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Legal: Moving Parts

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Written by Hanna Hasl-Kelchner
Monday, 01 October 2007
Legal expert Hanna Hasl-Kelchner says knowing how your company’s parts touch the law is critical to sound crisis management. The phrase “Made in China has taken a real beating this year. In April, a dog food ingredient tainted with a prohibited chemical was blamed for the death of several pets and led to a massive product recall. In June, toothpaste made in China was found to contain the toxic contaminant diethylene glycol (a solvent used in antifreeze) and was pulled off the shelves. Radial tires made in China were recalled after the distributor learned that its Chinese manufacturer had omitted the gum strip that prevents the tires from separating. Similarly, toys made in China were found to contain lead paint and caused Thomas and Friends to recall its wooden railway toys and Mattel to initially recall 1.5 million toys worldwide at an estimated cost of $30 million. These examples show how difficult it can be for businesses to benefit from low-priced goods without facing product liability and regulatory risks. Reputations that take years to build can be tarnished in a matter of days or weeks and take years to rebuild. Some estimate it can take as long as four years to repair the damage of a bad reputation. People look to alternative products when trust is broken, and sometimes they don’t go back. The result is not just a lost sale, but a lost customer. Having an effective crisis management plan is therefore a good investment in business sustainability. Most managers tend to think of a crisis as an unexpected catastrophic event like Hurricane Katrina or the terrorist attack on the World Trade Center. While those situations were largely unpredictable and uncontrollable, the vast majority of crises do not fall in that category. Most potential crises simmer quietly until they achieve a critical mass and boil over. The slow build-up of events means they can be anticipated and managed, but only if managers are savvy enough to read the warning signs. Loose magnets Take the case of Montreal-based Mega Brands, maker of Mega Bloks toys, which acquired NJ-based Rose Art Industries in mid-2005. Among the toys in Rose Art’s portfolio was Magnetix, a construction toy made in China that consists of small, colorful magnet-tipped plastic rods that grip shiny ball bearings. They can be combined into countless shapes. Unfortunately, the magnets had a tendency to come loose, and if more than one is accidentally ingested by a child, it does not pass through the child’s digestive system. Instead, the magnets form a clump and can rip through delicate tissue, such as a child’s intestines. Sometimes the consequences are fatal as in late 2005 when this scenario claimed the life of a toddler in Washington. By October 2006, the company had paid $13.5 million to settle four lawsuits and 10 claims related to Magnetix injuries. By April 2007, the toy was the subject of two voluntary recalls prompted by the US Consumer Products Safety Commission (CPSC), and the company had taken a first-quarter recall charge of $35 million. To make matters worse, a New York Times article reporting on the company’s woes was illustrated with a picture of Magnetix pieces shaped into a skull and crossbones. This summer, questions about the product’s safety were raised by a US Senate committee. The bad news was reflected in the company’s stock price. Shares fell from around $27 Canadian in March 2006 to around $20 this July. Customer complaints The investigation that followed showed that much of the company’s problems could have been avoided. Data submitted late to the CPSC showed that beginning in 2004, Rose Art had received 1,500 consumer complaints of magnets coming loose from the plastic rods. Customers were pointing out a serious problem, one that had the potential for serious product liability litigation. But no one connected the Magnetix dots until after the child’s death in 2005. That was mistake number one. Eager to keep Magnetix on the shelves, the company redesigned it after the first product recall. The redesign included stronger glue and magnets embedded deeper into the rods, along with a warning label on the package upping the recommended minimum age from three to six. Although the product was redesigned, the package remained the same. Unfortunately, new stickers on the old packaging caused confusion, both at retail stores and CPSC. The commission accused the company of not cooperating, making a bad situation worse. Today, Mega Brands is working hard to restore confidence in Magnetix. Old sets continue to be yanked from retail and wholesale shelves and are purchased on eBay. So far, no complaints have been received on the redesigned product. That’s the good news. The bad news is that Mega Brands is still mopping up four lawsuits and 11 complaints related to the old product and is in litigation with Rose Art’s former owners. The problem continues to be an expensive proposition and threatens Mega Brands’ reputation. The Mega Brands case offers valuable lessons in crisis management. It points out the need for proper due diligence during acquisitions and the need for customer complaint data to be properly monitored, analyzed for latent liabilities, and acted on in a timely manner. It also illustrates how a lack of transparency can complicate recall efforts and regulatory compliance. If your business can’t afford a crisis, it pays to develop an understanding of how the company’s moving parts touch the law—what can trigger legal liability and what doesn’t. No one expects you or your organization to be perfect, but they do expect organizations to tell the truth. Good communication and information systems can help you identify organizational hot spots. Improved legal literacy helps prioritize how hot. Put them together, and you have a winning formula for anticipating and managing potential problems before they reach a tipping point. Hanna Hasl-Kelchner is the author of The Business Guide to Legal Literacy: What Every Manager Should Know About the Law (Jossey-Bass, 2006) and a frequent speaker on business legal issues. Visit her Legal Literacy blog at www.legalliteracy.com.

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