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United States v. Spectrum Brands, Inc.

United States District Court, W.D. Wisconsin

October 1, 2017



          WILLIAM M. CONLEY District Judge.

         In an earlier opinion and order, this court granted partial summary judgment on plaintiff United States of America's claim that defendant Spectrum Brands, Inc., failed to report timely to the Consumer Product Safety Commission (the "Commission" or "CPSC") information that carafes distributed as part of its Black &l Decker SpaceMaker line of coffeemakers were suddenly cracking, separating and breaking at the handle in violation of Section 15(b) of the Consumer Product Safety Act (the "Act" or "CPSA"), 15 U.S.C. § 2064(b)(3). The court then held an evidentiary hearing to determine the appropriate amount of civil penalties and injunctive relief, if any, for that violation, as well as for Spectrum's related sale and distribution of those coffeemakers after their recall in violation of 15 U.S.C. § 2068(a)(2)(B). In advance of that hearing, the court also invited the parties to file briefs on those subjects. Based on the undisputed facts described in the court's summary judgment opinion and order (dkt. #196), as well as the parties' list of joint stipulated facts filed before the hearing (dkt. #224), deposition designations and designated expert reports, and additional evidence admitted at the hearing, the court will now impose a substantial civil penalty and permanent injunctive relief as set forth below.[1]


         I. Civil Penalties

         A. Penalty Range

         As a preliminary matter, the parties disagree about possible civil penalties that may be imposed for violations of the CPSA. In its current version, the Act provides for a "civil penalty not to exceed $100, 000" for each violation of § 2068, including violations of the requirement in § 2064(b) to report "information which reasonably supports the conclusion that [a] product. . . contains a defect which could create a substantial product hazard" and the prohibition in § 2068(a)(2)(B) against selling recalled products.[2] 15 U.S.C. § 2069(a)(1). The penalty cannot exceed $15, 000, 000, however, for "any related series of violations." 15 U.S.C. § 2069(a)(1). Defendant does not dispute that its belated reporting and its sale of recalled products constitute two, distinct "related series of violations" under § 2069.

         Given that there is no dispute that defendant sold tens of thousands more coffeemakers than would be required to reach this maximum penalty amount, see United States v. Mirama Enterprises, Inc., 387 F.3d 983, 987 (9th Cir. 2004) ("a company commits a separate offense for every potentially dangerous unit it fails to report"), the government asserts that the applicable maximum penalty is $30.30 million, or $15.15 million for each series of defendant's § 2068 violations, after applying statutorily-prescribed inflation adjustments on the maximum penalty. 76 Fed. Reg. 71554-02, 2011 WL 5592923 (Nov. 18, 2011) (adjusted amounts effective January 1, 2012). In contrast, defendant argues that the maximum penalty for its reporting violation is not $15, 150, 000, but rather $1, 825, 000.[3] This $1, 825 million maximum is derived from the $1.25 million amount provided by § 2069(a)(1) (again adjusted for inflation) before it was amended by the Consumer Product Safety Improvement Act of 2008 ("CPSIA"), Pub. L. No. 110-314, 122 Stat. 3016 (2008).[4]

         At its core, defendant's argument that the pre-CPSIA amounts should apply to its reporting conduct is a thinly recast version of its unsuccessful argument at summary judgment that the government's lawsuit is time-barred. Defendant maintains that even though Spectrum did not finally report until April 2012, the substantially lower, pre-CPSIA penalty caps should still apply because the government contended that Spectrum's reporting obligation arose as early as May 2009, three months before the amended penalty amounts went into effect in August 2009. More specifically, defendant emphasizes that "Congress did not indicate any intent that the new penalty cap for CPSA violations should apply retroactively, " citing a handful of cases for the purported proposition that amended penalties or damages amounts can neither be applied to conduct that took place before those amendments became effective, nor to conduct that "straddled" the old and new amounts, unless Congress expresses a contrary intent. (Def.'s Opp'n Br. (dkt. #207) at 7-10.)

         As the government correctly points out, however, the cases defendant cites are wholly inapposite since defendant's argument is premised on an egregious misreading of the court's summary judgment opinion. Contrary to defendant's assertion, the court did not "agree[] that Spectrum's obligation to file a Section 15(b) report arose in May 2009." (Def.'s Opp'n Br. (dkt. #207) at 7.) Far from it, the court acknowledged in its summary judgment opinion that both plaintiff and defendant were likely "entitled to a jury trial on the limited issue of determining the specific date Spectrum's reporting obligation arose." United States v. Spectrum Brands, No. 15-cv-371-wmc, 2016 WL 6835371, at *21 n.23 (W.D. Wis. Nov. 17, 2016).

         Given that neither party was likely to "want to undertake the expense of trying that single, narrow issue to a jury" as part of a separate liability trial, the court instead offered to account for the parties' arguments regarding the date the reporting obligation arose during the civil penalty phase of the case. Id. Having failed to seek a jury trial on the issue of when its obligation to report first arose, the court finds defendant's argument now for the earliest possible date to be transparently self-serving. Indeed, the court remains strongly disinclined, for reasons first explained in its summary judgment opinion, to endorse the "perverse situation where Spectrum would insist its duty to report was non-existent, but if it existed should be found to have dated back to the date the CPSC asserts."[5] Id. at *18 n. 18. Moreover, even if Spectrum were obligated to report before the amended penalties became effective, it failed to actually report (and thus did not end its illegal conduct) until long after the new penalties applied.[6] Regardless, the court here has little trouble considering only Spectrum's violations, which continued long after the CPSIA took effect. Accordingly, the court agrees with plaintiff that the maximum civil penalty that can be assessed against defendant is $30.30 million.

         B. Application of factors

         Although offered as guidance to the Commission, the court will consider the statutory factors Congress set forth by the CPSA to arrive at an appropriate civil penalty for defendant's violations:

In determining the amount of any penalty to be sought upon commencing an action seeking to assess a penalty for a violation of section 2068(a) of this title, the Commission shall consider the nature, circumstances, extent, and gravity of the violation, including the nature of the product defect, the severity of the risk of injury, the occurrence or absence of injury, the number of defective products distributed, the appropriateness of such penalty in relation to the size of the business of the person charged, including how to mitigate undue adverse economic impacts on small businesses, and such other factors as appropriate.

15 U.S.C. § 2069(b); see also United States v. Shelton Wholesale, Inc., 34 F.Supp.2d 1147, 1165-66 (W.D.Mo. 1999) (applying similar statutory factors directed toward the CPSC for determining an appropriate fine for violations of the Federal Hazardous Substances Act ("FHSA")).

         The court further looks for guidance to the regulations adopted under the CPSA, in particular that "[t]he policies behind, and purposes of, civil penalties include the following: [d]eterring violations; providing just punishment; promoting respect for the law; promoting full compliance with the law; reflecting the seriousness of the violation; and protecting the public." 16 C.F.R. § 1119.1. Similarly, the court considers four specific, "other factors" identified in the CPSA regulations: (1) "Safety/compliance program and/or system relating to a violation"; (2) "History of noncompliance"; (3) "Economic gain from noncompliance"; and (4) "Failure to respond in a timely and complete fashion to the Commission's requests for information or remedial action."[7] 16 C.F.R. § 1119.4. With this as framework, the court applies these factors to Spectrum's reporting and recall violations below.

         a. Reporting violation

         As to the first of the § 2069(b) factors -- the nature of the product defect -- the record here establishes that the carafe handles were defective, particularly given the dozens of reports of broken handles received directly from customers and similar modes of failure identified by defendant's engineers in two of the broken carafes returned by customers.[8] As defendant rightly points out, however, the severity of any defect remains unclear, as plaintiff failed to establish the extent to which broken handles separated completely from the carafe, rather than partially, leaving uncertain the risk of a catastrophic failure with multiple shards of sharp glass and most or all of the hot coffee being spilled on a consumer. That said, defendant was in the best position to investigate additional details about reported handle failures through its call center employees, and it, therefore, shares some of the responsibility for those missing facts. Ultimately, the court finds this factor weighs in favor of defendant, although not to a large degree.

         The second and third factors under § 2069(b) -- the severity of the risk of injury and the occurrence or absence of injury -- weigh more strongly in defendant's favor. As to evidence of injury, defendant correctly points out that plaintiff introduced no admissible evidence regarding any injuries that a customer actually sustained by virtue of a failed handle (as opposed to those self-reported by customers), and even the reported instances of broken carafes reflect relatively infrequent, minor injuries. Applica and Spectrum distributed approximately 159, 000 coffeemakers between July 2008 and April 2012, the month Spectrum reported. (Joint Stipulated Facts (dkt. #224) ¶ 6.) Between November 2008 and April 2012, Spectrum received approximately 1600 reports of broken carafe handles. (Id. at ¶ 38.) Of those reports, approximately 66 noted a resulting burn and three others noted cuts from broken carafe glass. (Id. at ¶ 39.) Out of those 69 reports of injuries, one indicated receipt of medical attention, and another expressed an intention to seek treatment. (Id. at ¶ 40 (citing Decl. of Christopher J. Paparo (dkt. #57) at ¶ 11).) Although defendant's failure to report timely was not justified by the fact that there were few reports of severe injuries for the reasons explained in the court's summary judgment opinion, [9] it does weigh in defendant's favor with respect to determining an appropriate civil penalty.

         The number of defective coffeemakers distributed before they were recalled -- the fourth § 2069(b) factor -- is unclear for at least three reasons. First, even after Applica began selling the redesigned carafes in May 2009, defendant continued selling the old carafes through December of that year, when its inventory was finally depleted. (Id. at ¶ 35-36.) Second, when Spectrum finally reported, it recalled both the pre- and post-redesigned carafes, even though its engineers had not identified similar modes of failure with respect to the redesigned carafe handles. Third, there are no facts in the record distinguishing between reports of failures of the original and the redesigned carafes. Accordingly, neither party can establish whether the attempted fix worked, and if it did, how many of the total carafes distributed were not defective. Still, given that defendant sold approximately 145, 849 units before January 1, 2010, and only approximately 14, 000 after that date (id. at ¶ 6), the fourth of the § 2069(b) factors would appear to weigh slightly in favor of the defendant.

         The last specific § 2069(b) factor -- "the appropriateness of such penalty in relation to the size of the business" -- is largely neutral. As stipulated by the parties, Spectrum is a large, global company with approximately 15, 000 employees in 53 countries that had net sales of $5 billion in fiscal year 2016 (id. at ¶ 3), and as the government noted at the civil penalty hearing, a total shareholder equity value of $1.8 billion (2/21/17 Hr'g Tr. (dkt. #232) at 66:9-12; Ex. 133 at 40). On the other hand, it appears that Spectrum sold the coffeemakers at a fairly modest profit margin.[10] Accordingly, this factor does not weigh heavily in either direction with respect to imposing a substantial civil penalty.[11]

         As for the four "other" factors set forth in the CPSA regulations, the second and fourth factors -- whether defendant has a history of failing to comply with the CPSA and whether defendant responded appropriately to CPSC's correspondence, respectively do not militate toward imposing a substantial penalty, since the government has offered no evidence with respect to either. In contrast, the first of the "other" factors, which relates to any safety or CPSA compliance program would appear to weigh strongly against defendant. As defendant's counsel acknowledged at the civil penalty hearing, although Applica and Spectrum had in place "pre-market safety systems" and "post-market surveillance, " those safety compliance programs "failed" to flag for consideration the defect here, much less prompt Spectrum to report to CSPC timely that the information it was accumulating on failed coffeemakers, and more specifically, the dangerous trend emerging from the sale of the defective carafes over time. (2/21/17 Hr'g Tr. (dkt. #232) at 98:1-5.)

         As the government emphasized at the civil penalty hearing and defendant's counsel also conceded, one of the most significant problems in Spectrum's program, which certainly contributed to defendant's failure to report timely, was a disconnect between the information being gathered about the potentially defective carafe handles by Applica and Spectrum's engineers versus the information being gathered by individuals receiving actual consumer complaints. (See Id. at 90:22-91:4.) Although defendant demonstrated adequately that its engineers applied stringent safety standards in designing, testing and manufacturing the carafes, [12] defendant's post-sale safety compliance programs were not robust enough to raise red flags that the failing carafes presented a safety issue, rather than a "quality, " issue on the street requiring notification to the CPSC. (See Id. at 79:16-80:6.)

         The last "other" factor - whether the firm benefited economically by failing to comply with the CPSA ~ also weighs against defendant ...

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