CPSIA - Target Gets WHACKED for Old L-I-P Violations

Target Corporation was assessed a $600,000 penalty today for old Lead-in-Paint violations (2006-2007). Makes you wonder when these matters close, doesn't it? There were three recalls, two of which were self-reported by Target based on its own internal auditing activities. There were no injuries, either. Target's good faith didn't matter at all. In fact, consider this quote from the Settlement Agreement: “Target’s quality assurance procedures were reasonable and satisfied the standard of care. Target’s knowledge when the subject products were imported and offered for sale was that they complied with the lead paint standard. Notwithstanding satisfactory pre-production test results, certain units were subsequently found to contain impermissible levels of lead paint." Although the CPSC could not pin a "knowingly" violation on them (or impute knowledge, apparently), they had no trouble assessing blame: "[Target] failed to take adequate action to ensure that none [of the recalled items] would bear or contain lead-containing paint. . . ." That's rather self-evident, isn't it?

The Target penalty is essentially a strict liability penalty, and was not (apparently) mitigated by Target's good faith or good efforts. Failure to prevent a L-I-P violation is apparently now deemed a bad act whether or not there is credible evidence that the incident could have been avoided - which is a strict liability standard for L-I-P penalties. The CPSC does not want to announce a strict liability penalty policy so they persist in twisting words to create the impression that something "bad" took place. Yes, something bad happened - there were three undiscovered L-I-P violations but there is also considerable mitigating evidence of Target's good faith efforts to control quality. This means that a defect occurred, which is a risk of any manufacturing business. Elimination of risk from the world around us is a fantasy for the likes of Henry Waxman but for the rest of us, risk is a permanent attribute of our reality. Target can clamp down on quality as much as it wants, but risk cannot eliminated, just controlled. They will fail again, and perhaps the CPSC will be waiting with their bill.

The consequences of these high and arbitrary fines will be bad for small businesses. Let me explain. If you sell on a make-to-order basis to large retailers, then the economic consequence of tighter compliance rules is minimal and the law incentivizes the lowest risk behavior (testing for that order to ensure compliance). You can lay off the costs on the large runs for the make-to-order customers. Everything's fine and prices don't even go up noticeably. Everybody's happy. Perhaps this is why you don't hear Hasbro or Mattel screaming, what do they care?

As for the rest of us, we live in a make-to-stock world. What does this mean? Companies in a make-to-stock model order new inventory to store in their warehouse for later sale to customers who haven't made a forward commitment to buy. Make-to-order means (not surprisingly) that you produce inventory only when you make a sale. If Wal-Mart buys 50,000 units of your widget, you make 50,000 widgets in a single run and send them directly to Wal-Mart. Who needs a warehouse?! We make-to-stock folks need warehouses. Make-to-Stock is almost obviously for lower volume items. If you were selling higher volumes, you would make-to-order, right? Make-to-stock is also riskier, as we buy the inventory before we sell it (again, different than make-to-order). With lower product volumes to absorb the high cost of testing, make-to-stock inventory is at considerable economic risk under the CPSIA. That means all of us small businesses. It also threatens markets depending on make-to-stock products (like schools, specialty retail, special needs, and so on).

When Target raises its quality and testing requirements into the stratosphere to avoid paying those annoying $600,000 penalties, it likely means that their door will be closed to small businesses that sell low volume items. Target's array of children's products will shrink and the ability of small businesses to grow by selling through major retailers will be limited to high volume, make-to-order items. Thus, your relationship with Target could be in one item per year, rather than the 25 you might get them to pick up for a planogram. This will make the mass market by-and-large the playground of large businesses. Small businesses will be left scraps in the specialty market.

Unfortunately, the Target penalty will make even the specialty markets unfriendly for small businesses. First of all, the larger and more sophisticated outlets in specialty will know about Target and will raise their requirements up to a level making low volume items unprofitable to avoid the large and arbitrary fines. These outlets will become like mass market retailers in their practices and assortments. As for the rest of the market, small businesses will also have a difficult time selling there because with so much shrinkage in the available market, the cost per unit for the testing and other CPSIA costs will make it impossible to make money. Many small businesses will either have to shut down, commit to the mass market over the specialty business, or make products that avoid the CPSIA lead and phthalate restrictions (exit the children's market).

It's unremittingly depressing. I wish I could tell you that I see a weakness in this argument. I invite my readers to dialogue on where the flaw is in my reasoning. Every time I read a press release from the CPSC, read one of their rules or find about one of their enforcement actions, I feel more and more certain in my views. Please set me straight.