By Leah S. Poniatowski, J.D.
Court’s order to engage an outside consultant was a reasonable clarification to ensure compliance with product safety laws, and the statute of limitations was not run out by company’s delay in reporting the defect.
A company hit with civil fines and a permanent injunction for violating consumer product safety laws failed to show that the statute of limitations had passed by virtue of it not complying with federal reporting requirements or that the modification to engage with an outside consultant as part of the clarification of the permanent injunction imposed was in error, the U.S. Court of Appeals for the Seventh Circuit ruled, affirming the lower court (U.S. v. Spectrum Brands, Inc., May 9, 2019, Rovner, I.).
Spectrum Brands, through its subsidiary, sold and distributed the Black & Decker SpaceMaker coffeemaker. Beginning in 2009, its customer call center began receiving consumer complaints pertaining to the carafe handle, the failure of which in one instance led to a consumer being burned from the coffee. Spectrum internally investigated the matter after several months of consistent complaints and modified the design. However, the company did not stop selling the prior design. The complaints regarding the carafe handle did not abate, totaling over 300 by the end of 2009.
During this period, the Consumer Product Safety Commission (CPSC) had received a report about the handle and notified Spectrum, reminding the company of its legal obligation under section 15(b) of the Consumer Product Safety Act (CPSA), 15 U.S.C. § 2064(b)(3), to timely report potentially hazardous defects. Spectrum did not file any reports with the CPSC. In the following two years more complaints accumulated but Spectrum took no action. Finally, in April 2012, Spectrum filed a 15(b) report and a recall was issued three months later. Inventory control issues further complicated the recall, prompting a second recall.
Government suit. The federal government filed a civil lawsuit against Spectrum in 2015, alleging that the company knowingly violated the CPSA by not reporting the defective coffeemakers and violating the Act by selling recalled coffeemakers. As a consequence, the government sought a civil monetary penalty and permanent injunction. Spectrum challenged the claims, asserting that the five-year statute of limitations began in 2009 and had expired before the government filed suit, and that the court did not have authority under the CPSA to impose forward-looking injunctive relief.
The court rejected both arguments. First, the court explained that a cause of action does not accrue until a company notifies the CPSC or has knowledge that the CPSC has been informed of the defect. To hold otherwise would motivate companies not to disclose defects until after the statutory time period had elapsed, which is not in line with the goal of the statute to protect the public from harm. Second, the court interpreted the authority to “restrain any violation” of the CPSA to allow injunctions against future violations, and such an injunction was merited by the company’s conduct. The court observed that the company’s policies and practices left doubt that it could effectively comply with the CPSA and related regulations, ordering the company to “maintain sufficient systems, programs, and internal controls to ensure compliance with the CPSA and the regulations enforced by the CPSC” and to “implement appropriate improvements to its compliance programs.” Spectrum sought a partial stay of the judgment, contending that the injunction was too vague.
Modified judgment. The court modified the terms of the injunction by providing six specific measures it expected the company to perform to ensure compliance in addition to requiring the company to engage with an outside consultant to review and recommend changes consistent with the injunction. The government asked the Seventh Circuit to treat the lower court’s decision as an indicative ruling and remand the matter to the lower court to re-enter the injunction as modified out of concern that the obligation to engage an outside consultant exceeded the court’s authority. The Seventh Circuit agreed, and the lower court re-entered the injunction as modified [see Product Liability Law Daily’s April 10, 2018 analysis]. Spectrum filed the present appeal.
Statute of limitations. The appellate court held that under the continuing violation theory, the statute of limitations did not commence until Spectrum filed with the CPSC, making the government’s lawsuit timely. Case law supports this conclusion that the limitations period does not begin to run when an action on the violation could be filed but when the course of illegal conduct is complete. The language of section 15(b) is clear that a failure to report a defect is a wrong that continues beyond a company’s initial failure to report. The “immediate” reporting requirement of 24-hours has no impact on the limitations period when the defective product still presents a danger to the public through sale or use.
Moreover, Spectrum showed its failure to report was a continuing violation by virtue of the consistency and number of complaints made. By 2012, the company had received over 1,600 customer complaints, which the court described as “a fresh opportunity and obligation to consider the potentially hazardous nature of its product and to reassess its reporting obligation.”
Permanent injunction. As an initial matter, the Seventh Circuit held that the CPSA authorizes forward-looking injunctive relief because section 22(a) of the Act authorizes a district court to “[r]estrain any violation of section 2068 of this title” (15 U.S.C. § 2071(a)(1)), and case law clarifies that “any” can be broadly construed to permit inclusion of prospective violations.
The appellate court also explained that the lower court did not abuse its discretion when it imposed injunctive relief. The government met its burden of proof to show that there was a reasonable likelihood of a future violation. Spectrum characterized its violation as an “isolated occurrence,” but this is inaccurate in light of the regular complaints and its continued sale of the defective product after the recall issued. The company showed to suffer from serious and systemic issues, principally communication failures within the company, the failure to meaningfully confront the situation, the absence of systems to keep recalled products from distribution, and the failure to train staff in compliance with the CPSA.
The appellate court stated that the lower court “justifiably concluded that there was a reasonable likelihood that Spectrum might again commit similar violations of the statute in the future.” Although the company has begun to implement measures designed to modify its corporate culture, it had not submitted to an independent audit nor was there evidence of how effective its changes would be.
Finally, the order requiring the company to hire an independent auditor was not an abuse of discretion because it was within the court’s power to modify its order in response to Spectrum’s argument that the initial order was too vague. Provisions vis-à-vis outside consultant engagements are commonly included in consent decrees, the appellate court noted, adding that it was reasonable in light of the significant and prolonged issues plaguing the company and its own concern about how to properly comply with the order. Therefore, the lower court’s judgment was affirmed.
The case is No. 18-1785.
Attorneys: Gerard Sinzdak, U.S. Department of Justice, for the United States. Erika Z. Jones (Mayer Brown LLP) and Timothy L. Mullin, Jr. (Miles & Stockbridge PC) for Spectrum Brands, Inc.
Companies: Spectrum Brands, Inc.
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