The fallout from the lead contamination crisis that rocked the toy industry two years ago culminating in Mattel Inc. recalling about 2 million items made in China is striking fear through Los Angeles’ many toy companies.

They are concerned because they now face civil penalties more than 12 times higher than in the past if their products are found to be contaminated by lead or a chemical used in plastic. Also, new regulations call for criminal charges which could put toy executives in prison.

As if that weren’t enough, the toy companies now face stringent and costly labeling requirements, plus inspection delays at the ports.

In a settlement announced June 5, Mattel and its Fisher-Price subsidiary agreed to pay a $2.3 million penalty for importing and selling toys with hazardous levels of lead. That got the attention of L.A.’s toy manufacturers because it was the largest fine ever imposed by the U.S. Consumer Product Safety Commission on a toymaker.

“It is significant because it’s the first major penalty imposed under the Consumer Product Safety Improvement Act,” said Alex Epand, a partner in the downtown L.A. office of Nixon Peabody LLP who advises companies on federal consumer safety regulations. “Companies can look to it as a benchmark as to what kind of penalties will be assessed in the future.”

The record fine was also a way for the commission to make an example of the El Segundo toy giant.

“This was the commission’s opportunity to send a message to every manufacturer,” Epand said.

Under updated regulations, the commission’s civil penalties were raised from $8,000 to $100,000 per violation. The regulations also increased criminal penalties. A conviction could result in five years in prison and forfeiture of assets associated with the violation.

That means a toy importer who was found to have violated the new rules three times may have to pay a fine of $300,000, up from $24,000. And he may be sent to prison for up to five years.

Also, the commission doesn’t have to prove that company executives knew of any violations before they are hit with criminal charges.

The new regulations also let the commission force the company to give customers refunds, repairs or replacements of recalled products.

Los Angeles has a high concentration of toy companies, from the big ones such as Mattel and Jakks Pacific Inc. to smaller shops. The Central City East Association puts the number of toy companies in downtown’s Toy District at 500.

The costs are being felt across the industry.

Christopher Barrios de Leon, artistic director for a small toymaker in Montebello called Frijolitos, said that his manufacturing costs have climbed 5 percent to 7 percent because higher-quality materials have to be used in the manufacturing of the company’s products. Those include plush toys, and Frijolitos has to make sure the stuffing and dyes comply with the updated regulations.

“Then you might pay an additional 1 percent for additional testing,” de Leon said.

Crisis of 2007

Mattel agreed to the settlement in order to resolve the commission’s allegations that the company violated the law and should’ve known that Chinese factories were using lead to manufacture their products, including Barbie accessories, and toy cars and boats.

The crisis erupted in 2007, when Mattel found lead contamination in routine tests and reported the findings to the commission. The company then recalled as many as 900,000 toys imported between September 2006 and August 2007, and an additional 1.1 million Fisher-Price toys imported between July 2006 and August 2007.

As part of the June 5 settlement, Mattel and Fisher-Price denied that they knowingly violated federal law.

Meanwhile, Mattel and other local toy companies are also struggling to meet new testing and certification requirements on lead limits that were updated as a result of the Chinese contamination problem. The certification, which also includes testing for phthalates, a chemical component in plastic, is required for products used by children under 13.

Enforcement of the lead and phthalate testing and certification requirements, which are part of the Consumer Product Safety Improvement Act, was delayed until February 2010 after manufacturers and retailers argued that they needed more time to comply with the new standards.

However, the delay did not apply to a ban on lead in children’s products manufactured after December 2008.

That means local toy companies since February have been required to test new products by independent labs. Companies must provide retailers with certified proof of the third-party testing results.

Complying with the new standards has been a costly endeavor for local toy companies.

Charlie Woo, chief executive of downtown L.A.’s Megatoys Co. Ltd., spent nearly $1 million about 1percent to 2 percent of his total revenue on independent testing last year in anticipation of the new rules. Megatoys sends a laboratory a random sample of six to 12 toys in a batch.

The lab charges $2,000 per toy to test whether it meets several safety standards. That means a bill of $12,000 to $24,000 for each batch the company makes.

Analysts have estimated these costs will result in a 10 percent average increase in the retail price of toys.

The third-party testing and certification process was voluntary in the past. Now it’s mandatory, but the amount of testing isn’t specified. Woo used to test on occasion, and is now doing it much more often in order to avoid the possibility of a steep fine.

Woo said he makes sure the testing is rigorous because he fears the $100,000 fines.

“The consequence of a violation is huge,” he said. “You have to do independent testing and quality control on almost every shipment and batch to limit the possibility of failure.”

Port delays

What’s more, U.S. Customs has been holding up shipments at the ports as a result of the new requirements, which require added inspection time.

Under the updated Consumer Safety Improvement Act, imported products, including toys, must be accompanied by a certificate showing that the goods meet the lead and phthalate limits. Customs and homeland security officials have the authority to inspect each item to make sure it has a certificate.

“In the last several months, it’s been particularly tight, and there are additional delays,” Woo said. “It creates a lot of uncertainty in terms of the delivery of products.”

Starting in August, toymakers will have the added burden and cost of making sure that their products are outfitted with tracking labels.

The labels, which will have to be placed on each product and its packaging, will allow consumers, companies and government agencies to trace the location and identify the date of the product’s origin.

“It will be easier to recall products, find them, and get them back,” Epand said.