Everything Rick Woldenberg

[Rob Wilson]

As many of you know from the video on this site (and other places, including youtube) Rick Woldenberg, Chairman, of Learning Resources has been championing our cause for some time now. I look to him for leadership and common sense, at a time and place where both of these attributes are sorely lacking. I will post writings and other information here that he has released to us, so that you can be better informed of the issues, and rationale arguments that need to be made to make our point heard and understood to the media, politicians, and most importantly to consumers to whom we, as an industry, are ultimately responsible to.

Please leave your comments. Where possible/appropriate, reply to the particular posting, rather than a general reply.

[Rob Wilson]

Fri 11/7/2008 1:16 AM

Dear Ms. Falvey,

Per our conversation today, I am writing you to express my deep concern over the dire financial consequences of your office's September 12th legal opinion ("September 12th Opinion") that the new safety standards of the CPSIA apply retroactively to existing inventory.



It is unfortunate that so many people misread the issue of "financial consequences" to refer simply to the cost of the inventory. Yes, as covered in detail in today's panel discussion, companies in the chain of commerce (manufacturers, distributors and retailers) have little practical ability to make existing inventory "go away". In that sense, the retroactive application of the CPSIA is in fact disastrous. Yet, the implications of the September 12th Opinion are far deeper and more threatening. A necessary result of the purported retroactive effect of the CPSIA on existing inventory will be (a) widespread defaults under loan agreements as of February 10, 2009, (b) widespread failures to obtain audited financial statements for 2008 (another loan default issue), and (c) for public companies, an immediate Sarbanes-Oxley disclosure issue stemming from these problems. Defaults under loan agreements may result in the reduction or termination of available credit to operating companies. It can also trigger cross-defaults among related entities or related agreements, causing even more far-flung financial destruction. For many family businesses, this could result in a total wipeout of all family wealth in one fell swoop.



While these financial consequences have received little attention to date, their potentially highly toxic effect should not be ignored.



Loan Defaults: The typical American company finances its operations with asset-based loans. In this kind of loan, lenders agree to advance a percentage of "Eligible Inventory" as a revolving loan. In other words, the loan floats up and down over its term as the borrower meets its daily cash needs, but overall availability is limited by the value of inventory. The size of borrowing availability is determined each month based on representations called "Borrowing Base Certificates" in which the borrower attests to the value of its inventory, and then makes various representations relating to the definition of "Eligible Inventory". I have attached a typical definition of "Eligible Inventory" for your review. Please note subparts (b) and (e), as well as the final paragraph. Subparts (b) and (e) cannot be attested to after February 9, and under the terms of the last paragraph of the definition of "Eligible Inventory", an undetermined amount of inventory would no longer be "eligible". In addition, the ongoing representation of the typical borrower that they are operating in compliance with law can no longer be made. This has implications for the Borrowing Base Certificate, see below.



In a typical Borrowing Base Certificate, the following language typically appears:



"Pursuant to the terms of that certain [Loan Agreement], we submit this Borrowing Base Certificate to you and certify that the information set forth below and on any attachments to this Certificate is true, correct and complete as of the date of this Certificate. . . . The undersigned hereby certifies that the above information and computations are true and accurate and hereby represents and warrants that as of the date hereof, (i) no Event of Default or Unmatured Event of Default under the Credit Agreement has occurred or is continuing, (ii) the representations and warranties of the Borrower set forth in the Credit Agreement are true and correct in all material respects as of the date hereof, and (iii) the Borrower is in compliance with the covenants set forth in the Loan Agreement."



Any Borrowing Base Certificate with such language after February 9 may not be executed by anyone intent on selling or placing a positive value on inventory existing on February 9. An inability to sign a Borrowing Base Certificate or signing a Borrowing Base Certificate with fraudulent intent is clearly a serious default under any loan agreement.



Consequences of Loan Defaults: Even a technical default must be resolved between borrower and lender. In this case, lenders will have three basic options for action: (a) levy fees to cure or waive the default (this is a typical provision in many loan agreements), (b) insist that the loan agreement be renegotiated, likely to reduce borrowing availablility based on a new, lower advance rate on Eligible Inventory, and/or (c) an outright and possibly immediate refusal to lend. Notably, if existing inventory continually becomes contraband under the September 12th Opinion as lead and lead-in-paint standards ratchet down over time, this cascade of defaults will repeat again and again.



It can be anticipated that many companies will find credit declining or terminated as a result of these defaults. This will have a dramatic effect on these companies' investable capital and their ability to maintain a stable workforce.



Audited Statements: Many loan agreements require audited financial statements at the end of every year. All public companies provide audited statements. In preparing audited statements, independent accountants will insist on "testing" inventory valuations. Furthermore, they will take into account events occurring after the close of the period, as such events could expose misleading information in the financial statements for the current period. In the case of retroactive effect on existing inventory, the pending change in valuation of inventory as of February 10, 2009 will make it impossible to certify 2008 financials without serious and negative qualifications (if at all). This failure would have an immediate effect on any company under its loan agreement (and in the public markets, if applicable), resulting in reduction or termination of available credit. Recent events on Wall Street demonstrate the serious threat posed by sudden losses of available credit, and the consequential financial destruction and loss of jobs.



Sarbanes-Oxley: The financial implications above clearly constitute a material financial event and create immediate issues under Sarbanes-Oxley for any public company. The fact that this issue has not yet been disclosed by any public company is troubling and potentially creates personal liability for many public company officers, including possible criminal liability.



The conclusion that the CPSIA applies retroactively to inventory is an inherently technical legal matter, involving detailed analysis of unbending rules of law. It should be no surprise then that equally technical financial issues emerge in its wake based on precise readings of unbending contracts and GAAP rules. In this case, the above financial/contractual issues are real and will get the attention of the financial community. Lenders have no incentive to be "understanding" in their appreciation of the CPSIA or its good intentions. Good intentions don't repay loans, and contraband inventory makes for poor collateral. And once lenders are provided with an incentive to act (to preserve their own capital), the dominoes will start to topple - ending where? ending how?



The CPSC needs to reconsider its opinion urgently and to render a clean, clear and well-publicized opinion that the CPSIA does NOT apply retroactively to existing inventory. Time is of the essence.



Thank you for considering my view on this important topic.



Sincerely,



Richard Woldenberg

Chairman

Learning Resources, Inc.

[Rob Wilson]

11 4 08 letter to Cheryl Falvey re lead inventory.pdf

[Rob Wilson]

From: Rick Woldenberg
Sent: Mon 11/10/2008 10:46 AM
To: [e-mail]
Cc: Michael Gidding ([e-mail]); [e-mail]; [e-mail]; [e-mail]; '[e-mail]'; '[e-mail]'; '[e-mail]'; '[e-mail]'; '[e-mail]'; '[e-mail]'; '[e-mail]'
Subject: Further Comments on Retroactive Application of the CPSIA

Dear Ms. Falvey,



Please find attached my supplemental comment letter dated November 10 relating to your September 12 Advisory Opinion.



Sincerely,



Richard Woldenberg

Chairman

Learning Resources, Inc.

[Rob Wilson]

From: Rick Woldenberg
Sent: Fri 11/14/2008 7:48 AM
To: [e-mail]
Cc: 'Michael Gidding ([e-mail])'; '[e-mail]'; '[e-mail]'; '[e-mail]'; '[e-mail]'; '[e-mail]'; '[e-mail]'; '[e-mail]'; '[e-mail]'; '[e-mail]'; [e-mail]
Subject: RE: Retroactive Application of the CPSIA

Dear Ms. Falvey,



I am writing in opposition to your legal opinion dated September 12, 2008 that the CPSIA has retroactive effect on existing inventory (the Falvey Opinion). This is my third letter on this subject. I wish to amplify one point for your consideration.



First, I would like to recap my points:



1. The Falvey Opinion will cause widespread loan defaults in corporate America.

2. The Falvey Opinion will prevent those same companies from obtaining audited financials at year end 2008 and perhaps thereafter.

3. The foregoing two issues create serious Sarbanes-Oxley issues for many public companies and officers of those companies.



[N.b., I am now aware of THREE COMPANIES that have filed comments with you acknowledging loan defaults and problems with audited financials, and one company that acknowledged Sarbanes-Oxley issues. Have you consulted with the SEC on the impact of the Falvey Opinion?]



4. Existing Inventory is safe and appropriate to sell off.

5. The silence of corporate America is coerced, not voluntary, and cannot be taken as quiet acceptance.

6. By letter to Christian Fjeld and cc'd to you, I have submitted evidence that the purported retroactive effect of the CPSIA was not known to the public or the business community before passage of HR 4040, raising serious questions of due process. It also raises important questions about the true intent of the legislation.



I want you to know what is happening in the marketplace in direct response to the Falvey Opinion. It is my understanding that Wal-Mart has informed its suppliers of children's products that it intends to return all merchandise, regardless of age, that cannot be proven to comply with the new standards. Supposedly, it intends to complete this transfer by February 10. At least two other major retailers are rumored to have taken a similar position. This tug-of-war over existing inventory is actually a game of "hot potato": whoever ends up with the inventory on February 10 has a massive, perhaps fatal financial problem. Thus, no one is talking about how to sell off existing inventory (the old "yard sale" idea) - everyone is focusing on how to stick the inventory (the problem) with someone else. We are deathly afraid that Wal-Mart's plan will trigger a massive inventory "run on the bank" where all of our dealers will demand to return their unsold inventory, a scenario implying a stand-off between thousands of companies over a financial issue triggered by the Falvey Opinion. As previously noted, it is certainly true that we cannot afford to absorb the hit on our existing inventory. The notion that we could somehow survive the burden of absorbing the entire U.S. supply chain's inventory of our products is nonsensical. If this happens, you should expect widespread corporate bankruptcies.



No sane person could argue that Congress "intended" this result. Clearly, Congress in its rush to punish the entire children's products industries (shoes, electronics, clothing, toys, sports equipment, novelties, books, lamps, etc.) for perceived "bad acts" drafted a law without regard to consequences. It's time to speak the truth - this was not intended by Congress because it couldn't have been intended by Congress. If that's so, the Falvey Opinion must be reversed.



Thank you for considering my views on this urgent matter.



Sincerely,



Richard Woldenberg

Chairman

Learning Resources, Inc

[Rob Wilson]

From: Rick Woldenberg
Sent: Wed 11/26/2008 12:34 PM
To: Mary Toro ([e-mail])
Cc: Etienne Veber; Michael Gidding ([e-mail]); Nancy Nord ([e-mail]); Joe Martyak ([e-mail]); '[e-mail]'; '[e-mail]'; '[e-mail]'; '[e-mail]'; '[e-mail]'; '[e-mail]'; '[e-mail]'; '[e-mail]'; '[e-mail]'
Subject: Cost of Testing

Mary,



I want to continue our dialogue over the issues presented by the CPSIA. I realize you are swamped with inquiries from many sectors, so I thought I would send this comment in via email.



I have previously raised the serious issue of the high cost of testing under the CPSIA. To be clear, the issue is not about the testing per se, rather it is the cost of the testing to prove compliance with the CPSIA. It is our legal obligation to produce products that comply with the law, of course. Financing proof of that compliance is the problem that confronts industry right now.



The attached lab test is a great example of the dilemma caused by the CPSIA testing requirements. The item in question is a new item called Let’s Tackle Kindergarten. This item is similar to other items in our product line and is quite uncontroversial from a safety standpoint. Because of our experience testing virtually identical items, we know this item is in compliance with the CPSIA on phthalates, lead and its other requirements. Nevertheless, to prove compliance, we will apparently have spend $6,144.06 on myriad tests. The product will be no more or less safe after this expenditure. No child will be safer or better protected. Our company will simply be much poorer.



High testing costs will have a significant effect on our business and businesses like ours. First, the cost of testing has increased about 5x – 20x under the new law. We do not believe these costs can be recovered because under current economic conditions, raising prices is not an option. Thus, the breathtaking increase in cost becomes part of our overhead.



The testing costs cannot be absorbed by small and medium-sized businesses. At typical net profit levels prevailing in the children’s products industry, the $6,144 cost of testing probably exceeds the anticipated total net profit derived from three or more years’ sales of the item. This does NOT take into account the cost of development, the cash expense of buying the inventory or the cost of owning inventory (usually estimated at 2.5% per month). Given that children’s products have finite commercial lives (three years is a good life for a consumer product), the CPSIA test costs might exceed the present value of creating a new item for many, if not most, businesses. So, will this product ever come to market? Not under the CPSIA. The only products left for sale will be mass market items where the scale of their production runs can support this wasteful expense. I believe this “mass market world” is not in the national interest as specialty companies like Learning Resources are an important means by which consumers obtain the products and services they need in our economy.



Notably, the gross cash expense required to finance these tests right now is literally unbearable. The law requires that all of this testing must be completed on all products in our line all at once. Several years of “catch-up” testing must be financed in just a matter of a couple months, bunching up the vast expense into one or two financial statements. Together with other excessive costs suddenly imposed by the CPSIA (for instance, lot traceability infrastructure), the economics of producing children’s items are being distorted into an unrecognizable form. If children’s products companies cannot produce a fair profit, they won’t be able to attract financing or risk capital, and the jobs (and products) will disappear. This problem needs a solution fast, and if we can’t come up with one, no one in Congress or the CPSC should be surprised to see bankruptcies rise inexorably as a result. The price will be paid.



I would appreciate the opportunity to dialogue with you on these rules and other negative incentives under the CPSIA. I am confident that through a partnership with industry, the CPSC can develop a common sense approach to safety rules and enforcement that will reward those companies committed to compliance while discouraging the bad actors who give the children’s products industry a bad name. The time to act is now. My associates in the business community are under intense pressure to pay these exorbitant testing bills – and once the money is shipped to the Chinese testing companies, there will be no getting it back.



Thank you for considering my views on this important topic.



Sincerely,



Richard Woldenberg

Chairman

Learning Resources, Inc.

[Rob Wilson]

(The following is an email sent to CPSC in response to Selecta pulling out of the USA--see link)

http://www.playthings.com/article/CA6620437.html

Subject: FW: Breaking News: Rising costs drive out German toyco
From: "Rick Woldenberg"
To:









--------------------------------------------------------------------------------

From: Rick Woldenberg
Sent: Fri 12/5/2008 4:45 PM
To: Judy Bailey ([e-mail]); '[e-mail]'
Cc: '[e-mail]'; '[e-mail]'; Shannon Weinberg ([e-mail]); Brian McCullough ([e-mail]); Will Carty ([e-mail]); Nancy Nord ([e-mail]); Joe Martyak ([e-mail])
Subject: FW: Breaking News: Rising costs drive out German toyco

The note below is consistent with my message on the CPSIA. The expense of PROVING compliance with the law is going to have a very strong negative impact on the market for children’s products. These choices are being made on a daily basis by thousands of companies now. In a product development meeting at our company this week, our development team informed us that they are raising the required first year revenues for new products by as much as 30% to cover the cost of new tests. The threshhold will be even higher for certain materials and pure toy products. We do not believe these test reports will result in ANY change in product design or materials. The impact of these new costs (including the cost of tracking lots) will destroy niche markets serving “orphan” markets like blind children and other special needs, and will make it exceptionally risky (financially) to start businesses making children’s products. It will kill small businesses manufacturing children’s items because the economics of their products will be ruined. These financial impacts, which are UNRELATED TO SAFETY, need to be explained clearly to the Rush Subcommittee so that some form of relief can be crafted. The message below is just the beginning. If we act quickly, we can fix the CPSIA to preserve safety gains without imperiling a marketplace for children’s products that comprises literally tens of thousands of companies, millions of products and perhaps 60% of the U.S. economy. This is a big issue which we cannot afford to ignore.



Rick Woldenberg

Chairman

Learning Resources, Inc.




--------------------------------------------------------------------------------

From: Scott McCabe
Sent: Friday, December 05, 2008 4:32 PM
To: Rick Woldenberg; Etienne Veber; Jim Whitney
Cc: Kent Brings
Subject: FW: Breaking News: Rising costs drive out German toyco



Its getting too expensive to meet US safety standards..



Scott McCabe

Educational Insights

[Rob Wilson]

Link here to the Learning Resources website as it pertains to the CPSIA. You can also link directly from the links tab.

[Rob Wilson]

Subject: Important Misconceptions about the CPSIA

Popular support for the CPSIA is founded on the premise that safety in children's products needs a radical overhaul. Media-fed revulsion over a wave of toy recalls in 2007 led to a popular misconception that everything was wrong with toy safety and therefore, with the safety of children's products in general. In this email, I will challenge that misconception, explain how the excessive breadth of the CPSIA is self-defeating and describe necessary revisions to achieve the critical mission of the CPSIA - to effectively improve safety in children's products.

The CPSIA Casts Too Wide a Net. The expansive CPSIA definition of “children’s products” incorporating products intended for use by children up to age 12 needlessly broadens the class of products subject to the new safety standards without improving safety. This broad definition has no basis in common experience with childhood safety hazards or in childhood injury statistics. In fact, it is likely that in expanding the definition of children's products, the CPSIA has become self-defeating - with so many imaginary safety issues and novel safety requirements for regulators to oversee, real safety issues will be lost in the noise. That would be the ultimate irony, as the original 2007 dissatisfaction with the CPSC asserted that it did not lavish enough attention on real safety hazards. Now, courtesy of the CPSIA, they won't be able to.

By and large, safety from lead and phthalates is an early childhood issue. The safety concerns related to these product defects depend on ingestion, which is known to be an early childhood risk. This fact is tacitly acknowledged in the marketing materials of the various public interest groups agitating for improved safety standards, namely U.S. Public Interest Research Group (PIRG), www.HealthyToys.org, Consumer Federation of America, Consumers Union, Kids in Danger, National Research Center for Women and Families, Public Citizen, Illinois PIRG, Washington Toxics Coalition and Natural Resources Defense Council. In EACH case, these organizations use images of children under three to illustrate their articles and position papers on children's product safety (see attached). The most common product illustrated is a rubber duck, a toy which is age appropriate for children under one year of age. Several organizations in fact display images of toddlers with rubber ducks in their mouths. While this imagery may tug on heart strings, it does not prove that children up to age 12 face safety issues from lead or phthalates – it just manipulates the reader into believing there is some sort of massive safety crisis under foot. Presumably, if these public interest groups felt strongly that lead or phthalates hazards crept into higher age groups, they might have illustrated 10-year-olds sucking on telescopes, licking the soles of their shoes or munching on a particularly delicious chapter in Harry Potter. In fact, their own documents reinforce the common sense, long-accepted principle that young children face special risks of toy safety and that older children (and adults) are not exposed to similar risks.

By extending the reach of the law to ALL categories of goods intended for children under 12, the CPSIA pulls in an entirely new, vast expanse of products not previously recognized as needing safety regulation. The list is quite extensive, including footwear, carpets, clothing, bedding, luggage, lamps, toys, books and magazines, consumer electronics, school supplies, office supplies, jewelry, housewares, sports equipment, and so on. With its enormous sweep, the CPSIA presents a “false promise” of better safety - Congress markets the notion that in applying safety standards to more items, we must necessarily be "safer". Unfortunately, this argument overlooks the fact that safety standards need a nexus with safety risks to be truly effective. When applied to products or situations that don't pose any real safety risk, the new standards become irrelevant in the practical sense and are then an unaffordable cost to society. [The excruciating cost of CPSIA compliance has been documented in earlier correspondence.] The application of the CPSIA to laughable hazards like licking shoes or sucking on telescopes is unfortunate and should not be permitted to stand.



Illinois and California have it Right – and the CPSIA has it WRONG. All safety issues are not made equal, and thus a one-size-fits-all approach to safety regulation cannot work well for consumers, industry or regulators. It is certainly possible to identify situations or product classes in which common sense would dictate that special safety rules are needed. A good example is lead-in-paint, which presents a known and obvious hazard to children. [Of course, lead-in-paint has been illegal for decades.] The longstanding approach of safety regulators has been to identify (and define) actual safety risks, and then develop appropriate safety rules. The fact, for instance, that cribs and bassinets require a special approach for safety does not mean every other product intended for children 12 and under must therefore be subject to the same rules. The CPSIA has not opted for this careful approach to tailored safety regulation - but it should.



Legislation in the State of Illinois, introduced by Attorney General Lisa Madigan, has provided a framework for this approach. Illinois SB 2860 (awaiting signature into law) defines three categories of items for concern with lead, namely:



a. Child care articles,

b. Children’s jewelry, and

c. Lead-in-paint (on toys)



Illinois, as one of the most aggressive states attempting to regulate children’s product safety, focuses its new law on the leading causes of possible lead poisoning among American children. [In fact, since SB 2860 is a consumer "right to know" law, it is not a model for the more substantive CPSIA. In this analysis, I am simply commenting on its careful focus on specific risks.] By zeroing in on real safety issues, Illinois SB 2860 models a structure for the CPSIA to have a real impact on safety. Not only does Illinois SB 2860 limit the categories of goods subject to its new requirements, but it also carefully defines lead hazards in each remaining category of goods. Illinois SB 2860 implicitly rejects the notion that lead is always a risk irrespective of circumstances. It is notable that the Coalition to End Childhood Lead Poisoning states that lead-in-paint is the primary lead risk factor for children. Since lead is ingested in the form of dust, only those products or situations that create lead dust should be a health concern. Their "leadsafe" website identifies principal sources of lead dust as leaded house paint, lead-in-paint on toys, soil and airborne industrial emissions (see http://www.leadsafe.org/content/kids_and_lead/index.cfm?pageId=57). Entrained lead (total lead) is not identified as a health hazard by this organization on its website. The CPSIA can and should narrow its focus on lead to those circumstances that have a real nexus to potential harm.



California's phthalates law (AB 1108) provides a different legislative model for consideration. AB 1108 promulgates a new phthalates standard (a ban above certain levels of six different kinds of phthalates) but omits the myriad bureaucratic requirements which accompany the CPSIA standards. See http://www.legisweb.com/calm/model/Retrieve.asp?ref=urn%3Acalm%3A20... The simpler California model for legislation substantially reduces the cost of compliance, but nevertheless clearly assigns responsibility for meeting standards. The California model of imposing simple standards without extensive implementing rules, if imparted to the CPSIA, would eliminate needless waste from paper-pushing, expensive testing to verify what is already known, ill-conceived lot markings and so on. A simpler, more focused CPSIA would also be much easier for the CPSC to enforce and for manufacturers, distributors and retailers to understand and implement.



It goes without saying that there might need to be specific exceptions to the generalized approach I advocate. Certain product categories might require unique approaches, as highlighted above. Some testing, such as lead-in-paint on toys, may be needed to reassure the public on known risks. Public hearings should be held to solicit the views of industry participants and regulators on the most appropriate approach to a simplified regulatory scheme.



How Would a Simpler CPSIA Enhance Safety? A simpler, more focused CPSIA would produce better safety results for several reasons:



a. Simply-stated standards would be easier to understand and to comply with, and much easier to enforce. Costs would fall for manufacturers and other market participants as they exercise business judgment on how to best devote their resources to compliance.



b. Better focused safety "targets" will release numerous categories of products from direct regulation under the law, but not from the regulatory authority of the CPSC. Thus, while the "hazard" of licking shoes would presumably not fall within this new CPSIA, the CPSC would retain the authority to regulate anything that presents a real safety risk. This regulatory power would put the CPSC in a position to expand the reach of safety rules to new product groups if the need became apparent.



c. Fewer rules and fewer targets will allow the CPSC to reorganize to patrol markets more effectively. We recommend that the CPSC consider reorganizing into teams devoted to different grades of "safety threats" to facilitate quicker responses, better analysis, the accumulation of more expertise, better research and issue anticipation, more dialogue with industry, and so on.



d. A stripped down CPSIA will make U.S. industry more efficient and competitive internationally. The freedom from wasteful expense will allow U.S. companies to devote more investment to real safety issues.



Conclusion. The CPSIA can have a positive impact on safety in the United States but not unless legislators recognize the fundamental errors in the current design of this law. If the CPSIA were remodeled along the lines of the streamlined Illinois and California formats, the new law would be in a much better position to achieve its goals of better consumer safety. In addition, law-abiding companies serving children's product markets would be able to survive the imposition of the new law, continuing to add value, provide employment and contribute to society while keeping kids safe. This is an admirable goal, and an achievable one. I call on Congress to urgently call hearings on needed changes in the CPSIA and to work toward substantive technical amendments that will facilitate trade without sacrificing safety.



Sincerely,



Richard Woldenberg

Chairman

Learning Resources, Inc.

[Rob Wilson]

Judy and Christian,

I thought you would be interested to know that I was informed today that one of the leading U.S. suppliers of science educational materials has suspended sales of all light bulbs (principally microscope light bulbs) owing to the little dot of solder found on the bottom. Apparently this little dot of solder makes those bulbs just too dangerous to sell into schools, despite the fact that no microscope bulb has ever harmed anyone from exposure to its little dot of solder. To my knowledge, there is no available substitute on the market for this ten cent item. This is EXACTLY what I predicted in my CPSC presentation on November 6 (see http://www.youtube.com/watch?v=AlMh7MJiodY). As my email from Friday indicated, it is no longer economic to sell telescopes either. Can someone explain to me what Congress had in mind with this law? Has Congress decided to delegate scientific pursuits to the Germans, Japanese or Chinese so Americans can be "safer"? Or is Congress hoping we will all move back into caves to adopt a "safer" lifestyle?

I still have kids in school. Your law makes illegal or uneconomic those implements they need for an adequate education. I can't escape the reach of the CPSIA by sending my children to private school - the ridiculous strictures of the CPSIA follows them everywhere in this country. Will I have to send them to boarding school in another country so they can look through a microscope or a telescope? What's Congress' master plan?

Richard Woldenberg
Chairman

[Suzie]

Did anyone else notice the laughing in the background while Rick was speaking on the videos? I'm guessing those people were the CPSC Panel and it infuriated me that they were laughing at his plight.

[Rob Wilson]

To: [e-mail], [e-mail]
Cc: [e-mail], [e-mail], [e-mail], [e-mail], [e-mail], [e-mail], [e-mail], [e-mail], [e-mail], “Larry Lynn” , [e-mail], [e-mail], [e-mail]

Subject: No More Telescopes - Congress Wants You To Squint Instead

I am writing to follow up on the below email on the cost of testing under the CPSIA. The attached document is a quote we received to test ONE telescope product under the CPSIA. The cost of the testing is a mere $24,050 for this single item. The average annual sales of this item are approximately $32,000 over the past two years. Needless to say, we cannot afford to spend $24,050 to test this (or any) item. I presume that Congress intended this result and wants us to stop selling telescopes to keep everyone safe. I guess kids can see the planets by squinting from now on. Thanks, Congress!

This absurd result is increasingly common under the destructive and poorly-conceived CPSIA. It is not surprising to me that a law born out of anger and written in a spirit of retribution has created market chaos and many unintended consequences. In my prior correspondence, I have set out many dangerous and unacceptable effects that are wreaking havoc among law-abiding companies. Good corporate citizenship is no help when facing a law which markets itself as “pro-safety” but cripples companies with unbearable financial burdens and pointlessly complex compliance requirements that redirect safety investments into bureaucracy. The CPSIA is simply an invitation by the Federal Government for all children’s products companies to find something else to do.

My letters to you are of public record. We are posting them on the Internet for all to see and read. These letters have put you on notice of many problems the CPSIA is creating. When the damage takes place, there will be no way for legislators to disclaim responsibility. I don’t want to see the destruction happen, which is why I keep writing you. It is unnecessary and will have lasting effects if not arrested now. I call on you and on Congress to act promptly to convene hearings on the effects of the CPSIA on commerce and markets, and to take immediate steps to partner with industry and the CPSC to rebuild a truly effective CPSIA to address real (not imaginary) children’s products safety issues. A stripped down, but focused, CPSIA could add a great deal of safety value without weakening companies, markets and the economy. A vindictive CPSIA salted with bitter distrust and enmity toward industry will simply gut markets and weaken the regulators’ ability to patrol markets for real safety issues. The choice is obvious – I urge Congress to choose the right path for our country.

Sincerely,

Richard Woldenberg
Chairman
Learning Resources, Inc.

[Rob Wilson]

Rick Woldenberg's Comments on the Penalties Section of CPSIA to the CPSC & Congress:

I am writing in response to the CPSC's Call for Comments on Civil Penalty Criteria under the Consumer Product Safety Improvement Act of 2008 (CPSIA). These comments are due on December 18, 2008.

General Remarks: We strongly urge the CPSC to reserve the imposition of penalties for only the most egregious and dangerous situations. Penalties under the CPSIA should NOT be to punish but instead to motivate better legal compliance. This is consistent with the mission of the CPSC - to protect the public. Notably, the CPSC does not have a mission to mete out "justice" so the use of penalties should be purposeful and not motivated by retribution. The CPSIA penalties can be used selectively to create compliance incentives when the facts demonstrate a need for such an incentive. We believe that the vast majority of safety incidents do not involve bad intentions or ill will so the need for "justice" will be infrequent. Penalties must be understood in light of the extremely high direct and indirect costs of any CPSC-imposed corrective action plan. Companies subject to corrective action plans incur tremendous costs in virtually all cases. Simple cases cost $50,000 but most cases quickly pass $100,000 in cost and skyrocket upward from there. The most notorious recalls in 2007 cost the affected companies tens of millions of dollars out of pocket - what would additional penalties accomplish? In addition, most companies experience commercial embarrassment and shame from these interactions, which must be seen as another form of high cost. The financial and other pain implicit in virtually any conflict with the CPSC typically accomplishes the mission of penalties - to modify behavior and ensure better future safety monitoring and legal compliance. In other cases (a factual inquiry), the CPSIA provides ample penalty firepower to up the ante and gain the cooperation of any recalcitrant company.

The complexity of the CPSIA is another factor which should be considered in penalty policy. In my experience, the CPSIA is too complex for most small and medium-sized companies to master - or even manage compliance with adequate resources. Perhaps the basics, the newspaper-worthy elements of the law, are clear but the rules are too sprawling and very specific. With so many rules to remember, properly implement and monitor across large product lines and evolving markets, and taking into account normal personnel ebb and flow affecting every company, the odds of complete compliance with this law is virtually nil at all times. Even Six Sigma companies (defined as organizations making 3.4 errors per 1,000,000 actions) will fail routinely to fully comply with the CPSIA if they are managing product lines of 500 items or more. At lower quality performance levels (even Five Sigma, 200 errors per 1,000,000 actions), regular full compliance will be impossible as a practical matter for virtually any product line over 25-50 products. [Typical competent companies are probably at Three Sigma or Four Sigma quality levels with experienced and knowledgeable personnel, and at lower levels after personnel turnover.] At the prevailing low value of most children's products, it is not possible for most (any?) children's product companies to invest the money in becoming Six Sigma companies - that's unrealistic on many levels. If this analysis is correct, good companies will now become serial violators of the law against their will and despite their constructive efforts and heavy compliance investments. It also implies that it will become much harder for the CPSC (or the public) to distinguish good companies from bad companies. We will all look "bad". If the complexity of the CPSIA essentially manufactures violations, the opportunity to penalize will rise exponentially - and if overused, will choke off markets and harm good companies. This is another strong argument against use of penalties except where there is a demonstrated (factual) need to ensure compliance in the future.

We are fearful that the power to impose high penalties will be used coercively by the CPSC, ending any notions that law-abiding companies can work openly and in partnership with the CPSC. At present, the CPSC encourages a practice of "when in doubt, file". In a regulatory environment where minimum penalties are $100,000, how many companies will take up the CPSC's suggestion to file "when in doubt"? Only the crazy ones. To be a truly effective safety agency, the CPSC cannot set penalty policies in a vacuum. If the CPSC sees value in having good (open and cooperative) relations with the business community, it may have to demonstrate restraint in the use of penalties. For the vast majority of companies subject to regulation, this approach will work very well. The CPSC has the legal authority to impose recalls without the consent of the offending companies, so there is already a power imbalance favoring the CPSC. If penalties are used inappropriately, we believe a moral hazard will be created - there will be a perverse incentive to hide safety violations (rather than disclose them) specifically out of fear of penalties. The CPSC cannot afford rules that discourage good and cooperative behavior.

Impact of Small and Medium-Sized Businesses: If imposed, penalties on the order of $100,000 per violation will kill or severely damage many small and medium-sized companies. We do not see the purpose of such high penalties (as explained above). The best way to mitigate the impact of high penalties is not use them except in extreme situations. As noted, the cost to small and medium-sized companies of most corrective action plans is so high that behavior change will almost always follow. Penalties on small and medium-sized companies should be reserved for egregious conduct or a lack of appropriate cooperation. In these troublesome cases, where companies subject to a corrective action plan demonstrate an active disregard for the law or CPSC process, imposing a penalty to coerce better behavior might serve the interests of the public. We certainly believe penalties at the $100,000 should be reserved for only the most shocking situations. At the levels specified in the CPSIA, penalties could be counter-productive with small and medium-sized companies, encouraging evasive and uncooperative behavior.

Penalty Factors Under Sec. 217(b)(2): We would like the CPSC to consider the interplay between (a) the nature of the product defect, (b) the occurrence or absence of injury, (c) empirical market data in the possession of the company. Companies must and do exercise business judgment in the daily administration of their affairs. We believe exercise of appropriate business judgment must be respected in any fair penalty scheme. This is an essentially factual inquiry using a "reasonable man" standard. Unfortunately, the listed factors might give the CPSC the opportunity to determine penalties using 20-20 hindsight ("you should have known . . ."). The problem with 20-20 hindsight is that it cannot be used prospectively - you have to know the unknowable. In light of the many "traps for the unwary" in the CPSIA, adding the impossible burden of satisfying 20-20 hindsight could drive more companies from the children's products market. As per my earlier comment letter, it is worth considering that one way to cure cancer is to kill the patient. I don't think we want to do that here.

There are cases where technical violations may occur (especially in a "when in doubt, file" situation) without the occurrence of any injuries. In this fact pattern, the absence of injury should be enough to justify no penalty - after all, the CPSC wants good companies to bring ambiguous issues to its attention early, so punishment for doing so should be very rare. In those cases, the economics of any corrective action plan must also be carefully weighed to not discourage further participation in the "when in doubt, file" program.

A more critical factor, in my view, is whether the company in question exercised good business judgment in its decision to sell or continue to sell the product. This would be a "reasonable man" standard and would take into account the need to exercise a duty of care toward consumers. Companies making consumer products must continually reassess what they know about their products and how they are being used in the field, and regularly remake the judgment that it is a responsible act to continue to sell their products. This takes into account that facts as they emerge can change what a "reasonable man" might think about his product - a reasonable decision to sell a product on "day one" could change if information is received later that suggests the presence of latent defects. We do not think it will benefit consumers or the market to make penalty rules so strict that companies must become entirely risk-averse in what they do. That would be a terrible overreaction to past recalls.

The factor "number of defective products distributed" is not as relevant as the other criteria, unless it has a knowledge component (knowingly distributed). In the case of latent defects, that is defects which were hidden at the time of initial sale (reasonable man standard), the number of defective products distributed can be rather large before discovery of the defect. I do not see that this factor is relevant in the absence of knowledge (including appropriate diligence).

All in all, the CPSC must be very careful to not create a menu of "gotcha" penalties. The CPSC's penalty policy or rules will be part of the "game play" between the regulators and the regulated companies. If the rules encourage cooperation, the CPSC has a chance to partner with industry to improve safety. If industry believes that penalties are viewed as a revenue source or are being handed out in a way disproportionate to the infraction, then interplay between industry and the CPSC will change for the worse. If the penalties are too great, companies will exit the business (find something less regulated to do) or start hiding infractions as a survival technique. This outcome would not contribute to the safety of American children, and must be carefully considered in crafting the CPSC's penalty policies.

Other Factors to Consider When Setting Penalties: We believe that penalties, if appropriate, are best set in light of the factual situation of each particular case. We do not like the notion of a menu of penalties, in part because it seems to suggest a price tag for bad behavior (encouraging dangerous behavior when it is a profitable "bet" to risk the penalty). As the saying goes, the penalty should fit the "crime" so careful case-by-case factual analysis and consideration of the purpose of the penalty should be part of any penalty decision.

We believe the additional factors listed in your call for comments (past record of compliance, timeliness (and quality/completeness) of response, safety and compliance monitoring (and procedures), cooperation and good faith, economic gain from noncompliance, and product failure rate) are all appropriate factors. We consider record of compliance, cooperation and good faith to be critical mitigating factors.

We recommend that the CPSC also take note of the investment of the company in legal compliance and safety monitoring. Many companies will engage experienced counsel to advise them on appropriate safety and compliance practices. They may establish written procedures to govern their practices. Careful recordkeeping, general management involvement and awareness of the laws are other indicia of good citizenship. We believe economic gain from noncompliance is rare (but egregious), as bad behavior is a poor business strategy for the long term. Finally, we are suspicious of the value of failure rates as a factor. Failure rates can vary based on many factors, and high rates may not be evidence of egregious conduct - it could equally well be innocent. The implication is that a high failure rate necessarily reflects on character, which we think is not always true.

Thank you for considering our views on this important subject.

Sincerely,

Richard Woldenberg
Chairman
Learning Resources, Inc.