New recall law could lead to litigation bonanza

New recall law could lead to litigation bonanza
Lawyer Michael C. Smith says the impact of Bill C-36 will depend on how the government implements it.
Many legal departments will likely face increased litigation and internal restructuring following Parliament’s approval of a new product recall bill last week, say business lawyers.

Bill C-36, the Canada Consumer Product Safety Act, gives unprecedented powers to Health Canada to order recalls and testing on manufacturers, importers, and retailers. It has been hailed by consumer safety advocates as a move that brings Canada in line with the best practices in other developed countries. The law will go fully into force in the next few months.

The new stringent reporting requirements will, however, likely increase the number of recalls. These will either be forced by Health Canada or be voluntary from cautious businesses wanting to avoid the stigma of being forced by regulators to recall a product.

As the number of recalls increases, current trends in Canada indicate the number of class actions will also go up.

“I expect that there will be an increase in litigation, typically class actions related to consumer products, as a result of this new statute,” says Peter Pliszka, a partner at Fasken Martineau DuMoulin LLP. “Essentially, as sure as night follows day, class actions typically follow recalls of products.”

Michael C. Smith, a partner at Borden Ladner Gervais LLP, says much will depend on how the government implements the act.

“I’m concerned that the government will want to make a splash with this legislation,” Smith tells InHouse. “The government may very well flex its mandatory recall muscle and either order a recall or put the company in a position where it feels it has no choice from the PR perspective other than to conduct a voluntary recall.”

One of the key parts of the law likely to affect in-house counsel is the requirement that companies report to Health Canada within two days of any incidents that might trigger a recall. The company then has 10 days to file a followup report and offer corrective actions.

“The fuse for the reporting is very short,” Pliszka tells InHouse. “Companies that currently don’t have organized processes for gathering information from the field — and funnelling it within their company to the appropriate people within their organization — are going to have a lot of work to do.”

While many companies will already be set up for this type of reporting because U.S. regulations have been mandating it for years, Smith says the new reporting system can be “fairly onerous” if the company does not have a reporting structure in place.

“If the legal and regulatory departments of the company are not already integrated with the customer service side of the company, then I think they now need to be,” says Smith. “So as soon as a flag is sent up by a report to the company with respect to a potential product defect that’s serious enough that would fit within the definition of an ‘incident’ within the legislation, then all four corners — and that could be across the world — are automatically notified so they can make the appropriate report to the government if they feel it is necessary.”

Despite the added work for many companies, key industry groups have welcomed the new legislation, which replaces laws in the books that were 40 years old. Supporters include Food and Consumer Products of Canada, the country’s largest industry association representing the food and consumer products industry.

With the bill’s approval, Health Canada joins U.S. and European Union regulators who currently have laws at their disposal that enable them to make mandatory product recalls and order product safety tests. Before the legislation, Canadian companies only made voluntary recalls.

Tips for in-house counsel

Bill C-36 has a few key elements that affect in-house counsel, according to Smith. Here are some tips:

• The bill offers a good opportunity to review supply agreements and ensure risks for expenses like recalls and product testing, that can now be ordered by the government, are properly allocated to the party that should bear that risk in the distribution chain.

• In-house counsel need to review the banned product lists in the new law to ensure they are not selling any of them as consumer products in Canada as they are now banned.

• If the company does not already have a recall plan in place, then it should absolutely have one so the company can do a voluntary recall if it is pushed by the government to do so.

InHouse will offer a more an in-depth look into this subject in its February 2011 print edition.

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