A Good Law's Bad Consequences for Small Businesses

After an excessive amount of lead-based paint was discovered two years ago on popular children’s toys such as Thomas the Tank Engine, Barbie, and Dora the Explorer dolls, the ensuing national outrage led to the recall of more than 1 million toys.

The uproar also prompted Congress last August to pass the Consumer Product Safety Improvement Act (CPSIA). The law is one of the most sweeping overhauls in the history of the U.S. Consumer Product Safety Commission (CPSC), a small, independent federal agency that is supposed to identify existing and emerging product hazards and develop safety standards to address them. It's also supposed to investigate potential hazards and recall products if necessary.

Few would argue that the law overhaul was unneeded, or that the CPSC’s work is anything less than commendable. But even the best intentions can sometimes wreak havoc, and the Act is a classic example of the law of unintended consequences. Though far from scientific, the maxim, like Murphy’s Law, is almost unfailing when a hubristic Congress acts too rashly.

In this case, the unintended consequences affect thousands of small businesses and retailers that either make or sell toys. While all of the recalled toys were made in China, the Act applies to U.S. manufacturers and toy sellers alike.

The CPSIA prohibits the sale or distribution of products for children under the age of 12 if those products contain more than 600 parts per million of lead. The new standard went into effect in February and was scheduled to be tightened to 300 parts per million on August 14.

To ensure compliance, the Act requires manufacturers to certify products meet the standards through independent lab testing. Therein lies one of the unintended consequences. The mandate is applied across all products and manufacturers regardless of any history of lead contamination.

David McCubbin is a partner in McCubbin Hosiery, a family business in Oklahoma founded by his grandfather 57 years ago. The company designs, markets, and distributes children’s and ladies hosiery to such retailers as Nordstrom, Dillard’s, Stride Rite, and Kmart, as well as hundreds of small, independent retailers.

"We are being asked to search, at considerable expense, for something that does not exist nor has been alleged to exist," McCubbin said at a recent House Small Business Committee hearing on the Act.

Compliance is a problematic for McCubbin because no specific test exists that measures lead in textiles, he said. Labs also differ on exactly what must be tested. In all, he said his company will spend in excess of $500,000 to comply with the law this year. Meanwhile, his customers are pushing back, demanding some kind of assurance that products meet the new standard, with good reason.

Any company that makes or sells an item that is known to have more than the acceptable limit of lead can be fined up to $100,000. The only sure way to prevent that from happening is to test the product.

Laurel Schreiber operates a small home-based business called Lucy’s Pocket, selling monogrammed gifts for children through her own Web site and such sites as eBay. Although she buys all of her supplies -- textiles, ribbons, threads and other materials -- from wholesale suppliers and retail stores, she is still required to test each component that goes into a product, she told the committee.

As a result, one of her most popular items, an appliqued bib and bloomer set, costs $900 to test because it is made with 12 components. Yet it sells for only $20.

Starting in August every item leaving her workroom must also include a permanent label that contains information such as the source of the product, the date of manufacture and batch or run number. "For a business that creates one-of-a-kind items --and less than 5,000 or so a year --this is an unnecessary hardship," she said.

While the law is confusing and burdensome for manufacturers and retailers, it reaches beyond them to thousands of people who re-sell products on auction Web sites like eBay or through brick-and-mortar stores.

Susan Baustian testified on behalf of the Winmark Corporation, which sells used children’s goods and new and used sporting goods through more than 500 Once Upon A Child and Play it Again Sports franchise outlets. "The ill-executed implementation of this legislation has brought fear into the industry, and that fear --especially in economic times like these -- can bring a halt to successful and productive businesses," she said.

While resellers such as her outlets, as well as Goodwill, the Salvation Army, church organizations, consignment stores, and eBay sellers aren’t required to test products, they are still liable if they sell tainted merchandise. "Our franchisees across the country have no idea how to determine if the painted blocks, toy trucks, dolls, or even clothing they are buying and reselling contain lead paint or toxic plastics [also covered by the law]," she said.

The CPSC has tried to respond to concerns by producing guidebooks to the law. But small business owners say they are too general to be useful. For example, on clothing "with rhinestones, metal or vinyl/plastic snaps, zippers, grommets, closures, or appliqu?s," the guide advises retailers to "test, contact the manufacturer, or not sell."

The CPSC’s acting chairman, Nancy Nord, told the committee that her agency is suffering from unintended consequences as well. Congress passed the law with an aggressive timetable to implement it without providing any money to cover her agency’s costs. The agency later won an emergency appropriation, but it was still $4 million short of its $29 million request and seven months late.

Nord said the agency has also been hampered because the law gives it no flexibility to deal with "real world" circumstances. She estimated that the cost for small businesses to comply will run into the billions of dollars. As a result the agency has issued stays on a number of the Act’s provisions until February 2010, so it can find "common sense" solutions to the problems.

That children need to be protected from unsafe toys is a given. The massive 2007 recall showed the system failed to keep dangerous toys out of their hands. But the Act proves that sometimes no law is better than bad law. Congress needs to rework the measure to make it more practical, and it needs to listen to small businesses that must live with its consequences, both real and unintended.