Hunton Retail Law Resource

August was a busy month in the world of recalls. First, the end of August ushered in a hefty $5.7 million civil penalty against a major retailer in the United States. The retailer was allegedly selling and distributing recalled products and has agreed, in addition to the civil penalty, to maintain a compliance program and a system of internal controls and procedures. The CPSC voted 4 to 1 to accept the settlement, with Acting Chairman Buerkle voting to accept a lower civil penalty.

This is the CPSC’s fourth multimillion dollar civil penalty of 2017. The CPSC has now extracted a total of $21.35 million in civil penalties this year. For the sake of comparison, 2015’s total was $23.4 million and 2016’s total was $37.3 million. Thus, 2017 is the third highest year on record but, with four months to go in the calendar year, it could surpass one or both of these prior years.

Second, the CPSC recently indicated it will follow the President’s directive to remove bureaucratic red tape from federal agency regulations. The CPSC requires independent, third-party testing to certify compliance with mandatory phthalates prohibitions on children’s toys and child care articles. But the CPSC voted unanimously to remove seven plastics from this requirement after concluding that they would comply with the CPSC’s phthalates prohibitions with a high degree of assurance. Acting Chairman Buerkle released a statement along with the announcement, explaining that “[r]educing unnecessary regulatory burdens is a top priority for me” and characterizing this move as “one of the most significant burden reduction steps the CPSC has taken in recent years.”

The CPSC’s “high degree of assurance” in compliance may be derived from the knowledge that what the CPSC relinquished as “red tape” may instead materialize as terms of a consent decree for those who do not comply. In a case in point, the Department of Justice and the CPSC recently announced a settlement with three toy companies and five individuals for allegedly importing and selling children’s products containing lead, phthalates and small parts that posed a choking hazard. The CPSC collected over 150 samples of non-compliant children’s products during port inspections and sent dozens of letters notifying the companies of federal standards violations to no avail.

To resolve these claims, the parties entered into consent decrees for permanent injunctions that prohibit the named companies and individuals from importing and selling children’s products until a series of compliance mechanisms are implemented. The compliance mechanisms include (1) establishing a children’s product safety and testing program, (2) hiring a product safety coordinator, (3) having products tested by accredited testing bodies, and (4) submitting to monitoring by the CPSC. The consent decrees are unprecedented given their lengthy and detailed requirements and procedures for these compliance mechanisms. The moral of the story? The red tape exists, but it will be doled out on a case-by-case basis to transgressors.

Third, this month also continued a 2017 trend involving outdoor recreational vehicles. In January, the CPSC published its ATV Annual Report estimating that annually 650 deaths and 100,000 injuries involve ATVs. Since that report, the CPSC has stepped up its focus on all outdoor recreational vehicles, including ATVs, ROVs and snowmobiles. Indeed, outdoor recreational vehicles have been the subject of a staggering 20 recalls so far in 2017, including three recalls during August alone.

Attorneys from Hunton & Williams LLP’s Insurance Coverage practice group weigh in regarding recent insurance coverage cases involving product recall claims:

In Charter Oak Fire Co. v. American Capital Ltd., a federal district court in Maryland ordered an insurer to pay $87 million to a private equity firm for costs incurred by the firm in connection with lawsuits arising from contaminated blood thinner that was subject to a recall in 2008. The dispute centered around whether the portfolio company that produced components used in the contaminated blood thinner was insured under the firm’s commercial general liability policy because the firm held a “majority interest” in the portfolio company. The court construed the ambiguous “majority interest” provision broadly and in favor of the insured, holding that the insurers were required to defend the underlying product recall lawsuits. The American Capital opinion is significant for private equity firms seeking coverage for majority-owned portfolio companies in future recalls.

In the frozen pea forum battle between National Frozen Foods Corporation (“National”) and its insurer, Berkley Assurance Company (discussed in prior posts in March, June and July), a district court ruled that National’s suit could stay in Washington state because Berkley’s forum selection clause was void under a Washington statute barring foreign forum selection clauses for policies issued in the state. In denying Berkley’s motion to dismiss or transfer venue, the court followed prior decisions holding that it was “beyond question” that the Washington Supreme Court would invalidate forum selection clauses like the one in the National policy as contrary to the plain language of the Washington statute. The ruling is a win for Washington policyholders trying to litigate future coverage lawsuits in Washington state.

A motion filed by Steven-Robert Originals, LLC (“SRO”) to intervene in the subrogation lawsuit between two of SRO’s insurers involved in a product contamination dispute was granted as unopposed. As you may recall from our April post, Houston Casualty Company filed an equitable subrogation and unjust enrichment lawsuit against Valley Forge Insurance Company to recover amounts that Houston Casualty had paid to SRO under a Product Contamination Policy for losses sustained in connection with contaminated brownies. SRO filed a motion to intervene, arguing that neither insurer had met its full coverage obligations to SRO under the policies, making resolution of the subrogation lawsuit premature and potentially prejudicial to SRO. SRO also argued that because each insurer-party had not yet fully satisfied its respective payment obligations, the equitable subrogation claim was not ripe for adjudication until the underlying coverage issues presented in SRO’s intervention complaint were resolved. The time to oppose SRO’s motion expired, so the court granted the motion to intervene as unopposed. The suit is Houston Casualty Co, v. Valley Forge Insurance Co. and Steven-Robert Originals, Inc. v. Houston Casualty Co. and Valley Forge Insurance Co.

Total Recalls: 23

Hazards: Fire/Burn/Shock (8); Choke (6); Violation of Flammability Standards (2); Crash (2); Laceration (1); Chemical Exposure (1); Injury (1); Fall (1); Bacteria Exposure (1)

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