ALJ Grants CPSC's Request to Name Individual CEO as Respondent in Aggressive Prosecution of Buckyballs Matter
In a groundbreaking opinion issued on May 3, an Administrative Law Judge granted the Consumer Product Safety Commission's (CPSC) motion to name an individual as a respondent in its ongoing administrative action seeking a mandatory recall of high-powered magnet products.
In the action, which the CPSC brought pursuant to Section 15 of the Consumer Product Safety Act (CPSA),2 the agency seeks an order that the magnet products contain a defect that creates a substantial product hazard. The CPSC also seeks to compel the three corporate respondents, including Maxfield and Oberton Holdings, LLC, marketer of Buckyballs and BuckyCubes, to recall those products and, among other things, pay for all of the costs associated with the recall. After Maxfield dissolved, the CPSC sought to add Craig Zucker as a respondent, both in his individual capacity and as CEO of Maxfield.
In granting the Commission's motion, the ALJ relied heavily on his interpretation of the "responsible corporate officer" doctrine derived from the Supreme Court's decisions in United States v. Dotterweich3 and United States v. Park.4 These cases both considered the imposition of criminal sanctions against corporate officers for violations of the Federal Food, Drug, and Cosmetic Act of 1938 (FDCA). The ALJ reasoned that, like the FDCA, the CPSA was enacted to protect the public health and safety, which justified holding corporate agents responsible under the statute even "in the absence of consciousness of wrongdoing."5 The opinion interpreted Park as establishing that an individual may be liable where he or she has "a reasonable relation to the situation" and the "authority and responsibility to deal with the situation" leading to the violation "by virtue of his [or her] position."6 The ALJ disagreed with Zucker's view that Dotterweich and Park were inapplicable to Section 15 for several reasons, including that they dealt with statutory provisions that clearly contemplated action against individuals who owned or worked for corporations, whereas, Zucker argued, Section 15 does not.
Applying Dotterweich and Park to the CPSC's allegations, the ALJ concluded that the allegations in the administrative complaint were sufficient to make Zucker "a proper party to the proceeding," as the person who allegedly "was responsible for ensuring Maxfield's compliance with applicable statutes and regulations," and "personally controlled the acts and practices of Maxfield, including the importation of Buckyballs and BuckyCubes."7
While there is a great deal to digest in this opinion and the history of this litigation, we offer here some immediate practical observations:
- The CPSC's approach in this case is yet another sign that the agency is increasingly targeting individuals and not just the companies they own or manage. Pursuant to Sections 20 and 21 of the Act, the CPSC has long had the authority to seek civil and criminal penalties against individuals in their individual capacities for their roles in corporate violations of CPSA requirements or Commission orders, under certain circumstances. The agency has rarely exercised this discretion, generally choosing instead to pursue penalties from companies. The CPSC's decision to bring Zucker into this matter is indicative of the Commission's increasingly aggressive interpretation of its authority under the CPSA. In short, owners and managers of companies regulated by the CPSA should be aware that the corporate form is not a perfect shield against CPSC action, including charges of personal liability.
- Cooperation with the CPSC does not insulate a company from a future Section 15 action. Respondents Maxfield appeared to have established a working relationship with the CPSC through a history of cooperation and compliance prior to the filing of the complaint. The company had agreed to a voluntary recall of Buckyballs and BuckyCubes in 2010 and thereafter relabeled those products as intended for consumers over 14 years old. Despite this, the CPSC revisited the same issue and decided to pursue a mandatory recall to ban the products from sale. Other companies working with the CPSC should not assume that agreeing to a voluntary corrective action will afford absolute protection from future Section 15 litigation.
- The CPSC's pleading highlights the fact that individuals must be very careful about personally making statements to the agency. The agency relied in part on Zucker's own conduct before the CPSC when it argued in its motion that he "personally controlled the acts and practices of the corporation." Among other things, it noted that he personally submitted formal responses to the agency on behalf of the company and recited statements he personally had made to CPSC staff. Regardless of whether the CPSC fairly characterized Zucker's conduct or its relevance to the issues, the case is a reminder that the Commission can and may well use individuals' statements against them in administrative or enforcement proceedings if issues cannot be voluntarily resolved. It is especially important that owners and managers of regulated companies bear this risk in mind in cases that potentially could result in a CPSC referral to the DOJ for criminal enforcement.
- Dissolving a corporation after being sued by the Commission for potential product hazards may increase the likelihood that the Commission takes action against individuals. In determining that Zucker could be individually named as a respondent, the ALJ focused on the fact that Maxfield as a company had been dissolved after the CPSC action was filed and that there was no responsible corporation remaining to comply with any mandatory recall order.8 Indeed, the CPSC said that it sought to add Zucker "in light of" that dissolution. This language makes clear that a corporate dissolution, particularly in reaction to CPSC activity, is likely to shift the Commission's attention to the individuals behind the corporation.
- The CPSC may change its mind over time about how to handle potential product hazards. When Buckyballs and BuckyCubes were initially recalled, Commission compliance staff had determined that the products could continue to be sold after they were relabeled as intended for 14 years old and above, thereby accepting that (after the relabeling) these magnetic products were not de facto toys. By the time the administrative complaint was filed against Maxfield approximately two years later, the CPSC had changed its position, alleging that the high-powered magnet products were "designed, manufactured, and/or marketed as a plaything for children under 14 years of age," despite the cautionary labeling, and for that reason, they violate the federal toy standard. Companies should thus be cautious about relying on the CPSC's position on a potential product hazard or negotiated corrective action as final because, as this case demonstrates, that may be subject to change.
It remains to be seen whether the ALJ's decision will be widely adopted or have a lasting impact on future CPSC litigation. Whatever the outcome, it is apparent that the Commission is continuing to escalate its enforcement activity and maximize the reach of its powers. Companies and individuals should take heed of the CPSC's view of its jurisdiction and approach in this case in considering the development of compliance programs, assessment of risks, and engagement with the CPSC.
A copy of the ALJ's Order granting the CPSC's motion is available here.
2 Section 15 of the CPSA authorizes the CPSC to, among other things, order public notice of the product hazard, a suitable corrective action, and reimbursement of others in the supply chain for the costs associated with the mandatory recall of a product.
3 320 U.S. 277 (1943).
4 421 U.S. 658 (1975).
5 In re Maxfield and Oberton Holdings, LLC, et al., CPSC Docket No. 12-1, 12-2, 12-3 (May 3, 2013) ("ALJ Op.") at 12 (citing Park, 421 U.S. at 669 (citing Dotterweich, 320 U.S. at 280-81)).
6 ALJ Op. at 12 (citing Park, 421 U.S. at 674) (internal quotations omitted).
7 ALJ Op. at 14, 17. The ALJ also concluded that naming Zucker would not unduly delay or broaden the scope of the case. ALJ Op. at 6-7.
8 ALJ Op. at 18.
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