CPSIA - Do Accidents Happen?

Accidents happen. It's an old saying.

Once upon a time acts of fate were no one’s fault and we each bore the risk individually. Today, things seem different – when bad things happen, the search begins for someone to blame. The media and politicians feed this trend in hysterical tones (they profit by doing so). Individual responsibility is passé. In the case of children’s products today, blame is often laid at the feet of the product or its manufacturer by the CPSC. In some cases, the fault is clear (the hazard is “substantial”); in other cases, it’s not nearly as clear. In this article, I am only interested in those more ambiguous cases where there is an element of fate or other factors outside the control of the manufacturer. Should we be satisfied with how the CPSC draws the line?

CPSC as Allocator

The CPSC’s assignment of responsibility for injuries (in the form of recalls) is an inherently “legal” process. Our laws allocate risk and responsibility in society in the form of rights. About 75 years ago, legal theorists developed a field of inquiry known as “law and economics” which held that legal systems incorporate economic principles which ensure efficient allocation of resources and promote economic activity. “Rights” are essentially factors of production in economic terms. Ronald Coase of the University of Chicago Law School won the Nobel Prize in Economics in 1991 for his seminal work on law and economics over the preceding 50+ years. Notably, Obama regulations “czar” Cass Sunstein is an ex-University of Chicago Law School law professor, as is President Obama himself.  Sunstein is closely associated with the study of law and economics.

The issues confronting the CPSC over injuries to children are not emotional in nature at all. They are actually purely economic issues because the CPSC is a market regulator. It is an objective fact that injuries to children or other consumers are a cost we bear in exchange for the benefits of economic activity (availability of innovative manufactured products, the provision of jobs, etc.). Naturally, as a community we want to bear as few such costs as is efficient, again to promote growth, hence a societal interest in reducing injuries. The interest in reducing injuries is economic, however; we are not indifferent to cost and judge them in light of corresponding benefits. For instance, this explains why you do not wear a crash helmet on the way to work despite your awareness that fatal auto accidents happen every day. The costs outweigh the benefits.

As a regulator, the agency brokers costs among a large group of parties. Consumer costs related to injury (including emotional loss and lost income, among other things) are weighed against manufacturer and market costs (recall costs, damage to brands, decreased growth, lost jobs, etc.). Whether the CPSC does the math properly or not, their decisions allocate resources by directing that one party incur costs to protect other parties from incurring costs. These decisions are purely economic even if stated in emotional terms. It is therefore clear that CPSC regulators have the capacity to promote economic growth or stifle it.

Is the Goal “No Injuries” Ever?

The CPSC has a legal responsibility to differentiate between a product hazard that causes accidents and accidents caused by the hand of fate. Congress limited the authority of the agency to regulate only those product hazards deemed “substantial” (a term of art under the CPSA and FHSA). As stated here many times previously, I believe the CPSC under current leadership regularly exceeds its legislative authority in this regard. The CPSC acts as though its role is to move society toward a Utopian ideal in which children are never injured or die prematurely. While I certainly don’t endorse injuries to children, the Utopian ideal of injury-free childhoods is illusory. In fact, an injury-free childhood could only be achieved at a very high cost. If the CPSC attaches an almost infinite value to preventing injuries, their allocation decisions will always constitute a transfer (a tax) and cause economic inefficiency (depress economic activity).

This over-appraisal of the cost and consequence of childhood injury is illustrated by recent remarks of Chairman Inez Tenenbaum about a recall of one million pool drain covers. Ms. Tenenbaum appears to justify the recall on the possibility of injury despite media reports confirming that no deaths had occurred since 2009:

"I want to make it clear that this recall announcement does not mean that one million drain covers will need to be replaced or repaired. The recalled covers were marked with the wrong flow rating . . . . Now for those public pools and spas that need their covers replaced or fixed, I have an obligation to advise that those facilities be closed at this time. They should reopen as soon as the work is completed that addresses the recall and brings the facility into compliance with the law. I know this is a very difficult message for many communities to hear so close to Memorial Day weekend, but we cannot risk a child becoming entrapped in a recalled drain cover." [Emphasis added]

This unstated policy attaching infinite value to childhood injury is much more than a strict liability standard because the CPSC only acts after an assessment of fault (rather than simply assigning responsibility). Isn’t the agency saying that the actions or inactions of manufacturers cause accidents?

Recent Recalls Allocate Uncontrollable Costs to Manufacturers

Consider some recent recalls for perspective:

a. Big Lots recalls bunk beds recalled after a three-year-old child died when caught under a futon.
b. Maclaren recalls one million strollers sold over 11 years because of more than a dozen fingertip amputations caused by a hinge.
c. Mattel recalls more than 7,000,000 children’s trikes sold over 14 years because of genital injuries to ten young girls jumping on the trike.

While it may be hard to look past these sometimes grisly childhood injuries, each of these cases calls into question whether the injuries were really the fault of the manufacturer. It’s not worth defending the product designs – let’s concede that in retrospect the products could have been better designed. Parental supervision appears to be an issue in each case. Manufacturers are typically unwilling to resist CPSC recalls by blaming consumers for injuries incurred using its products. That route is very risky and may in fact be more costly than going along with the CPSC’s dictates. As a result, the record in these cases is usually very one-sided – the CPSC has the first and last word on the subject, often on TV. Why would anyone stand up for these companies in public? There’s no incentive to do so; after all, the costs are paid by only one party, and that party isn’t talking.

There is a fundamental error in routinely blaming manufacturers for accidents or fate. It is widely accepted that laws operate efficiently when they allocate responsibility for risk to the party in the best position to address the risk. Manufacturers can efficiently bear many such costs – but not all. For instance, product safety is best assigned to manufacturers rather than consumers. This is fairly obvious – manufacturers know their own products better than consumers do and are best able to take steps to keep products safe at the lowest possible cost (most efficient). This is the reason why the common law tort system assigns product liability costs to manufacturers.

So who is in the best position to control costs associated with accidents or fate? Risks associated with acts of fate are difficult to control.  In fact, many foreseeable risks leading to childhood injuries are completely outside the control of manufacturers:

1. Fate
2. Failures of adult supervision
3. Product abuse or misuse
4. Mental deficiencies or mental illness (e.g., pica)
5. Risks well-known to the user (e.g., knives are sharp).

I would advance that good adult supervision is the lowest cost way to prevent accidents with children’s products. There are significant limitations to what a manufacturer can achieve on behalf of consumers who don’t adequately supervise their children. Of course, drawing the line is a big issue here. But can’t an argument be made that adult supervision of the toddlers using the Mattel trike could have prevented foreseeable injuries from jumping on the trike? That a parent must carefully supervise the location of a child’s hands before closing a stroller? This is a simple point – manufacturers cannot control these factors from their offices or warehouses. The cost for a manufacturer to do so would be excessive.

Some people might argue that assigning blame for matters of fate to manufacturers of consumer products is a neat way to efficiently spread cost among the community. Why not make the manufacturer pay the uncontrollable cost of fate relating to their products, and let them pass the costs along to consumers in the form of higher prices? Manufacturers can be converted into involuntary insurers by public policy, risk intermediaries for events of misfortune. The appeal is irresistible; after all, it doesn’t cost tax dollars to pay for these losses if we force responsibility on manufacturers. Of course, if you are a careful consumer, you might resent paying more to subsidize free-riding consumers who don't take appropriate precautions.  But money aside, doesn’t it reflect a hardening of our society if if we ignore heart tugs when kids are injured? Is this heartless . . . or sensible? Is the CPSC doing the American public a favor by increasingly pushing responsibility for uncontrollable risks to manufacturers?

The Important Role of Economic Efficiency in Laws Governing Children’s Products

I believe bad things do sometimes happen to good people. What is the economic effect of assigning these costs to manufacturers by default? Unfortunately, this invariable result is not economically efficient and will have the effect of a tax on the children’s market. In other words, the economic incentive to participate in markets will shrivel as manufacturer returns on investment decline because of legal risks (costs) they cannot control. This is basic stuff, folks – the reduced economic incentive causes market participants to withdraw, just as high taxes cause people to stop taking risks (trading).

Ronald Coase addressed this subject in two articles that led to his Nobel Prize. In a 1937 paper on the nature of the firm, Coase articulated what became known as the Coase Theorem which holds that if trade in an externality is possible (in this case, childhood injuries) and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights. Translated into English and applied to the facts here, Coase theorized that it would not matter which party was responsible to pay the costs of an injury (victim or tortfeasor) if there was no cost to bargaining between the parties. This of course is not the case in the real world. Coase returned to the subject in a 1960 article entitled “The Problem of Social Cost” and explored the role of regulations in achieving economic efficiency when economic activity creates social costs. This eminently readable article is a foundation stone of modern legal theory.

Considering the social costs of human activity (such as pollution or injuries from the use of children’s products), Coase concluded that efficient allocation of resources would be achieved regardless of allocation of rights relating to social costs (responsibility to pay those costs) provided that trading can be conducted without transaction costs. In other words, in an efficient market, economic factors (resources) will always be put to their highest and best use through allocation of resources and bargaining. Through bargaining in an efficient market, the party with the most productive use of economic factors will ultimately possess the resources, thus ensuring compensation for social costs regardless of who has been assigned legal rights.

Coase cites numerous examples (including torts) in making this point. Coase notes the symmetry of these disputes in his analysis. When cattle overrun crops causing economic losses, there would be no damage without the cattle, and likewise no damage without the crops! Causation is not black-and-white to an economist interested in efficient outcomes. As he notes, a smoothly operating pricing system ensures that “the fall in the value of production due to the harmful effects would be a cost for both parties.”

Nevertheless, Coase recognized that there ARE transaction costs in the real world (e.g., legal expenses, bargaining holdouts, etc.). These costs of altering and recombining rights allocated by the legal system can interfere with the ability to bargain and thus prevent the efficient allocation of resources in the market. He argued therefore that regulations are justified to the extent they allocate rights to the most efficient risk-bearer. Regulations can supersede market transactions by imposing the most efficient outcome. This is presumably the underpinning of President Obama’s call for more federal regulation. According to him, this will be good for us.  Coase might demur, noting that it all depends on the facts as we shall see below.

Coase was realistic in his assessment of the inherent dangers of regulation: “But the governmental machine is not itself costless. It can, in fact, on occasion be extremely costly. Furthermore, there is no reason to suppose that the restrictive and zoning regulations, made by a fallible administration subject to political pressures and operating without any competitive check, will necessarily always be those which increase the efficiency with which the economic system operates. Furthermore, such general regulations which must apply to a wide variety of cases will be enforced in some cases in which they are clearly inappropriate. . . . It is my belief that economists, and policy-makers generally, have tended to over-estimate the advantages that come from government regulation.” Coase’s solution: perform a cost-benefit analysis to make sure that regulations increase economic output (the all-in costs must be less than the all-in benefits when reduced to dollars).

We encounter situations regularly in which the party causing a legal nuisance does not bear the consequential costs. For instance, a home remodeler does not have to pay compensation to neighbors for noise and debris that may adversely affect them. He may feel a social obligation to give them freshly-baked cookies but is under no legal obligation to do so. This is one of many legalized nuisances. Why is this the legal rule? The allocation of rights takes into account that as a society, we want to encourage investment and capital improvements. The small cost of dealing with these inconveniences is considered a cost we all should bear in exchange for the benefits received from the economic activity. This rule does not apply to exceptional cases of nuisance where the costs outweigh the benefits. Not every instance of damage is remediable under our legal system for good reason.

Coase cites a fascinating real world example of this rule carried to a surprising extreme: under traditional English law, railroads are protected from liability for fires caused by sparks from their engines. Coase devotes considerable ink to prove that this legal rule creates an efficient allocation of resources (a positive effect for society) notwithstanding that there are “winners” and “losers”. This result would be very difficult to achieve through bargaining. Clearly a railroad would have a very difficult time working out a deal with every landowner along its lines as a precondition to laying down track.

Importantly, Coase points out that the opposite rule (where the railroad must pay for the fires its engines cause) does much more than just transfer liability. It also shifts incentives to everyone’s detriment. A farmer along the track now can gamble with the railroad’s money – he can get a market price from market buyers if he can harvest his crops or from the railroad if there is a fire. The farmer’s return is thus guaranteed, the incentive to take care is removed, and he will be rewarded for planting crops likely to be burned. This alternative rule’s transfer of costs to the railroad will simultaneously reduce the potential reward for constructing tracks and likely result in fewer train lines, reducing the broadly-distributed economic benefits that come with the expansion of the rail system. In other words, shifting liability in this case makes everyone along the train line poorer.

Coase notes that “nuisances” are not always against our interest: “[Pigou] is wrong when he describes these actions as ‘anti-social’. They may or may not be. It is necessary to weigh the harm against the good that will result. NOTHING COULD BE MORE ‘ANTI-SOCIAL’ THAN TO OPPOSE ANY ACTION WHICH CAUSES ANY HARM TO ANYONE.” [Emphasis added] CPSC, are you listening?

Placing the cost for nuisances on the producers’ shoulders may be well-intentioned but it is not necessarily the right result because it does not provide any incentive to consumers to take steps to prevent injury. “A tax system which was confined to a tax on the producer for damage caused would tend to lead to unduly high costs being incurred for the prevention of damage.”  The CPSC’s tendency to blame products via recalls and bans is the equivalent of a tax in this case. The “unduly high costs” leads to a reduction or suspension of economic activity. We can observe this in the children’s market over the past three years – the agency and Congress have both received considerable testimony on this topic (and seemingly ignored it). Coase won the Nobel Prize for pointing out that regulators often neglect to look at the full economic picture and thus fail to achieve optimal social results.

It goes without saying that the regulators may nevertheless achieve optimal newspaper headlines.

Conclusion

Why is it inefficient to invariably push costs to manufacturers for injuries associated with children’s products? As Prof. Coase notes, in a raucous marketplace, transaction costs can distort the allocation of resources. In this case, the prospect of liability and uncontrollable losses are a high transaction cost that affects the efficient allocation of resources by trade. Coase posits that a cost-benefit analysis must be performed to make sure that efficiency is achieved. The rule for such analyses is quite clear – the all-in cost of the regulation must be less than the all-in economic benefits achieved.

The best way to understand the formula in this case is to look at all marginal children’s recalls as a class. Let’s agree that there actually are some “substantial” product hazards out there and exclude them from our analysis.  [Manufacturers are in the best position to evaluate and prevent "substantial" hazards on behalf of consumers.]  We must also assess all the money spent as a result of CPSC action as a group. It does not matter who spends the money – we want to tote up all the costs and lay them off against all the benefits. The benefits are easy to calculate – there is an economic value to a life and also to injuries. This type of analysis is not only common, it is a requirement of federal law (as a result of Coase’s work outlined above). The government has tables of these values. Likewise, the costs are pretty easy to tote up: out of pocket costs for the recall, replacement of inventory, damage to reputation and brand, legal and regulatory costs, lost jobs, reduced investment, etc.

In the case of accidents or other uncontrollable factors leading to injury, the CPSC’s calculus is defective. It is quite telling that the regulators are not interested in my point that no victims have been identified. Lead-in-substrate victims – NONE. Phthalates victims – NONE. The ledger on the benefits side is undocumented, vague and untested, but the regulators' indifference suggests that they place an almost infinite value on injury or even the possibility of injury. On the cost side, the regulator also seems to largely ignore the impact on markets. As noted by Coase, the regulators are not subject to competitive pressures so they can easily overlook these costs. The math does not add up, and as a result, their decisions inevitably will choke the market. The CPSC acts as though not subject to the laws of economics.

The legislative fix for this misguided regulatory effort is clear – mandate economic analyses as a justification for any CPSC regulation. It is also necessary to restore (actually, to mandate the use of) risk assessment by the CPSC. Risk is all about cost allocation and cost management. By removing the ability to assess risk, Congress essentially removed the wiring necessary for the CPSC to make an intelligent assessment of the economics of their decisions. While the CPSIA was clearly written and passed into law in anger, enough time has passed to expect cooler heads to prevail. Congress, it’s time to act!

CPSIA - My Written Testimony at Senate Hearing 12-2-10

As you may know, there will be a Senate CPSC oversight hearing tomorrow. The hearing will be held by the Subcommittee on Consumer Protection, Product Safety and Insurance of the Senate Committee on Commerce, Science and Transportation. You can see the witness list here. The subject of the hearing is "Oversight of the Consumer Product Safety Commission: Product Safety in the Holiday Season"

I have submitted the following written testimony. I will not be testifying at this hearing.

STATEMENT OF RICHARD M. WOLDENBERG
Chairman, Learning Resources, Inc.
Vernon Hills, Illinois

December 2, 2010


As an operator of a small business making educational products and educational toys, I have had a front row seat for the implementation of the Consumer Product Safety Improvement Act of 2008 (CPSIA) by the Consumer Product Safety Commission (CPSC). On the occasion of your CPSC oversight hearing, I want to highlight the economic damage wrought by the CPSIA without achieving any material improvement in safety statistics. I also want to bring to your attention the open hostility of the CPSC toward the corporate community in the implementation and enforcement of the CPSIA, and conclude with my recommendations for legal reforms to restore common sense to safety administration without reducing children’s safety.

Children are our business. As educators, as parents and as members of our community, we have always placed the highest priority on safety. We would not be in the business of helping children learn if we didn’t care deeply about children and their safety. The CPSIA has dramatically impacted our business model, reduced our ability to make a profit and create jobs, pared our incentive to invest in new products and new markets, and generally made it difficult to grow our business. We would gladly accept these burdens if the law made our products safer, but the fact is that it hasn't. Our company, Learning Resources, Inc., has recalled a grand total of 130 pieces since our founding in June 1984 (all recovered from the market). Our management of safety risks was highly effective long before the government intervened in our safety processes in 2008.

The precautionary approach of the CPSIA attempted to fill perceived “gaps” in regulation by making it illegal to sell children’s products unless proven safe prior to sale. Yet the law has yielded few quantifiable safety benefits other than a reduction in recent recall rates for lead-in-paint (already illegal in children’s products for decades). Ironically, this progress in reducing recalls has taken place in a 27-month period in which, like the time before the CPSIA, testing of children’s products prior to sale was not mandatory. Consumer confidence wasn’t dented by the lack of mandatory testing. The justifications for the over-arching and excessively expensive CPSIA regulatory scheme just don’t hold water.

In any event, the reduction in recall rates is only a minor triumph and was not due to mandatory testing or harsh new lead standards, but most likely a (hyper) energized regulator and a great deal of publicity. Recall statistics can be highly misleading because the rate and number of recalls depend on many factors and do not generally correlate to injuries to children. In other words, product recalls are not tantamount to childhood injuries. The purpose of the CPSIA is to reduce injuries, not product recalls – yet CPSC recall statistics show that there have been almost no reported injuries from lead or phthalates in children’s products in the last decade (one death and three unverified injuries from 1999-2010, all from lead or lead-in-paint). The billions of dollars now being spent by the corporate community annually on testing and other compliance activities have not reduced injuries – there weren’t any to reduce. Whatever peace of mind has been generated by lower recall rates comes at a very high price.

The CPSIA significantly broadened the reach of federal safety regulation well beyond what was needed to deal with the lead-in-paint toy violations of 2007 and 2008. Under the CPSIA, the definition of a “Children’s Product” subject to regulation now encompasses ALL products designed or intended primarily for a child 12 years of age or younger (15 U.S.C. §2052(a)(2)). This definition ensures that virtually anything marketed to children will be subject to the restrictions of the Consumer Product Safety Act (CPSA), irrespective of known or quantifiable risk of injury. Put another way, this definition ensures that many product categories with a long tradition of safety are now subject to the withering requirements of this law for the first time simply because they fall within the overly broad definition of a Children’s Product. The affected safe products span the U.S. economy books, t-shirts and shoes, ATVs, bicycles, donated or resale goods, musical instruments, pens and educational products. The CPSC declined to use its discretion to narrow this definition in its recent “final rule” interpreting “Children’s Product”, thus ensuring continued market chaos and economic waste.

The consequences of the change in the consumer safety laws to a precautionary posture has had notable negative impacts and promises to create further problems, namely:

a. Increased Costs. The new law creates a heavy burden for testing costs. From 2006 to 2009, our company’s testing costs alone jumped more than eight-fold. We estimate that our testing costs will triple again after the CPSC (as anticipated) lifts its testing stay in 2011, and could multiply again if the CPSC enacts (as anticipated) its draft “15 Month Rule” on testing frequency and “reasonable testing programs”. Testing costs are often thousands of dollars per product. Having employed one person to manage safety testing and quality control for many years, we now have a department of five, including me, plus an outside lawyer on retainer. These jobs are funded by discontinuing sales, marketing and product development jobs – the CPSIA is NOT an ersatz stimulus program. Personnel, legal and other out-of-pocket safety expenses (besides testing) have more than quadrupled in the last three years – all without any change in our super-low recall rates or injury statistics.

b. Increased Administrative Expenses. The CPSIA requires that all products include tracking labels on both the packaging and the product itself. Rationalized as “analogous” to date labels on cartons of milk, tracking labels are in reality nothing but pure economic waste as applied to the vast array of “Children’s Products” under the CPSIA. As noted, our company has a virtually unblemished 26-year track record of safety so tracking labels promise to add little value in the event of recalls that are unlikely to occur. Ironically, with the strict new rules governing product safety, we believe the already low chance of a product recall has been reduced further. As noted above, the money to pay for all this administrative busy work comes from foregone business opportunities. We are being forced to shrink our company to apply tracking labels that no one will use.

An equally frustrating bureaucracy has sprung up around recordkeeping under this law. Burdensome requirements spawned by the government’s new involvement in our quality control processes forced us to make large new investments in information technology with no return on our investment. In addition, the pending CPSC draft policy on component testing promises to convert the simple task of obtaining a complete suite of safety test reports into a major recordkeeping chore. We will now be forced to manage each component separately, tracking test reports on each component one-by-one. This promises to multiply our recordkeeping responsibilities – and the related risk of liability for failing to comply – by more than an order of magnitude.

c. Reduced Incentive to Innovate. The increased cost to bring a product to market under the CPSIA will make many viable – and valuable – products uneconomic. To cover the cost of developing, testing and safety-managing new products, the prospective sales of any new item (“hurdle rate”) is now much higher than under prior law. This means that low volume “specialty market” items are less likely to come to market and many new small business entrants may find themselves priced out of the market. The CPSIA makes it much harder to start a new business serving the children’s market because the rules so heavily favor big business. Because of CPSIA transactional costs, high volume items now have a huge cost advantage over low volume items. This will hurt many small but important markets like educational products for disabled children. Our company, with its 1500 catalog items, is probably now a dinosaur under the CPSIA –the law provides a strong economic incentive to restructure our business around 50-150 items and to focus on high volume markets only. Schools would suffer from the loss of niche educational products.

d. Crippled by Regulatory Complexity. Our problems don’t end with testing costs or increased staffing. We are being crippled by regulatory complexity. Almost 28 months after passage of the CPSIA, we still don’t have a comprehensive set of regulations. Please consider how mindboggling the rules have become. There were fewer than 200 pages of safety law and CPSC rules that pertained to our business until 2008. These rules clearly defined our responsibilities and could be taught to our staff (in fact, many were rarely applicable to us). Today, the applicable laws, rules and interpretative documents exceed 3,000 pages. As a practical matter, it is simply not possible to master all of these documents – and yet it’s potentially a felony to break any of these rules. Sadly for us, the rules and CPSC staff commentary keep changing, are still being written and are rarely if ever conformed. How can we master and re-master these rules and teach them to our staff while still doing the full-time job of running our business? Ironically, the recalls of 2007 and 2008 were never a “rules” problem – those famous recalls were clearly a compliance problem. Imagine what will happen now with an unmanageable fifteen-fold increase in rules. No small business “ombudsman” can make that problem go away.

e. Small Business Will Certainly Suffer. The CPSIA was written in response to failings of big companies, but hammers small and medium-sized companies with particular vengeance. Our small business has already lost customers for our entire category on the grounds that selling toys is too confusing or too much of a “hassle”. This is our new reality. The highly-technical rules and requirements are beyond the capability of all but the most highly-trained quality managers or lawyers to comprehend. Small businesses simply don’t have the skills, resources or business scale to manage compliance with the CPSIA. For this reason, small businesses bear the greatest risk of liability under the law, despite being responsible for almost no injuries from lead in the last decade. The double whammy of massive new regulatory obligations and the prospect of devastating liability are driving small businesses out of our market.

In implementing and administering the CPSIA, the CPSC created a harsh regulatory environment for the business community over the past 28 months. Consider the following:

1. Unjustified Recalls. In June, in response to an inquiry by a Congressman and followed up by media inquiries, the CPSC pressed McDonalds to recall 12 million Shrek glasses for “high” cadmium content, despite the agency’s admission on Twitter that the glasses were not toxic. The recall effort was justified as being done “out of an abundance of caution”, a frightening regulatory standard when applied to products acknowledged to be safe by the regulator itself. McDonalds lost millions of dollars as a result, not to mention suffering from widespread and persistent bad publicity.

2. Unjustified Penalties and Coercive Tactics. The CPSC assessed a $2.05 million penalty against a hapless Japanese dollar store chain (Daiso) for five separate tiny recalls involving 698 units and 19 items. These items sold for between $1 and $4 each. There were no reported injuries from sales of the Daiso trinkets. Ms. Tenenbaum bragged about this extraordinarily excessive prosecution in a speech in March 2010 to the Consumer Federation of America: “We secured an injunction that completely stops Daiso from importing children’s products into the country. . . . Daiso has a very high hurdle to jump over to ever get back in the import business again.” Regulated companies take stunning examples like Daiso as a warning that outsized and disproportionate force may be used by this agency with little provocation.

The regulated community has also expressed alarm over the threatened use by the agency of unilateral press releases “to warn the public” about alleged dangers in specific products as a way to coerce “voluntary” recalls. Such threats have been used where facts may be in dispute to justify a recall. Under the law, the CPSC may only implement mandatory recalls subject to a court order, a slow process perhaps but also expensive and labor-intensive. “Voluntary” recalls can be much quicker and cheaper, only requiring “agreement” between the agency and the subject company. In more than one case, CPSC has threatened unilateral releases to try to "convince" a firm to undertake a "voluntary" recall but after the firm took the risk of standing up to the staff and the staff conducted further investigation, the CPSC decided that recalls were not even necessary. Not all firms can bear the expense of such a process or take the risk of calling the staff's bluff because issuance of a release would likely damage the firm and their brand, possibly irrevocably. Many supposedly "voluntary" recalls have resulted. Abusive tactics of this nature have severely damaged trust between the CPSC and the regulated community.

3. Disregard of Public Comments. The agency has garnered considerable criticism for overlooking or disregarding comments from the corporate community solicited in its public rulemaking processes. Ignoring or disregarding inconvenient public comments contrary to the agenda of the controlling party makes a mockery of the legally-mandated public comment process. Notable instances include the recent approval of interpretative rule on “Children’s Products” and the rules implementing the public database of safety incidents. The database debate was so fouled by the majority’s refusal to entertain the legitimate concerns of industry that the two minority Commissioners proposed their own draft rule – which the CPSC at first refused to post on its website.

4. Unjustified Hostile Rulemakings. The CPSC has implemented rules governing the public database that adversely affect the Constitutionally-guaranteed due process rights of our businesses. There is no adequate public policy justification for the erosion of the remarkable civil rights that distinguish the American legal system among all international legal systems – yet the Commission voted 3-2 to allow falsehoods to be posted without recourse in a database the CPSC will maintain. In other cases, the agency has published draft rules (yet to be acted on) which could force companies like ours to spend as much as $10,000 per item per year to meet ARBITRARY rules on testing frequency or “reasonable testing programs” – notwithstanding strong evidence that these rules are wasteful, unnecessary and financially irresponsible. The pendency of rules like this creates destabilizing market uncertainty and forces business decisions that have no basis other than fear of future regulation. For instance, Wal-Mart has already instituted a 100 ppm lead standard months ahead of the POSSIBLE implementation of the standard by the CPSC – simply because the CPSC has been so slow to act.

The CPSIA went off track by taking away the CPSC’s authority to assess risk. If the CPSC were again required to regulate based on risk, safety rules could focus on those few risks with the real potential to cause harm to children. All risks were not created equal.

I recommend several steps to reduce cost, liability risk and complexity all without sacrificing children’s product safety:

A. Mandate that the CPSC base its safety decisions, resource allocation and rules on risk assessment. Restore to the Commission the discretion to set age and product definition criteria for the 300 ppm lead standard and phthalate ban. Freeze the lead standard and lead-in-paint standard at their current levels unless the CPSC determines that a change is necessary to preserve public health and safety.

B. The definition of “Children’s Product” should not include anything primarily sold into or intended for use in schools or which is used primarily under the supervision of adults. Other explicit exceptions should include apparel, shoes, pens, ATVs, bicycles, rhinestones, books and other print materials, brass and connectors. Exclusions from the definition should take these products entirely outside the coverage of the CPSIA (including mandatory tracking labels).

C. Lead-in-substrate and phthalate testing should be based on a “reasonable testing program”, not mandated outside testing. The tenets of a reasonable testing program should be set by the reasonable business judgment of the manufacturer. Resellers should be entitled by rule to rely on the representations of manufacturers. Phthalate testing requirements should explicitly exempt inaccessible components, metals, minerals, hard plastics, natural fibers and wood.

D. Definition of “Children’s Product” should be limited to children six years old or younger and should eliminate the difficult-to-apply “common recognition” factor of Section 3(a)(2)(c) of the CPSA. Definition of “Toy” (for phthalates purposes) should be limited to children three years old or younger and should explicitly refer only to products in the form used in play.

E. Eliminate CPSC certification of laboratories (rely on the market to provide good resources). Fraud has only very rarely been a problem with test labs and is already illegal.

F. Impose procedural limits to insure fairness in penalty assessment by the CPSC under the CPSIA. Completely reformulate penalties to restrict them to egregious conduct (including patterns of violations), reckless endangerment or conduct resulting in serious injury.

G. Rewrite the penalty provision applicable to resale of used product so that violations are only subject to penalty if intentional (actual knowledge or reckless endangerment) and only if the violation led to an actual injury. Eliminate the “knowing” standard with its imputed knowledge of a reasonable man exercising due care.

H. Mandatory tracking labels should be explicitly limited to cribs, bassinets, play pens, all long-life “heirloom” products with a known history of injuring the most vulnerable children (babies or toddlers).

I. Public injury/incident database should be restricted to recalls or properly investigated incidents only. Manufacturers must be given full access to all posted incident data, including contact information. The “due process” civil liberty interests of the corporate community MUST BE PROTECTED.

I urge your committee to address the fundamental flaws in the CPSIA to restore order to the children’s product market and to protect small businesses from further damage. I appreciate the opportunity to share my views on this important topic.

CPSIA - Waxman's New Amendment - Needed Changes

Here is my full list of needed changes to the CPSIA:


Needed Changes to the CPSIA That Will Guarantee Safety and Promote U.S. Jobs:

1. Restore the CPSC’s authority to base its safety decisions, resource allocation and rules on risk assessment by giving the Commission the discretion to set age and product definition criteria for 300 ppm lead standard and phthalate ban. Eliminate the 100 ppm lead standard.

2. Definition of “Children’s Product” should not include anything primarily sold into or intended for use in schools or which is used primarily under the supervision of adults. Other explicit exceptions: apparel, shoes, pens, ATVs, bicycles, rhinestones, books and other print materials, brass, connectors, others? This would take these items outside the law, including tracking labels.

3. The standards/bans for lead and phthalates should be prospective from February 10, 2009, allowing the sale of merchandise manufactured in compliance with law prior to the implementation of the law.

4. Lead-in-substrate and phthalate testing should be a “reasonable testing program”, not mandated outside testing. Leave 300 ppm standard in place, but place burden on manufacturer and supply chain for compliance activities. Phthalate testing requirements should explicitly exempt inaccessible components, metals, minerals, hard plastics, natural fibers and wood.

5. Eliminate required future reductions in the lead-in-paint standard levels if technologically-feasible. Clarify that all inks are excluded from the lead-in-paint ban. Eliminate the definition of “technologically feasible”. Eliminate the “periodic review” provisions that require ratcheting up of requirements (e.g., periodic review of F963 to achieve “highest levels of safety” that are “feasible”). Eliminate the whisteblower provision.

6. Definition of “Children’s Product” should be limited to children 6 years or younger and should eliminate the difficult to apply “common recognition” factor of Section 3(a)(2)(c) of the CPSA. Definition of “Toy” (for phthalates purposes) should be limited to children 3 years old or younger and should explicitly refer only to products in the form used in play.

7. Restore ASTM F963 to voluntary standard status. Eliminate CPSC certification of laboratories (rely on the market to provide good resources).

8. Add penalties (up to and including felonies) for false or misleading accusations of violations of law or safety violations.

9. Rewrite penalty provision on resale of used product such that violations are only subject to penalty if intentional (actual knowledge or reckless endangerment) and if the violation led to an actual injury. Eliminate the “knowing” standard with its imputed knowledge of a reasonable man exercising due care. Completely reformulate penalties to restrict them to egregious conduct (including patterns of violations), reckless endangerment or conduct resulting in serious injury.

10. Restore the ability to export non-compliant product as long as the product is compliant with the destination jurisdiction's law.

11. Mandatory tracking labels should be explicitly restricted to cribs, bassinets, play pens, all long life “heirloom” products with a known history of injuring the most vulnerable children (babies). Tracking labels would be voluntary on all other children's products and if in use, can be used to trim scale of recalls (as with other data maintained by businesses).

12. Public injury/incident database restricted to recalls only. Private, confidential database permitted for other injuries.

CPSIA - Nancy Nord Announces a Delay in the "15 Month Rule"

As hinted at in this space on Thursday, the CPSC is apparently going to delay the issuance of the so-called "15 Month Rule". In Nancy Nord's new blog, she provides the following important information:

"Periodic Testing – On a related issue, the CPSIA requires that we issue a rule setting out further testing requirements within 15 months of enactment (November, 2009). The agency will not meet that deadline in spite of best efforts to do so. This issue is extremely complex and we need additional input from the affected public before we give answers. The staff will hold workshops on December 10th and 11th to seek public participation. A Federal Register notice will be published with details about the workshop and will also provide details for those who wish to submit written comments. In addition, a draft “Guidance Document on Testing and Certification” will be discussed with the Commission at a public meeting on November 9th. See http://www.cpsc.gov for webcast details." [Emphasis added]

This is good news for the business community on several levels. First of all, the CPSC is now communicating informally through at least one blog. While it increases the number of places to watch for legal developments, you can't beat candor and openness. In addition, the CPSC is doing the considerate thing - giving advanced notice of a material event (the delay in this much-anticipated and much-feared rule). They are being nice, which is MUCH appreciated.

Finally, the Commission is being candid and admitting a small failure. [In fact, the admission is being done in a bi-partisan way, as Democrat Tenenbaum presumably consented to Republican Nord announcing this development in her new blog.] It is somewhat more complex than that, in fact. This is probably not best understood as a failure of the CPSC (although they are going to miss a date). They are CHOOSING to miss a date. Why? My guess is that they realize how important this rulemaking is, and are probably troubled by what the rule would look like under the (defective) CPSIA. It's a public acknowledgement, the strongest in a long while, by the agency that it is genuinely troubled by the unintended consequences compelled by the new law. Withholding the 15 Month Rule is a sign of resistance against doing more damage in the marketplace.

The CPSC has heard from many stakeholders that this rule could be the final straw. I think it's fair to assume that they do not want to do more damage. It is a bi-partisan worry, too - which is in the character of the CPSC over the years. They have not traditionally been the enemy of the business community, so it is nice to see them act with consideration again. Rumorville has it that the CPSC Staff could not find the magic words to make this rulemaking "work". Good to admit it. There's a lot implicit in that statement, most of it very good.

In my comment to the Nancy Nord blog, I ask the Commission to use the plain English meaning of the statute to make their decisions. If they cannot make a sensible decision using the plain English meaning of the words (e.g., does "any" mean "any" or not?), then the Commission should go to Congress and ask for an amendment. A statutory scheme based on twisting words into pretzels does not serve anyone's interests. To understand our obligations, we go to the statute and read it. How can we run our businesses if there is a super-secret meaning to plain English words? Are we expected to master hundreds of pages of releases spread of months or years to discover the nugget explaining that "any" doesn't mean "any"? This kind of treasure hunt inevitably fails. [If you like treasure hunts, see my recent blogpost on resale shops.]

Importantly, the CPSC has announced a two-day meeting on the 15 Month Rule on December 10/11. This is a critical meeting for all stakeholders. Please try to make it. I will be there.

Bottom line, this announcement is another gratefully-received sign of a shift in the wind. Let's see whether more good follows in coming weeks. We now have more dots to connect. It would be wonderful to be able to trust the CPSC and the law again. Guys, please keep plugging away!

CPSIA - Phthalates Test Standard Comment Letter 9-16-09

[As submitted 9-16-09]

To Whom It May Concern:

I am hereby submitting comments in response to the Notice of Availability of a Statement of Policy: Testing of Component Parts With Respect to Section 108 of the Consumer Product Safety Improvement Act [CPSC Docket Number: CPSC–2009–0063] dated August 17, 2009.

1. Applicability of Component Testing. We believe the clear language of the CPSIA provides that TOTAL WEIGHT OF THE PRODUCT be the basis of any calculation of phthalate content. Sections 108(a) and 108(b)(1) state that “it shall be unlawful for any person to manufacture for sale, offer for sale, distribute in commerce, or import into the United States any children’s toy or child care article that contains concentrations of more than 0.1 percent of [certain phthalates].”

Notably, in the August 7, 2009 Statement of Policy on the Phthalate Testing Standard (the "Statement"), justification for component level testing is based on an argument that Section 108 of the CPSIA uses the term "children's product" incorporates the term "consumer product" which is defined in Section 3 of the CPSA as "any article, or component part thereof, produced or distributed . . . ." The Statement concludes: "Because the term consumer product includes components of an article, the Commission believes that the phthalate limits in section 108 of the CPSIA apply to each component part of any article." This reasoning overlooks the fact that the CPSIA also uses the same term "children's product" in Section 101 in regard to the new lead standards but clarifies it in the following terms: " . . . the lead limit referred to in paragraph (1) is 600 parts per million total lead content by weight for any part of the product." [Section 101(a)(2)(A)] [Emphasis added] Rules of statutory construction require that the words of a statute be interpreted to give meaning to all the words used. Therefore, apparently, Congress did not impute an obligation to test components for the term "children's product" in Section 101 and felt it necessary to state plainly that the lead standard applied to "parts", whereas no such limitation was incorporated into Section 108. The reasoning used to justify component testing on this basis is thus faulty. Without further action by Congress, the July revision revision of the March standard previously announced by the CPSC should be revoked and total toy phthalate concentration testing protocols be restored.

2. The Apparent Paradox of a Component in a Hypothetical Toy Containing Phthalates. The introduction to the July 27 Test Method (the "Standard") refers to a hypothetical toy containing a teether with phthalates in excess of permitted levels. The introduction refers to this as a "paradox". In fact, it is hardly paradoxical. The law does not prohibit parts containing phthalates, as illustrated above. In addition, the CPSC has on two occasions (CHAPS in 1998 and 2001) concluded that phthalates do not present a material health risk to children. Thus, I do not understand how the CPSC can express concern that a part in a hypothetical toy contains phthalates that might violate the standards IF the part were a stand-alone toy as the CPSC itself has stated publicly that this would not present a health risk. The apparent meaning of the "paradox" referred to in the Standard is that Congress outlawed six phthalates as a health risk in contravention of the reasoned and well-researched opinion of the CPSC scientists. This conflict does not justify reading the law more broadly than it is written.

Many companies and many valued products will be sacrificed to this "paradox" if the meaning of the underlying law is not respected. I think it is highly unlikely that any parts in a hypothetical toy will contain the six "bad" phthalates when they are outlawed all over the world. The economic incentive to use them is too low, and legal and uncontroversial substitutes are too readily available. Needless to say, the very existence of the CPSIA (not to mention the EU ban) cuts the market for the six phthalates substantially, if not entirely. With much lower volumes, these chemicals will rise in price and will become harder to find. In due course, manufacturers will literally have to work to obtain supplies of the six phthalates and take considerable risk to use them, all for no economic incentive. In a nutshell, right or wrong, the CPSIA will have the effect of ridding the market of these chemicals as long as they are illegal (which is not the same thing as saying that they are dangerous). YET under the test standards, we must forever test each and every component to prove that these hard-to-find chemicals are not present. That is the true "paradox" of the Standard's example - it is paradoxical that our safety system requires that we prove the absence of chemicals that are not economically or functionally advantageous nor easy to find.

In any event, in the cited hypothetical example, a teether is at issue. Why not simply require testing for all components which are suitable for children up to 36 months old and which can be placed in the mouth? In the past, the CPSC has asked industry to take certain phthalates out of products like this (without controversy, I should add). Companies can certainly test teethers, pacifiers and rattles without testing each other component that is not likely to be placed into the mouth. Given that this test procedure includes items suitable for children up to 12 years old, the Standard will impose widespread economic harm apparently in order to catch teething rings. I think this is unwise and unnecessary and will harm markets.

3. The Rationale Offered for Component Testing. In the Statement, the following rationale for the change to component testing is offered: "Given that testing the phthalate content of an entire children’s toy or child care article presents certain difficulties, may lead to dilution of the phthalate concentrations compared to that in one or more of its component parts, differs from similar regulations issued by other jurisdictions, and can be prohibitively expensive, the Commission believes that phthalate testing should be limited to those plastic parts or other product parts which could conceivably contain phthalates ('plasticized component parts')." I have previously addressed the inapplicability of component testing under Section 108. I will now address the other rationales offered in this statement.

Regarding "dilution", it can only be considered an issue here if component testing is required under the law. At the moment, the law as written (as explained above) specifies phthalate levels for the entire toy. Dilution would only be an issue if the law read differently, requiring certification by part, which it does not. As the CPSC has already ruled out in two previous CHAPS that the six phthalates present a material health risk to children, it lacks the legal authority under the FHSA to impose restrictions on products containing them as "banned hazardous substances". It is therefore entirely dependent on Section 108 to justify this new Standard. Dilution is therefore legally irrelevant as a consideration.

It has not been our experience in testing for phthalates that testing the whole toy presents any "difficulties". Testing for phthalates is, in general, prohibitively expensive. The right way to moderate that expense is to run fewer tests. Testing an entire toy is definitely cheaper than testing every component because it requires fewer tests. If a manufacturer encounters "certain difficulties" or finds that testing the entire toy is somehow more expensive than testing components, your rule should permit the manufacturer to opt for component testing. This simple solution will preserve the benefit those of us who have discovered that testing the entire toy is cheaper.

The concern expressed for coordinating test requirements with other jurisdictions is commendable, but which jurisdictions are the CPSC attempting to align with? If the Statement is referring to a state (like California), the Standard and Federal law should preempt the state standard. I think that industry action can be used to help bring different jurisdictions in line on testing standards. If that is not sufficient, legislative action is the next step. [It is ironic, actually, that this justification for the phthalate standard has been offered, as for many years the CPSC has stood pat and refused to align its testing procedures with European standards, causing U.S. manufacturers to test repetitively to two standards.] In this case, the alignment justification is going to cost industry millions of dollars in excessive and ineffective component testing. Unless the law requires that the CPSC correlate its testing standard, I think the March Standard should be remain in place (toy-level testing).

The Statement also notes: "Testing component parts to the phthalates limits established in section 108 is more protective of human health . . . ." As noted above, the CPSC has twice rejected the notion that phthalates are dangerous in CHAPS in 1998 and 2001. This statement should be struck from the Statement for that reason alone. The fact that Congress outlawed six phthalates does not invalidate the scientific conclusions reached in the agency's two CHAPS.

4. Inaccessible Components. The Statement and Standard do not differentiate between accessible and inaccessible components. Without meaning to contradict my comments above on the invalidity of component testing requirements, I believe there MUST be a distinction in the rules between accessible and inaccessible parts in any testing standard for phthalates. Inaccessible parts should be exempt from testing, whether on a component or whole toy basis, as there is no known health risk possible from inaccessible parts (whether or not the results of the two CHAPS are respected). This is a rather self-evident concept, as phthalates do not have the ability to "leap" from inside a toy into the human body. There is only one mechanism that can transport phthalates from a toy into the human body, namely mouthing or chewing. Inaccessible parts cannot be mouthed or chew without unforeseeable and substantial toy abuse, and thus should be excluded entirely from the testing requirements.

5. Vague Standards. In the Statement as quoted above, the test standard now requires that any "plastic parts or other product parts which could conceivably contain phthalates" be tested. This expansive definition is not only vague and undefined but it is also subject to second guessing. Vague terms like this also tend to cause disagreements in the supply chain, leading to loss of revenue and unnecessary testing. The Standard does not let the manufacturer make this judgment definitively, either. The inability of a manufacturer to rely on a "safe harbor" rule, short of testing every component of every product, is a major economic disincentive and will certainly disrupt markets. The CPSC has already received MUCH data from companies documenting this kind of market disruption. Although the CPSIA may have been cleansed of any reference to money or economics, the CPSC has no legal or moral obligation to promulgate rules that are devoid of sensitivity to market considerations. In this case, please consider that the financial implications of the new Standard making new products too expensive to develop, manufacture or distribute will stifle innovation, reduce the diversity of products available in specialty markets, stunt new company formation and reduce jobs - all to enforce a law which is directly contravenes the results of two CPSC CHAPS. To do so will severely disrupts markets regulated by the CPSC and disproportionately harm Small Business. In light of the CPSC's stated opinion on the safety of phthalates, this is unacceptable as a matter of public policy.

The Standard should specify which materials are known to contain phthalates and restrict it to known materials meeting physical examination criteria. In other words, it should not be sufficient that it is "conceivable" that phthalates have been used in a particular plastic or component. The part or material itself must also exhibit the characteristics of a plastic or part containing phthalates (in other words, it is pliable). This is a highly effective and low cost way to differentiate between plastics that have phthalates and those that do not. The presence of phthalates is not hard to detect with a physical examination.

De minimus risk of phthalates used in low mass components or materials, especially noting the function of the parts, should be exempt from testing. As an example, coatings on parts that are not likely to be mouthed (in other words, they are not intended for children under three years old or cannot be placed in the mouth) should not require testing. In addition, the mass of the possible phthalates in such coatings is likely completely immaterial. The repetitive testing of low value, low risk items or parts will bankrupt companies still remaining in this devastated market. Some exercise of regulatory judgment is necessary to save the children's market here.

6. Multiple Components. If component testing is required in the final standard, the standard should not require repetitive testing of the same component. If a component is used in multiples in a particular product or is used in more than one toy, the testing standard should permit use of a single test on a single component to apply for all of its uses in applicable toys.

It is also our recommendation that raw material testing be accepted in lieu of component testing. That said, raw materials testing is not likely to resolve testing problems under the CPSIA except for the simplest products. While I have consistently written that raw materials testing is an appropriate and effective supply chain management technique, raw materials test reports when compiled for a complex product will tend to raise questions (they will form an unreconcilable, incomprehensible mass of seemingly meaningless reports) and will in fact, detract from assurances that the final product actually complies with law. This flaw, which is highly likely to cause expensive delays at the border when U.S. Customs begins to examine test reports under the CPSIA, will again tend to force companies to test whole products at high expense, simply to keep products moving across borders and to make it easier to sell them into retailers who do not want to accept such reports for legal liability reasons or spend the time or money trying to reconstruct a passing test report on a toy from a pile of raw material test reports.

7. The Phthalates Standard is Effectively a Requirement to Test Every Component in Every Toy. The Statement does not rule out testing of ANY material as far as I can tell. The standard even leaves open the possibility that natural sand, glass, crystal, unfinished metal, cotton textiles or even natural wood might need testing under some circumstances. This is particularly perplexing because the CPSC knows that phthalates are an additive and do not exist in nature. They are also an organic chemical that would not survive the heat necessary to forge steel or melt sand into glass. To suggest that these items "might" have phthalates is quite a stretch - and all manufacturers using these materials will pay dearly for this stretch.

As if that wasn't bad enough, the Statement goes on to note: "Manufacturers either know or should know what materials and components go into the products they make, and if the product or its components contain one of the plasticizers specified in section 108 of the CPSIA, the manufacturer or importer certifying the product must test the component or product to ensure that it complies with the CPSIA. Failure to comply with section 108 of the CPSIA is a prohibited act under section 19 of the Consumer Product Safety Act (CPSA) and can result in civil and criminal penalties. Likewise, failure to have a product subject to section 108 of the CPSIA tested by an accredited third-party laboratory and have the appropriate certification for that product is also a prohibited act under section 19 (CPSA)." Such remarks are guaranteed to create insatiable demand among risk-averse retailers for complete suites of tests on every component in every toy, no matter what. The Statement could not be clearer that ALL mistakes, oversights or judgments invalidated with 20-20 hindsight by the CPSC will be held against the supply chain selling the product. As the CPSC penalties and saber rattling of the agency have been widely publicized, this rule is certain to depress trade and shrink markets. No one will be willing to take the risks outlined in this paragraph.

I would note also that a standard that puts the onus on manufacturers to make judgments on whether to test or not, and then attempt to get their customers (and testing labs) to go along with their judgments, seems particularly impractical and unrealistic. The scenario is apparently that manufacturers must prove to all of their trading partners, again and again, that their judgment to not test certain components or materials is legitimate. That judgment will not be accepted lightly, with or without documentary proof, by trading partners who have read the Statement's stern warning about liability. In any event, a long inquiry by trading partners and testing labs into any such manufacturer's judgment can be anticipated with a high degree of certainty. While some manufacturers may be looking forward to spending the rest of their working lives arguing with customers to accept a decision to save $500 in testing costs, I personally find it quite unappealing and unworkable. We have a business to run and cannot spend all day on test reports - we have to make some sales (to pay for the tests). If this is how the rules will work, we will either have to test everything comprehensively or drop the products. Please think realistically about the commercial implications of the rules you are promulgating.

If it is the intention of the Commission to require comprehensive testing of every component of every toy with no exceptions, I think the standard should be rewritten to say so directly and unambiguously. Writing a standard that uses vague language stating that incomplete testing is permissible under some circumstances, but only at high risk of civil or criminal liability, is disingenuous, as the agency knows full well the impact and meaning of those words.

Thank you for considering my views on this important topic.

Sincerely,

Richard Woldenberg
Chairman
Learning Resources, Inc.
380 North Fairway Drive
Vernon Hills, IL 60061
Tel 847-573-8420
rwoldenberg@learningresources.com

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.

CPSIA - Updated Toy Recall Data

The TIA has published an analysis comparing first quarter and first half 2009 CPSC toy recalls against comparable period statistics for 2008. Total recalls are down 75% in the first quarter and 60% in the first half of this year. The comparison by units recalled and by category of recall is equally impressive.

So what does this mean? My guess is that the fundamental problem unearthed in 2007/8 was . . . compliance issues. There was NO safety issue, there was no defect in the law, there was no problem with a hobbled agency. This was, plain and simple, a case of companies ignoring or being ignorant of the law. There were also a couple of notorious and avoidable quality control breakdowns. Now, with the microscope placed over its head, the toy industry's safety issues are basically gone. Don't forget that this miraculous recall reduction occurred during a period in which the legal standards were still unchanged (first quartner 2009) and entirely in a period in which product testing IS STILL NOT REQUIRED. Does that suggest the possibility that the strictures of this law are OVERKILL? Well, I think so.

What would work fine is the prior law with better administration. Among other things, the penalties should be reconfigured (certainly to eliminate felonies except in the most egregious cases) and the self-reporting on violations should be scaled WAY BACK. The ASTM F963 standard should be also returned to voluntary status to keep things simple and focused from a regulatory standpoint. Lead-in-paint testing should REMAIN mandatory but a materiality standard (or official practice) should be adopted for violations.

Most importantly, the agency should recognize the need, the absolute URGENCY, of a liaison function with industry and of an educational mission. [This is old news.] The CPSC must take control of awareness of its rules and invest in better compliance through an enhancement of its relations with industry. Becoming the "cop on the beat" will NOT work to motivate compliance - it will motivate fear and loathing, deception and non-compliance. Good safety practices are economic for industry - because bad safety practices leads to high and unbudgeted expenses from tort and recall liability and higher insurance costs. It's in everyone's interest to behave responsibly, as long as the rules are reasonable and tailored to the need. The educational investment is no less pertinent than it is for the "Click It or Ticket" campaigns. This can be the salvation of the agency - and the children's product industry.

As Congress heads toward hearings on the CPSIA (finally), these new statistics deserve attention and analysis. A common sense approach to fixing this law can save a large industry and an important agency of the federal government while preserving the gains in compliance earned in the last two years.

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

CPSIA - My "Wish List"

Here is my "wish list" for changes to the CPSIA:

Please note: the reasoning embedded in this list is that it will all be granted, thus some additional points which are important are implied in the list. I assure you that I would never attach my name to any suggested change to the CPSIA if I felt, even for a fleeting second, that any aspect of my suggestions would degrade safety in children's products or lead to any injury. Safety, to me, is only a sidelight to the issues in the CPSIA. The big issues relate to the law's structure, not its intent, and the very negative effects flow from the distortions in incentives and practice caused by its many rules.

In order of priority:

a. A Pause. We need a stay of enforcement or a delay in the implementation dates for the new standards until at least 180 days AFTER the CPSC has published and finalized its implementing rules and regulations. Many people are asking for a six month delay but this overlooks the activities that will take place in the next six months, namely rulemaking. In reality, even this proposed delay may not be enough as the period between final rulemaking and implementation will result in a huge surge of activity that eill likely swamp available resources all throughout the "food chain". Unfortunately, the CPSC has issued very few implementing rules at this point, even defining what "total lead" is or how to test for it. This is causing incredible chaos. The "pause" will allow for more discussion about the details of the law, public hearings and a legislative process that might result in structural repair of the law.

The National Association of Manufacturers has filed a formal request for a Stay of Enforcement signed by 67 assocations, with more associations expected to join the letter shortly.

b . No retroactive effect for the new lead standard. The retroactive effect of the CPSIA's new lead standards is creating massive dislocation. Companies have NO WAY to fix compliance issues with existing inventory which are usually technical in nature but may cost literally hundreds of thousands of dollars per item to fix. Retroactive effect will create a number of terrible problems: (i) huge costs for voluntary recalls of products that pose NO threat of harm to children, (ii) a subsidy to companies who are oblivious to the law, speculate that the law will be repealed or revised later, or who are intent on flagrantly disregarding the law, (iii) may drive many companies to openly disregard of the law, thereby creating a growing trend to disregard safety laws generally, or (iv) widespread business losses, closings and/or job losses. Elimination of the retroactivity effect will considerably reduce the pressure on the thrift store industry, as well as libraries and many other affected enterprises with large inventories of existing product.

c. Age range in the definition of Children’s Products should terminate at six years old. The broad sweep of the definition of Children’s Products under the CPSIA is causing widespread harm, and will dilute the efforts of the CPSC to patrol the marketplace. The risk to children from contact with children’s products sharply diminishes when children stop mouthing toys and other objects. The CPSC has determined that mouthing ends at three years old. There is no support for the notion that children are exposed to dangers from mouthing over three, so a limit of six years of age provides an appropriate margin of error. Elimination of products intended for children seven and over will greatly reduce the scope, and harm, of the CPSIA, as well as significantly narrow the categories of products affected by the law.

d. The Total Lead Standard should be abolished, and pre-sale testing should be limited to Lead-in-Paint. This change is in recognition of the fact that lead is known to be dangerous in some circumstances, but is not known to be dangerous in other circumstances. The way to properly administer the marketplace is to (re)empower the CPSC to identify safety issues as they arise and develop rules for such issues without limitation. The CPSC with its considerable scientific resources and devotion to mission is the right place to make these determinations, not Congressional committees with no such resources. See https://mail.learningresources.com/exchweb/bin/redir.asp?URL=http://www.forbes.com/2009/01/26/toys-lead-cpsia-oped-cx_phr_0127rubin.html. Implementation of this rule would, for instance, let the CPSC tighten up rules on children's jewelry if they felt it was needed. The need for, and the reach of, any “total lead" standard should be assessed by the CPSC on a risk-assessment basis, and should be implemented by the CPSC in its best judgment subject to appropriate public processes. I would note that the 2007 recalls related to Lead-in-Paint, not “total lead”. This is a critical point that Congress has refused, categorically, to acknowledge or consider.

Elimination of pre-sale testing on "total lead" should also explicitly exempt pre-sale testing on phthalates. Whatever standards remain on the books should be the responsibility of manufacturers to comply with, not to prove up before sale.

e. Lot Marking Requirement is Eliminated. This extremely expensive and burdensome requirement is intended to ease future recalls. Yet, future recalls are supposed to be well-contained by the other provisions of the CPSIA. [Have we found a logical problem here, perhaps?!] The lot marking requirements promises to be a crushing burden on non-mass market-oriented companies and will likely result in (i) reduced product diversity, (ii) abandonment of niche markets and specialty markets in favor of the mass market, and (iii) sharp elimination of jobs and economic opportunities for small and medium-sized companies. I believe this one provision has the greatest potential to downshift product innovation among small and medium-sized companies and must be amended urgently.

f. Effective Pre-emption. Effective pre-emption of state law on children’s product safety and the further restraint of State Attorneys General from enforcing (or effectively competing with the CPSC in the enforcement of) the CPSIA is essential to preserve efficient inter-state commerce.

Rick