CPSC Enforcement Action Against Michaels Highlights Importance of Proper Reporting

By Elliot Belilos

The U.S. Consumer Product Safety Commission (CPSC) recently filed an action in federal court against Michaels Stores, Inc., seeking civil penalties for allegedly untimely reporting injuries from a vase sold in the stores and, notably, for allegedly falsely reporting the incidents as a retailer rather than as the manufacturer of the product.  According to the Complaint, Michaels misrepresented to the Agency the company’s role in the distribution chain, allowing another company, The Gerson Company (“Gerson”) to report as the manufacturer even though Michaels was the importer of record (and, as a result, the statutory “manufacturer”).

CSPC asserts that Michaels engaged Gerson to contract to have the vase made overseas exclusively for Michaels, but that Michaels was the importer of record, a fact that CPSC alleges Michaels withheld from the Agency in its 15(b) report.  CPSC asserts that Michaels purposefully withheld that information so that Gerson would be the recalling entity, and that the recall would have been more successful had the more well known Michaels been the recalling entity.

This case bears watching as it moves forward.  Certainly companies that are importers of record for products manufactured overseas need to understand that they are deemed to be the manufacturer of those products under the Consumer Product Safety Act (CPSA), and that any report to the CPSC should properly reflect their role in the distribution chain.

Elliot Belilos represents companies on consumer product safety compliance issues, including reporting obligations to the CPSC and corrective actions, up to and including recalls.  Elliot can be reached at ebelilos@ofwlaw.com.

Spotlight on Compliance of Wood Products

By Elliot Belilos

In the wake of the recent 60 Minutes piece that highlighted alleged elevated formaldehyde in the Chinese-made wood flooring imported by Lumber Liquidators, all manufacturers and importers of consumer products containing compressed wood need to ensure that their products comply with the California Air Resources Board (CARB) limits regarding formaldehyde emissions.  And while the formaldehyde limits now only apply to products sold in California, those limits are soon to become the law nationwide, as EPA is finalizing regulations (expected by the end of the year) that largely parallel the CARB regulations.  The EPA regulations are being promulgated under 2013 amendments to the Toxic Substances Control Act.  All consumer goods that contain hardwood plywood (HWPW), particleboard (PB), medium density fiberboard (MDF) are affected.

Reasonable Prudent Precautions

For importers of HWPW, PB and MDF and finished products containing these materials, the Airborne Toxic Control Measures (ATCM) imposes no obligation to test, but importers must take “reasonable prudent precautions” to ensure that the products are compliant, which at a minimum, requires the importer to instruct (in writing) each supplier that the goods it supplies to the importer comply with the applicable emission standards, and obtain written documentation from each supplier that this is so. ATCM § 93120.6(b). In addition to certification from the supplier that all composite wood components are CARB 2 compliant, it would be advisable to require suppliers of products with composite wood components to provide copies of test reports that demonstrate CARB 2 compliance. Since the manufacturer is required to test for CARB 2 compliance, those test reports should be available – if not available, that should at least raise a red flag.

Recordkeeping Requirements

Importers of finished goods containing composite wood components must maintain records showing the date of purchase and the supplier of each shipment of goods containing HWPW, PB or MDF and document the precautions taken to ensure that the composite wood in the finished goods comply with applicable emission standards. These records must be kept in electronic of hard copy form for a minimum of two years and provided to CARB or local air district personnel upon request. ATCM § 93120.6(b).

Statement of Compliance

For each composite wood product or finished good made with composite wood, the importer must state on the bill of lading or invoice that the composite wood products or components comply with the CARB 2 emission standards.

Facility Inspections

Importers may be inspected by CARB or local air district personnel. In the course of an inspection, the importer may be subject to a records audit and product sampling.

Verification Testing

As noted above, there is no requirement that importers conduct independent testing of composite wood components of finished goods. Nonetheless, an importer of composite wood products or finished goods with composite wood components is still at risk for penalties even if it takes the “reasonable prudent precautions” described above. Those reasonable prudent precautions may serve to mitigate penalties levied by CARB, but penalties could still be levied if CARB were to determine that the composite wood is not compliant despite the certification and test reports provided by the supplier.  As a result, it may help to further mitigate potential liability to conduct some independent testing to confirm compliance.

In addition to the potential liability Lumber Liquidators is facing regarding alleged CARB emissions noncompliance, the Justice Department recently announced that it is investigating whether the Company violated the Lacey Act by importing endangered species of wood and the U.S. Consumer Product Safety Commission (CPSC) is investigating whether the Company’s products run afoul of CPSC regulations.

If you are a manufacturer or importer of consumer products that contain wood, it is important that you understand the laws and regulations that affect your products.  In the wake of the investigations surrounding Lumber Liquidators, your products are in the regulatory spotlight.

Elliot Belilos represents companies in the areas of product safety and compliance.  You can reach him at ebelilos@ofwlaw.com.

Medical Devices, Pharmaceuticals and Food Products as Consumer Products – Additional U.S. and Canadian Regulatory Considerations

A Webinar Presented by OFW Law and Davis, LLP

November 12, 2014, 1:00 p.m. EST

During this webinar, attendees will learn about additional regulatory requirements placed on medical devices, pharmaceuticals, and food products as consumer products in the U.S. and Canada. Topics will include, among others:

  • A general understanding of the interplay of obligations at the Federal and state/province levels in the U.S. and Canada
  • Additional labeling and advertisement requirements as consumer products
  • Additional reporting requirements in the U.S. and post-market recordkeeping requirements in Canada
  • Certification requirements under the U.S. Consumer Product Safety Improvement Act
  • The management of crises relating to medical devices, drugs and food products as consumer products in the U.S. and Canada and knowing when, how and why to recall products

The webinar will be approximately 40 minutes long with a Q and A session at the end. There is no cost to attend this webinar, but space is limited.

To register for the webinar, please go to http://www.cvent.com/d/14qf66.

About the presenters:

Elliot Belilos is of counsel to OFW Law and has more than eighteen years of regulatory and litigation experience representing corporations and associations in consumer product-related matters. Elliot counsels companies on product liability and regulatory compliance issues under the Consumer Product Safety Improvement Act, the Consumer Product Safety Act, the Federal Hazardous Substances Act, the Flammable Fabrics Act, the Poison Prevention Packaging Act, the Federal Food, Drug, and Cosmetic Act, and the Federal Insecticide, Fungicide and Rodenticde Act.

Sara Zborovski is a partner in Davis LLP’s Toronto office and is a member of firm’s Life Sciences, Food and Beverage and Intellectual Property Groups. Sara works with clients to get products from idea to market, providing strategic advice on approval and marketing strategies and intellectual property issues. She also works with clients on matters relating to product safety, including Health Canada inspections and enforcement, crisis management and product recalls.

For Drought-Hit Farmers, USDA’s Federal Crop Insurance Can Help, But Only If You Understand the Rules

By Kenneth D. Ackerman and Elliot Belilos

The severe drought that had plagued the American Southwest over the past three years – the worst in modern memory – has taken a toll on many local businesses, taxpayers, and homeowners, but among its worst casualties have been American farm producers.

USDA’s Federal crop insurance program, run by the Federal Crop Insurance Corporation (FCIC), was created by Congress during the 1930s dust bowl to help farmers in exactly this situation.  FCIC crop insurance pays farmers indemnities for drought-related losses in many forms, from direct crop damage to failure of irrigation systems to prevented planting, so long as the damage actually stems directly from the inadequate rainfall.

But FCIC coverage has limits, and it’s vital for farmers to know them in advance.  For instance, farmers using irrigation systems can qualify for better coverage than those who do not.  Irrigated farmers benefit from higher yields, and thus higher insurance yield guarantees based on their actual production history (APH).   Even here, though, there are limits.  FCIC rules require that, for a farmer to claim an irrigated “practice,” he must be able to prove a “reasonable expectation” of adequate irrigation water at the time he plants the crop.  If not, coverage can be denied, even if the problem is not discovered until after the fact.

Usually, this rule works smoothly.  It was designed to prevent farmers from planting a crop when they knew that their irrigation system would likely be turned off during the coming year – a situation that exists today in many Southwest states.  Most irrigation systems are fed by waters from melting snowpack or state-regulated aqueducts, so farmers can have plenty of advance notice if the system is likely to fail.

This is not always the case, though.  In Southwest Oklahoma, for instance, over 200 cotton farmers depend on annual irrigation water from Lake Altus, a lake fed by rainfall that historically comes during the growing season – not beforehand.  As a result, applying the rule to them can create confusion.  On one hand, these growers have 68 years of detailed historical records showing that annual post-planting rainfalls are consistent and reliable.  But, on the other, the technical FCIC rule itself appears to require virtual certainly.  It says: “If you know or had reason to know that your water may be reduced before coverage begins, no reasonable expectation exists.”

Can any farmer in this situation actually meet this test, regardless of how reliable his irrigation has been historically?  Can he flatly say at the time he plants a crop that there is no hypothetical “reason to know” that his irrigation water conceivably “may be reduced” at some point in the future?  No one can predict the weather with certainty.  This is why we have insurance.

As a result, in 2013, when these 200 cotton growers in Southwest Oklahoma suffered drought losses and filed claims with the four insurance companies that service their region for FCIC,  they were greeted with a range of responses.   Only two of the companies (those with the smallest number of policies) paid relatively quickly.  The company with the lion’s share of policies declined to pay at all, and the final company paid several months after the loss, and then only with a caveat that the indemnities might need to be returned.  (We represented the growers whose policies had been denied.)

Ultimately, FCIC took the view that each individual insurance company was responsible for determining for itself whether “reasonable expectation” of rainfall existed, and stated that it would support each company in its decision.  This allowed for claims to be settled, but the underlying issues remain open for 2014.

RMA has already indicated plans to clarify the “reasonable expectation” rule, and we strongly encourage it to do so.  But as drought continues to worsen in the Southwest through 2014, the principal duty is on farmers to understand the rules and follow them.

For questions about FCIC drought coverage, or crop insurance generally, please feel free to contact us here at OFW Law.

U.S. Supreme Court Extends Sarbanes-Oxley Whistleblower Protection to Employees of Privately-Held Companies

By Elliot Belilos

On March 4, 2014, the U.S. Supreme Court ruled in Lawson v. FMR LLC, No. 12-3 that “whistleblower” protection under the Sarbanes-Oxley Act of 2002 extends to the employees of a public company’s private contractors and subcontractors.

The Sarbanes-Oxley Act was enacted in the wake of the Enron scandal largely to protect investors in public companies and to restore trust in financial markets.  Among other things, Sarbanes-Oxley protects “whistleblowers,” providing that: “No [public] company…or any…contractor [or] subcontractor…of such company, may discharge, demote…[or] discriminate against an employee in the terms and conditions of employment because of [whistleblowing activity].” 18 U.S.C. § 1514A (a).  There are other Sarbanes-Oxley provisions, however, that directly affect more than simply public companies, notably changes to the criminal code enhancing penalties for all mail and wire fraud.

The extent to which Sarbanes-Oxley governs private companies continues to develop.  In Lawson, the plaintiffs, former employees of a private company that contracted with publicly-traded mutual funds, alleged that their employer, FMR LLC, retaliated against them for reporting alleged fraud by an FMR client.  The district court rejected FMR’s argument that the Sarbanes-Oxley protects only employees of public companies. On appeal, a divided panel of the First Circuit reversed, finding that while FMR was a contractor under § 1514A, that provision only protected public company employees.

The Supreme Court reversed in a 6-3 decision, holding that “§ 1514A extends whistleblower protection to employees of privately held contractors who perform work for public companies.”   The Court found that “clear from the legislative record is Congress’ understanding that outside professionals bear significant responsibility for reporting fraud by the public companies with whom they contract, and that fear of retaliation was the primary deterrent to such reporting by the employees of Enron’s contractors.”

Justice Ginsburg delivered the opinion of the Court, in which Chief Justice Roberts and Justices Breyer and Kagan joined. Justice Scalia, joined by Justice Thomas, filed an opinion concurring in principal part and concurring in the judgment. And Justice Sotomayor filed a dissenting opinion, in which Justices Kennedy and Alito joined.

Following the Lawson decision, privately held companies should carefully review their policies to ensure that they protect employees from retaliation for the reporting of fraud or other dishonest behavior by their customers and clients, especially customers and clients that are public companies.

OSHA Interim Final Rule Outlines New Whistleblower Protections for Food Company Employees

By Robert A. Hahn and Elliot Belilos

Does your Company have an up-to-date Whistleblower Protection Policy?  The answer to that question has become all the more important for food-related companies in light of a new interim final rule that the Occupational Safety and Health Administration (OSHA)  has issued for handling allegations by employees who believe companies illegally retaliated against them for reporting violations of the Food Safety Modernization Act (FSMA). 79 Fed. Reg. 8619 (Feb. 13, 2014).

Section 402 of FSMA added Section 1012 to the Federal Food, Drug, and Cosmetic Act (FD&C Act) (21 U.S.C. § 399d), which protects employee whistleblowers against retaliation by any entity engaged in the manufacture, processing, packing, transporting, distribution, reception, holding, or importation of food.

The Secretary of Labor has delegated responsibility for handling complaints of prohibited retaliation to OSHA’s Assistant Secretary for Occupational Safety and Health.  OSHA enforces the whistleblower provisions of the Occupational Safety and Health Act and many other statutes protecting employees in a variety of industries from retaliation for whistleblowing.

The OSHA interim final rule sets forth detailed procedures for the submission, investigation, adjudication, and appeal of complaints of retaliation.  Significant aspects of the interim final rule include the following:

Food company employees are now protected against retaliation because the employee (or any other person acting at the request of the employee) engaged in any of the following “protected activities”:

  • Provided, caused to be provided, or are about to provide to their employer, the federal government, or a state attorney general information relating to any violation of, or any act the employee reasonably believes to be a violation of, any provision of the FD&C Act or any order, rule, regulation, standard, or ban under the FD&C Act;
  • Testified or is about to testify in a proceeding concerning such violation;
  • Assisted or participated, or is about to assist or participate, in such a proceeding; or
  • Objected to, or refused to participate in, any activity, policy, practice, or assigned task that the employee reasonably believed to be in violation of any provision of the FD&C Act or any order, rule, regulation, standard, or ban under the FD&C Act.

The employee’s whistleblower activity is protected if it is based on a “reasonable belief” that the law has been violated.  To have a reasonable belief, an employee “must have both a subjective, good faith belief and an objectively reasonable belief that the complained-of conduct violated the FD&C Act or any order, rule, regulation, standard, or ban under the FD&C Act.”  79 Fed. Reg. at 8621.  An objectively reasonable belief is a belief based on the knowledge available to a reasonable person in the same circumstances with the same training and experience.  The employee is not required to show that the conduct complained of constituted an actual violation of law.

Prohibited retaliation includes:

  • Discharging the employee;
  • Other forms of retaliation including, but not limited to, intimidating, threatening, restraining, coercing, blacklisting, or disciplining any employee with respect to the employee’s compensation, terms, conditions, or privileges of employment.

To make out a prima facie case, the employee need only show that the protected activity was a “contributing factor” leading to the retaliation, i.e., that it was one factor that affected the employer’s decision to retaliate.

  • There is no particular form for complaints of retaliation, and OSHA will accept both oral and written complaints.  If the employee/complainant is unable to file the complaint in English, OSHA will accept the complaint in any language.
  • The complaint must be filed within 180 days after the alleged retaliation.  The time for filing may be tolled for reasons warranted by applicable case law (e.g., the employee mistakenly filed the complaint with the wrong government agency).
  • Upon receipt of a complaint, OSHA will notify the employer/respondent, as well as the Food and Drug Administration.
  • If the employer demonstrates, by clear and convincing evidence, that it would have taken the adverse action, i.e., the allegedly retaliatory action, even in the absence of the protected activity, OSHA will terminate its investigation.
  • “Food,” for purposes of whistleblower protection, is defined as it is defined in the FD&C Act (i.e., “articles used for food or drink for man or other animals, chewing gum, and articles used for components of any such article”).
  • Whistleblower protection may not be waived by any agreement, policy, form, or condition of employment.

The interim final rule became effective immediately upon publication.  OSHA is accepting comments and additional materials if submitted by April 14, 2014.

The existence of a Whistleblower Protection Policy, and adequate training on the provisions of that Policy to all employees, can be an important element of a defense to whistleblower claims.  If you have questions about whether your policy or employee training is adequate, it would be advisable to review that with your legal counsel.

OFW Law Wins Arbitration Decision Against Major Crop Insurance Company – Federal Agency Not Always Entitled to Deference in Interpretation of Its Rules

By Kenneth D. Ackerman and Elliot Belilos

OFW Law recently prevailed in Arbitration on behalf of a farm producer against a major insurance provider under USDA’s Federal crop insurance program.  The case hinged on whether a foreign individual with an ownership interest several layers removed from the insured held a “substantial beneficial interest” (“SBI”) as defined in USDA Risk Management Agency (RMA) rules.  OFW argued that the plain meaning of the term SBI, as consistently understood by the regulated community prior to this case, only required disclosure on the policy application of one tier of ownership above the farm itself.

OFW further argued that, even if the term SBI were ambiguous, the definition must be read in favor of the insured.  The insurance company had argued that the definition was ambiguous and RMA’s interpretation was entitled to deference by the Arbitrator.  Finally, OFW argued that the insurance provider made assurances to the ranch with respect to its eligibility to obtain crop insurance, and the insured reasonably relied on those assurances to its detriment.  The Arbitrator agreed with OFW on all three counts.

The issue arose when RMA, in a Compliance Finding, pronounced a new interpretation of SBI, requiring for the first time that an insured must report SBI information (SSN or EIN) on its insurance application of “embedded entities” – owners far removed but with greater than a ten percent ultimate interest in the insured.  The insurance company initially challenged that determination, but ultimately settled its dispute with RMA and declared the customer ineligible for indemnities.

Key to the insured customer’s victory was the Arbitrator’s reliance on the U.S. Supreme Court’s decision in Christopher v. SmithKline Beecham Corp.  In Christopher, the Court recognized that a Federal Agency is normally entitled to deference in the interpretation of its own regulations, but noted that an Agency is not to be afforded deference when the interpretation is inconsistent with prior Agency interpretations and is simply designed to fit conveniently a litigation position.  The Arbitrator ruled that RMA conveniently changed its interpretation of SBI to fit the facts in the case at hand.

A copy of the Arbitration decision (with the names of the parties and individuals involved changed) can be accessed here.

CPSC Proposes to Make Voluntary Recalls and Compliance Programs Legally Binding

By Elliot Belilos

On November 13, 2013, the U.S. Consumer Product Safety Commission (CPSC) issued a proposed interpretive rule concerning corrective action plans for “voluntary” recalls that may impact future voluntary consumer product recalls in two significant ways.   First, CPSC proposes to make voluntary recall agreements that companies negotiate with CPSC legally binding.  Second, CPSC proposes to permit the staff to require ongoing compliance programs as a component of such agreements.

Legally Binding Voluntary Recalls: Under the current regulation (16 C.F.R. § 1115.20(a)), voluntary corrective action plans – which identify the remedial actions a company intends to take, up to and including a product recall – have no legally binding effect.  The proposed rule would make such corrective action plans binding, allowing the CPSC to go to federal court to enforce the terms of the agreement.

Compliance Programs: The proposed rule would also allow staff to insist that voluntary recall agreements require companies maintain ongoing compliance programs, defining the terms of such compliance programs such as levels and frequency of internal and third-party testing.  The proposed rule provides examples of circumstances that might warrant a compliance program, as well as examples of requirements that may be included in a compliance program. The proposed rule also sets forth enforcement measures CPSC may take to remedy violations, including seeking injunctive relief, specific performance, and sanctions.

Since the proposal was issued, there has been considerable debate in the product safety community as to (1) whether the CPSC has the authority to issue this rule as proposed, and (2)  whether the proposal, if implemented, would create a deterrence for companies to come forward and propose a voluntary recall and/or slow down the recall process.

Comments on the proposed rule may be submitted to CPSC by February 4, 2014.

For more information on how this proposal may impact your company, please contact me at 202-518-6358 or ebelilos@ofwlaw.com.