Cepia CEO Russell Hornsby was in China on Dec. 5, scrambling to ramp up production of Zhu Zhu Pets, when he heard the news. GoodGuide.com, a San Francisco startup that tests products on behalf of consumers, had just issued a press release saying Cepia's electronic hamster line contained high levels of antimony, a metal that can cause cancer, lung, and heart problems. Suddenly, the 16-person St. Louis company behind the hottest toy of the holiday season was facing a potentially company-busting recall. "The faces of the people at the factory were just grim," Hornsby recalls. "This is a country where people killed themselves when their toys were found to be involved with lead." Hornsby was able to contain the scandal and avoid a recall thanks to one critical element: the U.S. government. The toy executive immediately hired a crisis communications firm, published the company's own product test results on Cepia's Web site, and even asked his 23-year-old daughter, Natalie, to go on television and radio defending the hamsters. Still, Hornsby's main ally proved to be the Consumer Product Safety Commission. For the federal agency, which is in charge of monitoring product safety, the Zhu Zhu Pets crisis was the first big test of tougher toy-testing laws passed earlier this year in the wake of widespread toy recalls in 2007. GoodGuide says its mission is to help "consumers identify safe, healthy, and socially responsible products and companies." It was founded by Dara O'Rourke, an associate professor of environmental and public policy at the University of California at Berkeley. According to the company's Web site, GoodGuide used an X-ray gun to analyze the content of some of the season's top-selling toys. It found antimony content of more than 93 parts per million in Cepia's Mr. Squiggles toy. The federal standard is 60 parts per million, GoodGuide noted. "Parents who have not managed to score a Zhu Zhu Pet this holiday might want to breathe a sign of relief," GoodGuide said in the Dec. 5 press release announcing its results. Product Safety TestsThe X-ray gun is a widely used device for evaluating the contents of products, particularly those containing lead. Federal regulations require additional tests, however, including ones that douse products in acid to simulate the chemical reaction in a child's stomach. On Sunday, Dec. 6, the safety commission put out a statement saying it was actively looking into GoodGuide's revelation and promised a swift decision. According to commission spokesperson Scott Wolfson, the regulators do extensive testing of their own on products, but a new expedited review process allows it to make recall decisions based on existing research from federally certified laboratories, with follow-up later in the commission's own labs. Cepia says it learned about the GoodGuide report from a local TV station. Hornsby, a veteran of toy giant Mattel (MAT), knew that millions of potential customers and retailers would soon be digesting the news and that he needed to get the word out on the Zhu Zhu Pets Web site that the products were safe. He put out a statement to that effect on Saturday afternoon and released a copy of a test performed on the toys in April by Bureau Veritas (BVI:FP), a widely used product-testing firm that's been in business since 1828. Such reports are paid for by the toymakers and required under the new toy safety laws. "That report is completely valid and covers anything you would normally test for," says Fred Mills-Winkler, the technical director for toys at SGS Consumer Testing Services, a rival testing firm that has also tested Zhu Zhu Pets on behalf of Cepia. On Monday, Dec. 7, Hornsby sent two of his top lieutenants, armed with test reports and a bag of robotic hamsters, to meet federal officials in Bethesda, Md. By then GoodGuide was already backtracking from its claims. "We should not have compared our results to federal standards," GoodGuide said in a press release on the morning of Dec. 7. "We regret the error." Later that same day, the safety commission said that based on its expedited review, no Zhu Zhu recall would be necessary. Crisis Resolved QuicklyFor crisis management consultants like Eric Dezenhall, that was the critical moment for Cepia. "Once you have government regulators on your side, it's almost game over, in a good way," says Dezenhall. "If they declare something to be safe, you're no longer the villain." In response to a Bloomberg BusinessWeek query about its testing, GoodGuide issued this statement: "We used a different, but not necessarily less extensive, testing methodology than the one used to determine federal standards." On Dec. 8, GoodGuide announced that it was changing its testing "protocols." If it finds negative test results, it will follow up on the tests with federally certified laboratories and alert federal regulators. GoodGuide removed its negative toy-test results—including those of Zhu Zhu Pets—from its Web site. The crisis was handled so quickly that consumers appear to have played it cool. "We are not experiencing product returns," says Toy "R" Us spokesperson Kathleen Waugh. One reason may be that Zhu Zhu Pets were already in short supply, with the $10 toy being sold for three times that price on eBay (EBAY). Hornsby says he doesn't expect the scare to affect Zhu Zhu sales, which he predicts will top 6 million units by yearend. "Mr. Squiggles has been exonerated," he says. But not without a lot of scampering on Cepia's part.
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