Tuesday, July 21, 2009

CPSIA - Clarification on the Jewelry Decision

I understand that the CPSC Commission believed it was effectively giving relief to the fashion jewelry industry by limiting its enforcement activities on crystals, glass beads and rhinestones to products for children aged six years or younger. I would like to clarify my previous comment on the effectiveness of this "relief". While the Commission's intentions were commendable, their decision provides no relief at all. Why?

First and most signficantly, the Commission has now removed all doubt - ALL subject stones (glass beads, crystals, rhinestones) are violative if they exceed the lead standards and if included in a product intended primarily for or designed for children twelve years of age or younger. In other words, these products are ILLEGAL. To sell them is to "knowingly" violate this law (CPSA Section 20(d)(2) - "the presumed having of knowledge deemed to be possessed by a reasonable man who acts in the circumstances, including knowledge obtainable upon the exercise of due care to ascertain the truth of representations"). That means penalties, even if you turn yourself in under Section 15(b). To sell such materials INTENTIONALLY (as might be induced by CPSC's highly-publicized policy to not enforce on products for children seven years of age or older) would be grounds for a felony charge. That would be perceived as a problem by most people. . . .

Most business owners and operators would take aggressive action to extinguish the possibility of any felony charge. Think of the shame that comes with this territory - felonies are serious crimes and might involve jail time and asset forfeiture (as though you were a drug kingpin). Felonies are easily avoided if you are good, law-abiding person. Have you ever committed a felony by mistake? No, I imagine not. Have you ever gotten close to the fuzzy line defining a felony? Again, probably not - most felonies are sharply defined. It's fairly easy to tell if you have murdered someone, for instance, and easy to avoid if you haven't already done the deed. How will businesses deal with this problem? They will stop selling rhinestones, etc., perhaps altogether, to avoid this risk of civil or criminal liability.

My experience with retailers, particularly publicly-held retailers (notably subject to the invasive and highly-risky Sarbanes-Oxley disclosure), is that they do not like take to take financial risks. Risk is decided against suppliers. If you have any doubt about this, consider TRU's new requirement that suppliers meet a 100 ppm lead-in-substrate standard as of January 1, 2010, almost two years ahead of any determination by the CPSC that it is required. TRU has taken the most conservative, risk-averse approach to "safety" since the lead-in-paint recalls of 2007-8. Their financial industry owners made a highly leveraged bet on TRU and don't want to blow it with uncontrollable liability risks. They would rather lose suppliers than take risk. Retailers dealing with the jewelry decision will simply insist on safety tests for all jewelry and apparel/shoes containing the stones, and the CPSC-certified labs will fail them all. It's a lock that these items will disappear from store shelves, notwithstanding the CPSC's promise to not enforce.

Another terrible implication of this decision is that possession of the now-illegal stones will mean significant and immediate inventory losses. Determining which stones are for which age child will be challenging or impossible. Products containing the stones are therefore likely considered contraband now, worthless in their present form. Who wants to be stuck with that loss? This is the classic "hot potato" problem highlighted in last November's Journal of Commerce article. Whoever has this inventory gets whacked with a total loss so a war will break out over its rightful owner. This is also the painful interaction of the Commission's decision with the Proposition 65 settlement and other correlated state laws - somebody's going to eat a lot of inventory (starting yesterday). To avoid this kind of risk, retailers will dump the goods back on makers, and the makers will have few options for the goods returned under this cloud (remember, felonies?).

Let's also not forget that products that are illegal under the CPSIA are not eligible for export to ANYWHERE. In other words, illegal here . . . illegal EVERYWHERE. The losses are total and irrevocable, courtesy of this decision. Who would want to get in the middle of that?

The fashion jewelry decision came as a shock to starry-eyed (non-cynical) optimists who held onto inventory from February without writing it off in the hope that the Commission would somehow preserve the stones' value. No such luck for them. With the Commission's decision, massive write-offs are now certain. In my original letter to Cheryl Falvey on retroactivity (here and here), I explained that inventory turning overnight into contraband would lead to widespread loan defaults, among other evils. It is not hard to imagine that among CIT's problem loans today are a few contraband jewelry and apparel/footwear cases arising from or related to this decision.

To add to the fun, the CPSC's new best friend, their partner U.S. Customs Service, is said to be impounding these goods as they are imported. I understand that numerous shipments are being delayed over these stones. What's the defense of the importer? "Hey, I know it's illegal but the CPSC says they don't care. . . well, they CARE but they won't enforce . . . right, no enforcement but still illegal, yes, can I have my inventory? . . . I can't give you a test report, the stones are over the limit but the CPSC says they won't be looking . . . but you ARE looking? . . . should I put my lawyer on the phone to explain???" Yeah, that might work . . . on Mars.

It's a royal mess but frankly, the CPSC and the Commission did as much as the words of the law allows. The law is very poorly-written and was even more poorly-vetted, and must be changed. The Commission will have more trying days ahead as it tries to make sense of a law that makes no sense. It's self-destructive legislation causing widespread harm but Congress stands passively on the sidelines, ready to point fingers. I think we as a country can achieve more. Now somebody has to prove it.

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