Chairman Kaye, in a widely covered recent speech, made no apologies about his clear intention to find a suitable case to seek an “eight digit” penalty, something never before seen at the CPSC. Certainly his remarks, made within a month of last week’s announcement, foreshadowed last week’s civil penalty against Gree Electric Appliances Sales Co. Ltd.. 
A Trophy Civil Penalty
In setting out his vision so clearly, Chairman Kaye made explicit what was already widely assumed to be the implicit goal of the agency’s leadership since the enactment of the Consumer Product Safety Improvement Act of 2008 (CPSIA). After his speech, many industry executives were frustrated that the Chairman seemed more intent on finding a trophy civil penalty than in making sure that civil penalties were commensurate with the facts of each case. Chairman Kaye, in these and other remarks, seemed intent to make an example out of a suitable corporate candidate where he and his team believed that a firm was profiting from unsafe practices and viewed civil penalties as “just another cost of doing business”. Last week, the Commission seems to have found its mark.
Chairman Kaye and most of the Commission clearly view this accomplishment as justice. And, indeed, the facts of the case, to the extent they are known, do not seem to cry out for sympathy for the Gree corporate entities.
Nevertheless, all stakeholders would be wise to pause for what is unmistakably a watershed moment: the moment that the CPSC ceased to be a relatively, quiet backwater agency and became an aggressive enforcement body deserving of respect or, at a minimum, fear.
1. Don’t lie to the government. How many times do we have to say this? There is literally nothing that antagonizes a government official so much as being lied to. Lying to the
[Click Read More link on the right to read full article.]
government is not only a surefire way of getting penalized, it is often viewed by government enforcement officials as an “aggravating” factor. That means that the government will not only penalize your company if they catch you lying to them, they will likely throw the book at you. You don’t want your company to be anywhere close to the “line” here. In this case, it appears as though Gree’s leadership made a series of deceptive, or at the very least, really dumb moves as it navigated a crisis. Most reasonable actors would agree that this is a good lesson and that this company is likely deserving of a very significant sanction. But is that the only lesson here? There are at least a few more.
2. Don’t counterfeit a trademarked safety mark. This is a corollary of the first lesson. UL states that if a product is UL listed, the product meets “UL’s published and nationally recognized Standards for Safety.” According to the agreement, Gree knew that the dehumidifiers were not compliant with UL flammability standards yet affixed the UL mark anyway. In addition, Gree made material misrepresentations to CPSC that the dehumidifiers met the UL safety standards and later misrepresented facts to CPSC about the date when the firm realized the dehumidifiers did not meet the UL standards. Lying about a private standards organization’s safety mark to the U.S. government authority tasked with product safety is not a good idea. Both of these acts are prohibited acts under the law so this counts as a double-whammy against Gree, a company that did itself no favors in this whole affair.
3. Undertake design changes to address possible safety hazards with extreme care and the advice of counsel. This is perhaps the most subtle and important lesson we can divine from the information provided. CPSC staff seem to view any design change undertaken to address a safety concern as an admission that the previous design was somehow defective and a substantial product hazard. This is difficult for companies engaged in a continual process of improvement to understand. And yet the settlement agreement in both Gree and the recent 2015 penalty against Johnson Health Tech for $3 million allege that both companies made design changes to address potential safety concerns and did not report those design changes to the CPSC.
Indeed, CPSC’s regulations outlining the requirements for a full Section 15(b) report require:
"An explanation of any changes (e.g. designs, adjustments, and additional parts, quality control, testing) that have been or will be effected to correct the defect, failure to comply, or risk and other steps that have been or will be taken to prevent similar occurrences in the future together with the timetable for implementing such changes and steps. Even if no defect, failure to comply, or risk is acknowledged, please provide a summary description of all design changes made to each model during its production and a copy of all engineering change notices. (Emphasis added)."
This topic is deserving of its own article. However, it is important to note that seeking experienced counsel and bringing together a diverse team outside of your own core team is critical. A company must guard against the natural human tendency to defend its own design choices and rationales in reviewing the very product it has created. Having outside subject matter experts, from engineers to attorneys, to assist and serve as “devil’s advocates” is invaluable as your company navigates safety-related design changes.
Done properly, design changes can be accomplished in a way that protects your customers and your company as a part of the process of continual improvement. Done improperly, a company making design changes opens itself up to a later charge that hands the investigating Commission attorney a gift that is the full benefit of “20/20” hindsight.
4. There is no requirement that there be injuries before a company’s duty to report is triggered. The case of U.S. v. Mirama Enterprises Inc., 185 F. Supp. 2d 1148 (S.D. Cal 2002) established that the duty to report is substantially broader than reporting an actual defect. Mirama stands for the proposition that a court will likely interpret broadly the statutory requirement that a company must report when it obtains information which reasonably supports the conclusion that a product contains a defect which could (emphasis added) create a substantial risk of injury to the public or presents an unreasonable risk of serious injury or death. See 15 U.S.C. § 2064(b). The fact that the largest civil penalty in CPSC’s history had zero reported injuries further evidences this principle. (Similarly, the recent Johnson Health Enterprises $3 million civil penalty also had no reported injuries.) There is little question, however, that the facts as described could create a substantial risk of injury in this matter.
Just the Facts
These are some good lessons learned. However, it seems like there could be more to learn, given additional facts. The facts, it seems, are actually hard to find out. (Indeed, Commissioner Mohorovic, a Republican who voted for the civil penalty, lamented in his statement that “too few of those compelling facts are reflected in the public-facing settlement agreement”.)
While we may have little information to guide us as to the facts of the Gree matter, what we do know – even if it is left unsaid in the Commission’s press release – is that the Commission will undoubtedly attempt to “anchor” all of its future negotiations with companies to this figure of $15.45 million. In of itself, the notion of “anchoring” a figure for future negotiations is only a natural outcome for any seasoned negotiator. Indeed, it is difficult to fault the Commission for doing just that.
Yet when a Commissioner publicly calls out the agency for failing to disclose enough facts, how should the public know if anchoring the next civil penalty to this figure is fair in the circumstances? What are some of the “compelling facts” alluded to in Commissioner Mohorovic’s statement? Is this not a matter of public record? As any lawyer will tell you, the facts matter.
And, if, as Commissioner Mohovoric alludes , this settlement represents the statutory maximum of $15.15 million for the “failure to report” and an additional $300,000 for a series of three misrepresentations to the government, why has the government been deliberately vague in making that clear and itemizing the civil penalty settlement? Could it be that the agency wishes to be as vague as possible to offer itself maximum flexibility and leverage in future negotiations?
Leveraging all of its weight to obtain this large settlement, is the government now saying “just trust us” to get it right when its your company’s turn? Such a notion is antithetical to the notion of due process and transparency. The aggravating factors that make this settlement a sum nearly four times greater than the next highest civil penalty call out for an explanation.
We would be remiss if we didn’t consider why this company voluntarily agreed to the statutory maximum penalty plus additional penalties instead of fighting the government for a potentially better outcome? Were the facts that bad? Could the government have even been threatening, either explicitly or implicitly, a criminal prosecution?
As ABC News reported, “When asked if the case had been referred to the Department of Justice for a possible criminal investigation, Kaye only said that his office has no problem referring ‘bad actors’ to the DOJ. Asked if there is a list of companies the CPSC would consider referring, Kaye responded, ‘internally, absolutely.’” 
Is there any doubt when reviewing this settlement and the publicity surrounding it that this Commission, led by Chairman Kaye, considers Gree a “bad actor”? We are left to wonder if this settlement is, in fact, the end of the matter or whether additional criminal charges may be forthcoming.
For most of us, however, the only question that matters is: Will the government try to widen the holding of this settlement agreement as it seeks to be more aggressive in other settlement agreements? And, in cases where there is not anything close to this level of deceptive acts by a company, but merely negligent or perhaps, mistaken behavior, will the government be “reasonable” enough to admit to the difference and agree to a less draconian figure?
Indeed, as Commissioner Mohorovic observes concerning the deterrent effect of a civil penalty:
What gives the number meaning and the power to change behavior is context. If other companies better understand the behavior that drew our ire in this instance, they can better understand what behavior they should avoid… If part of the goal of a penalty is to make an example of a company for alleged bad acts, we need to let people know what the example is. Without some level of candor, the only effect on the CPSC community will be a few moments' fear and paranoia, with no lasting lessons learned. To fail to make more instructive use of the first post-CPSIA maximum penalty is a missed teachable moment, and an agency with the limited resources we have cannot afford to miss moments.
In this article, we have tried to find some of the teachable moments of this massive civil penalty. One thing that we cannot answer ourselves is what makes this series of missteps so much more costly than prior ones? Was it the fact of the misrepresentations to the government? What is the sheer audacity of the lies?  Without further facts, we can only speculate. And that is, unfortunately, an opportunity lost by the Commission.
Time will tell the true impact of this remarkable penalty. Perhaps Chairman Kaye will be remembered as one of the most ambitious and effective Chairman in the CPSC’s history Or perhaps the facts of this case will make it a single outlier.
At the very least, if your company is involved in the world of consumer products, the Commission has certainly earned your attention with this civil penalty settlement. It is well past time to make sure your company has robust compliance programs and systems in place to avoid the series of judgment errors made in this case.
Neal Cohen is an attorney practicing in the area of product safety law. Neal was a CPSC official from 2009 to early 2016, during which time he served as the Small Business Ombudsman. Senior Counsel to the Director of Compliance, and as an attorney in the Office of General Counsel. Neal can be reached at Neal@NealCohenLaw.com. Follow Neal on Twitter @NealCohenLaw.
This article originally published in Law360 on April 6, 2016.
 “When it is fact based. When the conduct is so outside of the norm, I believe Congress wanted to see higher civil penalties. We are still not yet even halfway to the level that Congress called for and I’m hoping to see this year in particular, again, depending on some of the fact patterns we’re seeing, double million dollar digits, so we’re now in the single millions, I’d like to see double-digits in these civil penalties, based on some of the fact patterns we’re seeing.” U.S. Consumer Product Safety Commission Chairman Kaye, March 2, 2016 at the International Consumer Product Health and Safety Organization (ICPSHO) annual conference in Washington, D.C.
 “A conscientious reader will note that the maximum penalty for the misrepresentation charges is $100,000 per violation, so the great bulk of the penalty is derived from the alleged failure to report. None of the sparse facts provided in the agreement, however, differentiates this $15 million from any of the other failure-to-report penalty settlements that have come before the Commission since I took office.”
Statement of Commissioner Mohorovic Regarding the Commissions Provisional Acceptance of a Settlement Agreement with Gree Electric
 Was that “only worth” $300,000 of the $15.45 million total?