CPSIA – Dear President Obama

An Open Letter to President Obama:

Dear President Obama,

Tuesday’s election results were a message to your administration. The “shellacking” you experienced was a referendum on your economic policies as well as a passionate call for smaller government.

Readers of my blog have heard all about these issues for two years. It is frustrating to me that you and your administration remain in the dark. You weren’t listening.

My industry, children’s products, suffered mightily at the hands of your administration. Admittedly the problem began on Mr. Bush’s watch but it was your Democrats who refused to relent or admit their errors. Since passage of the Consumer Product Safety “Improvement” Act in 2008, your party has refused to consider our industry’s increasingly pathetic pleas for mercy. The result has been utter market chaos and dramatic financial loss. This regulatory “railroad job” has driven many of us into politics against you and your party out of desperation and profound anger over this undeserved and insensitive treatment.

If you take the midterm election results seriously, you must reexamine the impact of this law on our industry and promptly offer sensible relief.

The problems with the CPSIA can be divided into four categories – Cost, Complexity, Risk and Intrusion. Please give up the idea that these problems can be overcome with tax relief or some sort of economic incentive. If you break my leg, I won’t be able to get up and run like an Olympic champion no matter how many carrots you dangle in front of my nose. It’s time to be accountable for the damage that the CPSIA wrought – and then directly address it.

Cost: The many ridiculous new rules in the CPSIA dramatically raise the cost of operating our businesses. It goes far beyond the asphyxiating testing costs that the CPSIA imposes. Wasteful administrative costs are skyrocketing in every direction. For instance, tracking labels do not magically appear on our products – we must hire people to redesign each of our products and our manufacturing processes, and we must hire yet more people to make sure we don’t screw up these tasks. We sell or manufacture literally thousands of skus (items) – but have had only one tiny recall in the last 26 years. This is PURE UNADULTERATED WASTE. We nevertheless must incur these costs to keep the CPSC happy.

These well-documented costs come from somewhere. You may wonder why we’re not hiring. [In fact, I have previously disclosed in this space that our head count continues to decline, an uninterrupted trend since 2007 to this very day.] Well, we must fund these unproductive costs from productive activities – sales, marketing, product development – you know, activities that produce new revenue. [Please note: your proposed tax increases will be paid from the same kitty.] Unlike you, we can’t solve our money problems by printing more dollar bills – we have to EARN them. If you make us waste our money, we must shrink our business to pay these new costs. WE GIVE UP GROWTH TO PAY THESE WASTEFUL COSTS.

I find it exasperating to have to explain this to you.

Complexity: We now face perhaps 3,000 pages of new safety rules and laws applicable to our business. I have never included rules on childcare or infant items in this total. For those miserable companies who stubbornly persist in making this kind of item, their total is probably well in excess of 3,000 pages. Each word of those pages is a possible felony.

The pre-CPSIA total was about 100 pages of rules, most of which were inapplicable to our business. There was very little to remember – which made it easy for us to administer our business. We could teach the rules, we could remember the rules, we could follow the rules, we could set up sensible priorities oriented around safety (not merely compliance). This is no longer the case.

Face it, President Obama, NO ONE understands these new rules. I include the CPSC on that list. There are just too many rules, and they are riddled with inconsistencies, flaws and head scratchers. The rules are also a mess, existing in many forms, in many places, never correlated or conformed, and are certainly not indexed. The rules have no underlying logic, so it is not possible to anticipate how any rule should work or does work – you have to find the rule and study it, preferably with an expensive lawyer helping you. Even finding a particular rule is quite a treasure hunt.

We are pretty busy – this does not enhance our productivity.

I believe that unless one is a rabbinic scholar or some kind of savant, it is not possible to master 3,000 pages of dense and inconsistent rules. The CPSC has done little to make sense of these rules.

Consider the paradox of musical instruments – full-sized musical instruments are not considered “Children’s Products” even if marketed EXCLUSIVELY to children. Does that make ANY sense to you? Remember, these are SAFETY rules so if musical instruments are unsafe for some reason, wouldn’t logic suggest that we should not let children interact with them? And if they’re safe, then they shouldn’t be regulated at all. Right? Interestingly, the CPSC says that if you shrink the same instruments down for children, they WOULD BE considered “Children’s Products” and subject to the CPSIA, even if marketed side-by-side with slightly larger, full-sized instruments which are not regulated. This makes absolutely no sense, is completely indefensible as public policy and creates a terrible quandary for any business attempting to interpret and apply these rules.

The complexity and opacity of the rules outstrips EVERYBODY’S abilities. We are completely stymied – and it’s your fault. You and your team refused our advice on how to resolve these issues.

Risk: The CPSIA is a tort lawyers’ dream. With the coming public database, our industry will be a feeding trough for these vipers. To say the least, you have permitted the government to set up a system DESIGNED to be gamed by lawyers and litigants.

How do you think business people will react to this massive expansion of the tort system? Please note that NO ONE contends that there are more injuries to address – it is absolutely clear that the effect of the CPSIA is to create many more claims of action. More cost, more risk – and as a result, there WILL be less economic activity.

Good job, guys!

Add to this misery the current practice of this CPSC to press for recalls that do not meet the CPSA’s legal standards for recalls (substantial risk of injury or death) and to impose huge vindictive penalties. The agency is on the war path, trying with all its might to scare us to death. This is an especially powerful economic depressant for small businesses which typically lack the resources to resist these pressures. Small businesses are more conservative and tolerate risk less comfortably as they manage their own money and see themselves as having more to lose than mass market companies or public companies.

The aggression of the new CPSC is out of control. The current Chairman likes to BRAG about her big penalties. Trust has been utterly destroyed in the manufacturing community. In two short years, the CPSC squandered its reputation as a partner in safety, someone to be trusted. Who in their right mind would trust this CPSC? If you doubt me, ask McDonald’s how they feel about being pressured to recall 12 million acknowledged safe Shrek glasses (and the ensuing media frenzy over cadmium – all without ANY documented injuries from cadmium in children’s products EVER). Or ask Schylling Associates or Daiso how they feel about penalties imposed on them for rule violations without any injuries. By all appearances, those penalties reflected regulatory anger, not endangered public safety.

[While you're at it, ask the CSPC why they never completed their FOIA disclosure to me on the Schylling penalty.]

Seemingly, almost any violation of these rules can be twisted into a felony charge now. We joke in our office about visiting each other in jail – but it’s not really funny at all. I simply cannot fathom conducting my affairs in a way that risks being charged with a felony. As a lawyer, the criminal risk imposed by the CPSIA is completely unacceptable to me and highly offensive. I often say that felonies cannot be committed accidentally – except in the Children’s Product industry. The unavoidable accumulation of trivial infractions with heavy penalty risk gives the CPSC winning leverage in any negotiation. The game is FIXED. Everyone knows it, too.

This is no stimulus plan, by the way.

Intrusion: It’s this simple – we have a new partner who showed up two years ago – the U.S. government. They don’t know anything about our business and have never run any operation similar to ours but they now reserve the right to check all our work and to second-guess us. Mother May I? That’s the new game in our business.

Could we live without ANY of this? Yes, most definitely. While the zealots behind this self-destructive law like to emphasize the POSSIBILITY of injury from lead and love to repeat the simple-minded chestnut that there is “no safe level of lead”, they FAIL utterly to tie these claims of POSSIBLE injury to data of ACTUAL injury. There is no “nexus”. Lead may be “bad” but it has no history of causing injury in children’s products. Leaded gasoline, house paint and industrial pollution are the culprits that caused blood lead levels to rise materially – that’s undeniably true. Congress missed the boat entirely with the CPSIA – it’s all cost, no benefit.

Lead injuries from children’s products are virtually unknown. My study of CPSC recalls in 1999-2010 totals one death (from a piece of jewelry) and three unverified injuries from lead in 11 years. Given the truly massive size of our industry and the children’s marketplace, and the literally trillions of interactions with our industry’s products each year, this injury total is statistically equivalent to ZERO. Instead of punishing our industry, you should give us a good citizenship award. We have earned the trust of U.S. consumers.

The path forward is clear but frankly, I Still don’t think you get it. Trust has been broken. Until you and your administration DEMONSTRATE that you are taking a DIFFERENT path, we will continue to conduct a war against the CPSC and Congress. This defective law deserves a FULL repeal. It is misconceived and has cost countless jobs. I hope you and your associates will not continue to deny the obvious, to fly in the face of data and reason. The voters are on to this scam. They voted many Democrats out of work in midterm elections. If you and your team don’t wise up quickly, in the over-regulation of our industry and other industries, they’ll vote the rest of you out in two years.

The problem was never the law. Before Congress “improved” it, the CPSA was a powerful law that enabled the CPSC to closely supervise children’s markets. Let’s not forget that the recalls in 2007/8 were conducted under PRIOR law – the unamended CPSA had plenty of teeth. The recalls in 2007/8 were clearly a COMPLIANCE problem, not a problem with the rules themselves. For various reasons, some people weren’t following the law closely enough. As objectionable as that may be, it is also important to remember that the 2007/8 recalls were associated with virtually NO injuries. So what should we have done, in lieu of all the tough new standards and venal penalty provisions in the CPSIA?

The agency should have been reorganized to work on compliance more effectively. The agency needed to invest in education, outreach to industry and more effective partnership with industry. This idea that we in the business community can’t be trusted is revolting and completely untrue – it is a populist idea you and your allies flogged to get elected. If you want to keep your jobs for much longer, you need to drop this caustic idea. We are not bad people or incompetent people – we can be trusted and can be good partners (as our record proves). No, not everyone will be good or conscientious. Bad people and incompetent organizations cannot be legislated away (at a reasonable cost). Still, the data indicates that a lower cost approach of partnership and education will produce very good results.

Fixing this law will be a stimulus plan that creates JOBS. Please give us back control of our financial statements and we will find a good way to spend our own money to grow our businesses. We don’t need your help – we need you to GET OUT OF THE WAY.

Yours sincerely,

Richard Woldenberg
Chairman
Learning Resources, Inc.
Vernon Hills, Illinois

Read more here:
CPSIA – Dear President Obama

CPSIA – What Are We Trying Achieve?

787 days have passed since ANY Democrat in Congress did ANYTHING to help us on the CPSIA. There are only 23 days left until Election Day.

Sean Oberle published a lengthy contemplation of the issue raised in my last post on the relationship between compliance and safety as objectives for regulators and for industry. Mr. Oberle’s essay speaks for itself, so I will not attempt to summarize it. He concludes with the following message: “Therein lies the frustrating and frightening aspect of product safety. Those of you tasked with ensuring product safety – industry rep, consumerist, and regulator alike – are trying to quantify ambiguity amid a chaos of demands … all of them in flux … I don’t envy you.”

Sean, boy are you right!

I think it’s worth discussing a few issues on compliance versus safety since Mr. Oberle devoted so much ink (or electrons) to the topic.

1. The law defines what the CPSC can and cannot do. It’s a shame no one told them . . . .

First and foremost, the CPSC exists because of the CPSA and its activities are governed by the CPSA. Recall authority is governed by Section 15 which limits the agency’s recall authority to “substantial product hazards”, namely a product that “. . . creates a substantial risk of injury to the public”. [Section 12 gives the agency additional powers to seek a court order for "imminent hazards".] In other words, the CPSC does not have the legislative authority to tilt at windmills – it cannot demand recalls for anything unless it presents a “substantial risk of injury to the public”.

Consider recalling 12 million glasses that the CPSC acknowledges in writing are SAFE. Substantial risk of injury?

Consider recalling more than seven million trikes sold over 14 years that caused six children to cut themselves. Children who were under three years of age and should have been under the care of attentive adults. Substantial risk of injury?

Consider recalling more than 400,000 Sarge cars because the little yellow dot on the wheel hubcap violated the lead-in-paint ban, and those dots were produced from two cans of paint. Substantial risk of injury?

One must distinguish between legerdemain and reality, between policy and what the law intended. It is a little focused-upon responsibility of the agency to exercise this judgment. Is it even possible for everything that happens to be a “substantial” risk? We know of cases where a single broken toy without an injury provoked an official investigation at the agency. Fair? Is this an activity that the CPSA authorizes? It is . . . if you are running the agency and you say it is. Arguably, the recall of the 480,000 Mattel Wheelies on September 30 was just such a case. Consumers apparently reported two broken cars with wheels that fell off, and no injuries were reported or implied. Substantial risk of injury? I question that.

2. The notion that we need all this supervision flies in the face of injury statistics. But it sure makes the CPSC look irreplaceable, doesn’t it?

I have already published and discussed ad nauseum the historical injury statistics from lead based on CPSC recall notices – ONE DEATH and THREE UNVERIFIED INJURIES over 11 years (1999-2010). If we were facing such a dire public health crisis, why weren’t kids dropping like flies from lead poisoning over such a long time period of “lax regulation”? If the harm was so widespread and so devastating, why aren’t any of these actual victims known? Names, addresses, photos, case histories?

A friend replied to me recently reasoning that there is no safe level of lead. Okay, I concede that lead can be dangerous but it is absolutely true that lead in present throughout our environment and in the air, food and water that we consume every minute of every day. So since we take in lead from several sources all the time, we know we are building up lead and this leads to several questions. If lead is so harmful at all levels, why aren’t we ALL showing the effect of our cumulative build-up of lead? How can you demonstrate that children’s products contribute meaningfully to the asserted “problem”? How can you prove that “fixing” children’s products will meaningfully change lead blood levels? And if you could prove those things (which cannot be done), how can you measure the return on investment of our multi-billion dollar annual investment? Remember, we can only spend those dollars one time – so is flushing them down the toilet on test reports REALLY our best use of scarce and irreplaceable dollars? How would you measure that?

But the more that the CPSC enforces the law against “bad” corporations, the more they scam the public into thinking they needed the help all along. They talk about recall statistics but never put them in the context of injury statistics. The proponents never compare lead injury statistics to other injury statistics like swimming pools.

[Is a child injured by lead "worse" that a child killed in a pool? It better be - because we are spending billions to prophylactically eliminate the possibility of purported lead injuries while leaving swimming pools open to continue a continuing skein of killings of more than one child each day. That's okay according to our Democrat-run Congress. Tell that to the family of drowning victim - they can take comfort in knowing that their child didn't have lead poisoning thanks to the relentless and remorseless enforcement of the CPSIA . . . .]

So as the regulators abuse and confuse the definition of hazard, they create an atmosphere of dependence. Oh thank you Mother Government for saving me! What would I do without you?!

3. Mr. Oberle reminds us that “Lack of incidents may not mean a product is safe.” And just because you’re paranoid doesn’t mean they AREN’T out to get you.

Mr. Oberle does not take an offensive stance on this topic, btw. He is right, you can sometimes catch something dangerous before it creates harm. Presumably a quicker recognition of the hazard in Magnetix might have prevented injuries. Responsible companies need to always keep a lookout for insights that reveal latent hazards.

On the other hand, injury statistics are a useful tool. If, as is the case for lead, the assertion is that the hazard is widespread and present over a lengthy period of time, injury statistics become QUITE relevant. So, if lead was such a terrible problem in children’s products (putting lead-in-paint aside, long ago banned), injury statistics over many years would reveal a latent problem. Think of the breadth of the definition of “Children’s Products” and think of the years of recall data available for study. We are looking at TRILLIONS of interactions with children every year in the United States alone. Where are all the lead victims? We cannot say that we don’t know the scale of this problem. We have apparently been running an “experiment” on the U.S. public for decades in the period the zealots label as “lax regulations” or “lax enforcement”. If lead-in-substrate were so dangerous, wouldn’t you expect to see SOME evidence of it?

If we must imagine the scale of the danger, can we spend imaginary dollars to deal with it?

4. The compliance hawks want to frame this as a financial question – how much is your safety worth? I think that’s the wrong question – I think the question is “how long do you want to have a job?”

I have already reported that our compliance group is currently up to six people from a historical one or two, and of course, our products are no safer today than in the past. They were always safe and still are, but it costs us a lot more to operate. That’s not good for you or for me.

So how do we pay for all this new bureaucracy? We have not raised prices, that’s impossible these days. We are lucky to have customers and cannot spit in their faces with a price increase. Think of your business – it won’t fly.

We also need to hit profitability targets because we need to remain financable. We do not get money from “money fairies” – we have to deal with a bank, just like you. Our bank prefers to see that we make money. I know that doesn’t seem very civic-minded but I can’t fault them for their POV. In any event, I think it’s elementary that a business needs to make a profit to have the model sustain itself. Therefore, we cannot commit ourselves to ever-eroding profitability. When our costs rise, we cut elsewhere . . . just like you do.

Needless to say, we have skinnied up a lot since 2007. We have a much-reduced headcount and operate far more efficiently. This is how everyone behaved during the financial crisis and the jobs have not returned, in part because the economy remains sluggish. With our rising overhead relating to pointless regulations, what can we do? We must recover the money from activities that are focused on raising revenues. In effect, we are discontinuing activities that create growth to fund activities that are pure costs.

What’s the math behind this? Consider how we recover a dollar of bureaucratic cost from productive activities. If you are already operating efficiently and cannot wring out big productivity gains (as may be the case post-financial crisis cost reductions), then how do you pay for an additional dollar of overhead cost? When you eliminate a “productive” dollar of cost to pay for an unproductive dollar of cost (e.g., you trade a dollar of marketing promotion for a dollar of test costs), it’s not an even trade. No, because your dollar of productive cost creates gross margin whereas your overhead produces no profit whatsoever. Your productive dollar of cost produces gross profit which defrays your operating costs and produces marginal net profit on top of that. Wiping out the dollar of productive cost also wipes out the contribution to operating costs, so effectively, only the associated marginal net profit can defray the unproductive cost. Since profit percentages are generally low for most of us, the ratio of productive cost dollars needed to be sacrificed to cover unproductive costs is probably on the order of 2:1 or 3:1. Hire another QC person and fire the equivalent of two people elsewhere. In our case, we do it by attrition. We just shrink away.

As if this weren’t bad enough, it’s also a recipe for disaster or business death in a worst case. The continued erosion of productive spending to finance unproductive spending has a dramatic impact on growth. Revenue flattens out or stays in a downward trend. It’s no surprise – you are starving your company of investment dollars as you spend at constant levels. You have simply shifted your spending from productive uses favoring growth to unproductive uses that will not create growth. Presumably, those of you with children have discussed the merits of eating fruits and vegetables versus eating potato chips. It’s no different for a business and how it consumes dollars. We will never grow up to be big and strong if Mother Government restricts our financial diet this way.

Sean’s right. I don’t envy you . . . or me. This makes me very pessimistic about the future.

I hope you are mad as hell and won’t take it anymore. In 23 days, you will get to vote. DO IT!

Read more here:
CPSIA – What Are We Trying Achieve?

CPSIA – CPSC Jumps Into Action to Solve Pool Deaths

As the CPSC announced when it kicked off Pool Safety Week in late May, deaths and injuries to children from pools and spas are breathtaking in scale. CPSC statistics indicate that deaths from pools and spas average more than ONE PER DAY and serious injuries requiring emergency room treatment average more than 11.5 PER DAY. Now THAT’S a serious problem.

By contrast, lead accounted for one death and three unverified injuries over eleven years. So in one day, pools injure more kids than lead did in eleven years.

And how does the CPSC respond to these two threats? Well, for lead, they force industry to spend more than $5.6 billion per year in compliance costs (this doesn’t even count aggravation costs).

And pools? The agency runs some PSA commercials. Here’s a new one:

Love that sense of balance and proportionality. Of course, whacking innocent companies over lead gets good headlines and makes the regulators look valiant. No one wants the agency to crack down on pools. Perhaps it’s only cynics like me that think this lame approach reveals a lack of commitment to safety by both the agency and Congress. Perhaps our regulators think Public Service Announcements are PERFECT to reduce the scourge of pool deaths and injuries, but only asphyxiation of the children’s product industry will address the lead “threat”.

Particularly amusing, then, is the response of municipalities to the Pool Safety Initiative. Who remembers Chairman Inez Tenenbaum’s hearty self-congratulation on February 17, 2010 for conducting inspections of 1200 pools? Her words: “We’ve carried out my principle of firm but fair enforcement of product safety laws by inspecting 1200 public pools and spas for compliance with the Virginia Graeme Baker Pool and Spa Safety Act – the results gave us good reason to believe that the law is working”. She made a similar assertion in Congressional testimony in September 2009: “In addition, CPSC investigators have inspected over 1200 pools and spas in 38 states as part of a recently launched enforcement initiative. The good news is that CPSC’s public outreach and education efforts seem to be having a positive impact in this area. Recent inspections show that most public pools and spas have installed or have plans to install the new, compliant drains covers and safety equipment in the near future. Let me state again, contrary to some reports, there are many more public pools and spas that have been made safer because of this important law.”

Problem solved? According to the Fresno Bee, it’s hardly a closed book: “About half of the 1,300 public pools and hot tubs in Fresno County do not comply with new state safety standards designed to prevent swimmers from being caught by suction on drains, county officials say.” [This is the Virginia Graeme Baker law.] What explains the hold-up? The repairs are costly and then there’s the sense of urgency: “Mary Jo Quintero, water safety program coordinator for Children’s Hospital Central California, said she is not aware of any entrapment injuries occurring in the Merced-to-Bakersfield region during her 30-year tenure at the hospital.”

Perhaps you have heard of the financial problems in California and in municipalities in general. Think of the impact of this law when money is in short supply: “The city of Fresno retrofitted its four large pools more than a year ago, costing about $60,000, said city spokeswoman Heather Heinks. ‘We are totally compliant. It’s been county-inspected,’ she said.” So a few public pools have been fixed . . . and as for the rest of the public pools – no one is in much of a hurry. “Although many pools are not yet up to code, officials say they have no plans to immediately shut them down.”

So the local government is blowing this off. What about private owners? Are they just as bold, or are they afraid to defy government agencies armed with heavy penalties? “However, some apartment owners are closing pools on their own because they can’t afford the upgrades, said Bob Waterston, a former Fresno County supervisor who owns a pool company that specializes in the retrofits.”

The CPSC is running Public Service Announcements telling you to watch your kid in the pool (duh) in response to a childhood activity that is wildly popular and scandalously dangerous. The agency is also bragging about its enforcement of this high-profile law, asserting results that seem to be untrue. Hmmm. And as for the lead “problem” that produced one death and three unverified injuries in more than a decade, the CPSC has been actively developing rules that will lead to business death by compliance.

I just love our government!

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CPSIA – CPSC Jumps Into Action to Solve Pool Deaths

CPSIA – Power Imbalance

When the respected Chairman of the CPSC uses a prominent keynote speech to tell us:

“But now that our team of experts has gone back to the process of building the database, I want those in industry to stop fighting old battles and get prepared.”

and

“Well, to all of you here today, I say don’t believe everything you read on the Internet, except what you read on Web sites that end in dot gov.” [Emphasis added]

I believe it is an abuse of power by a public official.

Let’s think about how the cards are stacked in favor of the Chairman:

• She is appointed by the President to a fixed term of office and is not subject to removal but for malfeasance,
• She gets the microphone and media attention at her pleasure and is a regular on popular TV news shows,
• She has a PR machine working for her full-time,
• She supervises the writing of the rules and policy setting (including implementation of the CPSIA), the issuance of penalties, the prosecution of recalls and other cases (up to and including criminal charges), oversees appointment of senior staff, interacts with Congress and the Executive Branch on behalf of the agency, and oversees open forums with stakeholders as well as the solicitation of comments and other feedback loops with stakeholders, and
• She speaks for the Federal Government on consumer product safety.

That’s a lot of firepower. Most people don’t want to cross someone with so much power or influence as well as the almost unrestrained ability to prosecute. Let’s not forget another quote from her speech: “A new Commission that has new powers – and we are not afraid to use them. If you resist our efforts to recall children’s products, be forewarned, this Commission stands ready to be creative in the use of our enforcement authorities.” [Emphasis added] She has a lot of power and wants you to know she’s ready to squish you.

The Chairman is essentially judge and jury in cases and policies that matter a lot to safety stakeholders. Her warnings to “to stop fighting old battles” can be taken as a warning to people like me. It is hard to not believe that she is trying to be intimidating. Likewise, with her federal imprimatur, her remark that you should not “believe everything you read on the Internet, except what you read on Web sites that end in dot gov” feels like an effort choke off debate. Be forewarned, indeed.

This power dynamic is not my imagination. Others facing the overwhelming power of the federal government routinely have had to cave, right or wrong. For example, the latest issue of Fortune magazine features an interview with Stasia Kelly, former General Counsel of AIG. She tried, in vain, to negotiate with Kenneth Feinberg, the federal “Pay Czar” on behalf of her company. Eventually she quit her job, rather than face the consequences of Mr. Feinberg’s unilateral plan. Here is an excerpt from the interview:

“The next huge event for you was the June 2009 entry of Kenneth Feinberg, the special master of compensation for seven companies, AIG very much included, that had received TARP funds and not paid them back. You were AIG’s point person in dealing with Feinberg. I’ve read you emerged from that experience disliking it heartily. Was it bad from the beginning?

Yes, because, first of all, it’s very hard to negotiate when you have no power. Feinberg had the power — unfettered power. Our new CEO, Bob Benmosche, and I tried very hard to let him know what compensation we thought we required to attract and retain the kind of people we needed to pay off our debt to the taxpayers and deal with the risk in FP. We had the New York Fed and Treasury behind us on that. But Feinberg had political and populist considerations to worry about and a need to set amounts that would satisfy those. As we negotiated over the months, it became increasingly obvious to me that we were not going to end up in a good place.” [Emphasis added]

High officials at the CPSC have enough administrative and political power to be tremendously coercive. This goes double for small companies who lack the financial or political firepower to blunt a government attack. You can’t overlook the fact that the powerful Henry Waxman is essentially the CPSIA’s “sponsor” and hence, the principal off-stage player behind this leadership group. When they use their bully pulpit to stifle debate, they are essentially borrowing and wielding his power. This is a caustic environment, and it is not lost on anyone listening to their speeches. While the “have’s” may like it, the “have-not’s” (like me) chafe. This is a bad approach to building a community.

The folks running the CPSC are just trying to do their jobs. So am I. There’s room for both of us. Safety doesn’t have to be all about politics (see the Kelly quote above) and if leadership at the agency can guide us to a place where it isn’t all about politics and populism, the stakeholder fractiousness might die down. Until then, I would appreciate it if leadership would stop trying to stifle debate or discredit independent sources of commentary. It’s not our fault we don’t have a “dot gov” URL.

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CPSIA – Power Imbalance

CPSIA – Another Big Fine for L-I-P: What Does It Mean?

The CPSC today lashed out at RC2 Corp. for significant lead-in-paint violations on its Thomas & Friends wooden toys in 2007. The fine totalled $1.25 million. The facts of the case are relatively simple – an original recall in June 2007 of 1.5 million pieces was quickly followed by an additional September 2007 recall of 200,000 units. You can read all the details in the provisional agreement between RC2 and the CPSC. The agreement, however, doesn’t mention the really famous bit, namely that the second lead-in-paint recall included some of the “bonus gifts” that RC2 sent out to people who returned items in the first recall. Not a real confidence builder, apparently . . . .

We probably owe the CPSIA to RC2 and Mattel, who together so shocked and motivated Congress (and my hometown newspaper, the Chicago Tribune) that nothing could stop that runaway train. Since Thomas the Tank Engine was such a beloved traditional toy, the public’s sense of betrayal was understandable. Unfortunately, it is hard to believe that RC2 didn’t see this coming. The law on lead-in-paint was clear and unambiguous. The righteous outrage and the perceived need for retribution eventually led not only to the awful new law but also to this fine.

Let’s try to put it in perspective.

First, RC2 Corp. is a big company and won’t feel much pain from today’s action. It has peak sales of over $500 million and peak earnings of over $80 million. It has generated over $100 million in annual cash flow at least twice. In other words, they have pretty deep pockets. This fine is basically “walking around money” for them. They are even projecting earnings this year in excess of $25 million and cash flow of over $40 million – and 2009 was an awful year for the toy industry. As if that weren’t enough evidence of the symbolic nature of the fine, RC2 recently raised almost $60 million in a stock offering. In no sense will this fine imperil or even perturb the business over at RC2 – as an official “big business”, they seem structurally exempt from the pain we ankle-biters might feel.

That said, hasn’t RC2 paid quite a bit for its folly already? According to their 2008 year end financials, they incurred recall-related costs of $28.3 million in 2007, $14.3 million in 2008 and a further $13.9 million in 2009 year-to-date. Those are total costs of $56.5 million, excluding the new CPSC fine. Arguably, the CPSC recalls induced or precipitated these costs. These costs presumably also take into account the impact of RC2′s $30 million settlement of a class action lawsuit and related legal expenses.

[According to the provisional settlement agreement, in the wake of the publicity of the recalls, RC2 was hit with a number of allegations of injuries and claims from lead-in-paint, leading to lawsuits. I have no way of estimating the financial impact of these claims on RC2. The validity of the claims is also unknown. Welcome to America.]

These losses exceed RC2′s typical annual earnings – most people would call that a pretty high price paid, something that gets your attention.

And as the CPSC slams the barn door long after the horses got out, the company must now reiterate that it learned its lesson . . . three years ago. The press, however, will frame this case as a remedy much needed: “Toymaker’s fine in lead case tops $1 million. Oak Brook-based RC2 sold Chinese-made toys that were later recalled” [Headline from print edition].

With all this as background, I think the fine looks a bit different:

a. The fine cannot be justified as punishment, as the CPSC’s previous actions induced a very high stream of costs for the company. It cannot be justified as an inducement to behavioral reform, as better safety practices at RC2 began in 2007. What is the purpose of the fine then? I think the fine is intended for political purposes, to make the CPSC look “active” and “tough”. It hardly matters that the fine is opportunistic and coercive. [CPSC fines under the CPSIA are also arbitrary and hard if not impossible to negotiate.] Apparently, the RC2 recalls were not enough to satisfy the personified “Congress” – it wanted pecuniary revenge. This allows the Chairman and her fellow Commissioners to look “tough” to Congress and it allows the RC2 company to look “contrite”. Two needs met, neither of which should be part of our law.

b. The fine (the supposed punishment for the “crime”) is so detached from the time of the infraction that it has no actual connection as a “remedy”. The passage of time sacrificed any moral high ground for the regulators – its fine is only a gratuitous penalty now.

c. By waiting three years to impose a high profile penalty like this, the CPSC deals the company a cruel blow to its market. The fine makes it look like RC2 needed more correcting three years after the fact – isn’t that what any rational person would think? Yet RC2 already paid for its failings to the tune of more than $50 million out-of-pocket. [This does not include the significant loss of goodwill from the recalls, a tangible loss to RC2 business managers.] They also changed their safety practices, presumably quite significantly. The defective goods are long off the market. Yet, with the imposition of this high fine now, the company looks like a creep, again – even though there is no sign that it is anything but a good citizen today. As a consequence of the CPSC’s action, RC2 must again counter with more PR to attempt to preserve its good name.

Even more outrageous, to squeeze in the fine under the wording of the CPSIA, the CPSC asserts that the RC2 violation was made “knowingly”. [See par. 16 of the provisional settlement agreement.] I highly doubt that it was “knowing” in the plain meaning of the word and naturally, the company denies it, too. It’s a ridiculous contention. However, the law defines “knowingly” to include imputed knowledge; if the CPSC deems that RC2 should have never let this happen (duh), they can assert the imputed knowledge of a reasonable man to convert the infraction into a “knowing” violation. Prest-o, change-o! Incompetence or organizational failure can thus be given the appearance of ill intent. Since virtually any violation can be deemed “knowing” with the aid of 20/20 hindsight under this terrible law, the CPSC now has an unwritten strict liability penalty policy at its disposal. That’s sweet for an agency that is part legislature, part judge, part jury. As for companies cited for “knowing” violations, denials ring hollow. Frankly, it’s a set-up . . . and when this happens to you, it will feel the same way.

d. The CPSC’s apparent indifference to these factors will have a chilling effect on the children’s product market. There is no question that business people tend to look at these cases as “there, but for the grace of G-d, go I”. If RC2 can be hammered this way, what will happen to us if we make a mistake? There is just no way to tell. But, the RC2 and Mattel fines make it clear that “over” isn’t “over” with the CPSC until the statute of limitations passes. This fine came more than three years after the recalls. When are you allowed to move on from your mistakes? Seems like never. The recent fines levied against Excelligence for $25,000 are of a similar vintage, so this can happen to small companies with small infractions, too. This is randomness run amok. The fact that the agency has been unable to issue final penalty factors in more than a year does not help matters.

Finally, of course, we private business people can’t just stick our palm out to Wall Street for more money whenever we need to restock the coffers. The RC2 capital raise restores 100% of their losses from the recalls. Nice for them! Small private businesses have to go to their banks or our personal bank accounts to fund remediation of these problems. And let’s hope your bank sticks with you after bad publicity. . . .

Could the CSPC be so myopic that it doesn’t know how these risks affect the thinking and planning of small businesses? I can only conclude that the answer is yes.

Let’s hope that the RC2 fine helps the agency and its leadership build up a suitably tough image. And for their sake, one can only hope that the architects of this law and the agency’s penalty strategy are long gone, onto their next glories, before the cumulative impact of the CPSIA and its implementation are felt. And for the rest of us . . . good luck!

Read more here:
CPSIA – Another Big Fine for L-I-P: What Does It Mean?