Silence Isn’t Golden: Two Executives Convicted in First Criminal Prosecution Under the Consumer Product Safety Act

Although the Consumer Product Safety Act (CPSA) has been around for over 50 years to “protect the public against unreasonable risks of injury associated with consumer products,” it was not until 2008 that the statute was amended to authorize the Consumer Product Safety Commission (“CPSC”) to impose criminal liability against individual directors, officers, or agents of a corporation for violating the CPSA.  See 15 U.S.C.  § 2070.  Now, fifteen years later, on Nov. 17, 2023, the Department of Justice (DOJ) announced the first-ever conviction of two corporate executives in a criminal prosecution for failure to report a consumer product defect under the CPSA.

What led to this conviction?  It is a long story that started more than a decade ago.  It involved Gree Electric Appliances Inc. of Zhuhai, Hong Kong, Gree Electric Appliances Sales Co. Ltd., and Gree USA Inc. (the “Gree Companies”), an appliance manufacturer and two of its subsidiaries that were involved in the manufacturing, marketing, and sale of dehumidifiers.  According to the government, these companies knew as early as 2012 that their dehumidifiers were defective, in that they could overheat and catch fire.

The government also alleged that the Gree Companies and some of its executive officers knew of their obligation to report this information to the CPSC in a timely manner, but not only did they fail to report (for at least six months), they willfully continued selling products to avoid losing customer contracts, and  used falsified UL certifications to lie to the public about the safety of the dehumidifiers.

DOJ’s enforcement against the Gree Companies and its executives occurred in stages.  First, as is more common under the CPSC, the Gree Companies agreed to pay civil penalties for failing to make the required reporting to the CPSC.  At the time, in 2016, the Gree Companies’ settlement for $15.45 million in civil penalties set a new record for CPSC.

In 2021, DOJ announced that the Gree Companies agreed to plead guilty to one felony count for willfully failing to report consumer product safety information as required by the CPSA.   According to DOJ, the action against the Gree Companies represented the first corporate criminal enforcement action brought under the CPSA.

Then, earlier this year, in April 2023, Gree USA, Inc., the U.S. subsidiary of the Chinese appliance company, was sentenced to pay a $500,000 criminal fine.  The fine, along with provisions to pay restitution to victims, was part of a $91 million resolution with the three related Gree Companies.

Gree USA’s Chief Executive Officer, Charley Loh, and the Chief Administrative Officer, Simon Chu, however, did not agree to the plea deal for the corporate entity, and elected to go to trial.

According to the prosecution, Defendants Chu and Loh:

• deliberately withheld information about the defective and dangerous dehumidifiers from the retail companies that bought the dehumidifiers; from the insurance companies that paid for damage caused by the fires resulting from the dehumidifiers; and from the CPSC.
• continued to sell the dehumidifiers to retailers with false certifications that the products met safety standards, including the UL flammability standard;
• caused a company employee to solicit materials that would falsely portray to an insurance company that the dehumidifiers were safe and not defective; and
• sent an untimely report to the CPSC that falsely stated that the dehumidifiers were not defective or hazardous.

The government charged these individuals with conspiracy (18 U.S.C. § 371), failure to immediately report required Information to the CPSC (15 U.S.C. §§ 2068(a)(4), 2070), and wire fraud (18 U.S.C. § 1343).  After a brief trial, on Friday Nov. 17, 2023, DOJ announced that both defendants had been convicted of conspiracy and failure to immediately report the defects in the dehumidifiers to CPSC. Both defendants were acquitted of the wire fraud charges.  Per DOJ, this is the first-ever criminal prosecution of individuals for failure to report under the CPSA.  The two defendants face a maximum of five years in federal prison on each of the counts; a sentencing hearing is set for March 11, 2024.

Although the facts of these criminal enforcement actions are quite extreme and not limited to a mere failure to delay reporting of a product defects, the criminal actions and conviction of corporate officers serve as a reminder and as a warning to companies and corporate officers that CPSC has the tools to aggressively pursue action against those who fail to take consumer product safety seriously and do not follow the law.  Like FDA’s long-touted authority under the Park Doctrine, time will tell whether this recent prosecution will become a trend or whether they will be reserved for only the extreme scenarios.  Regardless, companies would be well-advised to ensure that they have the processes and policies in place so that they can (and will) timely comply with the reporting requirements related to defective consumer products.  Where it concerns the CPSC mum’s certainly not the word!