DOJ Brings First-Ever Criminal Prosecution of Executives for Failing to Report Dangerous Product DefectsJuly 12, 2019 – Alerts
A precedent-setting criminal prosecution of two California executives under the Consumer Product Safety Act is sending a strong warning to corporate boardrooms that the reporting requirements of the CPSA must be taken seriously and that a company’s compliance program must be thoughtfully designed to ensure that reports are submitted promptly.
In an indictment handed up in March, a federal grand jury charged that Simon Chu and Charley Loh – executives of two California corporations that import and distribute dehumidifiers from China – had received multiple reports that the dehumidifiers were defective and could catch fire, but failed to notify the Consumer Products Safety Commission.
According to the indictment, Chu and Loh knew that they were required to report their knowledge of the defects, but waited at least six months before doing so and continued to sell the dehumidifiers to retailers.
Chu and Loh were charged with conspiracy to commit wire fraud, failure to furnish information under the CPSA, and defraud the CPSC, as well as one count of wire fraud. The indictment identifies a number of unnamed, unindicted co-conspirators, including the two corporations that Chu and Loh work for, referred to as “Unindicted Co-Conspirator Company A” and “Unindicted Co-Conspirator Company B” throughout the indictment. The case is being prosecuted in the Central District of California.
CPSA Reporting Requirements
Section 15 of the CPSA requires every manufacturer, distributor and retailer of a consumer product – as well as all directors, officers, and agents thereof – to “immediately” inform the CPSC of a product defect that could “create a substantial product hazard,” or “creates a substantial risk of injury to the public.”
Regulations clarify that the requirement for “immediate” reporting means “within 24 hours” of receiving information that the product “contains a defect which could create a substantial risk of injury to the public, or creates an unreasonable risk of serious injury or death.”
Chu’s and Loh’s Conduct
According to the indictment, Chu and Loh became aware of the defects associated with the dehumidifiers as early as July 2012, when they saw a video that depicted a burning dehumidifier resembling those imported, distributed, and sold by their companies. Soon after, Chu tested the plastic used in the Chinese dehumidifiers and confirmed that it would burn.
In September 2012, Loh allegedly informed a manager of one of the companies that the dehumidifiers could catch fire, and that the material used in them did not meet safety standards. But the indictment alleges that manager recommended that Chu and Loh “delay a recall … for six to nine months.” Later that month, Loh allegedly told high-ranking executives at one company that he believed the defects should be reported to the CPSC. However, neither Chu nor Loh submitted a report to the CPSC, and they continued to sell the defective dehumidifiers to retail companies in the United States from September 2012 to April 2013.
Approximately 2.2 million Chinese dehumidifiers, including those sold by the companies that employed Chu and Loh, were ultimately recalled in September 2013.
The indictment alleges that Chu and Loh “knowingly and willfully failed to immediately report,” and “willfully caused others” to fail to immediately report to the CPSC “upon receiving information that reasonably supported the conclusion that the Chinese dehumidifiers contained a defect that could create a substantial product hazard, and created an unreasonable risk of serious injury and death.”
The indictment also alleges that the executives “deliberately withheld” information about the dangers of the dehumidifiers from retailers who purchased the dehumidifiers for resale as well as the insurance companies who paid for damages associated with the defects.
The government has routinely brought civil actions against corporations for failure to report product defects pursuant to Section 15. Indeed, the prosecution of Chu and Loh is related to a civil CPSC administrative matter brought against Chinese company Gree Electric Appliances that was resolved in 2016. In that case, Gree and others agreed to pay a $15.5 million civil penalty for failures to report the defective dehumidifiers.
The indictment signals that the U.S. Department of Justice is now willing to prosecute both corporations and their executives for failing to comply with the reporting requirement set forth in Section 15. Criminal penalties for failure to report product defects can no longer be ruled out. As U.S. Attorney Nicola T. Hanna of the Central District of California cautioned, the indictment “sends a clear message: If you plan to profit from selling defective products, you should also plan to face justice.”