### SERVED: November 6, 2013**'~** 

### U.S. DEPARTMENT OF TRANSPORTATION OFFICE OF HEARINGS WASHINGTON, DC

- j**~,** 4 I

In The Matter Of: NOUVEAU LABORA TORIES, LLC d/b/a COVERMARK USA Respondent ) ) ) ) 

### ) ) DocketNo. FAA-2011-0488

Case No. 2010S07000318

INITIAL DECISION OFU.S. ADMINISTRATIVELAWJUDGE


### Held: 1) The Respondent committed a total of 18 (eighteen) HMRs violations, as alleged inthe FAA'sJune 3, 2011 Complaint. 2) The Respondent is assessed a total civil penalty of$10,000 for the 18 (eighteen) violations.



### BriefSummary ofCaseFacts On or about April23, 2010, the Respondent offered to the United Parcel Service ("UPS") for transportationby air, a one-piece shipment containing an eight ounce container ofCM Beauty Super CleanToner ("Beauty Toner"). This Beauty Toner is classifiedbythe Hazardous Matenal Regulations ("HMRs"), 49 C.P.R., Subchapter C, as a hazardous material. Its proper shipping name is Ethanol Solution. Itis a flammable liquid classified bythe HMRs as Hazard Class 3 (Flammable Liquid) with an identificationnumber ofUN1170. Whenthe Respondent offeredthe one-piece shipment ofBeauty Tonerto UPS onor about April23, 2010, itdid so withoutproperly marking, labeling, orpackagingthe material as required under the HMRs. The Respondent also failed to include the proper shippingpapers or provide the necessary emergencyresponse information. In addition, the Respondent had also failed, as ofApri123, 2010, to properly train its employees who handled hazardous materials.

Page 1 oflO .__,.**'-~**BriefSummary ofLitigation Proceedings On June 3, 2011, the Federal Aviation Administration ("FAA") served a Complaint upon the Respondent, Nouveau Laboratories, LLC d/b/a/ Covermark USA ("Respondent") charging it with 18 (eighteen) violations 1ofthe HMRs, alleged to have occurred on or about April 23, 2010. Pursuant to 49 U.S.C. 

### § 5123(a), the FAA sought a total civil penalty of$10,000 for those 18 HMRviolations. On June 22, 2011, the FAA filed its Complaint, withthe Respondent's Request for a Hearing, withthe Office ofHearings. OnApril2, 2012, an Order Deeming Allegations ofSafety Violation Admitted and Granting/Denying Other Reliefwas issued. This Order found that the Respondent had violated the 18 (eighteen) charged HMRs as alleged, but that genuine issues ofmaterial fact remained regarding the FAA'sproposed $10,000 civil penalty. On October 31, 2012, the FAA filed the Complainant's Motion for Decision ("Motion"), arguing that no genuine issue ofmaterial fact remained regarding the proposed $10,000 civil penalty. As part ofthis Motion, the FAA filed Exhibit Nos. 1, 2, and 3, which were considered, without objection, as part ofthe FAA's Motion. (12/11/13 Tr. 7.) OnNovember 7, 2012, the Respondent filed an Answerto Complainant's Motion for Decision ("Answer"). On December 13,2012, an Order Denying Summary Judgment [on proposed civil penalty], Granting Joint Motion for Decision on the Written Record, and Granting/Denying Other Reliefwas issued. This Order found that genuine issues ofmaterial fact remained regarding the civil penalty. It also granted the parties' Joint Motion for decision based on the written record, made during oral argument presented on December 11,2012. As part ofthis Joint Motion, the parties agreed to the admission ofthe FAA's Exhibits 1, 2, and 3 as the evidentiary record for determining the civil penalty. 2 Both parties declined to submit further evidence. (12/11/12 Tr. 59:11-60:21.)

1The Complaint charged the Respondent with violating the following 49 C.F.R. sections: a) 171.2(e); b) 172.200(a) and 172.202(a)(l); c) 172.200(a) and 172.202(a)(2); d) 172.200(a) and 172.202(a)(3); e) 172.200(a) and 172.202(a)(4); f) 172.200(a) and 172.202(a)(6); g) 172.200(a) and 172.202(a)(7); h) 172.204(a) or (c)(1 ); i) 172.204(c)(2);j) 172.204(c)(3); k) 172.30l(a); I) 172.300(a) and 172.312(a)(2); m) 172.400(a); n) 172.600(c)(l); o) 172.600(c)(2); p) 172.702(a); q) l73.24(b)(l); and r) t73.24(t)(l).

2 12/13/12 Order Denying Summary Judgment [on proposed civil penalty], Granting Joint Motion for Decision on the Written Record, and Granting/Denying Other Relief(page 7, paragraphs 2 and 3). Page 2 of 10On January 17, 2013, the parties appeared by telephone andpresented oral arguments on the disputed issue ofthe proposed civil penalty, based onthe admitted evidentiaryrecord. 

### Legal Standard Determining an appropriate civil penalty requires the consideration ofnine factors: the (1) nature, (2) circumstances, (3) extent, and (4) gravity, ofthe violation; (5) the degree of culpability ofthe violator; (6) any history ofpast violations; the violator's (7) ability to pay, and (8) ability to continue to do business; and (9) other matters asjustice may require. 49 U.S.C. 

### § 5123( c) (2006).

The FAAhas the burden ofproving the first five factors. The FAA has established policy guidance for determining these five factors and assigning them weight. 64 Fed. Reg. 19443 (Apr. 21, 1999); FAA Order 2150.3B, Appendix C, FAA Sanction Guidance, Hazardous Materials Enforcement (October 1, 2007). A penalty calculated in accordance with the FAA's policy guidance should stand, absent a showing ofthe Respondent's inability to pay, inability to continue to do business, or some other matter required byjustice. See In re Villamos Tabula, FAA OrderNo. 2010-6 (Jun. 15, 2010); In re Rushmore Helicopters, Inc., FAA OrderNo. 2012- · 8 (Oct 11, 2012). Financial hardship is an affirmative defense thatthe respondentbears the burden ofproving. In re TWA, FAA OrderNo. 1999-12(); In re Dominion Concepts, Inc., FAA OrderNo. 2005-4, 10, n. 16 (Mar. 10, 2005).


### Evidentiary and Issue Stipulations As previously noted, on December 11, 2012, the parties agreedto the re-admission ofthe FAA's Motion Exhibits 1, 2, and 3 to serve as the evidentiary record for determining the civil penalty based on written submissions. Atthe beginning oforal argument on January 17, 2013, the parties stipulated that the motions filed for, and oral arguments made, during the December 11, 2012 motion conference couldbe re-considered as arguments for the civil penalty decision. (1/17/13 Tr. 20:1-22:21.) The parties also stipulatedthatthe FAAhadmet its burden ofproofin assessing the first five factors required under49 U.S.C. § 5123(c). The FAA had utilized its published sanction guidance in calculatingthe proposed civil penalty. The parties stipulated that the FAA's penalty calculations had originally resulted in a $63,000 proposed penalty, which the FAA reduced to $10,000 after considering various factors. {1/17/13 Tr. 11 :6-14; 19: 1-12; 40:8-41:9.) The issues
Page 3 oflOremaining were whether the Respondent had metits burden ofproofin asserting the affirmative defense offinancial hardship (i.e., its ability to pay and/or ability to continue in business), and whetherthe Respondent had taken remedial action that supported further reduction ofthe proposed penalty. (1117/13 Tr. 16:1-19: 11.)

BriefHighlights ofthe Parties' Arguments All arguments byboth parties were considered. Only briefhighlights are summarized here. 1. Respondent's Affirmative Defense Arguments Throughout these proceedings, the Respondent has argued that given the size and type of the shipment involved, the FAA'sproposed $10,000 civil penalty was "disproportionate to the violation, ignores mitigating circumstances, and would render Respondent's ability to continue in business difficult or impossible. (Respondent's June 8, 2011 Answer, 1.) The Respondent argued that even a $10,000 penalty was excessive. The proposed $10,000 civil penalty placed the business in peril, particularly given the small size ofthe company and its lack ofassets. (1117113 Tr. 47:16-48:10.) Justice required a lower penalty, in order to allowthe Respondentthe ability to continue to do business. (Answer, 1-2.) The Respondent argued that the Quick Ratio, taken alone, was the bestmeasure ofthe Respondent's business health, because it excluded inventory as an asset. Although the Respondent argued that its inventory was brand-name, unique, slow-moving, and oflittle value to competitors, no evidence was submitted in support ofthose arguments. (Answer, 3; 12/11112 Tr. 24:1-25:16.) The Respondent explained that at the end ofthe year 2011, its financial documentation demonstrated that it had approximately $24,000 in assets (excluding inventory), and $58,000 in liabilities (excluding long term liabilities). (FAA Exh. 1at 5-7; 12/11112 Tr. 40:10-42:19.) The company's total liabilities were $58,000, which was more than double its total assets of$24,000. The proposed $10,000 civil penalty would amount to almost 50% ofthe company's total assets, which currently were insufficient to pay the company's outstanding liabilities. The Respondent also asserted it had experienced a steady, documented, decline in sales during the three year period from 2009-2011. (FAA Exh. 1 at 6, 9-11; 12/11/12 Tr. 44:8-45: 11.) In fact, the proposed $10,000 civil penalty exceeded the Respondent's total yearly profit of
Page 4 of 10[Type text]
$9,261 inthe year 2011, and was almost double the amount ofprofit (i.e., $5,334) the company hadrealized in the year 2009. (FAA Exh. 1 at 2.) The Respondent recommended a further reduction ofthe proposed $10,000 penaltyto $1,000 or $2,000. (Answer, 5; 1/17/13 Tr. 47:22-48:2). 2. FAA's Responsive Arguments: The FAA arguedthatthe Respondent had failed to meet its burden ofproofregarding its inabilityto pay, the effect onits ability to continue to do business, and/or whether any further mitigation was warranted. The FAA arguedthat the Current and Quick ratio data shouldbe consideredjointlyin reviewing the Respondent's business financial data. The Respondent's CurrentRatio,3 which

was 1.74, showed a healthy business. Even the Quick Ratio,4 which was 0.33, demonstrated that the business could still paythe proposed $10,000 civil penalty without going out ofbusiness or suffering a decrease in sales. (12/11/12 Tr. 13:1-18:4; Motion, 7.) The Respondent's inventory should be deemed an asset, unless there was a showing ofsales decline orthat the business had ceased. (12/11112 Tr. 12:17-16:10.) The FAA did not disagree thatthe Respondent's financial documents showed a sales decline over a recent 2-3 year period. Nevertheless, the FAA characterizedthe admitted financial documentation and the Respondent's arguments as "all perspective." (12/11/12 Tr. 17:15-16.) Inthe alternative, the FAA argued that even ifthe Respondent had met its burden of proofon any ofthe affirmative defenses or**miti~ation,** no further reduction was warranted from its proposed $10,000 civil penalty. The FAA argued that it could have proposed a muchhigher penalty, by imposing the maximum of$50,000 multiplied by eachregulation listed in its Complaint.5 (Motion, 2-3.)

3 A Current Ratio measures a company's ability to pay short-term obligations. Itis a numberreachedby dividing the business's total current assets (i.e., inventory+ accounts receivable+ cash+ cash equivalents) bythe total current liabilities (i.e., accruals+ accounts payable+notes payable).

4 A QuickRatio measures a company's ability to pay short-term obligations without including inventory. Thus, the calculation is a follows: non-inventory business assets (i.e., accounts receivable+ cash+ cashequivalents) divided by total current liabilities (i.e., accruals + accounts payable + notes payable).

5Assuming that the FAA meantthat it could ignore all statutory considerations and simply impose a maximum of $50,000 for each alleged violation, then certainly $50,000 x 18 violations wouldresult in a higher proposedpenalty of$900,000. Page 5 oflO[Type text]**However~** the FAAdid not do that. Instead, it assessed a total of$63,000 for the 18 violations, after categorizingthe Beauty Toner as "Category B materials," the Respondent's culpability as "high," and the weight ofthe shipment as withinthe "moderaterange" for sanction purposes. (Motion, 4-5.) The moderate range was appropriate because the Respondenthad shipped 384 Beauty Toners, each weighing 4 ounces. (Motion, 4-5; FAAExh. 1 at 2.) The FAA asserted that it further decreased the amount ofthe penalty from a median penalty of$33,950 to $10,000 after giving considerationto the Respondent's attempts at corrective training action, and for any confusionthe Respondent may have had aboutthe hazardous nature ofthe BeautyToner. (Motion, 2-5.) FAA also arguedthatthe Respondent should be hurtbythe penalty. The Respondent shouldhave to showthatpayment ofthe penalty would force itto either "close its doors" or
cause "severe business damage." (12/11112 Tr. 18:9-22.) Giventhe facts herein, the FAA assertedthat itwas well withinthe Respondent's ability to cutotherbusiness costs (e.g., advertising), orborrow money in orderto pay the proposed fine. (12/11/12 Tr.20:4-23:11.)
Analysis 1. Ability to Pay

- Inventory and Liquidity Ratios In general, a companyis perceivedto have financial health when it has easily convertible liquid assets available to cover short-term liabilities (i.e., an ability to pay its short-term debts and still fund continuingbusiness operations). In noted above, the Respondent argued that the Quick Ratio calculation alone

- which excluded inventory as an asset

- should be utilized and deemed sufficient evidence ofthe Respondent's inability to pay the $10,000 proposed civil penalty. Boththe Current Ratio and the Quick Ratio are liquidity ratios, which attemptto measure
a company's ability to meet its maturing short-term obligations. Charles 

### R. Wright, Understanding and Using Financial Data:AnErnst & Young GuideforAttorneys§ 8.3 (John Wiley & Sons, Inc., 2nd ed. 1996); (Motion, 7). Inindustrypractice, however, the financial status ofa company cannotbe fully determinedby looking at only one - or eventwo

- liquidity ratios. See Wright, supra 

### § 8.1 (the "financial diagnosis" ofa company is bestreached bythe "use ofa number" ofdifferent techniques). In fact, it is recommendedto reviewmultiple liquidity ratios (e.g., CashRatio+ Quick Ratio+ Dynamic Current Ratio, etc.,) as well as other
Page 6 of 10[Type text]

financial calculations (e.g., Inventory TurnoverRatio, carrying costs, etc.,) in orderto obtain a balanced overview ofa business's financial status. As a result, the Respondent's argument that only the Quick Ratio of0.33 shouldbe utilized, and that it demonstrated that the Respondent simplydid nothave the abilitytopaythe proposed $10,000 civil penalty, was notpersuasive. (12111112 Tr. 24:5-25:16.) In addition, the Respondent failed to provide specific evidentiary proofregarding its inventory and/orturnover, to showthat its inventory was unique, slow-moving, and/or oflittle valueto competitors (i.e., could notbe easily convertedto cash), and should not be considered as an asset inassessingthe Respondent's overall ability to pay a fine. Thus, the Respondent's ability to pay a penalty mustbe assessed using all available information; not a single liquidityratio that excludes its primary asset. The FAAis correct in its argumentthatthe Respondent failed to showthat its business is in such a positionthat itis unable to sell its inventory, thereby warranting exclusion ofthe inventory from the Respondent's current assets. (12'111112 Tr.14:8-15:3, 15: 17-16:5; Motion, 8.) The Respondent failed to proveby a preponderance ofthe evidence thatthe civil penalty shouldbereduced based onRespondent's ability to pay.

2. Abilityto Continue to Do Business The Respondent argued thatthe proposed $10,000 civil penalty placed its business in peril, particularly given the small size ofthe company, its. slow-moving inventory, the poor economy, and its declining sales. The Respondent's financial data showed that the proposed $10,000 penalty was approximately 1.5%ofthe Respondent's gross profit for 2011 (i.e., the year ofthe last provided annual profit 

### & loss statement). (FAA Exh. l at 6.) Accordingto its balance sheets, the Respondent hadretained earnings ofonly $5334 in 2010, afterit apparently spent all ofits equity ($104,509) in 2009 inafailed advertising campaign. (FAA Exh. 1at 5, 10; 12/11112 Tr. 43:8-20.) Nevertheless, inreviewing the Respondent's annual balance sheet comparing the years 2009-2011, there were multiple signs ofrecovering financial health, both from the allegedly failed advertising campaign and from the overall downturn inthe recent economy.

Page 7 of 10[Type text]

For example, in2010, the Respondent substantiallyreduced its costs for print advertising (i.e., $126,000 from $281,889) andpress relations (i.e., $7,500 from $35,000), while atthe same time conservatively spending more oninternet marketing (i.e., $62,930 increased from $38,083). (FAA Exh. 1 at 9-10.) Atthe same time, the Respondent incurred a long-term liability listed as a $79,951 "member loan." (FAA Exh. 1at 5.) Nevertheless, the Respondent's total variable costs6 increasedby $5,492, and the Respondent reported $5,334 innet ordinary income. (FAA Exh. 1at 7-10.) In its December 2011 balance sheet, the Respondent continued to explore different liability expenditures, while maintaining a large inventory and sales operation. 

### Itreported only $1,949 in its checking/saving account, with its accounts receivable (i.e., $17,017)having increased only slightly (i.e., $614) from December 2010. (FAA Exh. 1 at 5.) Nevertheless, there

was no bad debt, indicatingthat productwas moving and receipts were being collected. The Respondent had also reduced both its costs for print advertising (i.e., $122,310 from $126,000), and internet marketing (i.e., $44,399 from $62,930), but increased its press relations (i.e., $10,125 increased from $7,500). (FAA Exh. 1 at 6.) Atthe same time, the Respondent decreased its total liabilities (i.e., $137, 987 from $152,205), eventhough itcontinued to maintainthe long-term liability listed as a $79, 951 "memberloan." (FAAExh. 1 at 5.) Although the Respondent's variable costs decreased by $15,271, the Respondent still reported an increase in net ordinary income (i.e., $9,281) for the year. (FAA Exh. 1 at 7.) Just six months later, as ofJune 2012, the Respondent's additional financial data showed that it had $20,489 in cash, $22,365 in accounts receivable, and $182,100 in inventory, for a total of$224,954 in assets. In contrast, its liabilities inJune 2012 were reportedto total only $129,337. (FAA Exh. 1 at 3.) It is not necessary for a civil penalty to be so severe that a business would be forced to borrowmoney or suffer "serious" damage to its business. Nevertheless, a civil penalty is supposed to "sting," in orderto provide a business with a strong incentive to comply withthe regulations. Based onthe dataprovided, the Respondent has failed to prove that the proposed $10,000 civil penalty wouldplace the business inperil, or substantially affect its ability to continueto do business.

6NB: Typically, variable costs rise as production increases, but fall when production decreases. Page 8 oflO

### 3. Other Mitigating Factors The Respondent argued that it took corrective action by.ceasing production, sale, and shipment ofthe hazardous material involved in this case. (12/11112 Tr. 33:21-34:7.) There are two problems with this argument. First, the Respondent has offered no evidence that it is no longer handling this product otherthan in argument filed in response to the FAA's Request for Admissions. (Motion, Exh. 1at 3**~4** & 

### 4**~4.)** 

### Second, even ifsuch evidence hadbeen filed, 

### it cannotbe considered as a mitigating factor. 

### Itis well established that a business's decision not to handle hazardous materials in the future does not warrant a reduction in the civil penalty, because it does not represent that the business took positive corrective action. 

### In re TCI Corporation, FAA OrderNo. 92-77, 22 (Dec. 22, 1992). The rationale behind this is the fact that the Respondent is free to change its policy again at any time with no guarantee that it will comply 'Yith the HMRs. 

### !d. The Respondent also argued for further reduction in the proposed civil penalty because its executive, Ms. Rachele Rego, completed a hazardous material training course. Clearly, this training was a timely corrective action. However, the parties had stipulated that the FAA had already credited the Respondent with completion ofthecourse as part ofthe FAA's reduction in the proposed civil penalty from $33,950 to $10,000. (Compl. 6; Motion, 5-6; Complainant's Reply to Resp't Answer to Mot. for Decision 3-4 (Nov. 30, 2012).) The Respondent has failed. to showthat any further reduction is warranted.

4. Payment Schedule The Respondent has also suggested that a payment schedule was preferred, in lieu ofa lump sum payment, without specifying any type ofinstallment payment plan.(l2/11/12 Tr. at ' 

### 26:13-18 and 31:16). Throughout this proceeding, it appears that the FAA has expressed a willingness to establish a payment schedule as opposed to a lump sum payment ofthe civil penalty. (Motion, 8; Complainant's Reply to Respondent's Answer to Motion for Decision, 3 (Nov. 30, 2012).) This administrative court may prescribe payment plans in civil penalty proceedings. 

### John D. Mulhall, FAA OrderNo. 95-16, at 5 (Aug. 4, 1995). However, this authority shouldbe reserved for rare occasions, either where "the respondent's financial means are so restricted that apportioning the payment will not minimize the deterrent effect ofthe penalty" orfor "cases in
Page 9 oflOwhich a respondent has proven that his financial circumstances are so constrained that payment ofa substantial civil penalty in a lump sum is impossible." 

### !d. at 6. In essence, as discussion herein has shown, the facts in this case do not rise to the rare occasion where an installmentpayment schedule should be imposed upon the parties by administrative court order. This does notpreclude the FAA from arranging for and accepting installment payments from the Respondent; only that the facts and caselawherein do not support the ordering ofsuch an installment payment schedule by this court.



### Conclusion In consideration ofthe foregoing, the Respondent is assessed a total civil penalty of $10,000 for the 18 (eighteen) HMR violations7that occurred on or about April23, 2010, when the Respondent offered to UPS a one-piece shipment for transportation by air, containing an eight ounce container ofBeauty Toner. Pursuant to 14 C.F.R. §13.232(d), this decision becomes the final order assessing civil penalty unless a party files a notice ofappeal with the FAA Hearing Docket, addressed to the attention ofthe Hearing Docket Clerk, within 10 (ten) days ofservice ofthe decision, pursuantto 14 C.F.R. §13.233 and 14 C.F.R. §13.210(a).

Attached: Service List

7 The regulatory violations are listed supra in fn. 1. Page 10 of 10SERVICE LIST
ORIGINAL & ONE COPY 

### Federal Aviation Administration 800 Independence Avenue, S.W. Washington, DC 20591 Attention: Hearing Docket Clerk, AGC-430 Wilbur Wright Building-Suite2W1000 1



### Mr. Gerald A. Ellis Complainant's Counsel 

### Office ofthe Regional Counsel, AS0-7 Southern Region Federal Aviation Administration P.O. Box 20636 Atlanta, GA 30320 TEL: 404-305-5200 FAX: 404-305-5223
Mr. Keith Roberts Respondent's Counsel 

### President, Roberts Proprietaries, Inc. 180 West 80th St. NewYork, NY 10024 TEL: 917-441-8642
Judge J.E. Sullivan U.S. Administrative LawJudge 

### Office ofHearings, M-20 1200 New Jersey Avenue, S.E. Washington, DC 20590 TEL: 202-366-6941 FAX: 202-366-7536 ONE COPY 

### FDMS No. FAA-2011-0488 (Civil Penalty Action)

1 Service was by U.S. Mail. For service in person orby expedited courier, use the following address: Federal Aviation Administration, 600 Independence Avenue, S.W., Wilbur Wright Building-Suite 2WIOOO, Washington, · DC 20591; Attention: Hearing Docket Clerk, AGC-430.