Earlier this year, manufacturers (including importers of record) became subject to several new children’s product safety rules: the lead substrate, phthalate and ASTM F963 mandatory toy safety standards. These standards join the small parts and lead paint rules, which have been in effect for some time. Several recent actions by Congress and the CPSC, however, provide limited relief for certain manufacturers from these standards.

The CPSC approved a component testing rule as a response to industry concerns about the burdens of product testing and duplicative testing. The component testing rule, which went into effect in December 2011, permits manufacturers to obtain certificates from suppliers of component parts and to rely on those certificates, as long as the manufacturer uses “due care” to justify such reliance. This is critical, since the manufacturer is still responsible for its product’s compliance with the underlying safety standards. Therefore, manufacturers have to be vigilant in maintaining extensive documentation, including copies of the certificates on which they rely, along with the third party test reports.

In August 2011, Congress enacted H.R. 2715, which amends the CPSIA and the CPSA. H.R. 2715 offers a reprieve for small businesses that manufacture a limited quantity of products. As a result of H.R. 2715, the CPSC is required to develop alternative, low-cost testing requirements for small manufacturers. In response, the CPSC promulgated a rule that provides that small batch manufacturers are exempt from certain third party testing requirements for covered products. To be considered a “small batch” manufacturer, a business must have no more than $1 million in gross revenue from sales of consumer products in the previous calendar year. “Covered products” are those of which the manufacturer made no more than 7,500 units in the previous calendar year. To qualify for the exemption, a manufacturer must first register with the CPSC as a small batch manufacturer (go to www.SaferProducts.gov). Following this registration, the manufacturer will be exempt from some, but not all, third party testing requirements. The exemption applies to the lead content, phthalate, and ASTM F963 mandatory toy safety standards. It does not provide relief from the lead paint rule, children’s metal jewelry standard or rules relating to infant and toddler products. While the exemption provides relief from certain third party testing requirements, the manufacturer is still required to certify that products comply with the underlying safety standards.

Another significant change could provide a respite from the tracking label requirement for some manufacturers. The CPSC now has the authority to exclude certain products from this requirement or to provide alternative labeling requirements if the statutory tracking label requirements are determined not to be practicable for those products.

On Friday, the FDA announced that it would not ban bisphenol A, commonly referred to as BPA, in food packaging. An FDA spokesperson stated that “there is not compelling scientific evidence to justify new restrictions.” BPA is a chemical additive commonly used in plastic food containers and the lining of canned food products. Some studies have shown that BPA is an endocrine disruptor with potentially adverse health effects.
The FDA’s decision not to ban BPA was issued as part of the settlement of a suit brought in the U.S. Circuit Court of Appeals for the District of Columbia in 2010 by the Natural Resources Defense Council (NRDC). NRDC filed the suit when the agency failed to act on NRDC’s 2008 petition to prohibit the use of BPA in food packaging. The court ordered the FDA to issue a decision by March 31.
The decision is a blow to public health advocates and consumer groups, who have been lobbying to ban BPA, particularly in baby bottles and toddler sippy cups. Some states, including Connecticut, Maryland, Maine, Minnesota, Washington, California, and Wisconsin, have enacted legislation limiting the use of BPA in certain products. Bans have also been passed at the local level, including statutes in Suffolk County, New York and Chicago, Illinois. Various bills have been introduced at the Federal level, most recently the Ban Poisonous Additives Act, which has been sitting in House and Senate committees for over a year. We do not anticipate movement on this bill until after the November election, although some companies are voluntarily eliminating BPA from their products and packaging in response to consumer demand and the patchwork of state laws described above.

It is not uncommon for a minority shareholder to cry foul when the corporation is sold and the shareholder believes he received less than fair value for his shares. Such claims often result in shareholder oppression suits, with the majority shareholder accused of having breached a fiduciary duty to the minority owner. Now it seems that controlling shareholders of even privately held corporations have another potential adversary: the Securities Exchange Commission. The SEC recently sued Stiefel Laboratories and its then-controlling shareholder and CEO Charles Stiefel, alleging that they defrauded current and former employee shareholders out of more than $110 million by buying back shares in the company at undervalued prices prior to the sale of the company to GlaxoSmithKline PLC.

The complaint alleges that the defendants misled the employee shareholders, who had acquired the shares as part of a stock bonus plan, by concealing material information about the potential acquisition of the company by GlaxoSmithKline. Information regarding several offers from private equity firms to acquire stock in the company at a higher price than the valuation provided to employees was also allegedly withheld from employees. The complaint further asserts that the valuation that the company provided to employees was prepared by an unqualified accountant who used flawed methodology. Adding insult to injury, a 35% discount incorporated into the valuation was not disclosed to the employees.

The complaint cites, among other things, the company's repurchase of 800 shares from employees at a price equal to $16,469 per share in the months leading up to the sale to GlaxoSmithKline, which acquired the company for $68,000 per share. As a result of the reduced number of outstanding shares, the remaining shareholders (consisting mostly of Stiefel family members) received a windfall.

The SEC warns that privately held companies and their officers should be aware that federal securities laws are intended to protect all shareholders, regardless of whether they acquire their shares in a private transaction such as a stock bonus plan or on a public market. Corporate officers in corporations with stock bonus plans should take care to obtain appropriate valuations to support stock repurchases from accredited professionals using commonly accepted valuation methodologies. Stock option plans and corresponding summary plan descriptions should be carefully reviewed, with a particular focus on their stock repurchase provisions. All material facts must be fully disclosed to plan participants in a timely manner.

To avoid post-transaction cries of foul play from former shareholders, we often include “tail” provisions that allow the former shareholders to enjoy the same economic benefit of a major company transaction such as a sale or merger that follows the sale of their shares. Such provisions are usually of limited duration (e.g., twelve months). This protects the company and senior management from claims like those raised by Stiefel Laboratories employees after the expiration of the tail period.

Effective January 1, the CPSC lifted its stay of enforcement of the third party testing and certification requirements for lead content, phthalates and the ASTM F963 mandatory toy safety standards. As a result, manufacturers and importers of children’s products subject to those requirements must issue children’s products certificates (or CPCs) that certify that the product meets these standards.

In August, 2011, Congress passed H.R. 2715, which modifies the CPSIA and the CPSA. Soon afterward, President Obama signed this bill into law. This legislation makes it clear that the new 100 ppm lead content requirement applies only to products manufactured after the effective date (August 14, 2011) and does not apply retroactively to products in inventory (as long as they meet the earlier 300 ppm level). Under H.R. 2715, some products are exempt from the third party testing requirement for lead content, such as ordinary books (books printed on paper or cardboard) and most used children’s products (with some exceptions, such as children’s metal jewelry). In addition, a party in interest may apply for an exemption from the lead content rule under the new “functional purpose exception,” and the CPSC may issue an exception on its own initiative. To qualify for an exception, a product must meet three tests: (i) the product must be made with lead because it is not practicable or technologically feasible to remove the excessive lead or to make the lead inaccessible; (ii) the product, class of product, material or component part is not likely to be ingested by a child or placed in a child’s mouth; and (iii) exposure to the product, class of product, material or component part will have no measurable increase in blood lead levels.

The phthalate rule applies to certain classes of phthalates, which are chemical compounds added to plastics to enhance their durability and elasticity. The phthalate ban applies to two classes of products: (i) all toys (products designed and intended for children age 12 or younger for use by the child when he or she plays), and (ii) all childcare articles (products designed or intended to facilitate sleep or feeding of children age three and younger or to help children with sucking or teething). H.R. 2715 amended the phthalate requirements to exclude inaccessible parts, similar to the existing carve-out for lead content limits, but we are still waiting for the CPSC to develop guidance on the scope of this exception.

At 63 pages, the Consumer Product Safety Improvement Act of 2008 is a hefty piece of legislation with wide-reaching (and sometimes unexpected) effects on the consumer product and toy manufacturing, import and retail industry and the consumers who purchase its products.. The underlying subject matter of the Act is complex, and the Act is therefore dense and at times confounding and frustrating. The Act was amended this summer to address some of the industry’s concerns. We at AMM are launching this blog to provide a forum for sharing insights, and we hope to generate some interesting discussions that will benefit our readers.

We’ve all heard of someone who hit the Enter key too quickly and sent an email he later regretted sending. Unfortunately, in some cases, the result is that the correspondents are deemed to have entered into a contract, without a formal writing and even in the face of evidence that the parties intended to later sign a formal contract. That was the case a few years ago when counsel for Amazon.com sent a one-word reply (“Correct”) to an email from opposing counsel outlining several specific terms of a settlement of a lawsuit. A Pennsylvania court faced a similar case in 2006, when it enforced an unsigned settlement agreement between Commerce Bank and First Union National Bank after concluding that the signing of the agreement was a mere formality since the parties had already evidenced their intent to be bound.

A company’s customer lists, price lists, marketing strategies, and other trade secrets are vital to its success. A smart business owner will ensure that key employees sign non-disclosure and non-compete agreements to protect the business if the employee leaves and takes a job with a competitor. But what if the company is sold? Does the buyer enjoy the benefits of the restrictive covenants contained in the selling company’s employment agreements? The answer is “it depends.” In Pennsylvania, if the purchase is structured as an asset purchase transaction, the buyer does not receive the benefit of the restrictive covenants contained in the seller’s agreements with its employees unless those agreements specifically state that the covenants are assignable. This is because these covenants are viewed as trade restraints that impair a former employee’s ability to earn a living and therefore are interpreted as narrowly as possible to protect the employer’s legitimate business interest.

The amendment to the CPSIA provides much-needed clarity and relief for many manufacturers, particularly small manufacturers and those in specific industries such as book publishers and bicycle and off-highway vehicle manufacturers. The determination that the 100 ppm lead content limit does not apply retroactively to products in inventory is certainly a welcome development for manufacturers. On the other hand, the new legislation does not contain some of the industry-friendly provisions contained in prior bills, such as delaying the implementation of the 100 ppm standard until 2012 and restricting the lead limits to products designed primarily for use by children age six and younger that can be placed into a child’s mouth. Nevertheless, the opportunity to provide comments and suggestions with respect to third party testing requirements offers manufacturers and other stakeholders the ability to voice their remaining concerns, and the new functional purpose exception will allow manufacturers to seek relief from the lead limits. I’m curious to see the comments of the various stakeholders…

Toy manufacturers, importers and retailers breathed a collective sigh of relief on August 1 at Congress’s clarification that the 100 ppm lead content limit, which went into effect on August 14, does not apply retroactively to children’s products in inventory. This standard only applies to products manufactured after August 14.

In addition, Congress codified the “functional purpose” exception that has been discussed in industry circles since the adoption of the CPSIA. In essence, this provision permits the CPSC to grant an exemption from the lead content rules if it determines that: (i) a product (or class of product, material, or component part) cannot be manufactured without lead either because it is not practicable or because it is not technologically feasible, (ii) the product is not likely to be placed in a child’s mouth or ingested during the normal and reasonably foreseeable use and abuse of the product; and (iii) granting an exception would have no measurable adverse effect on public health. Historically, the effect on public health was measured by reference to blood lead levels in children. The new law permits the CPSC in its discretion to adopt an alternative method. An exception can be granted by the CPSC on its own initiative or upon application of an interested party, in which case the interested party bears the burden of proof.

The legislation contains an exemption from the lead limits for off-highway vehicles (including snowmobiles). It also exempts used children’s products other than children’s metal jewelry and children’s products for which the seller or donor has actual knowledge of non-compliance.

The CPSIA limits or bans the use of certain phthalate compounds in toys and child care articles. The new legislation clarifies that these limits do not apply to component parts that are not accessible to a child through normal and reasonably foreseeable use and abuse of the product, as determined by the CPSC. More specifically, if a component part is not physically exposed to the child by reason of a sealed covering or casing and that covering or casing is not likely to be disturbed through reasonably foreseeable use and abuse of the product (including swallowing, mouthing, breaking or other children’s activities, as well as the aging of the product), then that part is not accessible to a child. The CPSC is charged with the task of developing a rule to provide guidance with respect to this provision.

The recent amendment to the CPSIA has several effects on the third party testing of children’s products. It clarifies that the CPSC must establish standards and protocols for the testing of representative samples (rather than the more stringent requirement of using random samples). It also directs the CPSC to revisit existing third party testing regulations within one year, taking into account public comments as to how testing costs might be reduced. Congress suggested that such comments might touch on topics such as redundant third party testing, sampling procedures, component testing, use of alternative testing technologies, and whether compliance with international standards should provide a reference for CPSC compliance.

The new law requires the CPSC to consider the economic, administrative and other limitations applicable to small batch manufacturers (generally defined as manufacturers with annual total gross sales of no more than $1 million) when implementing third party testing requirements. It must provide, after notice and a hearing, alternative testing requirements for covered products manufactured by small batch manufacturers. Alternatively, the CPSC may allow certification of a product produced by a small batch manufacturer based on compliance with another national or international governmental standard, as long as that standard is at least as rigorous as the consumer product standard enforced by the CPSC. The small batch manufacturer exemption, however, is not applicable to the lead paint and small parts standards nor is it available for certain classes of children’s products, such as cribs, children’s metal jewelry, and baby bouncers, walkers and jumpers.

Under the new law, ordinary books and ordinary paper-based printed materials are no longer subject to the third party testing requirements of the CPSIA. Additionally, the third party testing requirement as it pertains to lead content no longer applies to metal component parts of bicycles.