Hunton Retail Law Resource

June commenced with another massive civil penalty. A manufacturer agreed to pay a $5.2 million civil penalty and maintain a compliance program for allegedly failing to immediately report defective floorboards in recreational off-highway vehicles. In a three-year period, the manufacturer received over 400 reports of floorboards cracking or breaking in one vehicle model and over 150 similar reports in two other models. Once the manufacturer filed its report, it allegedly underreported the number of floorboard incidents associated with one model and failed to identify altogether the floorboard incidents associated with the two other models. These omissions, according to CPSC staff, constituted a material misrepresentation. The CPSC accepted the settlement by a 4-to-1 vote.

This is the third multimillion dollar civil penalty of 2017. We previously reported on the ones in February for $5.8 million and in April for $4.65 million. At halfway through the calendar year, the CPSC is on track to match its 2016 record of six multimillion dollar civil penalties. Will the CPSC’s leadership change paired with a Commissioner’s term expiration this year shake up the frequency and amount of civil penalties in the future? We will continue monitoring and reporting on trends with CPSC civil penalties.

June experienced only 18 recalls—a dramatic drop compared to the last few months. Nevertheless, those recalls did reveal a few interesting trends. First, the furniture tip-over saga continues this month with a new recall plus an expanded recall. Manufacturers have struggled to deal with this problem and its negative publicity over the past year. Second, three recalls involved clothing manufactured in China that failed to meet flammability standards. Perhaps this trend foreshadows that the CPSC will pivot its regulatory priorities to the enforcement of flammability standards. Third, we observed last month that fidget spinners—a viral children’s toy—made headlines for choking-related dangers but had not been the subject of any recalls. This month, there were no recalls for fidget spinners either but the negative headlines continue. Now, reports have emerged that bluetooth-enabled fidget spinners recently burst into flames while charging. Fidget spinners with an electronic component could create the next wave of recalls similar to hoverboards.

Attorneys Syed Ahmad and Jennifer White of Hunton & Williams LLP’s Insurance Coverage practice group weigh in regarding a few noteworthy decisions on insurance coverage for product recalls in June:

In National Frozen Foods Corp. v. Berkley Assurance Co., the insurer moved to dismiss the complaint filed by the insured frozen-food company on the basis of a forum selection clause in the policy. We previously reported on this case in the Recall Roundup: March. In this coverage dispute, the insured frozen-food company seeks coverage for costs arising out of a recall of frozen peas that tested positive for listeria, while Berkley Assurance seeks to have the policy rescinded due to alleged misrepresentations in the policy application. Specifically, Berkley Assurance claims that National Frozen Foods failed to disclose a prior, customer-initiated recall of green beans that had listeria contamination. According to Berkley, the policy has a valid forum selection clause that requires the parties to bring all claims and disputes for adjudication in New York. As a result, the insurer seeks to have the action dismissed, or in the alternative, transferred to the Southern District of New York. The court has yet to rule on this motion.

In Lexington Insurance Co. v. Wm. E. Martin & Sons, Inc., the insurance company, as the subrogee of its insured, Goya Foods, Inc., filed suit against a spice wholesaler for losses arising out of a recall of cumin contaminated with peanut protein. Goya had a Contaminated Products insurance policy that provided coverage for the cumin recall. Under the terms of the policy, the insurer paid Goya over $2.6 million for losses related to the cumin recall, then asserted its subrogation right to ‘stand in the shoes’ of its insured and pursue claims against the spice wholesaler. The insurer has asserted causes of action for strict liability, negligence, negligence per se, breach of contract for a third-party beneficiary, breach of warranty and unfair trade practices. No judgment has been entered in this case.

In Sentinel Insurance Company, Ltd. v. Tropical Smoothie Cafe, LLC, the insurer filed suit against its insured, Tropical Smoothie, in November of 2016, and sought rescission of its policies on the basis of material misrepresentations made in the policy application. We previously reported on this case in the Recall Roundup: March. After Tropical Smoothie received multiple claims from people alleging that they suffered exposure to Hepatitis A contained in food purchased from Tropical Smoothie, the insurer alleged that in its policy application, Tropical Smoothie represented that it was a franchisee, and had only two offices, as well as annual revenue of approximately $500,000. According to the insurer, Tropical Smoothie was in reality the national franchisor, with over 500 franchise locations and annual revenues exceeding $200 million. Tropical Smoothie filed a third-party complaint against its insurance broker, arguing that if its policy application contained any material misrepresentations or omissions, they were made “solely and exclusively” by its insurance broker, and asserting causes of action for indemnity, negligence, breach of fiduciary duty, breach of contract and contribution, among others. At the end of June, the broker filed its answer to Tropical Smoothie’s third-party complaint, denying the allegations contained therein. To date, no judgment has been entered in this case.

Total Recalls: 18

Hazards: Fall (5); Fire/Burn/Shock (4); Failure to Meet Flammability Standards (3); Impact (2); Choke (2); Tip-Over (1); Strangulation (1)

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