Product Liabilities: Recalls vs. Reporting

In the opening session of Managing Risk @ Retail in June, moderator Carol Arendall, senior director, Risk Management, OfficeMax, Naperville, Ill., along with panelists from conference-sponsor Marsh, Inc., engaged the audience in a lively and informative discussion on how retailers should prepare for a product recall.

It was not only a timely topic, given the preponderance of headlines featuring product recalls on everything from toys to tomatoes, but it also provided an ice-breaking forum that enabled attendees to quickly warm up to the networking discussions that would follow. Katherine Ann Cahill, global managing director of product risk services, Marsh, Inc., New York City, and Julie Ross, VP, who heads product-recall placement at FINPRO Special Insurances and is based in Marsh’s London office, posed a series of thought-provoking questions, statistics and case studies.

Cahill, who has been involved in more than 5,000 product-recall engagements, opened with a question about a retailer’s responsibility to the public and its product liability: “In the United States, is a retailer held in the same light as a manufacturer or wholesaler?”

“Yes,” she answered, explaining that there is “strict liability under Section 402 of the product liability statute that makes everyone in the supply chain liable.”

“The Consumer Product Safety Commission [CPSC] has jurisdiction over 15,000 types of products which are put into the stream of commerce by manufacturers, distributors, importers and retailers,” she noted. “In 2007, the CPSC obtained the largest number of voluntary recalls in the last 10 years, a total of 472 recalls, involving 110 million product units. Additionally, in 2007 the CPSC obtained $2.75 million in civil penalties for violations of safety rules.”

Although product recalls can be cumbersome and costly for retailers, the more challenging concept to grasp is the depth and breadth of product liabilities.

“There is a difference in a product recall and product liability,” noted Cahill. “When there is a safety-related issue, [government agencies] will require a recall if there is the potential to cause injury or if the product has injured.”

Retailers typically have a clear understanding of when to react to a product recall. For instance, with the recent salmonella outbreak that was initially attributed to tainted tomatoes, many food retailers and restaurants voluntarily stopped offering tomatoes even before the FDA issued official warnings.

The grayer area has to do with reporting what appear to be more isolated incidents.

“A key take-home message that you need to leave with,” Cahill told conference attendees, “is an understanding of what the reporting requirements are. Rule No. 1: You have to know under what circumstances you must report an incident and to whom you report it.”

The rhetorical question she posed to attendees: “If you are selling 1 million widgets and one of them caused an event, is that one event sufficient to be reportable?”

The answer, which of course no one wanted to hear, was “Yes.”

The consequences for a retailer that doesn’t report are assorted fines and penalties. However, even more damaging is the reputational fallout to a retailer’s brand after the Consumer Product Safety Commission publicizes a retailer’s failure to report.

There are exceptions to the reporting rule. For instance, if a retailer becomes aware of a potential problem and pulls a product before it reaches channels of consumer distribution, then the retailer does not have to report it. However, if the retailer is aware of a problem and that product is distributed to other retailers as well, then the retailer still has an obligation to report the problem.

An additional take-away message was that ignorance is not a legitimate alibi.

The example shared was a gift-with-purchase promotion that a footwear manufacturer ran to promote the sale of children’s shoes, including a bracelet with the purchase of a pair of sneakers. Tragically, a child removed a charm from one of the bracelets, swallowed the charm and subsequently died from lead poisoning that was linked to the charm.

The question posed to conference attendees: “Did the retailer where the shoes were purchased have an obligation to know there was lead in the charm?”

Opinions ran the gamut from “Absolutely not” to “Of course they should have known.”

The director of risk management for a footwear retailer, which was not impacted by this particular incident, argued that knowing the charm had lead paint was an “unreasonable standard” to hold the retailer to and monitoring products at that level would involve a “huge expense.”

Dena Abdallah, claims manager, OfficeMax, countered that retailers have a moral as well as a legal obligation to ensure the safety of products.

The consensus, arrived at after a spirited debate, was that retailers should push responsibility back through the supply chain and require manufacturers to test products. However, this would require spot testing during manufacturing as well as training with vendors to ensure understanding and compliance.