Mattel Toy Recalls Sparks Lawsuits by Shareholders, Angry ParentsOct 11, 2007 | Parker Waichman LLP
Mattel Inc. continues to be plagued by fallout from this summer’s massive toy recalls. In addition to a tarnished reputation, Mattel is facing dozens of lawsuits filed by parents whose children were exposed to the lead paint and dangerous magnets used in the recalled toys. And just this week, a large pension fund filed a shareholder lawsuit against Mattel, alleging among other things that the company mishandled the toy recalls.
Since August 1, Mattel has issued three separate recalls for a total of 21 million toys because they contained either toxic lead paint or dangerous magnets that could cause intestinal injuries in children if swallowed. Following the company’s first recall of lead tainted Fisher-Price toys, the Consumer Product Safety Commission (CPSC) announced that it was investigating Mattel’s timing of the recall announcement.
Federal law requires that companies inform the CPSC of safety issues within 24 hours of learning of them. But Mattel learned of the problems with its Fisher-Price toys on July 6, and the recall wasn’t announced until August 1. In the past, the CPSC has fined Mattel several times for failing to report safety problems in a timely manner. In 2001, the CPSC levied a $1.1 million fine against Mattel's Fisher-Price division for failing to report serious safety defects with Power Wheels toy vehicles. It was the largest fine against a toy firm in the agency's history. For its part, Mattel has long refused to comply with disclosure laws, calling the rules “unreasonable”.
Now, a Michigan pension fund, the Sterling Heights Police and Fire Retirement System, has sued Mattel, seeking compensation for the loss that shareholders may incur from the recalls. According to the New York Times, the suit claims that Mattel’s directors, including the chief executive, Robert A. Eckert, breached their duty to shareholders by allowing the company to delay the reporting of hazardous toys beyond the 24 hours allowed by law. The lawsuit also claims that Mattel withheld information about its products from the CPSC for years in order to prop up sales and avoid fines, thereby artificially inflating the value of Mattel stock. Finally, the suit also accuses four Mattel directors of selling $33 million worth of stock from late January to early May and profiting from insider knowledge of coming problems.
The pension fund owns 23,600 shares of Mattel stock now worth $534,776. But the value of the pension fund’s stock could be negatively affected by the Mattel recalls. The company has already had to restate projected sales figures as a result of the recalls. And Mattel faces at least 10 lawsuits filed by parents in federal courts on behalf of children exposed to defective toys. The company also faces even more lawsuits in state courts, and some are seeking class action status.
So far, Mattel has not commented on any of the pending litigation.