Products Liability Law Daily CPSC fails to stick cost-benefit analysis underlying magnet set safety standard
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Monday, November 28, 2016

CPSC fails to stick cost-benefit analysis underlying magnet set safety standard

By Pamela C. Maloney, J.D.

In enacting its final rule restricting the size and strength of rare earth magnets sold by Zen Magnets—effectively banning the sale of these magnets by the company—the Consumer Product Safety Commission (CPSC) failed to conduct an effective cost-benefit analysis as required by the Consumer Product Safety Act (CPSA), the U.S. Court of Appeals for the Tenth Circuit ruled, vacating the magnet set safety standard and remanding it to the agency for further proceedings (Zen Magnets, LLC v. Consumer Product Safety Commission , November 22, 2016, Ebel, D.).

This case involves small, high-powered magnets (magnet sets), also referred to as Small Rare Earth Magnets (SREMs), that users can arrange and rearrange in various geometric designs. The individual components of these magnet sets are unusually small (with diameters of approximately five millimeters) and unusually powerful due to rare earth metal cores (their magnetic flux index ranges from 400 to 500 kGmm) and have been marketed and sold to consumers as desktop trinkets, stress-relief puzzles, and toys, as well as for educational and scientific purposes.

The strength of these magnets poses a grave danger if two or more are ingested. Specifically, they can cause serious intestinal damage when the tissue becomes tightly clamped between the magnets. This danger, which is of particular concern when the magnets are handled by children, came to the attention of the CPSC. In response to injury reports, the agency took a number of regulatory steps to address the danger, beginning with its 2008 toy safety standard which prohibits any product designed, manufactured, or marketed as a plaything for children under 14 years of age from containing a loose magnet that (1) has a flux index greater than 50 kGmm and (2) is small enough to fit within a standardized "small parts cylinder."

In 2011, CPSC stepped up its enforcement efforts, eventually negotiating agreements with 10 of the 13 companies that distributed these magnet sets to cease the importation and distribution of the magnet sets. The Commission staff went on to initiate administrative complaints against the three remaining companies, including Zen.

Final rule. Shortly thereafter, CPSC proposed a new safety standard aimed at regulating the size and strength of all magnet sets. Following the notice and comment period, the agency adopted the proposed rule, thus establishing a new safety standard that extended the size and strength restrictions applicable to all children’s toys under ASTM F963 to magnets marketed, intended, or used for adult entertainment (79 FR 59962, October 3, 2014). As a result, the size and strength limits used in CPSC’s toy standard was extended beyond product intended for children under 14 years of age to all magnet sets that met the following definition: "Any aggregation of separable magnetic objects that is a consumer product intended, marketed or commonly used as a manipulative or construction item for entertainment." In effect, Zen argued, the standard banned the manufacture, importation, distribution or sale of Zen’s high-powered magnet sets.

Federal court proceedings. After finding itself the only remaining importer and distributor of the magnet sets targeted by the final rule, Zen requested judicial review of the final rule in a federal district court in Colorado. According to Zen, it had made every effort to comply with the toy standard by implementing 4-and-under age restrictions and placing warnings on its website and packaging, as well as by imposing sales restrictions on its retail distributors. However, Zen’s magnet sets do not comply with the strength and size restrictions of the final rule. Zen achieved a measure of success when on April 1, 2015, the Tenth Circuit stayed the effective date of the final rule, without giving a reason for its ruling [see Product Liability Law Daily’s April 6, 2015 analysis]. One month later, on May 14, 2015, the district court ordered Zen Magnets, LLC and its owner, Shihan Qu, to stop selling the high-powered magnets that had been recalled [see Product Liability Law Daily’s May 15, 2015 analysis].

Earlier this year, Zen scored another victory when a CPSC administrative law judge determined that not all SREMs, and especially those marketed as Zen Magnets and Neoballs, were a substantial product hazard because the instructions, packaging, and warnings were adequate to apprise U.S. consumers of the risks associated with the product. Furthermore, based on the warnings and manner in which these two products were marketed, they were not toys as defined by the applicable standard. This victory was limited in scope, however, because the ALJ did find that before May 2010, some of these products were sold without warnings and, therefore, he ordered Zen Magnets to institute a corrective action plan with regard to magnet sets sold before 2010 [see Product Liability Law Daily’s March 29, 2016 analysis].

Cost-benefit analysis. The CPSA establishes a two-step process for promulgating a safety standard. First, the agency must consider and make appropriate findings regarding the social and economic costs and benefits of the rule. Second, the agency must balance the costs and benefits identified in its finding to determine whether a safety standard is justified. In this case, CPSC’s rulemaking analysis failed at the first step—the initial cost and benefit findings. Specifically, CPSC’s analysis neglected to address critical ambiguities and complexities in the data underpinning its findings as to (1) the degree of the risk of injury caused by magnet sets, and (2) the public’s need for the sets and the rule’s effect on their utility and availability.

Degree of risk findings. With regard to CPSC’s findings on the degree of risk posed by magnet sets, the court explained that the January 2009 through June 2012 data set used by CPSC did not reflect the subsequent significant changes in the number of injuries triggered by the agency’s compliance activities which began in May 2012. As a result of these activities, sales of magnet sets dropped and injuries associated with ingestion of individual magnets declined. According to CPSC’s own calculations, regarding the 18 months following June 2012, the estimated number of emergency room visits due to magnet sets dropped by about 100 incidents a year. However, CPCS’s benefits findings did not adequately account for the reduced injury rate as a result of its enforcement of the existing toy safety standard. The court admonished that an agency could not simply ignore, without analysis, important data trends reflected in the record. The court also took issue with CPSC’s reliance on imprecise injury report narratives, finding that according to the agency itself, 90 percent of the reports on which it relied only "possibly" involved the magnets at issue. Although the Tenth Circuit refused to decide what an acceptable degree of uncertainty in a benefits finding might be it expressed its confidence that the mere possibility cited by CPSC in this case fell short of the appropriate standard.

Public need for magnet sets. The court also found CPSC’s evaluation of the costs to consumers to be incomplete, although the court did acknowledge that the agency’s evaluation of the costs of the rule to magnet distributors was adequate. Specifically, CPSC failed to address the public’s need for magnets sets as scientific and mathematics education and research tools and the rule’s probable effect on the availability and usefulness of the magnet sets for these purposes. Admitting that this task might be difficult, the court stated that CPSC abdicated its responsibility to assess the demand for and usefulness of magnet sets as research and teaching tools and that the agency’s evaluation of this need, could not accurately evaluate whether the cost of the lost utility was, in fact, outweighed by the rule’s benefits.

Dissent. Writing in dissent, Judge Robert Bacharach found that CPSC’s findings on both the unreasonable risk of injury and the reasonable necessity for the rule supported its issuance of the final rule. Contrary to the majority’s findings, the empirical data relied on by the agency was not limited to imprecise injury report narratives that established only a possibility that 90 percent of the incidents involved covered magnets. In addition to that data, CPSC relied on three other sources of information, including (1) a survey of doctors which showed a sharp increase in injuries caused by ingestion of magnets from 2008 to 2013; (2) the results of a study which concluded incidents had spiked in 2009 when the magnet sets became popular; and (3) comments by medical experts who regarded the statistical data as a serious "under estimation." These sources, combined with studies showing that many children were unlikely to appreciate the dangers from ingesting these magnets provided a sufficient basis for CPSC’s finding of an unreasonable risk of injury. Bacharach also suggested the Zen downplayed the risk of injury by comparing it to harmless items like balloons.

In response to Zen’s argument that the rule’s effective ban on its magnet sets was excessive in light of the risk of injury, Judge Bacharach wrote that the Commission acted reasonably in classifying the rule not as a ban but as a safety standard in that it set performance requirements. This determination by a federal agency was entitled to judicial deference under a Chevronanalysis.

Judge Bacharach also pointed out that he would not have reached the data set time frame argument because during the notice and comment period, no one took issue with CPSC’s choice of the January 2009 to January 2012 timeframe. Further, he explained that the agency had acknowledged the decline in injuries, citing its enforcement activities as a reason for the decline, but stressing how the market would operate absent agency intervention. This rationale was not obviously defective according to Bacharach.

He also disagreed with the majority’s finding that the final rule did not adequately address the magnets’ usefulness for education, research, and art. The rule specifically covered only separable magnetic objects marketed for entertainment, thereby excluding less powerful magnets included in science kits and those that serve industrial and commercial needs.

The case is No. 14-9610.

Attorneys: David Curt Japha (Law Offices of David C. Japha, PC) for Zen Magnets, LLC. Andrew Clark, U.S. Department of Justice, for the CPSC.

Companies: Zen Magnets, LLC

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