Buckyballs Saga Ends, Question of Individual Liability Remains Open

The CPSC and the former CEO of Buckyballs, Craig Zucker, have reached a settlement in which Mr. Zucker has agreed to pay $375,000 into a “recall trust” that will provide consumers with refunds if they turn in their Buckyballs to the feds. The amount is a fraction of the amount originally sought by the CPSC , an estimated $57 million, for the costs of conducting a recall.

Pursuant to the settlement, Mr. Zucker will dismiss the lawsuit he filed in federal court in Maryland to stop the agency from pursuing him.  (UPDATE: A notice of voluntary dismissal was filed on 5/16)

The Commission approved the settlement by a vote of 2-1, with Acting Chair Bob Adler voting in opposition.  Adler filed a dissenting opinion on May 14 “strongly disagreeing” with a number of the settlement terms, which he believes do not adequately protect and compensate consumers.

Commissioner Ann Marie Buerkle voted to approve the settlement, but found the agency’s addition of Mr. Zucker as a respondent to the complaint, without a Commission vote, “troubling.”

While the settlement (almost) ends the Buckyballs’ saga, it leaves open the important question of whether the CPSC has the authority to go after the personal assets of corporate officers.

As discussed in earlier posts, the company had worked in cooperation with the CPSC to market its products strictly for adult use and convey numerous warnings on the product, its packaging, and at the point of sale. The agency ultimately concluded, however, that no amount of warnings or other action could adequately address the agency’s safety concerns with children swallowing the products. Given its efforts, the company resisted CPSC pressure to conduct a voluntary recall of its only products, essentially putting it out of business. The CPSC took the rare step of filing an administrative action to force a recall. After his company dissolved, the CPSC targeted Mr. Zucker personally, naming him as a respondent in the administrative action, seeking his personal financial records, and attempting to hold him personally responsible for the costs of the recall.

Mr. Zucker and small businesses declared the settlement a victory.

“After nearly two years of fighting, it’s good to finally have this case behind me,” said Zucker in a statement. “My life has been consumed with defending both an overreaching lawsuit and the rights of small business owners. At this point, I have spent

more on legal fees than I will on the settlement. The law does not support an individual being named in a case like this and I hope that this settlement will discourage the CPSC from wrongfully pursuing individual officers and entrepreneurs again in the future.”

In response to news of the settlement, Karen Harned, Executive Director of NFIB’s Small Business Legal Center, observed that “there’s a bold line between regulatory enforcement and regulatory abuse, and in this case the federal government crossed it without ever slowing down.”  “We hope that this settlement does not encourage regulatory agencies to attack small business owners in the future,” Harned said. NFIB, which represents the nation’s small businesses, filed a brief supporting Mr. Zucker in his action in federal court to stop the CPSC.

BuckyballsSettlement

According to the settlement, the CPSC will establish a “Recall Trust,” which will be administered by CPSC staff and a trustee acting on Zucker’s behalf. The trust will establish a website to publicize and implement the recall.  The Recall Trust is expected to begin accepting claims within six months of publicizing the recall. Consumers who request a refund will need to provide proof of purchase, including a receipt and affidavit confirming purchase in the United States, the place of purchase, and the purchase price. Basically, those who return more than half the Buckyballs in a set, along with the required proof of purchase, will get a full refund. Those who return slightly less than half will receive a refund of 50% of the purchase price. The settlement specifies that the $375,000 is considered a business expense, not a fine or penalty.

Commissioner Adler objected to the short time frame it provides consumers to request a refund and because he views the amount of the settlement as “minuscule” given the 2.5 million products sold. Although the Acting Chair acknowledged the possibility that the CPSC might not be able to collect more from Mr. Zucker, Commissioner Adler would not have agreed to return any unclaimed funds to Mr. Zucker after six months, as provided by the settlement terms, and would have given consumers five years to request a refund.

The CPSC faced strong criticism for its unprecedented attempt to impose liability on an individual for the cost of a recall. There are significant questions as to whether the Consumer Product Safety Act provides the CPSC with statutory authority to go after someone other than a “manufacturer, distributor or retailer” to conduct a recall, whether the agency can pierce the corporate veil, and, if so, whether the Responsible Corporate Officer doctrine provides as basis to do so, particularly where there was no criminal violation (or any regulatory violation found whatsoever).

In voting to approve the settlement, Commissioner Buerkle emphasized that the “when, if ever, an individual officer or director of a corporation can properly be made a Respondent in a contested recall case—is one of enormous consequence for consumers and manufacturers alike.”  She expressed concern that if the CPSC staff lawyers “can alter our fundamental policy judgments about whom to sue and why, by amending the complaint,” the regulation reserving this power to the Commission “is virtually meaningless.”

The Buckyballs settlement leaves these questions unanswered. While the CPSC is unlikely to routinely add corporate officers as respondents in actions or casually wield the powerful threat of individual liability in voluntary recall negotiations, it will retain the ability to do so. The Buckyball’s matter certainly shows the Commission’s willingness to take an aggressive approach to regulation and enforcement, even if it means climbing far out on a legal limb.

Have we heard the last of Buckyballs? Not necessarily.

Cause of Action, the group assisting Zucker with his legal defense, has claimed that “the CPSC sued him as an act of retaliation after he criticized the agency for heavy-handed enforcement actions that allegedly crippled his business.” The group vowed to continue pursuing litigation against the CPSC to uncover documents through a Freedom of Information Act (FOIA) request that might show the commission “values retaliation against its critics above its own mission to protect consumers.”

Meanwhile, the CPSC continues to pursue an action against Zen Magnets and Star Networks, two other magnet brands. A proposed rule designed to ban all small magnet desk sets also remains pending since September 2012.

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