Former CEO Personally Liable For $57 Million Recall of Still Legal Magnets
(CNSNews.com) -- The Consumer Product Safety Commission (CPSC) is “trying to rewrite the cherished American tradition of ‘limited liability,’ which protects responsible, law-abiding company officers like myself from being unjustly sued,” said former CEO Craig Zucker.
Zucker is being held personally responsible for the federal agency’s $57 million recall of Buckyballs, a desktop magnet toy intended for adults. That amount is “more than the company ever did in sales, let alone profits,” Zucker told CNSNews.com. (See M&O complaint.pdf)
At a hearing in Washington on Tuesday, consumer advocates and physicians urged the commission to “prevent injuries before they occur” by banning neodymium magnet sets, which were first introduced in the U.S. in 2009 as Buckyballs by Maxfield & Oberton Holdings (M&O), a Delaware-licensed LLC founded by Zucker and co-owner Jake Bronstein, who was not named in the complaint.
The estimated two million rare earth magnet sets already sold in the U.S. pose a “serious and unreasonable risk” to children who might swallow them, several panelists told the commissioners.
Dr. Marsha Kay, a pediatric gastroenterologist at the Cleveland Clinic, told commissioners there are usually no immediate symptoms after the high-powered magnets are ingested, so there is a “marked delay” in diagnosis and treatment. Swallowed magnets can cause intestinal organs to bunch up, creating “serious and life threatening” injuries. “Most patients have required surgery” for bowel obstructions, perforations, and necrotic tissue, she testified.
But Zucker maintains that the Buckyballs packaging came with five prominent warnings and the company was in full compliance with CPSC regulations.
When CNSNews.com asked Scott Wolfson, communications director for CPSC, whether the powerful magnets are still legal to sell in the U.S., he said, "That's correct. But we have taken certain actions to improve safety in the marketplace....Ten of 13 companies have agreed to do the right thing" by not importing or selling them. The other three companies, including M&O, "were subject to lawsuits by our agency."
“We followed their guidance and their rules every step of the way,” Zucker told CNSNews.com. “Now they want me as a former officer to take on all the corporation’s obligations and pay for the cost of the recall. And it’s not limited to what I earned as a corporate officer and founder of the company,” he added. “It applies to my personal financial wealth and any money I make from products or salaries in the future.
“This is completely unprecedented. They’re trying to get an administrative judge to change the bedrock American principle of limited liability. That’s exactly why corporations exist, so that entrepreneurs and innovators can create products, take risks and not be held liable so long as they are following the law,” Zucker said.
In July 2012, there was a Buckyball and Buckycube recall by retailers after an estimated 20 children suffered severe intestinal injuries after ingesting them even though a letter to the company from CPSC attorney Cheryl Falvey confirmed that “it is not a violation of any law administered by the CPSC for any retailer to continue to sell Buckeyballs and Buckycubes.”
As a result of the CPSC action, the company went out of business on December 27, 2012 after selling an estimated two and a half million sets of Buckyballs nationwide.
After receiving “over one dozen reports of children ingesting the Subject Products, many of which required surgical intervention,” CPSC filed the $57 million lawsuit against Zucker even though he claims a similar product is being sold in a store less than two miles from the commission’s Washington, D.C. headquarters.
"That is incorrect information," Wolfson told CNSNews.com. "They do not sell the product anymore." But he was unable to say whether Nanodots, another brand of rare earth magnets, was still being sold after the Buckyballs recall. "To the best of my knowledge, we haven't had a recall of Nanodots, but that company has taken the right actions to stop making and selling the product."
When CNSNews.com asked him again if such magnets were illegal to sell in the U.S., he replied, "Not at this time."
CNSNews.com also called Barston's Child Play in Washington, where a store employee said that "yes, we do carry Nanodots, but we only sell them to people over 14 due to the magnet hazard." She added that the magnets were available in plain, black and gold starting at $34.99 per pack of 216.
“We never marketed Buckyballs as toys,” Zucker told CNSNews.com. “There were five warnings on every pack. Retailers had to sign a responsible seller agreement, and we worked very closely with CPSC the entire three and a half years the company was in business.’
The government is allowed to go after executives personally under the “responsible corporate officer doctrine,” Walter Olson, senior fellow at the CATO Institute, told CNSNews.com. “Usually there’s much stronger evidence that the executive behaved in clear violation” of the regulations. In this case, “the agency doesn’t have a very good case.”
Olson added that Zucker’s defiant “United We Ball” campaign against the CPSC may have been the impetus for “the cinderblock dropped on his head. No one else has faced such a harsh measure. The commission has never gone after an executive personally in this way.”
“Every product intended for adults – power tools, household cleaners or even detergent pods – could be considered defective” under the commission’s current reasoning. Zucker told CNSNews.com.
“What the commission is saying for the first time is that warnings don’t work any more. This could lead to a very long list and gives the commission quite a lot of power” to ban any product that could potentially be misused,” he pointed out.
“This case is an atrocity,” agreed John Berlau, senior fellow at the Competitive Enterprise Institute (CEI). “This product should never have been recalled in the first place. Parents need to be careful about a lot of things. What’s next? Recalling thumbtacks and paper clips? This is Big Government on steroids, using a show trial to totally contravene our traditions of due process.”