Not surprisingly, last month’s article generated intense interest as well as an unusually high number of inquiries. Accordingly, one purpose of this article is to clarify and amplify certain points made in that article as part of our examination of the EX-approval regulation.
Among the concerned are persons who provide the manufacturer with a formulation and who have adopted the practice of having EX-Numbers issued in their names. These persons mistakenly believe that having the EX-number in their name protects their right to the formulation in the event of a falling out with their manufacturer, such as preventing or enjoining the manufacturer from using the formulation. The process of providing a formulation to the manufacturer, however, is currently being used by a minority within the fireworks industry. One person commented that they use the EX-number like a patent – to protect their product. This series of articles examining the EX approval process has highlighted some of the unintended consequences of having EX-Numbers issued to a person other than the manufacturer. Any benefit derived by having the EX-number in a non-manufacturer’s name is illusory, at best, and is likely outweighed by the exposure to the liabilities associated with fireworks products.
As a threshold matter, the purpose behind a patent for a firework is different from obtaining an EX-number for that item: a patent is meant to protect a person’s proprietary interest in something such a formulation, whereas an EX-number approval is only meant to afford assurance that the firework can be safely transported. As a general rule, PHMSA will not, and should not, concern itself in commercial disputes between a distributor and a manufacturer; such as when a manufacturer sells a product based on a formulation provided by another person, such as a distributor. By inexplicably issuing Ex-Numbers to non-manufacturers PHMSA has created this conflict and, to date, it has not offered the industry any meaningful guidance or solution. For example, there is nothing to stop a manufacturer from getting its own EX-Number based upon a formulation furnished by another person (such as a distributor), provided that the manufacturer meets all other requirements (e.g. a foreign manufacturer needs to have a registered agent), presenting a relatively low barrier to overcome.
Additionally, if for some reason a person changes the manufacturer listed on the approval that person must apply for a new EX-number. In other words, if you change your manufacturer you are forbidden from transporting your products until you apply for and receive a new approval from PHMSA (see 49 C.F.R. § 173.56).
If a person wishes to protect their proprietary interest in the formulation there are more appropriate legal avenues to accomplish this goal. One approach is to enter into a strongly worded agreement that contains harsh remedies by reason of continued production by the manufacturer after termination of the business relationship.
A prime issue associated with issuing EX-numbers to non-manufacturers concerns safety and accountability. Indeed, the main objective of the HMRs, including the EX-number approval process, is to ensure the safe transportation of the fireworks. When PHMSA evaluates a fireworks formulation and design it does so for Drop Weight Impact Sensitivity, Friction Sensitivity, Thermal Stability, etc. (See 49 C.F.R. § 173.57). PHMSA expressly places responsibility squarely on the manufacturer to ensure that there are no changes in product formulation or construction that may affect the safety of the product (while in transportation). PHMSA regulations also describe what changes transform a previously approved explosive into a “new explosive”, triggering the filing of a new application and the issuance of an entirely new approval number (See 49 C.F.R. § 173.56(a)). This is the main reason why safety in transportation dictates that the Ex-number be issued in the name of the manufacturer—only the manufacturer has the oversight capabilities and facilities to implement and administer the quality control measures needed to assure that the approved formulation and design remains unchanged every time the product is manufactured. As a practical matter, the distributor—whether or not they provide the formulation to the manufacturer—would be able to satisfy the quality control required only by assigning a distributor representative to the manufacturer’s facility each and every time the product is made, a practice likely to be cost prohibitive.
By insisting on having an EX-number in your name as a non-manufacturer you are asking to step into the shoes of the manufacturer and, as a consequence, PHMSA may try to hold you accountable for actions of the distant manufacturer, as recent prosecutions demonstrate. It defies good business sense to expose your business to prosecution and, at the same time, abandon certain defenses to an agency action (such as the defenses of an innocent bona fide purchaser lacking authority or control over the manufacturing process, or detrimental reliance).
In addition to the foregoing situation where the manufacturer makes a change and PHMSA prosecutes the person to whom they issued the approval–the non-manufacturer, PHMSA is prosecuting people who order a previously approved item, but asks the manufacturer to change the name and place a private label upon the product. In this scenario, the basis of the prosecution is predicated upon the fact that the name does not match that on the Ex-number approval, despite the fact that it is not “new” under the regulations, nor the fact that the manufacturer supplied the distributor with the EX-number. Experience has shown that when members of the fireworks industry insist upon having approvals issued in their name PHMSA may attempt to blur the line of what constitutes a ”knowing” violation.
In conclusion, a streamlined EX-number approval process will likely enhance safety and place accountability where it belongs, making good business sense.
[EN- special thanks is given to Thomas Seymour, Esq. for his preparation of this article. Thomas Seymour recently joined the Creadore Law Firm, P.C. after spending nine years in the Office of Chief Counsel, DOT, PHMSA].