CPSIA - Schylling Penalty Update

You may recall that I have written about the excessive penalty inflicted on Schylling for old and cold lead-in-paint infractions in the amount of $200,000. These infractions did NOT result in injuries. [As I have noted previously, I have no firsthand knowledge of this matter, nor do I have any direct relationship to the principals involved in this penalty.]

Well well now, some of the more astute observers of the CPSC may have noticed that poor ole' Schylling did not actually end up paying the excessive $200,000 penalty. No, that agreement was apparently REJECTED in favor of a new agreement signed on May 18. The new agreement, which is virtually identical to the original agreement executed by the CPSC on January 19 (but for a non-substantive paragraph 30 and an order attached at the end) DOUBLES the penalty inflicted on Schylling to $400,000. The agreement was published for comment in the Federal Register on June 2.

Whoa.

So what happened?

It's not entirely clear. The original agreement was announced by press release on February 4 and notes: "The penalty settlement, which has been provisionally accepted by the Commission, resolves staff allegations that the company violated the federal lead paint ban regarding toys with surface paints containing lead above the 600 parts per million (ppm) legal limit applicable at the time, and failed to immediately report to CPSC information about the non-compliant toys."

The press release goes on to quote Ms. Tenenbaum sternly admonishing Schylling for violations that occurred between June 2001 and May 2003: “Manufacturers, importers, distributors and retailers have a legal obligation to ensure that no banned products are introduced into or distributed in the U.S. marketplace, and to inform CPSC as soon as they become aware of information that must be reported under our laws. We will continue to penalize companies that do not follow these basic requirements.”

The normal procedure is for the settlement agreement to be published for comment in the Federal Register, but that never happened. Although the February 4th press release states unambiguously that the settlement agreement had been provisionally accepted by the Commission, something derailed the agreement and back to drawing board it went. It's possible that the Office of Public Affairs somehow jumped the gun with the press release, too. Nevertheless, the time between signing and press release suggests it had to be something else. But what? I cannot find the Public Calendar for this time period but there were probably at least two closed Commission meetings that could have considered this case.

Somebody was NOT happy with the size of the penalty for these old violations. Schylling apparently changed law firms to deal with the revived crisis (two different firms signed the agreements) and four months later, a new agreement doubling the penalty was signed by the parties.

There is no public record of who was unhappy or why. It could have been a Commission member. It could also have been one of the self-appointed protectors of the public good, our good friends the consumer advocates. Who knows? I will be submitting a FOIA request to see what I can find out. Watch this space carefully over the next several years to see if I ever get an answer.

Everyone feeling safe and happy? How about you manufacturers? Happy about justice being served?

Here's another serious oddity: The statute of limitations for these violations had RUN by the time the agreement was signed. The CPSC should not have been able to assess penalties in this case. Hmmm. Let's unpack this a bit further. There are really TWO kinds of violations here - (a) lead-in-paint violations, and (b) failure to timely report the violation. On the former, the statute of limitations is apparently quite clear - it had run out. The CPSC had no legal ability to hammer Schylling for lead-in-paint violations that were so old. Bummer for the agency.

Just as the FBI uses the device of failure to report income to put away gangsters like Al Capone, the CPSC has another trick up its sleeve. The other violation, failure to timely report, is in a grey area as far as the statute of limitation goes. Does the statute start to run when the company should have reported . . . or does it run from the date the company finally files a report? This has never been tested in court. The CPSC seems to have seized on this ambiguity to assert penalties against Schylling. To judge by the outcome, the company did not relish litigation with the Federal Government. The old rule that you should never litigate with someone with a printing press holds doubly true in conflicts with the Obama Administration. They clearly know how to print money.

So the CSPC doubled an excessive penalty on a hapless toy company without the means or the will to push back, and set a terrible precedent that could be used . . . against you. The due process rights of corporations are trampled again. Who is protesting? No one.

All this brings to mind the March 3rd Commission hearing on the new civil penalty rule. Commissioner Bob Adler took a very hard position on penalties:

"I do think that the regulated community deserves to know that we are making a 'pivot' with respect to enforcing the law [referring to the size of penalties] [28:20] . . . . I certainly agree that we have to have gradations of civil penalties depending on the gravity of the offense. I personally wouldn't want to tie our hands by saying that the only time we can hit you with a big civil penalty is when there was a death or a serious injury. There may be an immense potential for death and serious injury which just through fortuity did not occur. So what I would like do is to retain the discretion on the Commission to say where you have done something REALLY BAD, and it could be a variety of factors, we are going to impose civil penalties. But there may be situations where what the company did was REALLY BAD but through fortuity, nobody was injured or nobody was killed. [32:00]" [Emphasis added]

Call it the "Adler Penalty Principle". Schylling's case did not involve any injuries, but perhaps under unforeseeable circumstances, a child or two could have been injured by the toys. They weren't but that doesn't seem to matter under the Adler Penalty Principle. The company also failed to report (see my original blogpost for details). another "crime" needing retribution. One cannot help wondering if Mr. Adler decided this was one of those "REALLY BAD" cases. It's not clear how such an assessment is to be made. Adler explicitly rejected outcome as a measure of the severity of infractions. In any event, a massive penalty like this is clearly intended to terrorize the regulated community. The niceties of whether the company's behavior merited this treatment seems to be a secondary consideration.

The penalty policy of this CPSC Commission is completely arbitrary, excessive and intended to be highly coercive. Practitioners in the CPSC Bar have regaled me with stories of the CPSC's use of the penalty free-for-all to coerce all sorts of unreasonable settlements.

Every outcome can be justified in a world without rules or due process protections. Maybe that's the pivot that Adler was referring to.