NEW YORK (FORTUNE Small Business Magazine) - The sound of packing tape being torn from its roll echoes through the nearly empty warehouse of Boston Billows, a maker of nursing pillows based in Nashua, N.H. Only two executives--the co-founders--remain at the company, which last year employed seven. Having laid everyone else off, they struggle to sew and ship the pillows, which support newborn babies as they breastfeed.

Over the past two years, annual revenues at Boston Billows have shrunk from $750,000 to less than $15,000. "We just canceled our UPS account," says co-founder Ken Igoe, 57. The cash-strapped company could no longer afford the $40-a-month fee required for daily pickup.

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Boston Billows' decline stems from a single catastrophic event--a 2004 decision by the U.S. Consumer Product Safety Commission (CPSC) that forced the company to recall its pillows. Company president Erik Skoug, 73, claims that the recall was unwarranted and that his nursing pillows have never been linked to any deaths or injuries. Ten hospitals still order and use them in neonatal intensive-care units -- including Children's Hospital in Boston and the Cincinnati Children's Hospital Medical Center. (Hospitals are exempt from the recall.)

The CPSC is the federal agency charged with ensuring the safety of household wares. In 2005 it issued 400 recalls affecting more than 330 companies. Congress established the CPSC in 1972 to reduce injuries caused by products such as kitchen gadgets and toys, but the agency has been controversial virtually since its creation.

Consumer advocates say it doesn't do enough to get unsafe products off the market quickly. Business owners consider it a meddlesome, heavy-handed bureaucracy.

Yet the Boston Billows case shows that the rules under which the CPSC operates often favor big corporations over small businesses. Companies with deep pockets and in-house counsel can negotiate virtually every step of the process--even dispute whether a recall should happen at all. But a small business under CPSC scrutiny often finds itself in a fight it can't afford and usually has no choice but to comply.

Boston Billows has been contesting the recall of its product for two years. Skoug and Igoe, angered by the CPSC's inefficiency and what they consider its disregard for their arguments and evidence, say they don't have the money to hold out much longer. (The CPSC, through a spokeswoman, declined to speak about the specifics of the Boston Billows case.)

"We just want to continue to sell our product," says Skoug. "We know from the medical community that it helps save lives." Before the recall, the U.S. Department of Agriculture bought the company's pillows for low-income communities where mothers weren't properly breastfeeding. "It's a needed product," Skoug says. "That's why we'll continue to fight."

Skoug was born in Norway and studied at Harvard on a Fulbright scholarship in the 1960s. He spent more than 30 years in management and marketing positions with Siemens, Volkswagen, and finally Nashua Corp., an imaging-technology company in Nashua. While there he hired Igoe, and the two hit it off.

By the mid-1990s both had quit the company and shared office space in Nashua, working on consulting projects. They realized that before retiring, they wanted to launch an entrepreneurial venture.

On a tip from a childhood friend in Norway who runs a pillow company, Skoug bought the license for a nursing pillow that had proved popular in European hospitals for more than 25 years.

In the U.S. about a dozen firms sell a similar product, mostly in major retail chains. The market leader is Boppy Co., based in Golden, Colo., which posts about $18 million in annual sales. Boppy sells its nursing pillow in chains such as Target and Toys "R" Us.

Most nursing pillows are filled with foam or polyfiber, but the European pillow used plastic beads, which are denser and designed to firm up under the weight of a baby. According to several lactation consultants (nurses who work with new mothers in hospitals), Boston Billows' pillow makes it easier for a baby -- especially one born prematurely -- to latch onto its mother's breast.

"Boston Billows provides more support under a baby's head" than competing pillows, says Diane DiSandro, a lactation consultant for 25 years who is based in Audubon, Pa. "It holds shape. There's nothing else out there that does that."

Other products, DiSandro says, compress under the newborn's weight, so the mother has to support the baby's weight with her arms.

Because their pillow's design was already popular in European hospitals, Igoe and Skoug decided to market it through lactation consultants and hospital retail shops in the U.S.

By 2003, after five years in business, Boston Billows was selling its product in more than 70 hospital retail shops, and its revenues hit $750,000. That June, Skoug and Igoe received a letter from Boppy Co. claiming that the filling in Boston Billows' pillow could be dangerous.

"Boston Billows' nursing pillow contains 'poly-beads,'" the letter read. "Such a filling has been found to be unsafe for use with infants and small children."

Not long after, in January 2004, Boston Billows received a recall letter from the CPSC, noting that it had been tipped off by a competitor. The CPSC wouldn't divulge the competitor's name.

When asked if Boppy Co. had notified the CPSC, Boppy spokeswoman Nancy Bartley declined to answer directly but said, "There are a lot of pillow products out there--I don't know that you could pin it on just one company."

The CPSC hears about unsafe products through a number of channels, including consumer hotlines and insurance investigations, and it's not unusual for competitors to turn each other in. Recalls are technically voluntary, meaning the CPSC asks a company to cooperate. But if it doesn't, the agency can sue to force it to comply. (The CPSC estimates that less than 1% of its recalls involve a court case.)

If a company agrees to a recall, it meets with CPSC staff to negotiate the next steps: notifying retailers to pull the product from shelves, retrieving defective items already purchased by consumers, tracking repairs, and issuing refunds. The CPSC publishes a press release, but the company is responsible for all other costs, which can range from $10,000 to $10 million.

Because of the bad publicity and potential losses involved, companies sometimes drag their feet when faced with evidence that their products are unsafe.

During the 1980s, for example, ATV manufacturers argued with the federal government for years over the safety of three-wheeled ATVs, even after more than 100 riders had been killed in accidents. (The manufacturers agreed to stop selling three-wheeled ATVs in 1988.)

More recently, baby-gear maker Graco Children's Products, based in Exton, Pa., paid a $4 million fine to the CPSC last March for failing to report injuries with about 12 million items sold from 1994 to 2001. "Graco currently has a good working relationship with the CPSC," says a Graco spokeswoman.

In the case of Boston Billows, however, its product was not linked to any injuries or deaths. Skoug and Igoe had researched pillow fillings for about two years prior to launching their company, and the poly-bead fillings they decided on have been used for decades without problem in Europe--not exactly a slacker in the regulation of business. Hoping to persuade the CPSC to change its mind, Skoug and Igoe flew to Bethesda, Md., where the CPSC is based, to contest the decision in February 2004.

With their lawyer on speakerphone, the two sat at a conference room table, across from CPSC staff, lawyers, and engineers. According to Skoug's notes from the meeting, the CPSC staffers said that they had spent three weeks examining the pillow in the agency's lab, and that its design and filling were too similar to those of several infant mattresses made by a dozen companies in the 1980s and early '90s.

Those mattresses were banned by law in 1992 after 35 infants were found dead on them. (The cause of the deaths--possibly suffocation--was never conclusively determined and is still debated among pediatricians.)

Skoug and Igoe didn't think the comparison was fair. The filling in the two products was the same, but nothing else was similar. Their pillow was crescent-shaped and designed to support a nursing infant.

Skoug says that even if a baby were left unattended on the pillow, he would roll off. Conversely, the infant mattresses banned in 1992 were flat, soft slabs on which babies were put to sleep. The CPSC decision was akin to recalling a car because it shared a part with the Corvair.

The agency told Boston Billows to take two weeks and modify the pillow so it could possibly be sold in the future (Skoug says he was given no guidance on how to alter it), and it demanded the recall of those already on the market.

"I asked what would happen if we didn't follow through with the recall," says Skoug. "The CPSC said it would bring all the resources of the U.S. government down on us."

Without the money for costly legal fees, Billows issued the recall in March 2004, spending about $10,000 to contact retailers, write letters to customers, and issue refunds.

Big companies often have other options. After the CPSC issues a recall, such heavy-hitting corporations can dispute specific aspects of it, and they have time on their side. (The product under dispute stays on the market while a case is being resolved.) If negotiations break down, the agency can take the manufacturer to court.

"Suing is very rare," says Patty Davis, a spokeswoman for the CPSC.

Still, it happens: Household-goods manufacturer Sunbeam (now a division of Jarden, a conglomerate in Rye., N.Y.) put off recalling a line of fire sprinklers for two years. The CPSC claimed the sprinklers were defective and would fail to operate during a fire. The CPSC sued Sunbeam in 2001, but the recall wasn't launched until mid-2003. Jarden declined to comment on the incident.

For most of 2004 and 2005, Boston Billows tried to persuade the CPSC to overturn its decision. Igoe made the pillow smaller and more compact, but he says the CPSC ignored his modified version.

Next he recruited Senator John E. Sununu and Congressman Judd Gregg, both Republicans from New Hampshire, to write letters on behalf of the company. That prompted a meeting with CPSC chairman Hal Stratton and seven CPSC lawyers in April 2004, at which Skoug and Igoe explained how their pillow was different from, and safer than, the mattresses banned in 1992.

They had done their homework. According to medical reports cited by the CPSC in its 1992 ban, a baby's face might sink into a mattress filled with polystyrene beads, suffocating him. But Skoug and Igoe presented recent research that strongly disputed that theory, including an updated report by the pediatrician who conducted the original CPSC study, Dr. James Kemp.

"Beanbags stood out," says Kemp, now an associate professor of pediatrics at St. Louis University. "But soft bedding like comforters and pillows, not unusual to find in beds, increase the risks too."

Other researchers reached similar conclusions. "Ten years ago, people were looking at polystyrene vs. this and that," says Dr. Rachel Moon, a pediatrician at the Children's National Medical Center. "But the thinking right now is that fillings are probably irrelevant."

In the company's notes of the meeting, Stratton is quoted as saying, "I'm not sure I would have voted for this in 1992 if I had been here, but now we're stuck with it." Stratton advised Skoug to get him "off the hook" by asking his Congressman to tweak the 1991 legislation and allow Boston Billows' pillows back on the market. (Gregg wrote a letter on Skoug's behalf asking the CPSC to expedite the process.)

In August, Boston Billows resorted to its final option, filing paperwork to get the agency to reverse its decision. An answer will probably take two years.

The CPSC's job is not easy--it is responsible for the safety of more than 15,000 household objects--but critics ranging from the Consumer Federation of America to the Government Accountability Office (the investigative arm of Congress) say that its recall process is deeply flawed.

"CPSC's injury and death data allow at best an incomplete view--at worst, a distorted one--of the incidents that result from consumer product hazards," the GAO stated in a 1997 study.

E. Marla Felcher, an adjunct lecturer at Harvard's Kennedy School and the author of It's No Accident: How Corporations Sell Dangerous Baby Products, says CPSC relies too much on information supplied by large companies. Because it can't possibly write guidelines for the manufacture of thousands of products, it asks industries to set their own standards.

Felcher says that small companies often can't afford to attend the meetings and thus have to react to new rules only after they are published.

"Little companies are excluded from the big manufacturer collusions," says Felcher. "This makes little companies easier to pick on."

Unfortunately, the situation is only likely to get worse. Among the smallest of all government agencies, the CPSC has seen its budget (now $62 million) and headcount (480 employees) trimmed by almost half since 1975, and more cuts are looming.

"I find it hard to believe that the commission will be able to continue to fully serve its mission in the face of such budget cuts," Stratton told Congress in April.

Back in New Hampshire, Skoug and Igoe stitch up pillows when orders from hospitals trickle in. They say the monthly $2,000 rent for the warehouse--one of their last business expenses--might force them to close up shop soon. Both have already taken management consulting projects on the side, hoping to hear good news before the company goes under.

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