Shihan and the Order of the Phoenix

With an apology to J.K. Rowling, I note with some awe that Shihan Qu and Zen Magnets has once again bested the dementors at the CPSC to live another day. Yesterday, the United States District Court for the District of Colorado reversed and remanded the Commission’s Final Decision and Order (FDO) ordering Zen to stop sale of its small rare earth magnets (SREMs).

To review, the CPSC brought an administrative complaint against Zen in 2012 to force a mandatory recall of its SREMs product.  In tandem with this administrative action, in 2014, the Commission finalized a rule banning the future sale of SREMs.  Zen challenged the rule and in 2016, the Tenth Circuit vacated and remanded the rule, finding that the evidence the Commission relied on did not support the rule.

Also in 2016, the Administrative Law Judge in the Zen administrative complaint found that the agency had not proved that the magnets were a hazard when accompanied with proper warnings and allowed Zen to continue sale. The agency lawyers appealed this decision to the Commissioners.  Given the public statements three of the Commissioners had made about the merits of the case, it was no surprise that the Commission overturned the ALJ’s decision and issued the FDO to force Zen to stop sale of its SREMs. Zen appealed this decision, and the court has now ruled in Zen’s favor.

The court’s decision was a curious one.   First, the court considered the substantive rationale offered by the Commission in its FDO and concluded that the agency did not act in an arbitrary and capricious manner—the standard for overturning the agency’s decision.  After an analysis of the Commission’s reasoning, the court found, among other things, that “[T]hough a court might come to a different conclusion if it were in the Commission’s role, that does not render the Commission’s finding arbitrary and capricious.”

However, the court then went on to consider whether the due process afforded Zen met constitutional standards. Here the court found that the Commission fell short, stating that “Zen’s due process rights were violated because Zen was deprived a fair and impartial tribunal” in its appeal from the ALJ’s decision.  Specifically, the court found that the public statements of certain Commissioners prior to the FDO decision demonstrated such a closed mind by decision makers that it was clear that Zen was not provided an impartial tribunal.  The court then, strangely, concludes that while the Commission’s decision was not arbitrary and capricious, it was nevertheless unconstitutionaly tainted by the obvious prejudgment of certain Commissioners. The result is that Zen wins and the CPSC loses.

I will leave to others to debate the nuances of the court’s decision. What bothers me greatly are the safety implications of the CPSC’s actions here.  Zen has made clear from the get-go that it does not oppose reasonable safety regulations of its product.  Indeed, it has petitioned the CPSC to issue a regulation with rigorous requirements for packaging and labeling.  Instead, the agency has petulantly insisted that it will accept nothing less than the complete capitulation of the company to the agency’s demands that it cease sale of its only product.  This insistence has led to repeated “slap-downs” by those judicial bodies that have looked at the issue.

From a safety standpoint, the CPSC’s ineffectual regulatory and litigation strategy has resulted in opening the marketplace to companies who, unlike Zen, have no interest in promoting safe use of SREMs.  Because the agency’s position on both the regulation and the recall of the Zen product have been overruled, the market is now wide open, with no requirements for safety precautions applicable to the product in place.   This result is on the agency.  If any injuries involving this product occur in the future, the agency must look internally for the cause.  Their incoherent policies, in large part, bear the blame.

In 2012, Zen was viewed by most as a small company making a principled but quixotic stand against the overreach of the federal government. Like a phoenix, Zen has prevailed against overwhelming odds.  But, beyond the story of a small company prevailing against the federal government, is the concern that, in this case, the federal government is not effectively protecting the safety of consumers.  Because of the CPSC’s actions, the marketplace is less safe. That is on the agency and they need to answer for this result.

 

 

 

 

 

 

Not Knowing When to Quit

Recently I had the great honor of being appointed a fellow at the University of Pennsylvania Law School.  As part of those responsibilities, last month I spoke to the administrative law class on how regulators balance competing priorities, using the CPSC’s actions on Zen Magnets[1] as one example.

The Zen Magnets case is especially relevant since it dramatically illustrates how regulators, acting in the first instance with the best of intentions, can pursue their regulatory and enforcement goals with such fervor as to distort and pervert the consumer safety objectives central to the agency’s mission.  I have written extensively (see here and here) about the procedural and due process issues that the agency threw to the winds in pursuing Zen Magnets.[2]  As a result of the agency’s zealousness, expansive reading of the statute, and lack of care, it lost the administrative recall case, with the Administrative Law Judge finding, in part, that Zen’s warnings were sufficient and that the agency did not prove that a defect existed. When the related regulation banning all small powerful magnets was challenged, the 10^th Circuit Court of Appeals found that the administrative record showing injury from the product and considering benefits of the product was deficient.

Nevertheless, the battle rages on.  In a move that surprised no one, a majority of the commissioners recently voted to overturn the ALJ’s findings that SREMs are not defective and ordered Zen to immediately stop sale of the product.  The parties agreed to delay the effective date of that stop sale order to allow for an appeal to be filed.

What is especially interesting about the majority’s opinion overturning the ALJ’s decision is its breadth in determining that consumer misuse of the product, standing alone, can form the basis for a product defect determination. However, the regulations do not support this conclusion as clearly as the majority contends.  The regulations discuss consumer misuse in two contexts.  First, the regulations present an example of a defect when product instructions or safety warnings are inadequate and this inadequacy contributes to the misuse of the product. (See 16 USC §1115.4 (d)) Obviously, this is not the situation with Zen Magnets.  Second, the foreseeability of consumer misuse is listed as one factor to be considered and balanced with other appropriate factors in determining whether the risk of injury rises to the level of making the product defective.  (See 16 USC §1115.4)

However, it is a stretch to say that injuries occurring solely from consumer misuse of a product makes a product defective, especially in the presence of strong package warnings.  One need not look very far to find examples of products where the commission has come out the other way.  For example, small button batteries present a similar ingestion hazard to magnets but with even more severe injuries, many more incidents and a number of child deaths.  Yet the commission has determined that package warnings and consumer education adequately address this more significant risk.  Choking hazards from small parts in toys are well-established risks.  Every year children choke on small parts in toys found in the family toy chest.  Yet the commission has determined that package warnings are sufficient for toys designed for children older than three, even knowing that many households have children of varying age groups and that the toy with the small part may be accessible to younger children.

Finally, the commission opinion provides no boundaries that can be applied beyond this case between foreseeable consumer misuse and obviously risky behavior.  The take-away is that if a child is injured, even though the injury occurs because an adult negligently misuses the product or disregards warnings and instructions, then the product may well be deemed defective. The regulations do not necessarily lead to that conclusion but the current commission’s reading of them suggests that.

From a safety standpoint, the problem is that all this has led to a perverse result where safety considerations take a second chair to winning the case.  The CPSC has devoted a significant amount of public resource to forcing Zen Magnets off the market. So far Zen’s record in court is much better than is that of the agency.  With all its guns trained on Zen, the agency has allowed magnets without warnings to enter the country and be sold freely.

Zen has approached the agency to find a solution that would allow magnets to be sold but with aggressive restrictions on packaging, warnings, age restrictions and sales channels. In fact, Zen recently petitioned the CPSC to issue such a regulation.  With little fanfare (and without even notifying the petitioner), the agency has requested comment on the petition and the deadline for comments expires next week.  It almost seems like the agency does not want to hear what the public thinks of this idea.  Yet such a rule may provide the agency with a mechanism for policing the marketplace while still allowing the product to be sold with a strong safety message.

The Zen case is an example of the agency, in its zeal to address a real safety concern, losing sight of the ultimate safety goal.  In terms of regulatory priorities, the agency is putting winning above safety—since on its current course, it may put out of business a company trying to address the safety of its products while it ignores the many other magnet products that are being sold with no warnings or safety information.  In this case, if the agency wins, consumers loose.  It’s time to quit.

 

 

 

[1] Zen is a very small Colorado based company that sells small rare earth magnets (SREMs) primarily on the internet.  Its packaging is difficult to open and the product has multiple warnings of ingestion hazards.

[2] Among other things, the CPSC wrote to magnet retailors urging stop sales prior to negotiating recalls, thereby destroying retail market rather than seeking an injunction against sale as provided by the statute.  Individual commissioners made public statements about the safety of the product prior to voting indicating a predetermination of the issues.  When the agency voted to sue for a recall, the staff amended the complaint to add counts and the company principal without a vote of the Commission.

Such a Tiny Product; Such a Large Issue

On a recent overseas trip, in one of the trendiest shops in one of the trendiest Western European capitals, I saw a display of tiny spherical rare earth magnets (SREM’s) with signs extolling the coolness of the product.  I almost bought up the entire display but thought about the possibility, when I got back to the States, of CPSC investigators confiscating the whole batch and hauling me off as an importer of deadly banned products.  If only I were kidding.

Remember that, here in the U.S., SREM’s were once a very popular product, intended as an adult desk toy or for making remarkable sculptures and art works.  However, if children swallowed the tiny magnets, they could cause serious internal injury.  Therefore, the CPSC set out to force the product off the market–through a series of recalls aimed at individual importers together with strong pressure on retailers not to sell the product. The agency also issued a rule banning the sale of tiny powerful magnets when used as a manipulative.  Only one company—little Zen Magnets in Boulder, CO, whose CEO is not yet 30 years old—refused to knuckle under and decided to fight the government.

This past weekend, in a battle of David v. Goliath proportions, Zen finally got a win.  Here’s what happened.  When Zen refused to voluntarily recall the SREM’s he was importing and selling, the CPSC filed a lawsuit to force a mandatory recall.  A trial was held before an Administrative Law Judge (ALJ) to determine if the magnets, when sold, were defective and constituted a substantial product hazard and therefore must be recalled. After a long trial and much deliberation, the ALJ found what most of us, except the CPSC, already knew:  that ingesting SREM’s can create a risk of injury but that proper use of the magnets pose no threat and that, when sold with appropriate warnings and proper age recommendations, the magnets do not pose a substantial product hazard.  The ALJ rejected the agency’s argument that warnings cannot be effective because the spheres can become separated.  He also rejected the agency argument that the product was so inherently dangerous to children that proper use by adults must give way.  Significantly, this is the first judge to examine the underlying theory of the agency’s actions forcing recalls and he found the agency’s proof to be wanting.

Even though Zen won this battle, it has not won the war. The agency lawyers now have ten days to appeal the ALJ’s decision.  That appeal will be heard and decided by the five members of the CPSC—the same group who voted to sue Zen, who voted to issue the related rule banning the product, and several of whom have made public statements that suggest where they will come out on the appeal.  In other words, Zen doesn’t stand a chance before the Commission.  The Commission’s decision can then be appealed to the appropriate Court of Appeals.   If Zen has the resources and is scrappy enough to continue the fight, it will be a long one indeed.

Solving At Least One Magnet Issue

On a related matter, the Commission has stepped up to address a flaw in its rules governing trials before ALJ’s.  When the agency was trying to force the recall of SREM’s sold under the name “Buckyballs”, and when the company had the “hutzpah” to say “no” to the agency’s demand that it recall its magnet product, the agency voted to sue Buckyballs as well.  After the Commissioners voted to bring the action against the company, the agency staff took it upon itself to expand the complaint to sue the CEO of the company in his personal capacity.  While this case was ultimately settled, the settlement did not address whether the staff acted properly in expanding the complaint without an affirmative vote of the Commission.

The agency is currently updating its rules of practice for adjudicative proceedings and those proposed rules are now out for public comment.  Commissioner Mohorovic was able to get into the proposal – unanimously – an amendment that expressly requires the ALJ to refer to the Commission “any proposed amendment [that] would have the effect of adding or removing any person as a respondent to the complaint or adding or removing any count.” Just in case an ALJ tried to reason in such a way that an amendment that should come to the Commission didn’t actually add a party (by, say, reasoning that the CEO of a company is de facto on the complaint already, so it’s fine to add him by name) and thus could be done without Commission approval, the proposal also creates an interlocutory appeal right for any ruling on an amendment made without a Commission decision.

Admittedly, this language is overly broad since one would not want to capture situations where staff needs to add a DBA, for instance, nor should the agency give an interlocutory appeal for amendments that clearly are within staff’s administrative authority, but, for the handful of times in a decade that the agency actually litigates something, the burden of work from overbreadth seems to be insignificant compared to the risk to Commission authority from being too narrow. The staff’s action with respect to the Buckyballs situation demonstrates the need for this kind of correction.  Since the proposed amendments make a number of other changes to the adjudicative procedures, they should be carefully reviewed and comments provided the agency.

The proposed changes to the agency’s adjudicative proceedings are now out for public comment.  Those who practice before the agency and other interested parties should read them carefully and take the time to comment.  As we have seen from the Zen case, this stuff matters.

Shihan vs Goliath, Addendum

It is nice to know that folks out there read what I write.  When I started this blog I really wanted to have a conversation with people who are impacted by the actions of the CPSC, both positively and otherwise.  In response to my last blog post, I got a response from Shihan Qu, among others, and I thought I would share his comments.

Shihan takes issue with my notion that the magnets rule applies only to magnet sets that are intended to be used as adult desk toys and manipulatives.  He reminds me that the final rule blew a hole through this interpretation when the Commission added the phrase “commonly used” to the definition of magnet set.  The definition states “magnets sets are aggregations of separable magnetic objects that are marketed or commonly used as a manipulative or construction item.”  By expanding the definition this way, all powerful small magnet spheres may well end up within this definition since it is the end user, not the manufacturer, who determines whether the product is regulated or not.  One problem is that US based industrial magnet companies who never considered themselves within the definition may well be in for a nasty surprise if their products fall into the hands of the wrong user.

In response to my observation that magnets are easily available for sale online, Shihan responds, “Indeed you can still purchase magnet spheres easily by searching “neocube” or “buckyball” online. The rest of the companies are based in China, and are not easily targeted by the CPSC like we are. As long as there is demand, there will continue to be suppliers who will provide them. What can the CPSC do about them, if anything?”

Finally, I again emphasize that, in its latest action, the CPSC has targeted Mr. Qu personally, as it did when it went after Craig Zucker, in his individual capacity, in the Buckyballs matter.  It seems that the agency is really prickly when it comes to young entrepreneurs who still think that they can challenge the government.  Oh, when will they grow up?!

However, for those who are not willing to accept the notion that the government is always right, this is a troubling development.  And for CPSC attorneys who represent small companies, best let your clients know that, apparently if you want to fight the CPSC, be prepared to put your entire bank account on the line.

Process is Important

This week’s CPSC Commission briefing on the proposed final rule for high powered magnet sets was as notable for what did not happen as for what did.  As the Chairman explained, Commissioner Buerkle declined to participate in the briefing and in the upcoming vote because she believes that it is inappropriate for the agency to vote on a rulemaking addressing the same issues that are currently before a judge in a litigation to which the agency is a party, and which may come back to the commissioners for further review. How refreshing–a public servant who believes that process is important.

The case is being litigated before an administrative law judge against Zen Magnets, and seeks a recall, alleging that the company’s product is defective because it presents a substantial product hazard–children can sustain serious injuries if they swallow small powerful magnets like those Zen sells as adult desk toys.  Zen is the only company currently selling such a product, according to the agency.  While this case is ongoing, the agency plans to issue a final rule to prevent anyone from selling such a product in the future. (It is currently scheduled to vote on the final rule before the end of the month.)

At the hearing at least one commissioner argued that this two-pronged attack against tiny Zen was appropriate because (i) the statute allows for rules to be issued only on a prospective basis for product manufactured in future; and (ii) the statute allows for the agency to get dangerous product already manufactured out of the market through recalls, including those resulting from administrative litigation.  Therefore, the argument goes, the agency’s actions are perfectly proper. That analysis is disingenuous because it is incomplete.

The agency initiated rulemaking in 2012.  It is true that rules are prospective.  However, the agency does have a mechanism for getting products it believes to be unsafe off the market while a rule (or a litigation) is pending and it is not the coercive tactics agency used.  Under section 12 of the statute, the agency may go to court and seek an injunction against the sale of such a product while it undertakes rulemaking if the product poses an imminent hazard.  Of course, the problem, from the agency’s point of view, is that it would have to actually convince a judge.   But that is what the notion of due process is all about.

Instead of seeking an injunction while it pursued rulemaking, the agency “requested” retailers not to sell magnets, destroying the retail market, and tried to negotiate voluntary recalls with as many companies as possible.  Those that did not agree were sued.  The purpose of the agency’s actions was never to get product out of consumer’s hands.  The paltry return rate of the recalls that were done demonstrates that consumers were not going to send the product back.  Instead the purpose was to stop the sale of the product on an on-going basis and on an across-the-board basis, picking the companies off one by one.

At this point in the saga, the only player to withstand the government is Zen which is insisting on its right for a judge to determine whether its products pose a substantial product hazard because they are defective.  While some may say this is a quixotic quest on Zen’s part, that is its right under our system of justice.  If the agency believes that Zen’s products pose an imminent threat to consumers while this litigation is going on, it could seek an injunction under section 12 of the statute but it has not done that.

The commission now seeks to put its very heavy thumb onto the scales of justice by finding that the magnets Zen sells pose an unreasonable risk and therefore are illegal.  This decision by the commission cannot help but have an impact on the litigation before the administrative law judge.  The agency cannot argue that risk to consumers justifies this action since it has not taken the action it could have under section 12 to actually protect consumers.  Add to all this the fact that the same commissioners who are so anxious to vote on the rule will hear any appeals that might come out of the ALJ’s decision and you hardly have to wonder what that outcome will be.

Commissioner Buerkle seems to understand that process is important.  Too bad her colleagues are in such a hurry to throw it out the window.

Fielding Differences

BUT BY WHAT MEANS?

It has been said that no two people ever read the same book.  Our perspectives and reactions are all influenced and informed by the points of view we bring to a particular issue.  This is especially true of commissioners at the CPSC who bring a wealth of experiences to the agency and whose outlooks are influenced by those experiences.

My former colleague and good friend, former Commissioner Anne Northup, and I did not always initially agree on various issues that we were confronted with.  But because of mutual respect for the other’s point of view, we were usually able to find common ground on most issues.  Even when we differed in approach or outcome, those differences provided opportunity for healthy debate and persuasion, which is the point of regulatory commissions.

One example of this was the commission’s approach to regulating small powerful magnets.  Former Commissioner Northup and I approached the issue from very different perspectives.  Commissioner Northup voted to bring an administrative action to force a recall of Buckyballs, the brand name of the most popular magnets sold as an adult desk toy.  Like all commissioners (myself included) she was very concerned about the number of injuries to children who swallowed the small magnetic balls.  She saw this as a product that was attractive to children and so, should be regulated as a toy.

My approach was different.  I was concerned by the fact that the product seller had gone to extraordinary lengths to market the product as an adult product.  I was unsatisfied with the commission’s view that it is appropriate to ban a product that is being safety used by its intended audience when unintended users are being harmed through misuse of the product.  I was concerned that the administrative action the commission undertook was tantamount to backdoor rulemaking and that if the commission wished to regulate this product it should do so directly.  Finally, I objected to the agency’s approach to contact retailers informally asking them to pull the product (thereby destroying its market without any kind of due process) rather than go to court to seek an injunction against the sale of the product during the pendency of the lawsuit (as the law allows).  Former Commission Northup shared this last concern.

Former Commissioner Northup recently wrote an opinion article that describes her reactions to the recent settlement of the CPSC’s administrative suit against Buckyballs.  Her article is worth reading.  Like me, she is most disappointed that the agency staff, presumably with the acquiescence of the Chairman, expanded the scope of the lawsuit to include one of the company’s principals as a party in his personal capacity.  This unprecedented action was never put to a vote and, hence, was not done by agreement of the commission.

While Anne and I did not agree on the merits of whether this case should have been started, we do agree that it soon badly went off the tracks.  And I cannot find anything but agreement when she concludes that “collaboration with manufacturers and retailers is a faster and fairer way to protect the public…”  Unfortunately, this is a lesson that I do not think the agency has yet learned.

 

$375,000: The Price for Peace

Yesterday the CPSC announced that it has reached a settlement with Craig Zucker, in the litigation to force a recall of Buckyballs.  The Commission alleged that Buckyballs, although designed and marketed for adults, were defective because a number of children had sustained serious injuries after swallowing the tiny powerful magnetic balls.  The settlement calls for the CPSC staff to establish a recall trust fund to manage the recall. Mr. Zucker will fund an escrow account to dole out money to the trust fund up to $375,000.  In its press release, the CPSC trumpets that this is “a win for safety.”  Mr. Zucker, on the other hand, says that he hopes “the settlement will discourage the CPSC from wrongfully pursuing . . . entrepreneurs in the future.”

Who, then, won and who lost?  In the most simplistic terms, perhaps one could say that the agency won since it accomplished a recall that would not otherwise have occurred.  But what is that recall worth and at what price was the recall obtained?

Left on the table is the question of whether Buckyballs are defective.  The government’s theory of defect was that warnings are not sufficient to prevent injury to an unintended user group and therefore the product cannot be made and sold, even though there were no injuries to the intended user group.  In the settlement Mr. Zucker does not concede that Buckyballs are defective, and the settlement leaves unresolved the agency’s apparent philosophy that a product can be banned if warnings do not work.

Also left on the table is the question of whether the agency even had jurisdiction over Mr. Zucker in his personal capacity. The agreement makes clear that Mr. Zucker is not conceding the issue of jurisdiction and so the applicability of the Responsible Corporate Doctrine is not addressed by this agreement except to say that Mr. Zucker personally is released from all agency liability (assuming it existed in the first place).

The recall itself is very curious.  The CPSC staff will implement the corrective action plan and claims (accompanied by proof of purchase or an affidavit attesting to purchase location and price) must be presented within six months of the recall trust being established and consumers notified of the recall.  Refunds will be made in the order they are received and any consumers who either file after the six month period ends or after the funds have been depleted are out of luck.  A web site paid for out of the recall fund will be established and maintained by the Commission for five years. The escrow account funding the recall will be closed after 12 months with any remaining funds reverting back to Mr. Zucker.  But since the government does not have experience administering recalls and will, no doubt, have to hire a third party (paid for out of recall funds) to administer the fund and oversee the recall, it is pretty unlikely that there will be any monies going back to Mr. Zucker.

The settlement agreement does raise a side issue that may be interesting to lawyers or students of regulatory policy.  The Antideficiency Act prohibits a federal agency from obligating the government to pay out money before funds have been appropriated and a real question exists as to whether this agreement violates the Antideficiency Act.  Further, administering recalls is not within the specified functions of the Commission and the act is rather specific in stating that recalls will be undertaken by the product seller.  It is not clear to me that the agency has the authority to take the actions specified in the agreement but it is also not clear who (other than the agency’s inspector general) would be in a position to object.

Going back to the question of winners and losers, it seems that there are lots of losers but I don’t see any winners.  The agency lost since it has spent substantial public resources (would it not be interesting to know how much the government has spent on this?) to reach an agreement that is about half a percent of what it initially wanted.   The agency lost because the issues that were central to the litigation were left unresolved.  Mr. Zucker lost because he, no doubt, ended up spending more in legal fees than the value of the recall and basically paid the government to get them off his back.

But at the end of the day, consumers lost. Scarce public resources were spent to achieve a recall that cannot be effective both because of how it is structured and what it is trying to accomplish.   Past experience shows that very few of these products will be returned, thereby achieving little added safety even if the government’s theory of hazard is correct.  And if the past is prologue, then the government achieved very little at a very great cost with consumers footing the bill.

 

 

The $57 Million Shakedown

The CPSC’s action to force a recall of Buckyballs–small powerful magnets the Commission believes to be unsafe but which are still being legally sold by others—has raised many serious questions about whether the agency acted properly.  But its efforts to blow up the concept of limited liability by individually suing one of the company’s founders–absent any allegation of wrongdoing–has elevated this action into one that could impact all businesses. 

Recently Craig Zucker, a founder of the now-defunct company that sold Buckyballs and the object of CPSC’s ire, and I discussed this case with the U.S. Chamber of Commerce. Calling the long-term implications of this case shocking, the Chamber has now produced a video that details the concerns this case poses for American businesses.  As a former safety regulator, a mother and, of course, a consumer, I strongly believe the agency could have addressed any safety concerns with this product without the unprecedented overreach taken in this case.

Go to FreeEnterprise.com to see the video for yourself.  Here is a link: