In Regulators’ Sights


Published: October 31, 2013

Over the last three weeks, more than 2,200 people have placed orders for $10-to-$40 sets of magnetic stacking balls, rising to the call of a saucy and irreverent social media campaign against a government regulatory agency.

The money from the sales of the so-called Liberty Balls goes to a legal-defense fund. At the crux of the battle is an arcane legal tussle that has caught the attention of a number of mainstream business organizations and free-market legal groups.

It involves an effort by the federal Consumer Product Safety Commission to recall Buckyballs, sets of tiny, powerfully magnetic stacking balls that the magazines Rolling Stone and People once ranked on their hot products lists.

Last year, the commission declared the balls a swallowing hazard to young children and filed an administrative action against the company that made the product, demanding it recall all Buckyballs, and a related product called Buckycubes, and refund consumers their money. The company, Maxfield & Oberton Holdings, challenged the action, saying labels on the packaging clearly warned that the product was unsafe for children.

But the fuss now has less to do with safety. After Maxfield & Oberton went out of business last December, citing the financial toll of the recall battle, lawyers for the product safety agency took the highly unusual step of adding the chief executive of the dissolved firm, Craig Zucker, as a respondent in the recall action, arguing that he controlled the company’s activities. Mr. Zucker and his lawyers say the move could ultimately make him personally responsible for the estimated recall costs of $57 million.

While the “responsible corporate officer” doctrine (also known as the Park doctrine) has been used frequently in criminal cases, allowing for prosecutions of individual company officers in cases asserting corporate wrongdoing, experts say its use is virtually unheard-of in an administrative action where no violations of law or regulations are claimed.

A spokesman for the product safety commission said the group had never used it in a recall action. He declined to say why it was used in this case.

“I think this case presents some important and troubling legal issues that really break new ground legally for the C.P.S.C.,” said Nancy A. Nord, who was the only commissioner to vote against filing the administrative action. Ms. Nord retired from the commission last weekend.

Three well-known business organizations — the National Association of Manufacturers, the National Retail Federation and the Retail Industry Leaders Association — banded together this summer to file a brief urging the administrative law judge reviewing the recall case to drop Mr. Zucker as a respondent.

The groups argue that holding an individual responsible for a widespread, expensive recall sets a disturbing example and runs counter to the business desire for limited liability. They contend that such risk would have a detrimental effect on entrepreneurism and openness in dealing with regulatory bodies.

“It really has a chilling effect on the kinds of things all of us were trying to do, which is involve corporate officers in these kinds of decisions — to decide if something should be reported and if there should be a recall,” said Lee Bishop, a lawyer for the manufacturers association, who helped draft the brief.

Conservative legal groups like Cause of Action, a nonprofit that targets what it considers governmental overreach, have been watching the proceedings with interest and weighing taking some action.

“This really punishes entrepreneurship and establishes a bad precedent for businesses working to create products for consumers,” said Daniel Z. Epstein, the group’s executive director. “It undermines the business community’s ability to rely upon the corporate form.”

Mr. Epstein once worked for a foundation run by Charles G. Koch, who, with his brother David, has funded numerous conservative and antigovernment or antiregulatory causes. He would not disclose the donors behind Cause of Action. The Washington Legal Foundation, which promotes pro-business and free-market positions, has weighed in with a background paper titled “C.P.S.C.’s Misuse of R.C.O. Doctrine Bodes Ill for C.E.O.’s and Consumers.”

The administrative law judge on the case has refused to drop Mr. Zucker’s name from the case. Last month, Mr. Zucker, 34, began the so-called “United We Ball” campaign on Facebook, Twitter and other outlets to raise money for his legal defense fund. The products for sale, called Liberty Balls, are bigger versions of Buckyballs — too big, he says, to be a swallowing risk. So far, he says, the campaign has raised more than $100,000.

“The Consumer Product Safety Act in the Congress is very clear that recalls cannot be conducted by individuals, so entrepreneurs can innovate and create products and don’t have to be in fear of personal bankruptcy and personal financial ruin in the case of a product defect,” Mr. Zucker said in an interview. He added: “But Buckyballs weren’t defective. The commission changed its mind. It said the product was lawful and changed its mind.”

The case is now in the hands of the administrative law judge. If he rules that the product does present a hazard and a recall is warranted, Mr. Zucker may appeal to the commissioners, who will then vote on what action to take.

Buckyballs were created by Mr. Zucker and Jake Bronstein, two friends who said they were down to their last $1,000 each when they invested it in the company. There was something strangely addictive about stacking the powerful little magnets into endless shapes, and the product took off. By 2011, sales reached $18 million. Mr. Bronstein has not been named in the case.

The company had a history of collaborating with the commission, including during a voluntary recall of the product in 2010 to change its warning labels. The original labels said the product was unsafe for people under 13, but after Congress passed a law changing the definition of a child to anyone under 14, the company worked with the commission to recall the product and replace the labels.

The product safety agency says it has reports of about 1,700 emergency room visits involving children who had ingested Buckyballs. The power of the magnet in some cases caused ripped intestines.

“The core issue for Consumer Product Safety Commission is we did not see progress on safety to children,” said Scott Wolfson, a spokesman for the agency. “The labels were not effective,” he said, explaining that many people did not keep the balls in the packaging so the labels were going unnoticed. “Children were getting access to this product,” he said.

After the company protested the recall, the commission approached retailers directly. At least six — including Barnes & Noble, Brookstone and Bed Bath & Beyond — initiated a voluntary recall and agreed to stop selling the product.

Buckyballs were also popular in Europe and elsewhere, including Canada and Australia, which have both initiated similar regulatory actions. The product had distributors in approximately 15 foreign countries, accounting for about 15 percent of sales, according to a spokeswoman for Mr. Zucker. When Maxfield & Oberton went out of business, sales to those distributors stopped as well.

Last week, the commission moved ahead with plans to outlaw these types of small powerful magnets from the marketplace, separate from the recall action. Five doctors testified about safety hazards in a hearing aimed at drafting a federal rule limiting the force and size of magnets for sale to the public.