CPSIA - Thoughts on Tracking Labels Guidance (Part II)

With about two weeks to go before implementation of the tracking labels requirement under Section 103 of the CPSIA, I thought it would be appropriate to continue to detail my comments on the new guidance issued by the Commission last week (the Guidance).

[Please note that I have previously published an Op-Ed in the Journal of Commerce on tracking labels, as well as submitting a comment letter documenting many problems with this provision. I have also testified before the CPSC's Tracking Labels panel on May 12.]

Why the Delay in Issuing Guidance? The Guidance came out late, with only days to go before implementation on August 14th. By voting on the Guidance on July 20 without previously releasing it, the Commission issued the Guidance in "final" form, although Commissioner Nord stated that further clarifications would follow. Why didn't the agency ask for comments before the vote? Why didn't they release the Guidance while they were considering their vote? One man's theory: if they put themselves in position to receive comments, much less ask for comments, it would have been impossible to meet Commissioner Moore's promise to issue guidance before implementation of the Section 103 requirements. That would have forced the issue of a stay, currently stymied with a 1-1 vote by the Commission. It was therefore necessary to make the Guidance "final", or to seem "final", in order to preserve the option that implementation of tracking labels not be delayed. Just a question: where's the fire?

I am still hopeful that Chair Tenenbaum will listen to reason and allow more time for tracking labels implementation by voting in favor of the NAM petition. There is much work to do. Ms. Tenenbaum has demonstrated discipline as a regulator in her early days on the job, which I think is commendable. That is not enough, however, given the terrible law she has been given to enforce. While I agree that she should enforce the law as written, she has been given a leadership position that demands more than just being a good administrator. To restore common sense and integrity to the safety rules governing our markets, Ms. Tenenbaum will need to broker a reasonable compromise with Congress as the new Chair. This was a critical point in Bob Adler's keynote speech at ICPHSO in February. Frankly, the alternative is intolerable - without legislative change, much of her good efforts will be wasted pursuing the technical violations of innocent, good companies in lieu of other more impactful safety undertakings. This terrible misallocation of resources should be very troubling to Ms. Tenenbaum, a fate she does not have to accept on behalf of her agency.

Recall Effectiveness and The Right Economic Choices. The Guidance notes that Section 103 is meant to help make it easier to identify products subject to recall. The agency also states that it will focus its enforcement efforts on recall situations. In other words, if your product is subject to recall, the CPSC may add to your punishment if you happen to fall afoul of this provision. The Guidance states: "If a manufacturer can identify the location, date of production, and such individualized information as the batch or run number, it can more readily isolate products that it or others may discover present a safety concern. Similarly, if a consumer can identify the manufacturer (or private labeler), location and date the product was made, and any more specific identifying information, he can more easily determine whether a product in the home is the subject of a safety recall."

The implicit reasoning of the Guidance (and law) is that consumers need to be in a position to judge whether their product is subject to recall, and this is the "missing link" that would make recalls more effective. As I noted in my tracking labels presentation at the CPSC on May 12, there are many reasons why people don't return recalled products. Primary among the reasons is that they don't hear about the recall. It's a big country, guys - that's going to continue to happen. The second leading cause of not returning recalled products is that they have been discarded, broken or lost/misplaced. One more reason is that people may not want to return it, for whatever reason. The least likely explanation for a failure to return a recalled product is that the consumer knows about the recall, has the product in hand but can't figure out whether it is subject to the recall. What would YOU do in that circumstance? Me, I would return it if I felt uncomfortable. Duh. Frankly, it is amazing that someone sold Congress on the idea that tracking labels would address the issue of recall effectiveness.

Unfortunately, the law and its noble goal of better recall effectiveness also ignore all concepts of economics. At the time of the drafting of the CPSIA, Congress was enraged against "evil corporations" for their supposed dastardly deeds and decided to pass a law without monetary wiggle room on any aspect of product safety. The law was drafted with great precision to remove any reference to money or economics (see, e.g., the definition of "technological feasibility" in Section 101(d) in the CPSIA). By writing the law this way, Congress essentially banned economically rational decision-making by children's product companies regardless of their commitment to good product safety. Please remember it is possible to do more than compare the cost of injury against the cost of injury prevention. For many companies, particularly those strongly committed to "doing the right thing" (a not-uncommon kind of company), this is not the calculation they would be making.

Consider companies that never or infrequently have a recall. In the case of our company, we have recalled one product once (130 pieces) in 25 years. Clearly for us, recalling products is very rare, so expending time and resources to make these recalls more effective would be economically irrational. Instead, our economic incentive is to channel our limited resources into RECALL PREVENTION. This completely aligns with the interests of our customers and of consumers. Nonetheless, we have no choice under the CPSIA but to invest in the new labels. [In our case, increased recall effectiveness would not be possible since, in our one recall, we spoke to each buyer individually and recovered all the pieces subject to the recall.] Companies like ours would prefer to compare the cost of the labeling program with the risk-adjusted cost of having to recall more product that might otherwise be required. Since we don't expect any recalls (our historical recall rate well under 0.001%), we consider our expected recall cost to be near zero, so any expense to reduce it would be essentially wasted. It's a bad bet for us.

Frankly, there are other recall formulas available. For one thing, a manufacturer could recall more units than required. They could also recall everything ever made. If they maintain detailed inventory records using a warehouse management software package, it may be possible to identify the customers who bought the bad goods and recall only through those outlets. It is also possible that specific time periods can be identified to further limit or define the recall. If a product is not identifiable, the maker could also unquestioningly accept it for recall (to remove doubt and build consumer confidence). The CPSC could (and should) allow manufacturers to make these choices and to not penalize them for acting economically rational. To disincentivize rational behavior is to knowingly run an irrational marketplace - which is pretty inexcusable in my opinion.

If you very rarely have recalls, these options are probably CHEAPER than putting tracking info on the products. [The most onerous (expensive) obligation under the Guidance is lot markings and the associated quality control and recordkeeping activities associated with lot markings.] It is important to note that there are some kinds of products that pose very little risk of EVER being recalled. Even companies at a high risk of recalls on some products may have a very low risk of recalls on other products. There are reasons for recalls, it's not random, so this kind of thing can often be accurately predicted. A manufacturer dealing with low risk items might also feel it is economically better off by not labeling and simply taking its chances. The law does not permit this, although it is not obvious to me how consumers lose from granting this option.

For instance, the highest risk items for toy recall (our industry) are items coated with paint or items age-appropriate for children three years of age or younger (risk of small parts). [The high risk and low risk items in other industries could also be identified.] The risk of recall of other toys is slight or near zero. For us to waste time and resources on an elaborate tracking system for low risk toys is to spend money to improve recalls that we feel strongly will never take place. Yet, we would be risking serious civil or criminal liability if we do not make this investment for all of our items regardless of recall probability. The law now requires us to behave irrationally with only a flimsy justification and in a way that will benefit no one. For some companies, this excessive expense could be quite significant. In our case, the majority of our items (probably the great majority) are highly unlikely to ever be the subject of recalls - so the majority of our soon-to-be considerable investment in tracking labels will be unproductive overhead. Another clear example would be children's book publishers. Even though new books are now deemed exempt from the lead standards, they remain subject to the tracking labels requirement. Why? You tell me.

It goes without saying that the waste of resources will not be for companies only. The CPSC will suffer right along with us. And if the CPSC suffers, so will American consumers. The diversion of CPSC resources to purposeless activities dreamt up in a misguided and poorly-vetted law will cost Americans dearly.

The new Chairman, Inez Tenenbaum, has rightly stated her intention to enforce the law as written. That being said, this provision is overly broad and wasteful and needs to be revised. It's Congress' job to make these changes. The CPSC Commission, in particular Ms. Tenenbaum, can be part of the solution by making it a priority to explain these problems to Congress and broker a legislative solution . . . soon.