Take this short poll and let us know what you think.  When you are done, you will have the opportunity to see how others responded.

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Fifteen companies each paid $100,000 or more, versus just six companies paying amounts over $100,000 in 2008. Because the Consumer Product Safety Improvement Act of 2008 (CPSIA) allows for higher penalties, the settlement sizes are expected to increase in the future. In addition, because of the tougher regulations, we expect to see more companies in violation and, therefore, more fines. From 2003 to 2007, no more than ten companies faced civil fines in each year. That number rose to 23 in 2008 and, as noted, jumped again in 2009 to 38.

Violations of the federal lead paint ban topped the CPSC penalties charts in both 2008 and 2009. The largest civil penalty in 2008 was Reebok’s $1 million penalty for allegedly importing and distributing charm bracelets that contained toxic levels of lead, which Reebok recalled in 2006.  The largest settlement in FY ’09 was Mattel’s $2.3 million penalty for products recalled in 2007 due to excessive lead, lead paint and small magnets.

Another hot button issue in 2009 was failure to report drawstrings in children’s outerwear. During the fiscal year, 20 firms settled with the CPSC over issues related to drawstrings. In April, the CPSC announced agreements with 14 firms, each firm agreeing to pay between $25,000 and $315,000.

In 2009, besides lead paint and drawstrings violations, several firms were fined for failure to report possible product hazards in a timely manner. In one such example, Mega Brands America Inc., formerly Rose Art Industries Inc., agreed to pay a $1.1 million civil penalty to settle allegations that the firm failed to provide the government with timely information about the Magnetix magnetic building sets. The CPSC Mega Brands press release said, “by the time Rose Art agreed to the recall of Magnetix in March 2006, the firm had received more than 1,500 complaints of magnets falling out of plastic pieces in more than 65 different models of Magnetix.”

Failure to inform the CPSC is not a new violation. According to the CPSC Recall Handbook published in 1999, companies are required to report to the CPSC within 24 hours of receiving or identifying information “that reasonably supports the conclusion that a product fails to meet a consumer product safety rule, standard, or ban, contains a defect which could create a substantial product hazard or creates an unreasonable risk of serious injury or death.”

Looking at some of the other notable penalty years, we find that, in 2005, the largest settlement was for Graco’s $4 million penalty to resolve CPSC charges that it failed to inform the CPSC in a timely manner about more than 12 million products that posed a danger to young children nationwide. And, in 2001, the largest settlement was for Cosco and Safety 1st’s $1.75 million penalty, also for failure to report. Both Cosco and Safety first are subsidiaries of Dorel Industries, Inc. Cosco agreed to pay $1.3 million to settle charges that it failed to report product defects with cribs, strollers, car seat carriers and high chairs. Safety 1st paid $450,000 to settle charges it withheld information about defects with its walkers and wipe warmers.

Civil penalties are negotiated settlements that result from CPSC’s enforcement activities. The CPSC cannot use these civil penalties funds, so enforcement activities do not affect the agency’s budget. Settlements take time, so the fines typically are not determined in the year in which the violation took place. In the magnet example above, the settlement was finalized in April 2009, but the related recalls took place in 2006 and 2007.

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I am not a battery expert, nor have I seen the CPSC documents related to the iPhone and iPod incidents; however, based on my research of lithium batteries when looking into remote control helicopter recalls, I would not be surprised if it turns out that the iPhones and iPods in question had been dropped at some point, either during manufacture, shipping or use. 

Lithium batteries, while lighter and able to pack more power into a smaller package compared to nickel-cadmium, are unstable and require special mechanisms to function properly. Should those mechanisms be disturbed, overheating, which can lead to fire and explosion, may ensue.  Here are some of the facts:

•  Lithium-ion is fragile and requires a protection circuit to maintain safe operation.

•  The maximum charge and discharge current must be properly limited; overcharging is dangerous.

•  The battery will become more vulnerable to failure if subjected to impact, crush or high rate charging.

•  Lithium-ion Polymer, generally thought of as safer and more stable, is often compromised in commercial use to improve conductivity.

Although there are several other factors in the case of iPhones that could be causing issues, such as overworked processors, looking back on the numerous lithium battery operated products that have been recalled over the past several years, I again find myself questioning the safety of this power source in certain products.  U.S. manufacturers and importers announced more than 30 lithium battery related recalls during the five year period from 2004 through 2008, involving nearly 14 million product units.  While most recalls involved computer batteries, products ranging from bicycle lights to toys experienced problems. As a side note, it will be interesting to watch the safety reports of the many new lithium-ion powered cars.

With regard to CPSC documents that identify reports of iPhone failure, anyone can request such documents under the Freedom of Information Act (FOIA), but companies are afforded intellectual property protection.  Therefore, if a company claims that documents expose proprietary technology or trade secrets, the documents will not be released.  However, if it is true that KIRO-TV received documents from the CPSC as noted in the above referenced report, one could simply ask to see a copy of the documents already provided to the news station.  There may be a fee associated with the physical copying or scanning, but the time to receive the documents should be less than the seven months reported by KIRO now that the documents already have been produced. Here is where to request the information:  http://www.cpsc.gov/library/foia/foiaonline.html

Interestingly, because of new rules imposed by the Consumer Product Safety Improvement Act of 2008 (CPSIA), consumers soon may be able to find this type of information online.  Sec. 212 of the CPSIA mandates that, "subject to the availability of appropriations," the CPSC must create an online searchable database of incident reports; information that currently must be formally requested under FOIA.  Companies will still have an opportunity to claim intellectual property rights (though less likely to stick given that the information will be coming from consumers) and will be allowed to provide comments to be published alongside the reports.  The database is scheduled to come online by August 14, 2010.

As for iPhone, regardless of what is in the CPSC documents, Apple has taken the possibility of dangerous overheating seriously enough to release an update that includes a temperature warning screen, though the temperatures are so extreme (less that 0 degrees F and greater than 113 degrees F) that most will never see the warning.

It may be too early to say whether the CPSC will require Apple to issue a recall related to iPhones.  Nevertheless, as a practical matter, in addition to watching the ambient temperatures and heeding warning screens, if you drop your iPhone or iPod – or any other lithium battery operated device for that matter – consider replacing the battery, especially if you notice unexplained changes in charge cycles.

Here’s some general information from Apple on their lithium batteries:
http://www.apple.com/batteries/ 

And, here is some research on the pros and cons of lithium batteries:
http://en.wikipedia.org/wiki/Lithium-ion_battery
http://www.popularmechanics.com/technology/upgrade/4204202.html
http://electronics.howstuffworks.com/lithium-ion-battery.htm

Please go on in to check it out and let us know what you think – feedback links at the top of every page.  Also, be sure to follow us on twitter @WeMakeItSafer (http://twitter.com/wemakeitsafer) as we will be continuously rolling out new content and features.

Please tell all your friends – especially those with kids at home or those with senior family members living alone – to stop by the site and peruse our simpler than ever recalled-product gallery to make sure there aren't any items in their homes with safety defects.  Unfortunately, nearly everyone owns dangerous, recalled products without knowing it.

And, don’t forget – never buy or sell another secondhand item without running a search at WeMakeItSafer.com first.  Together, we can make the world a safer place.

Commissioner Moore commented that "This penalty should serve notice to toy makers that CPSC is committed to the safety of children, to reducing their exposure to lead, and to the implementation of the Consumer Product Safety Improvement Act."

While manufacturers may sit up and take note, for a company the size of Mattel at $5.9 billion in annual revenue, $2.3 million won't be felt at all on the bottom line, and determining whether the announcement has any impact on Mattel’s immediate stock price will have to wait a few days.  Although the deal was signed on May 29, 2009, it was not announced until today, after the market closed on a Friday. 

In a touch of irony, The Motley Fool’s James Early mentioned the stock in his “The Best Stock to Own” post, published just an hour or two before the settlement announcement:

Perhaps today’s settlement will signal to investors the end of a difficult period for Mattel and a chance to finally move forward.   However, the question remains whether today’s settlement will settle the matter in the minds of consumers.  As long as Mattel can avoid further missteps, my guess is that it will and, other than some minor residual effects from the reminder of Mattel’s faltering, consumers will soon get over it.  After all, our kids love Barbie, Dora, Elmo, Sarge and the rest – we’ve been searching for reasons to forgive Mattel for over a year now.

As part of an ongoing study of the financial impacts of product recall, WeMakeItSafer will be watching the Mattel stock closely over the next several weeks.  Check back for future publications on our findings.

What these individuals correctly
assume is that product recalls are expensive to conduct.  What they are missing, however, is that there
are many indirect expenses that may outweigh any incentives to hide or slow a recall.  In my article, Company Recall Costs: Incentives to Fix or Ignore Recall Effectiveness Problems, I identify many of
the direct and indirect costs of recalls and discuss whether the influence is
likely to be positive or negative with respect to a company’s propensity to act
responsibly – that is, to do everything possible to retrieve defective products,
even if that means doing more than what the law requires. 

You can read the full article by
clicking the link above.   A summary of
my main points, and excerpts from my conclusion are presented here.

• Direct costs include the cost of implementing the recall, lost inventory and reversed sales.
• Direct costs tend to increase as recall
  effectiveness increases.
• Indirect costs include government
  fines, product liability claims and lost future sales; the last of which is driven by brand-image and Corporate Social Responsibility (CSR) effects.
• Indirect costs tend to decrease as recall
  effectiveness increases.

The chart above summarizes recall
costs and whether each carries a positive or negative incentive for companies
to ensure the recall is effective.  Although
quantifying these cost incentives is difficult and goes beyond the scope of the
paper, I do offer this small bit of analysis:

 
In the fall of 2007 Mattel faced
several recalls in a short period of time due to loose magnets and lead paint
violations.  Even though the fraction of
Mattel’s products that were affected was very small, the company suffered
significant impact on its stock price. 
Given that Mattel had $5.5 billion in annual sales at the time, and
that the then-current direct recall costs were only $69 million, something else
must have been driving the bulk of the impact.[1]  Shareholders and analysts were building in
expectations regarding the recalls’ impact on Mattel’s future sales, which are captured
in direct costs.

 
Therefore, while it may seem
counterintuitive, when all costs are considered, companies have an incentive to
implement the most effective recalls possible; that incentive being improved
financial performance.  It may be the case that companies that do
not go the extra mile to locate defective products and communicate with
consumers quickly are budget constrained, but more likely they are too focused on direct costs.  

• On average, product recalls have a statistically
  significant, negative impact on a recalling-company’s stock price.
• 
  The industries most financially impacted by
  recalls are drugs, cosmetics, toys and appliances.
• Loss of market share is the biggest cost of a
  recall.
• A company’s reputation, both as a safe brand and
  as a responsible company, heavily influences sales and stock prices.
• How a product recall is handled has at least
  as great an impact on a company’s reputation as does having to issue the recall
  in the first place.
• Prompt, complete and direct recall notification can protect and even improve
  brand image, Corporate Social Responsibly (CSR) ratings and financial performance.

The bottom line is that while, in general, the market
responds negatively to product recalls, the effects are due to how the market
perceives a company’s ability to retain customers and maintain
sales.   The company’s reputation – both as a safe brand and as a
responsible company – help drive this perception, and therefore stock
performance, surrounding product recalls. The good news for companies is that making the
decision to recall a product does not mean resigning itself to either bad or
very-bad financial results. Conducting
an effective recall with the right messaging can not only protect its
financial performance but, in some cases, improve its position in the market.

If you would like more information about this research, please email me at: jennifer [at] WeMakeItSafer [dot] com.