On November 16, 2023, a jury convicted two executives of an appliance sales and distribution company for conspiracy and for failing to report a consumer product defect under the Consumer Product Safety Act (CPSA). According to the U.S. Department of Justice, the case represents the first-ever prosecution of corporate executives under the act. The DOJ’s November 17, 2023, press release about the prosecution can be found here. The Hyman, Phelps, & McNamara law firm’s November 28, 2023 memo about the prosecution can be found here.
Simon Chu and Charley Loh were part owners and officers of two companies based in California – Gree USA Inc. and Gree Electric Appliance Sales – that distributed and sold to retailers for consumer purchase dehumidifiers made by Gree Electric Appliances Inc. of Zhuhai, China. The government alleged that as early as September 2012, Chu, Loh, and their companies received multiple reports that their Chinese dehumidifiers were defective, dangerous, and could catch fire. In its press release about the prosecutions, the DOJ says that more than 450 fires and millions of dollars of property damage were linked to the Gree Zhuai dehumidifiers.
The CPSA requires manufacturers, importers, and distributors of consumer product to report “immediately” to the Consumer Product Safety Commission (CPSC) information that reasonably supports the conclusion that a product contains a defect that could create a substantial product hazard or creates an unreasonable risk of serious injury or death. The duty also applies to the individual directors, officers, and agents of those companies. In 2008, the CPSA was amended to impose criminal liability against individual directors, officers, or agents of a corporation for violating the CPSA.
The government alleged that Chu and Loh not only knew that the dehumidifiers were defective and dangerous, but they also allegedly knew that they were required to report the product safety information to the CPSC immediately. Despite their knowledge of consumer complaints of dehumidifier hazards, Chu and Loh failed to disclose the dehumidifiers’ defects and hazards for at least six months while they continued to sell their products to retailers for resale to consumers.
In April 2023, Gree USA was sentenced to pay a $500,000 criminal fine after pleading guilty to failing to notify the CPSC of the problem with the dehumidifiers. The criminal fine, along with provisions to pay restitution to victims, was part of a $91 million criminal resolution with Gree USA, Gree Zhuai, and Gree Electric. The resolution completed what the DOJ said was the first ever corporate criminal enforcement action ever brought under the CPSA. Chu and Loh were not part of the plea deal with the corporate entities, and instead they elected to go to trial.
The Prosecution and Conviction
The two individuals were charged with conspiracy; failure to immediately report required information to the CPSC; and wire fraud. Among other things, the government alleged that the two individuals withheld information about the defective and dangerous dehumidifiers from its retail store customers, from the insurance companies that paid for the damage caused by the defective humidifiers, and from the CPSC; continued to sell the dehumidifiers to retailer with false certifications that the products met safety standards; caused an employee to solicit materials that would falsely portray to an insurance company that the dehumidifiers were safe and not defective; and sent untimely reports to the CPSC that falsely stated that the dehumidifiers were not defective or hazardous.
On November 16, 2023, a jury convicted the two men of conspiracy and failure to report the information to the CPSC. The two men were acquitted of the wire fraud charge.
The DOJ was clearly trying to send a message with this prosecution (as well as the prior prosecution of the corporate entities). The DOJ’s press release states that the agency “will prosecute companies and their employees when they willfully put the public in harm’s way by failing to report known dangerous products.” The press release quotes one of the prosecuting attorneys as saying that “it is critical to hold corporate executives accountable for misconduct.”
While this case, according to the DOJ, represents the first-ever criminal prosecution of corporate executives under the CPSA, the case nevertheless reinforces the proposition that the risks and exposures that corporate executives face includes the possibility of criminal prosecution. This prosecution risk includes not only more widely known and appreciated risk such as those associated with violations of the federal securities laws, but can also include a wide variety of other types of potential criminal liability – including even potential criminal liability for consumer product safety reporting violations.
The law firm memo to which I linked above notes that while the facts involved in this prosecution are “quite extreme and not limited to a mere failure to delay reporting.” The prosecution and conviction of these two individuals serve as “a reminder” and “a warning” to companies and to corporate executives that the CPSC “has tools to aggressively pursue action against those who fail to take consumer product safety serious and do not follow the law.”
The memo goes on to state that “time will tell whether this recent prosecution will become a trend or whether they will be reserved for only the extreme scenarios.” In any event, the memo concludes, 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.”
The government’s prosecution of these two individuals also seems to me to be an appropriate occasion to note that the typical D&O insurance policy will provide insurance for defense costs associated with criminal charges (usually after indictment). By the same token, however, most D&O insurance policies have provisions precluding coverage for criminal misconduct, but only after a final, non-appealable adjudication establishes that the precluded conduct has taken place.
If the company involved here has a D&O insurance policy with these kinds of provisions, the individuals would – despite their conviction – still be able to continue to tap their company’s D&O insurance policy to fund an appeal.
In some instances, D&O insurance companies, following a final, non-appealable adjudication that the precluded conduct has occurred, may seek to recoup amounts they have paid to support the convicted individual’s defense. Whether or not the company has the right of recoupment will often depend on policy language and applicable law, among other factors. As a practical matter, insurance companies will elect not to pursue recoupment owing to the low likelihood of any recovery.