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Wholesaler-Distributor May Be Liable for Product Recall

NAW Legal Advisory - October 2007


Federal law grants broad authority to the U.S. Consumer Product Safety Commission (CPSC) to order the recall of a defective consumer product that presents a substantial risk of injury to the public. A consumer product is generally any product offered for sale to a consumer for use in or around a household, residence, a school, in recreation or otherwise. The statute excludes certain articles. Articles that are primarily intended for use in commercial and industrial settings may nevertheless be considered a consumer product.

The law authorizes the CPSC to order the manufacturer or any wholesaler-distributor or other seller of the product to give public notice of the defect and also give specific notice to every person to whom the product was delivered or sold. In addition to notification, the CPSC may order the manufacturer or any wholesaler-distributor or other seller of the product to either: (1) repair the defect in the product; (2) replace the product with an equivalent product free of defects; or (3) refund an amount up to the purchase price of the product.

In most cases it is the manufacturer that bears the responsibility and expense of a product recall. However, in cases where the manufacturer is out of business, in bankruptcy or is located in a foreign country (thus beyond CPSCís jurisdiction), the US-based wholesaler-distributor may become the ultimate responsible party. The bottom line consequence to wholesaler-distributor may be substantial since the net profit realized on a sale is a small fraction of the productís sale price or replacement cost.

The wholesaler-distributor can minimize this liability exposure by exercising due diligence when selecting a supplier, especially a foreign-based supplier, to assure that the company has insured against this risk and is likely to be able to fulfill its recall responsibility if required. It is also prudent for the wholesaler-distributor to consider buying product recall insurance coverage as part of the firmís general liability policy.