On March 2, 2010, the Consumer Product Safety Commission (“CPSC” or “Commission”) announced a settlement agreement with Daiso Holding USA Inc., Daiso Seattle LLC, Daiso California LLC, and one of the companies’ officers (collectively, “Daiso”). The consent decree, filed by the Department of Justice on behalf of the CPSC, requires Daiso to pay a $2.05 million civil penalty and prohibits the company from importing, selling, or distributing children’s products and toys in the United States unless Daiso satisfies numerous requirements regarding product evaluation and incident review. The CPSC alleges that Daiso violated the Consumer Product Safety Act (“CPSA”), the Federal Hazardous Substances Act (“FHSA”), and the Consumer Product Safety Improvement Act (“CPSIA”) by importing, distributing, and selling toys with illegal levels of lead, lead paint, and phthalates, toys that had small parts intended for children younger than three years old, and products that lacked required warning labels.

Allegations Include Violations of CPSIA’s Lead Content, Lead Paint, Phthalates and Certification Requirements as well as Pre-CPSIA Requirements for Small Parts and Various Warnings

The CPSC began its investigation of Daiso in 2006 when, from November 2006 to November 2008, the CPSC collected Daiso product samples from imports into the United States. The CPSC determined that many of these products violated federal statutes and CPSC regulations. In May 2009, the CPSC conducted a full investigation of Daiso’s California warehouse facilities and discovered dozens of children’s products with similar defects. Further, in November and December 2009, the CPSC collected additional samples of Daiso’s imports and found similar violations. The CPSC has issued Letters of Advice (“LOA”) for all the violations it found since commencing the investigation in 2006.

In its complaint, the CPSC alleged that Daiso:

Violated the CPSA by importing and selling children’s products and toys that contained excess phthalates.
Sold children’s toys and products containing lead-containing paint and other lead substances that are banned hazardous products under the CPSA, FHSA, and CPSC regulations. In August 2009, the lead paint ban was increased to include “lead-containing paint” that contains lead “in excess of 0.009 percent of the weight of the total nonvolatile content of the paint or the weight of the dried paint film.” Under the FHSA, as amended in August 2009, a children’s product may not contain more than 0.003 percent, or 300 parts per million, of lead.
Failed to ensure that its children’s toys and products complied with CPSC children’s product safety rules, as tested by an independent third-party assessment body.
Failed to furnish information to the CPSC that its children’s products failed to comply with applicable consumer product safety rules, even despite receipt of the LOAs.
Failed to comply with FHSA regulations prohibiting children’s products with small parts.
Failed to include required cautionary statements regarding small parts, latex balloons, marbles, and art materials.

In late 2009, the CPSC and Daiso had announced the recall of numerous products that are the subject of the consent decree, including wooden toys, purses and pen cases, stuffed toys, and children’s jewelry.

Consent Decree Restrains Daiso from Importing, Selling, or Distributing Products Until Requirements are Met

In addition to the over $2 million civil penalty, the consent decree requires Daiso to satisfy numerous product safety evaluation and review procedures before it can import, sell, or distribute products.

Among the consent decree requirements, Daiso must retain an independent product safety coordinator, who is approved by the CPSC, to: (1) create a comprehensive product safety program, (2) conduct a product audit of all Daiso’s merchandise to determine testing and certification requirements, (3) create guidance manuals for managers and employees regarding product safety compliance, (4) develop procedures for CPSC compliance and reporting, and (5) establish procedures to conduct product recalls.
Daiso’s comprehensive product safety program must include: (1) reasonable testing procedures that ensure compliance with CPSC regulations, (2) procedures that ensure Daiso complies with all cautionary labeling requirements, (3) assurance that Daiso has adequately corrected product violations cited by the CPSC, and (4) systems to investigate all reports of consumer incidents, property damage, injuries, warranty claims, insurance claims, and court complaints regarding products under the CPSC’s jurisdiction.
Daiso must also recall, at least to the retail level, all defective and non-complying products that they have distributed after January 1, 2010. The recalled items must be destroyed in accordance with all applicable environmental regulations.
Finally, the consent decree restrains the company from directly or indirectly importing or distributing children’s toys or products that violate any laws, standards, or bans enforced by the CPSC.

In agreeing to the consent decree, Daiso did not admit any violation of the law.

An Indicator of Future Enforcement?

In the CPSC’s press release announcing the settlement, Chairman Tenenbaum, noted that “[t]his landmark agreement for an injunction sets a precedent for any firm attempting to distribute hazardous products to our nation’s children.” The Assistant Attorney General for the Justice Department echoed her warning stating, “[c]ompanies that manufacture and distribute toys should be put on notice by the government action today.”

With that warning in mind, companies should consider the following:

With a few exceptions, historically the CPSC imposed civil penalties without injunctive relief, particularly when the penalty was not preceded by the filing of a lawsuit. In this matter, the CPSC obtained extensive injunctive relief in the absence of litigation. This could indicate the Commission’s intent to begin locking companies into future conduct rather than just paying a penalty.
The injunctive relief might be used as a road map of the CPSC’s expectations for manufacturers, distributors, and retailers of consumer products, particularly children’s products. For example, Chairman Tenenbaum also stated in the CPSC’s press release, “This consent decree is an agreement by Daiso to follow best industry practices.”
The Commission alleged that Daiso failed to issue or obtain third-party conformity certificates, as required by the CPSIA. This is the first enforcement action regarding those certificates. Although the CPSC has issued a stay for certain certificate requirements, companies should ensure that they are in compliance for products not covered by the stay.
An officer of the company is a named defendant. Historically, the CPSC named only the company for civil, rather than criminal, penalty proceedings.
The firm had been previously issued Letters of Advice after examinations at ports and inspections revealed violations. Any time a company receives a Letter of Advice, it should carefully review the letter and immediately implement any appropriate changes.
U.S. Customs and Border Protection San Francisco and Seattle area ports assisted in the enforcement action, demonstrating the increased role that Customs is expected to take in CPSC enforcement.
CPSC has typically reached civil penalty settlements through administrative proceedings outside of court. In this matter, the Justice Department, on behalf of CPSC, filed a complaint in federal district court just three days before filing the consent decree. This could indicate the CPSC’s intent to use more aggressive procedural options.

Kelley Drye & Warren LLP

Kelley Drye & Warren’s Consumer Product Safety practice group is experienced in providing advice on the difficult issues of how and when potentially hazardous consumer products must be reported to the CPSC. If product recalls are necessary, we work with our clients and CPSC staff to quickly develop and implement cost-effective communications programs that satisfy product liability concerns and minimize potential penalties. When the CPSC threatens or brings enforcement actions, we advise our clients on appropriate strategies. For more information about this Client Advisory, please contact:

Christie Grymes Thompson
(202) 342-8633
cgthompson@kelleydrye.com

CPSC Announces First Civil Penalty Enforcing CPSIA: Daiso Agrees to Create Product Safety Program, to Audit All Products, and to Pay $2 Million Civil Penalty