Record penalties a reminder of product safety obligations

In brief

Record US penalties recently imposed on car manufacturers for failures to deal appropriately with safety defects are a timely reminder to Australian manufacturers of their product safety obligations. Partner Belinda Thompson, Senior Associate Jaime McKenzie and Lawyer Ishwar Singh report.

Recent US prosecutions of product liability offences

On 30 June 2014, General Motors announced that it will conduct six product recalls in Northern America, involving approximately 7.4 million cars, of models ranging between 1997 and 2014.¹ General Motors is aware of seven crashes, eight injuries and three fatalities arising from a defective ignition that led to the recall. The expected cost of the recall is $1.2 billion.

Further, on 16 May 2014, the United States National Highway Traffic Safety Administration announced that General Motors had agreed to pay a civil penalty of US$35 million and to make significant internal changes to its business, following its failure to report promptly to regulators a separate safety defect in many of its vehicles, which resulted in the non-deployment of airbags.This is reportedly the single highest penalty imposed by the US regulator resulting from an investigation following a product recall.²

Toyota has recalled 2.3 million cars globally this year, including almost 320,000 vehicles in Australia, due to a number of safety concerns, including airbag failure. Media reports have also claimed that Toyota was aware of some of these safety concerns well before recalls were commenced.³ The recalls were undertaken shortly after Toyota reached a settlement with the US Department of Justice to pay US$1.2 billion to settle criminal charges alleging a 'cover up' of a safety defect linked to dozens of deaths.

Also, in May 2014, Hyundai recalled all of its i35 model vehicles manufactured between 2011 and 2013, due to concerns over the vehicle's airbag and horn. The i35 is Australia's highest-selling small SUV.

These recent examples from the car industry highlight the significant criminal and civil penalties, exposure to litigation and reputational risks that suppliers of consumer goods face in the event of a failure to comply with their obligations to address promptly known safety concerns.

Australia's product liability framework

In Australia, the primary source of a supplier’s obligations in relation to product safety is the Australian Consumer Law (the ACL), which forms Schedule 2 to the Competition and Consumer Act 2010 (Cth). Relevant state and territory laws mirror the ACL's provisions. Together with the obligations imposed on suppliers to notify the regulator about known safety concerns and to undertake product recalls, the ACL empowers the regulator to set mandatory safety standards and information standards for particular products, to issue safety warning notices in relation to potentially dangerous goods and to ban unsafe goods.⁴

Goods associated with death, serious injury or illness

Suppliers must give the relevant Minister written notice of goods that may be associated with the death, serious injury or illness of any person. This is potentially a very broad obligation, as the requirement to notify is triggered if the supplier becomes aware that another person believes that the death or serious injury or illness was caused by the good, unless it is clear that the death or serious injury was not caused, or is very unlikely to have been caused, by the good.

Notice must be given if the injury or illness is 'acute', in the sense that it requires medical treatment by, or under the supervision of, a nurse or doctor, and notice must be provided within two days of the supplier becoming aware of the association between the goods and the injury, illness or death. This mandatory reporting obligation also applies to suppliers of services connected with a product (eg installers and technicians); and all participants in the supply chain for the goods or services, including retailers, dealers, hirers, distributors, installers, repairers, importers, manufacturers and exporters of the goods or related services.⁵

Suppliers of consumer goods who do not comply with the mandatory reporting obligations may face fines of $16,650 for a company and $3,330 for an individual.⁶ The regulator can also apply for the disqualification of an individual from managing a company, arising from their involvement in a breach of the mandatory reporting requirements.⁷

Voluntary product recalls

A supplier will often voluntarily recall goods if it has determined that it is reasonably foreseeable the (intended or other) use of any of the goods will, or may, result in the injury of another person.⁸ The ACL does not contain guidance as to when a supplier should commence a voluntary recall. However, this obligation is informed by the common law duty imposed on manufacturers and suppliers to take reasonable care in relation to the safety of their products. If a supplier does institute a product recall because of safety concerns, it must notify the Minister of the recall and the reason for it.

Compulsory product recalls

If the Minister determines that it is reasonably foreseeable that a product may cause injury, and the regulator determines that the supplier of that product has not taken satisfactory steps to prevent injury being caused,⁹ the regulator may impose a compulsory recall.

In addition to the broad range of claims (including individual and class actions) and criminal charges that relate to the supply of unsafe consumer goods, a supplier may also be in breach of civil penalty provisions, and may be exposed to criminal penalties, if it fails to comply with a recall notice, or to take other corrective action ordered by the Minister in relation to the safety of consumer goods.¹⁰

Accordingly, it is usually best practice for a supplier to be proactive and undertake a voluntary recall where a safety issue is identified, rather than be subject to a compulsory recall. Recalls are undertaken relatively regularly in Australia, with 44 recalls undertaken between 3 June and 1 July 2014.¹¹

Other potential consequences for suppliers of consumer goods

The supply of unsafe consumer goods can expose suppliers to other potential consequences, including:

• a broad range of litigation risks, including individual claims and class actions by people who assert they have suffered injury or other compensable loss or damage;¹² and
• criminal charges, including penalties of up to $1.1 million for companies and $220,000 for individuals for:
  • false or misleading representations about goods, including that they are of a particular standard or quality;¹³
  • misleading conduct as to the nature of goods, including their suitability for their intended purpose;¹⁴ and
  • the supply of goods that do not comply with a mandatory standard (there is a wide range of standards in force, including mandatory product safety standards for various kinds of toys, exercise and sporting equipment and tobacco products).¹⁵

The criminal offences referred to above are strict liability offences. This means that there is no need to prove negligence or fault by the supplier, and that a supplier may be liable even if it took reasonable care in the supply of the goods.

What you can do

Suppliers of consumer goods and, in some cases, service providers who offer ancillary services, must remain vigilant in their response to potential safety concerns with consumer goods. Suppliers risk criminal and civil penalties, and exposure to litigation, if they do not adequately and promptly address known safety concerns. Further, product liability litigation remains an active contributor to Australia's class actions landscape.

To manage these risks, it is important that suppliers have quality assurance and monitoring, complaints handling and other risk management procedures in place, to identify product liability issues quickly and to escalate those issues efficiently where appropriate. The reputational risk for a company for failing to address a safety issue, or for being found to have 'covered up' known safety issues, is significant.