Court Denies Michaels’ Motion to Dismiss CPSC Penalty Enforcement Action and Finds that Failure to Report is a Continuing Violation
On March 21, 2016, a federal judge in the Northern District of Texas denied Michaels Stores, Inc. (Michaels) motion to dismiss an enforcement action brought by the U.S. Department of Justice (DOJ) on behalf of the U.S. Consumer Product Safety Commission (CPSC). The enforcement action seeks civil penalties and injunctive relief based on Michaels’ alleged failure to timely report hazardous glass vases that it imported and sold in its retail stores. U.S. v. Michaels Stores, Inc., No. 3:15-cv-01203, 2016 WL 1090666 (N.D. Tex. Mar. 21, 2016). The court’s short opinion rejected Michaels’ argument that the government’s action was time barred and agreed with the government that Michaels’ failure to report under Sec. 15(b) continued until it adequately informed the Commission. The court did not directly address the applicability of the discovery rule and Gabelli v. S.E.C., 133 S.Ct. 1216 (2013) to CPSC enforcement actions.
As previously reported, the CPSC alleged that Michaels knowingly imported and sold glass vases between 2006 and 2010 that were too thin to withstand normal handling and that were prone to shattering in consumers’ hands and also that Michaels intentionally misled the CPSC about the vases. According to the CPSC, Michaels should have immediately reported its receipt in September 2008 of an expert report opining that the vase was “unreasonably dangerous for its normal use,” rather than waiting almost two years, until February 2010, despite numerous injury reports in addition to the expert analysis. The CPSC also asserted that Michaels’ violations did not cease until February 2012, when it finally disclosed to the CPSC that it was not only the seller but also the importer of the vases.
In June 2015, Michaels filed a partial motion to dismiss, arguing that the CPSC’s claims for civil penalties and injunctive relief were time-barred under the general five-year statute of limitations for government enforcement actions seeking civil penalties. See 28 U.S.C. § 2462. Michaels argued that, based on the facts alleged in the complaint, its duty to report arose in September 2008, but the enforcement action was not filed until April 2015 – over six and a half years later.
Michaels relied heavily on Gabelli, which established that the discovery rule for statutes of limitation did not apply in an SEC enforcement matter and thus that the statute of limitations would begin to run when the underlying violation occurred, not when it was discovered by the government. Michaels argued that Gabelli applied more broadly to prohibit extra-statutory tolling doctrines, including the “continuing violation” doctrine, in government enforcement actions seeking civil penalties. Michaels also contended that the Sec. 15(b) obligation to report is not continuing in nature, based on the statutory interpretation of the Consumer Product Safety Act (CPSA).
In opposing Michaels’ motion, the government argued that its claims were not time barred because the Sec. 15(b) duty to report is continuing in nature, and the statute of limitations does not begin to run until the violation ceases. It claimed the action was timely because it was filed within five years of the CPSC being adequately informed about the vases, in February 2012. According to DOJ, Gabelli did not apply and to hold otherwise would incentivize companies to hide product safety problems in order to outrun the statute of limitations.
The district court concluded that the CPSC enforcement action was not time barred because the statute of limitations for a CPSA enforcement does not run until the Sect. 15(b) violations cease. In viewing the facts in the light most favorable to the government, the court held that Michaels’ violation first began when it obtained the expert report identifying the vases’ defect and continued until Michaels obtained actual knowledge that the CPSC was adequately informed of the defect, which was when Michaels disclosed that it was the importer of the vases.
The application of Gabelli to CPSC enforcement actions has been widely debated since the Supreme Court decided the case in 2013. Yet the Michaels court sidestepped Gabelli and did not discuss the application of the Supreme Court’s rationale or policy arguments relating to the CPSA. Nor did the court explain the legal basis for concluding that failures to report under 15(b) are continuing in nature.
The Michaels opinion, along with the Zen Magnets recall order and the record $15.45 million civil penalty against Gree marked a week of CPSC victories over alleged violators. While the alleged behavior in each case seems egregious, it demonstrates the Commission’s aggressive stance on enforcement and should be a call to industry to be prepared for potential action by an emboldened CPSC.
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