Small Magnets, Big Trouble – Zen Successfully Challenges CPSC Rulemaking in the 10th Circuit

MagnetsThe United States Court of Appeals for the Tenth Circuit recently vacated the Consumer Product Safety Commission’s (CPSC) 2014 rulemaking that prohibits the importation and distribution of high-powered, small, rare earth magnet sets (SREMS).  See Zen Magnets, LLC v. Consumer Product Safety Comm’n., No. 14-9610 (10th Cir, Nov. 22, 2016).  As we have previously reported, CPSC has regulated SREMS on multiple fronts over the past eight years, but the Tenth Circuit’s ruling seemingly ends CPSC’s efforts to rid the market of SREMS and clears the way for the last remaining SREMS importer and distributor, Zen Magnets, LLC (Zen), to continue doing business in the United States.

Background

SREMS, often marketed under the names Zen Magnets, Buckyballs, or Neoballs, are small high‑powered magnets that come in sets of 100 to 200 pieces.  Roughly the size of a pea, they exhibit exceptionally powerful magnetic properties.  CPSC began to regulate SREMS after injuries resulting from misuse.  Specifically, ingesting two or more magnets can damage intestinal tissue that becomes clamped between them.

In 2008, Congress adopted CPSC’s proposed mandatory safety standards that prohibit selling SREMS as part of any product designed, manufactured, or marketed as a toy for children under 14 years of age.  See 15 U.S.C. § 2056b.

In 2011, CPSC found that certain companies continued to market SREMS to children under 14 years of age.  CPSC required the thirteen leading SREMS distributors to report any non‑compliance with applicable safety standards and ultimately negotiated agreements with ten of the thirteen largest companies to cease importation and distribution of magnet sets.

Most recently, in late 2014, CPSC proposed and promulgated a new safety standard restricting the importation and sale of SREMS in all products, not just those marketed as a toy for children under 14 years of age.[1]  See Proposed Rule: Safety Standard for Magnet Sets, 79 Fed. Reg. at 59,962, 59,966-72.

CPSC Rulemaking: A Primer

The Tenth Circuit’s recent decision focused on CPSC’s 2014 rulemaking.  When promulgating a new rule, CPSC must conduct a two-part analysis.  First, CPSC measures the risk of the product against its benefits to the public.  This cost-benefit analysis focuses specifically on four factors:

  1. the degree and nature of the risk of injury sought to be prevented;
  2. the approximate number and type of products subject to the rule;
  3. the public’s need for those products, and the probable effect of the rule on the utility, cost and availability of the products; and
  4. any means of reducing the risk of injury while minimizing adverse effects on competition or other commercial practices.  See 15 U.S.C. § 2058(f)(1), (2).

Second, CPSC must determine if the cost-benefit analysis justifies the safety regulation.  CPSC can only promulgate a regulation if it reaches and articulates four conclusions:

  1. the rule is reasonably necessary to eliminate or reduce an unreasonable risk of injury;
  2. the rule is in the public interest;
  3. the benefits expected from the rule bear a reasonable relationship to its costs; and
  4. the rule imposes the least burdensome requirement which prevents or adequately reduces the risk of injury to which the rule is directed.  See 15 U.S.C. § 2058(f)(3)(A), (B), (E), (F).

Courts analogize this process to the familiar balancing test of tort law: the regulation may issue if the severity of injury that may result from the product, factored by the likelihood of the injury, offsets the harm the regulation imposes to the public.

A court will uphold a safety standard so long as CPSC can support its findings and conclusions with substantial evidence—in short, CPSC must justify its conclusions as reasonable and cannot ignore unfavorable facts.

Zen Challenges the Rule

After CPSC regulated and negotiated most SREMS distributors into compliance or outright submission, Zen remained the sole entity in the United States selling magnets to the public.  In challenging the regulation, Zen relied on 15 U.S.C. § 2060(a), which allows any person adversely affected by a rule to file a petition in the U.S. Court of Appeals.  Zen filed suit in the Tenth Circuit, and so began the fight.

The Tenth Circuit began its analysis with its conclusion: CPSC’s rulemaking failed at the first step—the cost-benefit analysis—because CPSC did not adequately address (1) the degree of risk of injury caused by magnet sets; and (2) the public’s need for the magnets and the rule’s effect on their utility and availability.

CPSC’s Calculations of the Risk of Injury Were Suspect.  CPSC estimated the final rule would prevent approximately 900 magnet ingestion injuries, for a savings of $28.6 million.  While these figures are persuasive in isolation, the Court pointed out that the underlying data was insufficient to support them.

In calculating the risk of injury, CPSC relied on data spanning January 2009 through June 2012 that did not reflect the salient market shifts caused by CPSC’s enforcement efforts from 2012 onward.  In mid-2012, ten of the thirteen largest SREMS distributors agreed to stop selling the magnets, and sales throughout the United States reduced commensurately.  Similarly, the data did not account for the effect of CPSC’s regulation that prohibited marketing SREMS to children under 14 years of age.

By failing to take into account its enforcement efforts regarding SREMS, CPSC ignored an observable reduction in the injury rates associated with SREMS.  In 2009, there were an estimated 610 emergency department visits associated with magnet sets.  But additional data cited by CPSC showed that emergency department visits were decreasing by an average of 100 visits per year between 2009 and the end of 2014.

CPSC conceded that the decrease in injuries was likely due to its enforcement activities.  In failing to account for this, CPSC fell short of its obligation to consider the effects that parallel pending rulemaking would have on the same subject matter.  See Portland Cement Ass’n v. EPA, 665 F.3d 177, 187 (D.C. Cir. 2011) (“The refrain that [an agency] must promulgate rules based on the information it currently possess simply cannot excuse its reliance on that information when its own processes [may have] render[ed] it irrelevant.”).

The Tenth Circuit also pointed out that CPSC’s data lacked certainty.  CPSC used a keyword search to identify magnet set-related injuries in emergency department reports, but according to CPSC, most of the reports only possibly involved magnet sets.

The Tenth Circuit found that the downward trend in the rate of injuries and the lack of certainty about whether magnets caused the injuries casted doubt on whether rulemaking was “reasonably necessary.”

CPSC Did Not Address the Public’s Need.  Finally, the Court found that CPSC failed to fully address the public’s need for SREMS and the rule’s probable effect on that need.  Numerous comments sent to CPSC showed that teachers and researchers use SREMS to model and explain educational concepts in physics, biology, and geometry.  CPSC’s findings, however, did not address those uses, so the court was unable to fully compare the costs of the lost utility of SREMS against the benefit of the regulation.

Challenging CPSC Enforcement Efforts

The Tenth Circuit found in favor of Zen and vacated and remanded the magnet safety standard to CPSC for further proceedings.  This victory for Zen, a lone business challenging agency rulemaking, serves as a reminder that there is recourse against regulatory action by CPSC.  At the same time, Zen’s success is rare, and it comes in a setting where CPSC bears a heavy burden to justify its rulemaking activities.  By contrast, in the same month CPSC had another court win, with a federal district court finding a company liable for failure to report.  Juxtaposing these two opinions highlights CPSC’s broad discretion in enforcing reporting obligations and that challenges to CPSC’s enforcement efforts have a greater likelihood of success where CPSC must make a greater showing of diligence.


[1] The restriction on SREMS is technically not a complete ban on high-powered magnets.  Instead, the regulation specifies certain size and strength specifications to which magnets must adhere.  SREMS fall outside the acceptable specifications because they are too strong for their size.  For example, larger magnets with the same strength could be sold under the new regulation because the increased size means less risk of ingestion and injury.  Thus the regulation is not a ban on SREMS, technically.  Instead, it is a regulation on magnets, which effectively prohibits the importation and sale of SREMS of a certain size (read: small) and strength.