What to Do If Your Company's Product Is Defective

When does a company have to report a defective product to the CPSC?

A manufacturer, distributor, or retailer of a consumer product must immediately report when it obtains information that reasonably supports the conclusion that the product fails a CPSC safety rule, “contains a defect which could create a substantial product hazard,” or “creates an unreasonable risk of serious injury or death” (15 U.S.C. § 2064(b)). The test is reasonable support for that conclusion, not proof, and the duty falls away only if the company has actual knowledge that the CPSC has already been adequately informed.

An importer counts as a manufacturer: the CPSA defines “manufacturer” as “any person who manufactures or imports a consumer product” (15 U.S.C. § 2052(a)(11)). The safety-rule trigger covers a product that “fails to comply with an applicable consumer product safety rule or with a voluntary consumer product safety standard upon which the Commission has relied under section 2058 of this title,” and the statute adds other rules the CPSC enforces (§ 2064(b)). A separate federal duty covers choking incidents: “Each manufacturer, distributor, retailer, and importer of a marble, small ball, or latex balloon, or a toy or game that contains a marble, small ball, latex balloon, or other small part, shall report to the Commission any information” that reasonably supports the conclusion that a child choked on one and, as a result, “died, suffered serious injury, ceased breathing for any length of time, or was treated by a medical professional” (Pub. L. 103-267, § 102(a)(1), in the statutory notes to § 2064).

The CPSC’s rule defines a defect broadly as “a fault, flaw, or irregularity that causes weakness, failure, or inadequacy in form or function,” and adds that a defect “can also occur in a product’s contents, construction, finish, packaging, warnings, and/or instructions” (16 C.F.R. § 1115.4). A defect becomes a substantial product hazard through “the pattern of defect, the number of defective products distributed in commerce, the severity of the risk, or otherwise” (§ 2064(a)(2)). Volume is not required: “Even one defective product can present a substantial risk of injury” if the possible injury is serious or likely (16 C.F.R. § 1115.12(g)).

Two points narrow the room for a judgment call. Meeting a mandatory safety standard “does not, of itself, relieve a firm from the need to report” a defect that creates a substantial product hazard (16 C.F.R. § 1115.8(b)). And the only statutory exception is “actual knowledge that the Commission has been adequately informed” (§ 2064(b)). The rule says “subject firms should report if in doubt as to whether a defect exists” (16 C.F.R. § 1115.4), and CPSC staff’s published advice is “when in doubt, report” (CPSC, Duty to Report).

How fast must you report, and when does the clock start?

The CPSC’s rule says a firm should report “Immediately, that is, within 24 hours,” after it has information that reasonably supports the conclusion (16 C.F.R. § 1115.14(e)). The clock can start before the information reaches the executive team, because the CPSC counts what your employees know.

Firms “should not delay reporting in order to determine to a certainty the existence of a reportable noncompliance, defect or unreasonable risk” (16 C.F.R. § 1115.12(a)). Where information is not clearly reportable, the rule allows a short investigation: it “should not exceed 10 days unless a firm can demonstrate that a longer period is reasonable” (16 C.F.R. § 1115.14(d)), and “Weekends and holidays are excluded from the computation of the time periods in this part” (16 C.F.R. § 1115.14(a)). The rule names the kinds of information that can start the duty: “complaints, injury reports, quality control and engineering data” (16 C.F.R. § 1115.14(c)).

Knowledge is imputed. The CPSC treats a firm as having reportable information once it reaches “an official or employee who may reasonably be expected to be capable of appreciating the significance of the information” (16 C.F.R. § 1115.11(a)). The firm is also deemed to know “what it would have known if it had exercised due care to ascertain the truth of complaints or other representations” (16 C.F.R. § 1115.11(b)). The rule adds that “Under ordinary circumstances, 5 days should be the maximum reasonable time” for the information to reach the chief executive or the person responsible for reporting (16 C.F.R. § 1115.14(b)).

When I advised a small seller through a voluntary recall, the owner’s main concern was the gap between the first customer complaints and the report. The customer complaint emails, with their dates, should be gathered early, because the full report asks for “a chronological account” of events “beginning with receipt of the first information which ultimately led to the report” (16 C.F.R. § 1115.13(d)). I suggest routing every safety complaint to one named person who logs its date, because the CPSC measures your timeline from the first employee who could appreciate it.

What goes in a CPSC report, and who signs it?

An initial report identifies the product, its manufacturer or importer, the nature of the possible defect or risk, the injury or risk of injury, and who is reporting. “This initial report may be made by any means, but if it is not in writing, it should be confirmed in writing within 48 hours of the initial report” (16 C.F.R. § 1115.13(c)).

A full report follows. It covers the product’s model numbers and date codes, the number of units, when they were made and sold, and where the units are now. It also covers complaints and injury reports, the chronology described above, the changes made to fix the problem, and what the company has told or will tell purchasers (16 C.F.R. § 1115.13(d)). The chief executive officer “should sign any written reports to the Commission under section 15(b) of the CPSA unless this responsibility has been delegated by filing a written delegation of authority” with the CPSC (16 C.F.R. § 1115.13(a)). I suggest deciding who signs before the first report goes out, because a written delegation has to be on file for anyone else to sign.

A report is not a confession. A firm “need not admit, or may specifically deny,” that its information supports the conclusion that the product is defective, noncomplying, or unreasonably dangerous (16 C.F.R. § 1115.12(a)). The statute also limits public release of the report: “the Commission shall not disclose to the public information submitted pursuant to section 2064(b) of this title respecting a consumer product unless” the CPSC has filed a complaint alleging a substantial product hazard, accepted a written remedial settlement, received the reporter’s consent, or published a public health and safety finding (15 U.S.C. § 2055(b)(5)). That limit does not cover a product “which is the subject of an action brought under section 2061 of this title, or which the Commission has reasonable cause to believe is in violation of any consumer product safety rule or provision under this Act or similar rule or provision of any other Act enforced by the Commission,” or “information in the course of or concerning a judicial proceeding” (§ 2055(b)(5)).

How should you handle sales and inventory once a defect surfaces?

I suggest stopping shipments of the affected product as soon as the information looks reportable, because each unit sold is one more unit a recall must reach. Federal law bars selling a product that fails an applicable consumer product safety rule or a similar rule, standard, or ban under another Act the CPSC enforces, or that is a banned hazardous substance. It also bars selling a product under a CPSC order or under a voluntary corrective action taken “in consultation with the Commission” once the CPSC has announced it or the seller knew or should have known of it. Distributors and retailers holding the product should hear from you the same day, because they may still be selling it.

Federal law makes it unlawful to sell or distribute a product that is “subject to voluntary corrective action taken by the manufacturer, in consultation with the Commission, of which action the Commission has notified the public or if the seller, distributor, or manufacturer knew or should have known of such voluntary corrective action” (15 U.S.C. § 2068(a)(2)). The same provision covers a product subject to a CPSC order and a product that is “a banned hazardous substance within the meaning of section 1261(q)(1) of this title” (§ 2068(a)(2)(D)). A product “that is not in conformity with an applicable consumer product safety rule under this chapter, or any similar rule, regulation, standard, or ban under any other Act enforced by the Commission” is unlawful to sell under § 2068(a)(1), unless the seller holds a conformity certificate issued under section 2063(a) and does not know otherwise, or “relies in good faith on the representation of the manufacturer or a distributor of such product that the product is not subject to an applicable product safety rule” (§ 2068(b)). Those two exceptions also reach the voluntary-recall, order, and banned-substance bars, because “Paragraphs (1) and (2) of subsection (a) of this section shall not apply” to either seller (§ 2068(b)). After a hearing, the CPSC can order a company “To cease distribution of the product” (15 U.S.C. § 2064(c)(1)). A company that wants the Fast Track program must stop sooner: “the firm must immediately stop sale and distribution of the product” (CPSC, Fast Track Recall Program).

Minnesota adds a rule for toys. “No commercial retailer shall sell in this state a toy that the commercial retailer knows at the time of the sale has been recalled for any safety-related reason by an agency of the federal government or by the toy’s manufacturer, wholesaler, distributor, or importer” (Minn. Stat. § 325F.135(a)). The statute limits “toy” to items designed primarily for play by children under 12, and its definition of “recalled” excludes “corrective actions that involve safety alerts, parts replacement, or consumer repairs” (§ 325F.135(b)). It is enforced under the state’s hazardous-toy sections (§ 325F.135(c)).

How does a CPSC recall work?

A recall can be voluntary, through the Fast Track program, a corrective action plan, or a consent order, or the CPSC can order one after a hearing. A report does not always lead to a recall: CPSC staff says “Many of the reports CPSC receives require no corrective action because CPSC staff concludes that the reported product defect does not create a substantial product hazard” (CPSC, Duty to Report).

The paths differ in speed and control:

• Fast Track. “To participate in this program, a business must be prepared to implement a corrective action plan – including a consumer-level recall (refund, repair, or replacement).” For businesses that “successfully complete the Fast Track Program,” the benefit is that “CPSC staff will not make a preliminary determination (PD) that the product contains a defect that creates a substantial product hazard.” Fast Track reports must be filed “exclusively online through the portal” (CPSC, Fast Track Recall Program).
• Corrective action plan. A plan sets out the remedy the firm “will voluntarily undertake to protect the public, but which has no legally binding effect,” and the CPSC “reserves the right to seek broader corrective action if it becomes aware of new facts or if the corrective action plan does not sufficiently protect the public” (16 C.F.R. § 1115.20(a)). In deciding whether to recommend a plan, “the staff shall consider favorably both the promptness of the subject firm’s reporting and any remedial actions taken by the subject firm in the interest of public safety.”
• Consent order. A consent order agreement “incorporates both a proposed complaint setting forth the staff’s charges and a proposed order by which such charges are resolved” (16 C.F.R. § 1115.20(b)).
• Ordered remedy. If the company does not act, the CPSC may, after a hearing, order it to repair the product, “replace such product with a like or equivalent product,” or “refund the purchase price of such product (less a reasonable allowance for use, if such product has been in the possession of a consumer for one year or more” at the time of notice. The order “shall also require the person to whom it applies to submit a plan, for approval by the Commission” (15 U.S.C. § 2064(d)).

The liability insurer should hear about the defect early. In the recall I advised on, I asked early whether the company had notified its liability insurer, because a liability policy can require prompt notice of a potential claim or occurrence. I suggest reading your policy’s notice condition before the recall announcement, because the policy’s own terms decide what notice it requires; how an insurer’s duty to defend works under Minnesota law matters once claims arrive.

What are the penalties for not reporting a defective product?

Failing to report is itself a violation: the CPSA makes it unlawful to “fail to furnish information required by section 2064(b) of this title” (15 U.S.C. § 2068(a)(4)). A knowing violation carries a civil penalty, and an individual officer who knowingly and willfully authorizes it can face criminal penalties.

The statute sets a civil penalty “not to exceed $100,000 for each such violation,” with a cap “for any related series of violations” of $15,000,000, and both figures “shall be adjusted for inflation” on a published schedule (15 U.S.C. § 2069(a)). A failure to report under § 2068(a)(4) “shall constitute a separate offense with respect to each consumer product involved,” subject to that series cap (§ 2069(a)(1)). I suggest checking the CPSC’s current published schedule rather than these base figures, because the schedule sets the ceiling that applies now. “Knowingly” includes “the presumed having of knowledge deemed to be possessed by a reasonable man who acts in the circumstances” (§ 2069(d)), so a company cannot avoid the penalty by not reading its own complaint file. In setting a penalty, the CPSC considers the nature of the defect, the severity of the risk, whether injuries occurred, “the number of defective products distributed,” and the size of the business (§ 2069(b)).

A knowing and willful violation of § 2068 is punishable by “imprisonment for not more than 5 years for a knowing and willful violation of that section,” a fine, or both (15 U.S.C. § 2070(a)). “Any individual director, officer, or agent of a corporation who knowingly and willfully authorizes, orders, or performs” the violation is subject to those penalties regardless of the corporation’s own (§ 2070(b)).

How can you recover recall costs from a supplier under Minnesota law?

I suggest starting with the supply contract, because its indemnity, recall, and limitation clauses can decide who pays. Where the contract leaves a gap, Minnesota’s Uniform Commercial Code gives a buyer a warranty claim against a merchant seller. Two timing rules can bar it: a buyer that accepted the goods must notify the seller “within a reasonable time after the buyer discovers or should have discovered any breach” (Minn. Stat. § 336.2-607(3)(a)), and the claim generally accrues “when tender of delivery is made,” “regardless of the aggrieved party’s lack of knowledge of the breach” (Minn. Stat. § 336.2-725(2)). For a supplier based in another country that has joined the CISG treaty, as the United States and China have, the treaty “applies to contracts of sale of goods between parties whose places of business are in different States” unless the contract excludes it, and Article 39 sets the treaty’s own notice rule (CISG arts. 1(1)(a), 6, 39).

Contract terms come first. A private label or supply agreement may assign recall costs outright, and how private label deals allocate recall costs shows ways to structure that allocation. Before signing the next agreement, recall clauses in supply agreements and pass-through warranty terms are where that protection is written.

The UCC fills the gaps. A merchant seller gives an implied warranty that its goods are merchantable “Unless excluded or modified” (Minn. Stat. § 336.2-314(1)), which includes that they “are fit for the ordinary purposes for which such goods are used” (§ 336.2-314(2)(c)). To disclaim it, “Subject to subsection (3), to exclude or modify the implied warranty of merchantability or any part of it the language must mention merchantability and in case of a writing must be conspicuous” (Minn. Stat. § 336.2-316(2)). Under subsection (3), “unless the circumstances indicate otherwise, all implied warranties are excluded by expressions like” as is or with all faults, or by “other language which in common understanding calls the buyer’s attention to the exclusion of warranties and makes plain that there is no implied warranty” (§ 336.2-316(3)(a)). The difference between express and implied warranties under Minnesota law decides which promises your supplier made.

Notice is the step a recall can put at risk. After accepting goods, “the buyer must within a reasonable time after the buyer discovers or should have discovered any breach notify the seller of breach or be barred from any remedy” (Minn. Stat. § 336.2-607(3)(a)). I suggest sending your supplier written notice of the defect when you report to the CPSC, because the same records that start the CPSC clock show when you discovered the breach. The delivery-based accrual rule has one exception in § 336.2-725(2): “except that where a warranty explicitly extends to future performance of the goods and discovery of the breach must await the time of such performance the cause of action accrues when the breach is or should have been discovered.” If a customer sues you for a breach “for which the buyer’s seller is answerable over,” you may give the supplier written notice of the suit, and the supplier that does not come in and defend is bound by “any determination of fact common to the two litigations” if the notice “states that the seller may come in and defend and that if the seller does not do so the seller will be bound” (§ 336.2-607(5)(a)).

Damages follow the notice. A buyer that accepted goods “and given notification” may recover “the loss resulting in the ordinary course of events from the seller’s breach” (Minn. Stat. § 336.2-714(1)), and “In a proper case any incidental and consequential damages” (§ 336.2-714(3)). Incidental damages include “any other reasonable expense incident to the delay or other breach,” and consequential damages include losses from “requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise” and “injury to person or property proximately resulting from any breach of warranty” (Minn. Stat. § 336.2-715). Whether a given recall expense fits those categories turns on the facts and the contract.

A supply contract can narrow all of this. It may limit remedies, “as by limiting the buyer’s remedies to return of the goods and repayment of the price or to repair and replacement of nonconforming goods or parts” (Minn. Stat. § 336.2-719(1)). “Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this chapter” (§ 336.2-719(2)). Consequential damages “may be limited or excluded unless the limitation or exclusion is unconscionable,” and the statute adds: “Limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but limitation of damages where the loss is commercial is not” (§ 336.2-719(3)).

How does Minnesota law treat a seller that did not make the product?

A Minnesota seller sued in strict liability over a product it did not make can have that claim dismissed by certifying who the manufacturer is, once the manufacturer has answered or is required to answer. The protection is lost if the seller had actual knowledge of the defect, exercised significant control over the design or manufacture, gave the manufacturer instructions or warnings about the defect, or created the defect (Minn. Stat. § 544.41).

The non-manufacturer defendant “shall upon answering or otherwise pleading file an affidavit certifying the correct identity of the manufacturer” (§ 544.41 subd. 1). After the manufacturer has answered or was required to, “the court shall order the dismissal of a strict liability in tort claim against the certifying defendant,” provided none of the subdivision 3 exceptions applies (subd. 2). The plaintiff can move to reinstate the seller on grounds the statute lists, such as “that the manufacturer is unable to satisfy any judgment as determined by the court” (subd. 2).

The exceptions matter after a recall. A court may not dismiss a seller that “had actual knowledge of the defect in the product which caused the injury, death or damage,” or one that “exercised some significant control over the design or manufacture of the product, or has provided instructions or warnings to the manufacturer relative to the alleged defect in the product which caused the injury, death or damage,” or one that “created the defect” (subd. 3). A seller’s own complaint log and recall records may be where a plaintiff looks for that knowledge. The statute reaches only the strict-liability claim, and it does not “affect the right of any person to seek and obtain indemnity or contribution” (subd. 4).

What protects an employee who reports a product defect?

Federal and Minnesota law both bar retaliation against an employee who reports a suspected product-safety violation. A manufacturer, private labeler, distributor, or retailer may not “discharge an employee or otherwise discriminate against an employee with respect to compensation, terms, conditions, or privileges of employment because the employee” reported it (15 U.S.C. § 2087(a)).

The federal protection covers an employee who “provided, caused to be provided, or is about to provide or cause to be provided to the employer, the Federal Government, or the attorney general of a State information relating to any violation of, or any act or omission the employee reasonably believes to be a violation” of the CPSA (§ 2087(a)). The internal report to a supervisor is covered, not only a report to the CPSC.

Minnesota’s Whistleblower Act protects an employee who “in good faith, reports a violation, suspected violation, or planned violation of any federal or state law” to an employer or a government body, and one who refuses an order the employee has “an objective basis in fact to believe violates any state or federal law” and says so (Minn. Stat. § 181.932 subd. 1). An injured employee may sue “to recover any and all damages recoverable at law, together with costs and disbursements, including reasonable attorney’s fees” (Minn. Stat. § 181.935(a)). I suggest treating that employee’s report as the start of your reporting record, because the CPSC counts that employee’s knowledge as the company’s (16 C.F.R. § 1115.11(a)). The limits on firing an employee who reported a violation apply to any later discipline as well.

A Short Plan for the First Days After a Defect Report

A possible defect in a consumer product puts a federal reporting clock in motion, and the decisions in the first days shape the recall, the penalty exposure, and the supplier claim. In order, I suggest these steps: stop shipments and tell your distribution partners, preserve and date every complaint and test result, and decide who signs and file the CPSC report on time. Then choose between Fast Track and a negotiated corrective action plan, give your insurer and your supplier written notice, and protect the employees who raised the issue. If you would like an analysis of a possible defect, a draft section 15(b) report, or the recall terms in your supply contracts, email [email protected] with a brief description, and I can start an intake and conflict check before you send any confidential documents. More on how I handle these matters is on my compliance practice page.