The Regulators Are Closing In: A Tougher Environment for Product Recall

The regulatory climate for product recall is heating up across the globe. Regulators in the United States and the United Kingdom are flexing their muscles, and company executives, manufacturers and importers are beginning to feel the impact.

Time Is Not on Your Side

Failing to notify regulators immediately of a potential safety issue carries the risk of criminal prosecution in many jurisdictions, including the United States and the United Kingdom. Notification within a relatively short time period is not something new, but the risk of being pursued in a criminal court has historically been considered remote. Such complacency has fueled change and, unsurprisingly, regulators are increasingly calling for early dialogue, even if risk assessments are ongoing and the nature of any corrective action has yet to be determined.

Some fear that such dialogue may mean that regulators are “tipped off” early, leading to an otherwise unnecessary recall. However, such concerns are likely to be unfounded, and the consequences of failing to engage early can be significantly more serious.

Company Executives Indicted

This was highlighted in a U.S. case against Simon Chu and Charley Loh, two company executives. Chu (CAO) and Loh (CEO) are facing several indictments, including failing to immediately inform the U.S. Consumer Product Safety Commission (CPSC) of information that “reasonably supports the conclusion that a product contains a defect which could create a substantial product hazard or create an unreasonable risk of serious injury or death." Under CPSC regulations, “immediately” means “within 24 hours after the company had obtained information regarding a defect or unreasonable risk.” Chu and Loh are now facing criminal charges that carry sentences of up to 20 years in prison.

The facts of the case are unusual but unlikely to be unique. Chu and Loh imported, distributed and sold Chinese-manufactured dehumidifiers in the United States, and each dehumidifier carried certification stating that it met the required U.S. safety standards. In July 2012, Chu and Loh received a video clip of a burning dehumidifier, and the company continued receiving further fire reports over the following nine months. Early on in this period, Chu tested the plastic on the dehumidifier and found that it did not meet U.S. safety standards. The Chinese manufacturer met with Chu and Loh in September 2012, indicated that improved dehumidifiers could not be manufactured for some months and suggested that any recall be delayed to avoid losing sales and reduce the costs and effects of a recall.

Nevertheless, Loh contacted the president and CEO of the Chinese manufacturer in September 2012 and stated that the matter should be reported to the authorities because he thought that the dehumidifiers would continue to catch fire. He also emphasized that the dehumidifiers did not meet U.S. safety standards, that the company had received reports of fires and that the dehumidifiers may cause “personal, life and property damage.” Loh urged the manufacturer to make a report to CPSC, failing which he would do so himself as the matter was “super urgent and important.” Neither party made a notification to the regulator at that time.

CPSC was finally contacted in March 2013. However, the initial report did not mention the known defects and hazards. A further report in April 2013 stated that the company did not consider the dehumidifier to be defective or to require a recall. Ultimately, a recall of 2.2 million dehumidifiers was announced in the United States in September 2013.

This case shows how a significant delay and clear financial motive for delaying a recall can lead to serious criminal charges being levied against company individuals. Regulators have now shown that they are willing to hold individuals responsible for failing to take prompt and effective action in light of product safety information. Criminal action cannot be sidestepped by a company or its executives by informing an overseas manufacturer of a potential safety risk and expecting them to take action. Proactive steps need to be taken—and fast.

Regulators Dictate Corrective Action

Historically, regulators have worked hand-in-hand with manufacturers in adopting proportionate and workable approaches to addressing safety issues. Regulators have commonly taken a pragmatic approach to the difficulties associated with obtaining replacement products and spare parts or training engineers to carry out repair campaigns.

However, consumers are exerting increasing pressure on manufacturers and regulators to ensure that the products in their homes are safe and that responses to safety issues are swift and effective. Several high-profile fire cases involving household appliances have increased the pressure on manufacturers to take greater responsibility for the safety of their products and for regulators to take more proactive action to ensure that any unsafe products are recalled quickly. More and more, lengthy repair campaigns—however successful—are coming under intense scrutiny and criticism, particularly when products waiting to be repaired are failing in the interim.

The Pressure Is On

This increasing demand for a more proactive approach to recall may have been what spurred the U.K. regulator to indicate that it was prepared to take an unprecedented step—issuing a Recall Notice to force a company to take additional corrective action. Such Recall Notices can be used to compel manufacturers to recall a product, in particular if the corrective action being undertaken is considered by the regulator as “unsatisfactory or insufficient to prevent the risks concerned to the health and safety of persons.” The ability to issue such Recall Notices is not new, but regulators have not previously felt the need to threaten that they would be willing to invoke such a tool—voluntary action has generally satisfied both regulators and consumers. However, regulators are now facing intense pressure from safety-conscious consumers to force manufacturers to alter their corrective-action plans and increase recall response rates.

Voluntary measures will undoubtedly continue to be favored by manufacturers and regulators, but the increasingly strong voice of consumers and safety groups may start to dictate what is considered acceptable in terms of swift and effective corrective action and we may see Recall Notices being issued.

Minimize Regulatory Risk

• Have solid quality control procedures throughout the design and manufacturing process. Test on a regular basis. 
• Implement a comprehensive and joined-up procedure for tracking product safety issues—consider warranty claims, repairs, complaints, cases, social media postings and information from regulators.
• Have a product recall policy and plan. Familiarize the business with the plan and carry out a dry run. Keep the policy updated as key individuals change.
• Act on any potential safety issue quickly. Timescales for notifying regulators vary across jurisdictions and are often very short. 
• Continue to monitor any safety issues after corrective action is implemented—you may need to take additional measures.