadth of the definition of “children’s products” or even “toys” subject to the phthalates ban, the sweep of items included in the restrictions encompasses many items or categories of items that have never presented any risk of injury from poisons. A good example is books. The burden thus imposed is excessive (unrelated to risk) and unmerited (won’t improve safety if there was never an issue with safety). Both the lead and phthalates bans need to be carefully constrained to avoid unnecessary harm to commerce.

The children’s product industry is not prepared for the sudden imposition of heavy regulatory burdens. These changes will definitely lead to business closures and severe job losses. My experience at highly regulated industries is that their products must generate a lot of gross profit to cover high compliance costs. For instance, it can cost hundreds of million of dollars to take a drug or a food additive through the FDA approval process. Clearly, any manufacturer or marketer needs to achieve a reasonable return on such a massive investment to make the risk, effort and investment worthwhile. Children’s products are typically commodities and are priced low in a very competitive marketplace. The overhead and infrastructure needed to comply with the CPSIA is more than all but a tiny percentage of American children’s products businesses could handle. Compliance activities under the CPSIA are completely unreasonable for small manufacturers, single location stores or even small retail chains. By placing this burden (and the associated risk of civil and criminal penalties) on companies in this space, the new law will certainly foster and accelerate a transformation of the business community toward mass consolidation. This pressure is why there are no small drug or food ingredient companies anymore, and that’s why the CPSIA will make small children’s products companies an endangered species, too.

In a highly regulated industry, it is absolutely critical to capitalize on all of your investments. Products are simply too expensive to develop and obtain permission to sell, to be allowed to fail. It is therefore likely that highly regulated industries will concentrate on very few items after a Darwinian selection process. At my former company Merisant, we had two basic product lines, Equal (little Blue packets of sweeteners) and Canderel. These two items produced several hundred million dollars in annual revenue alone. By contrast, Learning Resources and Educational Insights have about 2000 items in their product lines and introduce as many as 200 new items each year. Despite our large product portfolio, our total annual revenues are substantially lower than that of Merisant. Do you think we can afford to run our companies the same way after the CPSIA? Certainly not – many of these items will quickly die because of the regulatory change. The kids and schools that need them will suffer, and because there was no quantifiable risk of injury from our products previously, it cannot be argued that anyone will actually be safer after we transform our company into its post-CPSIA form. This is a “lose-lose” proposition for our society.

Here are several comments that Congress needs to consider seriously to ensure the safety of our children without destroying law-abiding companies that are already suffering greatly in a depressed economic environment:

1/ Create an adequate transition period for new standards. There is virtually no precedent in CPSC history for a retroactive ban on anything, much less where there is no apparent public health crisis. It is unconscionable to impose "economic death" to good corporate citizens by labeling many of their assets as dangerous when in fact the products present no quantifiable risk of injury. Even the Prohibition gave industry years to clear out its supply chain. The timetable of implementation needs to be spread out over a much longer time to give companies time to absorb and adjust to the new rules, as well to foster a more effective partnership between the regulators and the industries being regulated.

2/ Sharply restrict use of the heavy penalties in the CPSIA. No one running a legitimate business with due care for their consumers should be exposed to the same remedies as "drug dealers". This is one of the most outrageous elements of the current version of the CPSIA and insults a broad swath of American society. The current law provides broad discretion to the CPSC to impose “instant death” remedies like million dollar fines, criminal charges and even asset forfeiture! These remedies should be extraordinary, not ordinary, and the law should specifically restrict their use. Otherwise, who would want or risk doing business under these conditions? The whistleblower provision is another highly coercive provision in the CPSIA that should be sharply curtailed or eliminated. It is utterly inappropriate in this law and under these circumstances.

3/ The lot traceability provisions of the CPSIA should be scrapped. Absolute traceability of individual production lots is not practicable (nor frankly justified) in the world of specialty products. The key concern is that a manufacturer must be able to efficiently identify a recalled product if indeed an issue arises. Many companies have demonstrated in the past that this can be achieved without lot markings. In addition, any company not marking by lot would always be able to retrieve all items from the market that cannot otherwise be specifically identified. The economics of lot markings are easy to assess for any manufacturer. If it is cheaper to mark by lot than suffer the open-ended economic consequences of a product failure, then manufacturers will mark their products. In this case, where public health risks are very remote, it does not make economic sense to require markings.

4/ The law should not require recall insurance nor give the CPSC the ability to create such a rule. The cost of such insurance would be absolutely prohibitive for small companies to bear. In addition, there is no market for recall insurance right now. Who is going to provide the insurance? AIG? This provision is yet another element of the CPSIA that punishes the many to get at the few. The failure of Simplicity to provide adequately for a recall of its cribs after bankruptcy is no justification to punish all who dare make children’s products in the future.

5/ The funding of the CPSC is inadequate and needs to be fixed. The CPSC is a good organization made up of talented folks who are highly committed to serving our government and country. The agency is clearly under-funded and under-staffed for the mandate they have under the CPSIA and other safety laws. Blaming the CPSC for CPSIA implementation problems is not justified and does not address the fundamental issue of inadequate resources. Funding for the CPSC needs to be considerably enhanced to facilitate a smoother implementation of the CPSIA.

As a highly responsible and law-abiding manufacturer of children’s products, we urge Congress to implement reasonable and common sense amendments to the CPSIA to fix its many serious flaws. Congress’ failure to act would have disastrous implications for the many industries involved, our economy as a whole, our education system and our children. We cannot afford to take that kind of risk. As the impact of the CPSIA is already starting to cripple many companies, there is a great deal of urgency in acting both sensibly and quickly.

I am happy to participate in any meeting, hearing, roundtable or discussion to help reach an acceptable outcome for all parties. Learning Resources has had an outstanding track record in safety for 25 years and we take these matters very seriously.

Respectfully,

Etienne Veber
President/CEO
Learning Resources, Inc.
Educational Insights, Inc.
380 N. Fairway Drive
Vernon Hills, Illinois 60061
eveber@learningresources.com
W (847) 573-8422
C (312) 493-8985

3 comments:

Tristan Benz - Maiden America - www.maidenus.com said...

Beautifully written. FYI, I just posted a link that poses a similar, sensible argument re: another bill that made its way to a House committee hearing yesterday - I think it was written well, too. http://www.nytimes.com/2009/03/11/opinion/11hayes.html?_r=1&ref=opinion

Let's turn the barrels headed off Niagra AROUND!! May these letters be 'heard' - great post.

Carol Baicker-McKee said...

Wow, Rick, is everyone at your company as smart and articulate as you too? Between your two letters there's not a whole lot left for the rest of us to say. (But I'm working on my letter anyway.)

What about tweaking these letters as articles to submit to mainstream media? If nothing else, there are outlets like Newsweek's My Turn column. (Stiff competition and slow turnaround, but better than nothing.) You can find submission details here: http://www.newsweek.com/id/43767

I'm still convinced we need a combination of public perception pressure and legislative pressure to make this turn around.

John said...

Sent my letter today. Here's a hoot for you: we have an tobacco awareness program to help kids learn about the dangers of smoking. By selling this product, we risk fines of $100,000, asset forfeiture and prison time if there is ever a problem, even if nobody is hurt.

Here in New Jersey, the fine for selling cigarettes to a minor is $250 (rising to $1000 for the third and subsequent offenses).