On March 29, 2019, the U.S. Department of Justice (DOJ) announced it had initiated the first-ever criminal prosecution of individual business executives for alleged failure to timely disclose product safety issues to federal regulators. This prosecution decision underscores the critical importance of appropriate disclosure as part of a company’s response to safety failures in light of the government’s continuing efforts to hold individuals responsible for alleged corporate misconduct.
The defendants, Simon Chu and Charley Loh, were co-owners and executives of two California companies that imported and distributed dehumidifiers manufactured in China. Chu and Loh allegedly failed to inform the government after they learned their dehumidifiers presented a fire risk, resulting in the DOJ filing a three-count indictment against them on March 28, 2019. The indictment charges each of the individuals with failing to timely inform the government of safety issues with the dehumidifiers, as required by the Consumer Product Safety Act (CPSA), and with wire fraud and a multi-object conspiracy.
The Consumer Product Safety Act
Enacted in 1972, the CPSA is intended, in part, to “protect the public against unreasonable risks of injury associated with consumer products.” The CPSA is enforced by the United States Consumer Product Safety Commission (CPSC), an independent federal agency.
Under the CPSA, manufacturers, distributors, and retailers of consumer products distributed in commerce must “immediately” inform the CPSC of certain information, which includes information that “reasonably supports” the conclusion that a product could create a substantial risk of injury to the public. Covered parties must also inform the CPSC of any information reasonably supporting the conclusion that such product “creates an unreasonable risk of serious injury or death.” This duty to inform applies to individual directors, officers, and agents of covered companies. A knowing and willful violation of this duty constitutes a criminal offense punishable by up to five years’ imprisonment, a fine, or both. This case is the first in which the individuals have been prosecuted for allegedly failing to disclose such a risk.
The Indictment
On March 28, 2019, DOJ filed a three-count indictment against Chu and Loh. Notably, both Chu and Loh were indicted in their individual capacities; their companies do not presently face criminal charges. Among other things, the indictment charges the defendants with violating the CPSA by knowingly and willfully failing to immediately report to the CPSC upon receiving information that reasonably supported the conclusion that the Chinese dehumidifiers both (1) contained a defect that could create a substantial risk of injury to the public, and (2) created an unreasonable risk of serious injury or death. According to the DOJ’s indictment, Chu and Loh learned that certain of the Chinese dehumidifiers they imported and distributed were a fire risk as early as July 2012, when they received a consumer video showing one of the dehumidifiers in flames. Based on this incident and other similar reports, the next month, the defendants conducted their own tests, which allegedly confirmed the flammability of the plastic used in the dehumidifiers. In September 2012, it is alleged that the defendants met with employees from the Chinese manufacturers of the dehumidifiers, at which time additional suggestions were presented indicating that the product could overheat and catch fire, and that certain of the components did not meet the required safety standard for fire resistance. It is further alleged that during the September 2012 meeting, the Chinese manufacturing company recommended that the defendants delay any potential recall until a viable (and safer) alternative could be manufactured. After this meeting, Loh reportedly continued to raise concerns to executives at the Chinese companies about the risk of fires, even threatening to report the issue to the CPSC himself.
Their concerns notwithstanding, the indictment states that neither Chu nor Loh timely disclosed the issue to regulators, but instead continued to sell the defective dehumidifiers to retail companies in the United States without revealing the problem. It was not until March 14, 2013, that the defendants’ companies contacted the CPSC about the dehumidifiers, according to the indictment.
On September 12, 2013, a recall was finally initiated of approximately 2.2 million Chinese dehumidifiers, including those sold by Chu’s and Loh’s companies.
Implications
The DOJ’s March 29, 2019 press release touts this case as the “first-ever criminal prosecution for failure to report under [the] Consumer Product Safety Act,” and emphasizes that the DOJ intends to “send[] a clear message” that future failures to report product risks to the CPSC will be prosecuted. It also supports the government’s repeated threats to identify and charge individuals for corporate misconduct. However, it remains to be seen whether this indictment is a harbinger of increased enforcement emphasis in this area, or whether it is instead merely the product of wrongdoing that appears particularly brazen on the face of the indictment. Either way, this case illustrates the potentially serious stakes involved with failing to report product safety issues.
The case is United States v. Chu, Case Number 2:19-cr-00193, in the United States District Court for the Central District of California.