SACRAMENTO / BRADLEY INMAN : Struggling to Understand State’s New Corporate Accountability Law

Consumer protection and worker safety got a boost this year with a tough new California law that makes it a criminal offense for corporations and their managers to knowingly conceal serious dangers from their employees or cover up harmful consumer product defects.

Failure to correct the problem or notify the proper state or federal government agency can result in jail time for the guilty manager and hefty fines for the corporation, according to the law that went into effect on Jan. 1.

Industry is scrambling to understand the full consequences of the legislation, which Consumers Union lobbyist Harry Snyder calls the “strongest corporate accountability law in the nation.”

While it’s being heralded by consumer activists, the new law has struck fear among business executives, who could face more criminal culpability for their individual business decisions.

“It’s difficult for any manager in California to ignore this statute,” said Fred Main, vice president at the California Chamber of Commerce in Sacramento.

Dubbed the California Corporate Criminal Liability Act, the new law gives managers who have knowledge of a concealed danger 15 days to notify the appropriate regulatory agency. They must also alert their employees of the hazard.

Failure to do so is a felony punishable by 16 months to three years in state or county prison and a $100,000 fine. A corporation can face a fine as high as $1 million.

Beyond the criminal threat, some company lawyers and business insurers are worried that the bill may increase their exposure to civil lawsuits. They are concerned that the bill “may get businesses in a trap,” according to Main.

Once a manager discloses a danger, then it “may prompt a consumer liability or workplace lawsuit,” he said, which “may encourage managers not to be too aware or look too deep for problems.”

But Snyder argued that many firms are likely to see the measure “as a way to avoid severe punitive damages, because if they comply with the law they have protected themselves against lawsuits.”

Introduced by Assemblyman Terry Friedman (D-Sherman Oaks), the new law loosely defines manager as “a person having actual management authority for the safety of a product or business practice or for the conduct of research or testing in connection with a product or business practice.”

The law applies to business services as well as products, and it carefully defines a “serious concealed danger” as something that “creates a substantial probability of death, great bodily harm, or serious exposure.”

Before the law was approved, “corporations only worried about civil liability,” said Los Angeles County Dist. Atty. Ira Reiner.

Without criminal consequences, companies engaged in “cost-benefit analysis,” according to Reiner.

He pointed to the Ford Pinto case in the 1970s as an example.

A design defect in the Pinto caused the automobile’s gas tank to rupture when the car was in a rear-end collision.

The problem was purportedly known to Ford executives, and to justify their decision to continue manufacturing the car, a cost-benefit analysis was conducted. It showed that the cost to fix the defect would far exceed the expense associated with civil lawsuits. Therefore, they continued making and selling the car.

“If this bill had been law in the 1970s, it is not unreasonable to assert that none of the people killed by Ford’s cost-benefit analysis would have died,” concluded a legislative analysis of the new law.

Snyder pointed to the manufacturers of the Dalkon Shield birth control device as another example of “corporate policy-makers who were aware of potential dangers but chose to continue marketing the product without correcting the problem or warning of the danger.”

Even if defective products are manufactured in other states, the manufacturer could be subject to arrest in California, according to Snyder.

In the heated legislative debate that surrounded the bill’s passage, industry lobbyists were able to get the measure amended so that business firms could pay the fines that are imposed on their managers. Consumer activists went along with the change because they believe that the threat of prison is the strongest deterrent.

There is some speculation that business groups removed their opposition to the bill because they will be seeking legislation later on this year that limits the financial awards on civil product-safety lawsuits.

By taking a softer position on this bill, they might find it easier to work with consumer groups on tort reform.

Expanded Protection on Foreclosure Sales

Beginning Jan. 1, real estate investment companies now face stiff new requirements when they purchase homes that are in foreclosure.

Company representatives must be licensed real estate brokers and must purchase surety bonds before they solicit homeowners who face losing their homes.

Introduced by Sen. Art Torres (D-Los Angeles), SB 2641 was aimed at equity scams, where loans are made to homeowners at unusually high interest rates and unreasonable terms.

The loans can put an already indebted homeowner into a dire financial position and make him easy prey for foreclosure investors, who then purchase the properties at discounted prices.

A growing and sophisticated industry has developed around foreclosed properties. Savvy investors purchase properties after a lender starts foreclosure proceedings but before the formal sale on the courthouse steps.

A number of laws already regulate the loan side of the problem, but until now there was no licensing requirement for companies that specialize in foreclosure investments, and surety bonds were not required.

The new requirements, “will drive the crooks out of the business,” said Paul Lee, director of litigation at the Legal Aid Foundation.

But investors in foreclosed properties are criticizing the bill for failing to stop equity scams and putting what they see as an unreasonable burden on legitimate foreclosure investors.

“The bill does not address the problems that were outlined by the proponents of the measure,” claimed John Beck, publisher of the Distressed Sales Report, a newsletter that specializes in foreclosures.

Plus, legitimate companies are having problems obtaining the surety bonds, which could put them out of business, according to Beck.