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The recent rush to recall lead-tainted toys and other products has regulatory and corporate lawyers scrambling to upgrade clients’ testing programs and supplier contracts, as well as bracing for deeper regulation from new legislation. The new legal work generated by the “lead scare” includes helping corporations craft arbitration clauses to share the potential burden with suppliers. The wave of recalls that began last summer culminated in a $1 million U.S. Consumer Product Safety Commission (CPSC) civil penalty against athletic-shoe maker Reebok International Ltd. Reebok accepted the penalty, the highest ever for a Federal Hazardous Substances Act violation, to settle charges related to company-issued charm bracelets with toxic levels of lead. The penalty is awaiting a commission vote to become final. Reebok, which ultimately recalled 300,000 bracelets, initially gave them to customers who bought certain children’s footwear. Keith Wexelblatt, senior counsel to Reebok in Canton, Mass., declined to comment on the fine. Lawyers say both manufacturers and retailers are going beyond current testing and monitoring requirements because they’re expecting more regulation in the near future when Congress reconciles bills that have passed the House and Senate. From part-time to ‘obsession’ “A number of companies are going way beyond what the law requires,” said Jeffrey Bromme, a partner at Arnold & Porter in Washington who was general counsel at the CPSC in the late 1990s. In the past, working on consumer product safety issues “has very much been a part-time profession,” said Chuck Samuels, a legislative and regulatory lawyer in the Washington office of Boston-based Mintz, Levin, Cohn, Ferris, Glovsky and Popeo. “Working on this issue has become the obsession of my career for the last year,” said Samuels, who also specializes in tax and energy-related regulatory issues. The recalls have sparked lawsuits against companies over children’s exposure to lead on toys and even a shareholder derivative lawsuit against Mattel Inc., which claimed that the company’s delays in notifying the government of problems with products led to the stock price plummeting after toy recalls. [NLJ, 10-11-07.] Concern about reputation is also motivating companies to revamp their testing and product evaluation, said Stephen Murphy, a partner in the regulatory litigation group in Reed Smith’s Washington office. “I wouldn’t be surprised to see companies try to go beyond the requirements,” Murphy said. “At the [congressional] hearings last year there was a great deal of corporate embarrassment.” Clients have raised at least two or three, and sometimes up to a half-dozen, lead-related issues each month during the past year, said Josh Johanningmeier, a Madison, Wis.-based lawyer in the products liability and tort practice group of Milwaukee’s Godfrey & Kahn. Johanningmeier is helping clients set up their own testing programs and renegotiate vendor and supply contracts to require partners to test products for compliance with U.S. regulations. The work has involved pulling in some of the firm’s corporate partners, he said. “Companies domestically are really taking this seriously,” Johanningmeier said. “They were thinking their vendor partners were taking care of them before and now they’re thinking maybe they weren’t.” Products from China, for example, are often sourced through one or more middlemen, and U.S. buyers often have little information about how the products are made, said Peter Winik, deputy office managing partner of Latham & Watkins’ Washington office. The lead scares have generated a wide range of work at the firm, he said. Latham has recently helped a manufacturer and distributor client create a compliance program with third-party testing and a system to track products once they’re in the retail stream. And a retail client has recently established its own product-testing program. New ‘due diligence’ Assessing a target company’s consumer products has also become part of a due diligence check in mergers and acquisitions deals, Winik said, particularly for a firm client that periodically acquires other makers of children’s products. “The legislation is the icing on the cake,” Winik said. “I think companies were focusing on it before.” Getting suppliers to share some of financial and legal risks of bringing faulty products to the U.S. market is also a new focus, said Sean Wajert, a Philadelphia lawyer who co-chairs Dechert’s mass torts and products liability practice group. Companies are seeking to add arbitration clauses to new contracts as supply deals expire, Wajert said. “Companies are looking for ways to share the burden of these recalls, which for the most part has fallen on U.S. importers,” Wajert said. “It’s a bargaining issue like everything else. It’s gotten on people’s radar screens.” Arbitration clauses are important because differences in the Chinese legal system means it’s infeasible to file a lawsuit against a Chinese company, either in a U.S. court or in China, Samuels said. U.S. importers are also seeking to bond their Chinese partners as a way of ensuring financial reimbursement for the cost of recalls, he said. Smaller importers, both manufactures and retailers, would sometimes choose products from a showroom in Hong Kong, but that type of arrangement may be bygone, Samuels said. “Now it’s going to be necessary to make inquiries about who made the product, and in addition to greater testing, [there's] more interest in holding the Chinese supplier responsible for the safety of its product,” Samuels said. The House’s Consumer Product Safety Modernization Act, passed in December, and the Senate’s CPSC Reform Act, passed earlier this month, need to be reconciled. But lawyers agree that a law that expands the commission’s budget and staff and enforcement powers is likely this year. “A lot of people felt like it couldn’t be business as usual,” Murphy said. “It came as no surprise that both parts of Congress moved ahead to pass [two] of the more far reaching and potentially impactful [pieces of] legislation in this area in some time.” Both versions also mandate third-party testing of certain children’s products and give state attorneys general enforcement authority. More litigation initiated by the CPSC and the expansion of potential criminal liability for executives, which the commission very rarely used in the past, is on the horizon, Samuels said. “I now need to surround myself for the first time with both civil and criminal litigators,” Samuels said. Senate bill requirement A Senate provision requiring the CPSC to post reports it receives about product-related deaths, injuries or illnesses on an Internet-searchable database within 15 days of receipt could become fodder for plaintiffs’ lawyers, Wajert said. “It’s going to encourage additional litigation on the front end and perhaps be misused in litigation,” Wajert said. Lawyers also say empowering state attorneys general is likely to generate more enforcement claims against companies, Wajert said. “AGs have been willing to take a more aggressive stand on other issues in terms of enforcing rules in their states,” Wajert said. The goal of Congress is to broaden the CPSC’s enforcement resources, but it creates uncertainty for companies, Wajert said.

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