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How To Protect Your Company From Bad China Product

Posted in Legal News

My firm’s China attorneys are constantly get e-mails and phone calls from readers and clients regarding issues arising from the recent melamine pet food tainting. We not only represent a number of companies involved with China food, we also represent many importers of Chinese manufactured products who constantly encounter quality and safety issues. To assist our clients, we developed a checklist/audit program to minimize and reduce risks associated with the health and safety issues arising from bringing Chinese products into the West.

This post is a portion of what we tell our clients and it is intended to set forth some of the things that you, as a Western business involved in China/doing business with China, must do to minimize the likelihood of your product harming people and to minimize your liability if, after doing everything you reasonably can to prevent a problem, such a problem occurs. Our basic theme is that when you purchase products from China you must take action to ensure the safety and quality of your product; you cannot rely on the Chinese side to do these things.

Dangerous Chinese products were entering the United States and Europe long before the Melamine pet food tainting hit the news. But that incident and the many additional food safety issues involving China that quickly followed it mean that everyone is on notice that these issues are real. From now on, it will be impossible for any Western company to plead ignorance. Western companies that refuse to take proper action to protect their customers from bad China product will increasingly be subject to to severe penalties, including punitive damages. In other words, any Western company that does nothing to assure the safety of its Chinese products and then steps into court claiming it had every reason to trust its Chinese supplier (based on faith alone), is likely to face real anger and major damages. Plaintiff’s class action lawyers in the United States should be and are salivating.

While we China lawyers step up our efforts at protecting our clients.

And get this straight, we are not just talking about food products here, though that is the most obvious and prominent right now. If you are selling Chinese bikes, do you know whether the nuts on your seats are really strong enough to withstand a 200 pound Westerner? If you are selling Chinese electrical goods, do you know if that Underwriters Laboratory (UL) sticker is counterfeit or not? Is the plastic in your Chinese made baby item really nontoxic? Will your cigarette lighter explode? Are you certain the fake fur on your coat is not from a dog? The time for complacence is over.

Liability for damages caused by defective Chinese products is going to be huge and it is going to be vast and it is going to fall disproportionally on American and European companies. The reason for this is twofold. First, it is viewed as difficult and expensive to sue Chinese manufacturers. Second, and more importantly, Chinese courts do not give large damage awards, so the result of a tort suit in China is not likely to be attractive to U.S. and European plaintiffs. Therefore, there will be overwhelming pressure to file such suits in the United States or in Europe, with the importer and retailer as the defendants. Based on our experience in the United States, such suits will likely be heard by U.S. courts and damages will be awarded. We are already getting two to three calls a month from US insurance companies seeking our help in pursuing Chinese companies on behalf of their policyholders who have been sued or threatened with a lawsuit over a China bought product.

We recommend Western importers of Chinese goods take the following actions:

1. Know Your Chinese Suppliers. Chinese suppliers run the gambit from superb to good to mediocre to criminal. We advise our clients to thoroughly check out any potential supplier in advance. For a recent client we developed the following plan for a supplier audit. We will be retaining investigators that will make sure our client is (and will be) dealing only with high end Chinese suppliers. We will begin with a credit check. Such a check can usually be done for less than $1500 and they are often quite revealing. Among other things, such a check can reveal whether the Chinese company with whom you have contracted is in fact the factory owner, or just some broker posing as the factory owner. It can also tell you whether it is properly registered for doing business in China and the amount of its initial registered capital.Does the factory pay its bills? A thriving company is far less likely to risk its reputation by cutting safety corners to save a few Yuan than a company on the verge of going under. The credit check may also reveal other Western companies to whom the Chinese company has been supplying product. What do these Western companies think of this Chinese supplier? Learning that a well regarded Western company has been purchasing product from the Chinese factory without major problems for the last five years is obviously a good sign.

2. Quality Control. It is absolutely essential the Western purchaser of Chinese product take responsibility for quality control. Most Chinese products arrive in the U.S. or Europe already packaged for retail sale, making inspection outside China cost ineffective. In these situations, a statistically valid inspection system within China is critical for proving out the safety and quality of the product. For food and drug items, the Chinese government has its own effective inspection system, but to reduce costs, many Chinese suppliers intentionally avoid the Chinese government procedures. The Chinese government itself estimates as many as 50% of the food and drug items exported from China violate China’s own export rules. It therefore becomes your job to make sure your Chinese supplier is licensed both to manufacture the product you are buying from it and licensed to export it. It is also your responsibility to make sure that the product you are buying went through proper Chinese government inspection before export.

3. Contracts. All contracts with Chinese suppliers should focus in detail on safety and quality control issues. It is frankly shocking to us that many importers of product from China not only do not have a contract dealing with quality and safety issues, they  have no contract whatsoever. Such businesses are simply asking for trouble under the U.S. legal system, and presumably in most European countries as well. Your contract with your Chinese supplier must be clear and specific as to quality expectations. If your product calls for 12% stainless steel, your contract should clearly state 12% stainless steel is required and anything else is completely unacceptable and will lead to you being entitled to damages. The contract also must make clear your right to inspect and it should delineate responsibility for injuries and recalls. Equally important, you must do what the contract provides. If the contract states you are responsible for inspection, then you must actually inspect. The contract is not there for show; it is there to provide a procedure to be followed.
Your contract with your Chinese manufacturer can serve either to shift liability towards you or away from you.

At the same time, however, you must recognize that U.S. Courts are likely to be reluctant to see an injured party walk away with nothing. Therefore, no matter how good your contract is at deflecting liability from your company, you must still not abandon your other protections.

4. History. If you have been using five suppliers for the last few years and four are good and one is problematic, dump the worst one as soon as possible. It seems every time my law firm is called in to deal with a major supply problem our client says something like, “we should have known we would have a problem with this supplier.” You know who your problem suppliers are and you need to replace them now before they cause even bigger problems. Ask a product liability defense lawyer whether having to deal with a bunch of e-mails from you to your supplier complaining of “continual quality shortfalls” is going to be good for your product injury lawsuit. Actually, don’t bother, you know the answer as well as they do.

5. Insurance. Insurance is NOT a replacement for the above, but it is your backup. Insurance almost never covers more than your legal fees and out of pocket damages. It will not cover your time spent defending lawsuits nor will it cover your damaged reputation. Make sure you know your own situation (for example, are you a manufacturer or not?) and make sure your policy covers your situation.

6.  Marketing. I represented a company whose product brochure sported a cover claiming it made the “toughest” product in the industry. Every time something would go wrong with that product (which typically cost around $250,000), the opposing lawyer would argue my client should be held to a higher than normal standard because it had expressly warranted its product to hold up better than its competition.  Make sure you are not making claims about your product you cannot back up. For example, many U.S. importers claim their Chinese manufactured product is manufactured to an international standard that simply is not followed in China. Others act as though they are making the product in the United States when it is being made in China. Things like this just give the plaintiff’s lawyer more ammunition against you in any legal proceeding.

There is obviously a lot more to protecting your company from dangerous China product than just abiding by the items we set forth above, and many of the things you do to protect yourself will be industry and company specific. But, at minimum, every company getting product from China should be reviewing at least these aspects of its business.

Do you agree?

  • http://www.allroadsleadtochina.com All Roads

    Excellent post guys.
    To date, the majority of the press and attention has been on China. But as I have said in a number of posts (another today), it is ultimately the responsibility of the BUYER to ensure the safety of the products they are buying in China.
    For several previous programs we worked on, customers would balk at spending any money on third party inspections, and at the time all they had to worry about was being cheated out of their money.
    Now, you have to worry about safety.
    In hindsight, I am 100% sure that those pet food brands had paid the money that would have been required to visit the plants, do some due diligence, and QC the containers…

  • http://www.calpolymbatrip.com/ Chris Carr

    Yes, excellent post, Dan. You should send a modest bill to your business readers for this solid legal advice and strategic thinking …

  • http://www.chinalawblog.com China Law Blog

    All Roads –
    I hear what you are saying about paying for instpectors. There is this idea that “I went to China to save big money, no way am I going to pay even $200 a month to make sure what I get is of high quality.
    All I know is that whenever I ask my clients about the cost-benefit of using QC inspectors in China, they ALWAYS tell me that the benefit greatly exceeds the cost. I have one client in the food business who has his own people go to the plants with video cameras and beam back what they see in China and my client watches it on their computers. He says this saves them hundreds of thousands of dollars a year, not to mention helping insulate them from product liability damages.

  • http://www.chinalawblog.com China Law Blog

    Chris Carr –
    I do not believe in “modest” bills. I also do not know where to send the bills.

  • Duncan

    All great points. If you’re saving money by offshoring to China you need to know where those savings are coming from, and whether you’re prepared to face down any flack that comes with that strategy. This applies as much to companies and suppliers employing “sweatshop” labour (think the iPod/Foxconn controversy last year) as to those using cheap materials.
    Interesting question: do you need to be as cautious on these sorts of issues if you’re targeting the domestic market rather than foreign ones? I’d say yes, given the increasing glee the local media’s taking in bashing foreign firms, but would be interested to hear other views.

  • Chip

    I forgot where I read it, but doesn’t Walmart have it’s own quasi-spy system to check out its own suppliers during production?

  • nanheyangrouchuan

    Video cameras, interviews, lengthy inspections, etc. all assume that the inspector can get to all of the facilities. And if the local factory boss doesn’t want to let you see something, you are stuck. What are you going to do, complain to the local authorities?

  • http://transnationallawblog.typepad.com/jackson_profile/ Wendy Jackson

    nanheyangrouchuan — Hopefully Dan can correct me if I’m wrong, but this seems to go back to the issue of having a contract. Presumably, the buyer can stipulate a right to inspect and monitor the premises and operations–either directly, or through a third party. After that, if the buyer cannot gain access to the plant, then he/she has options: 1) Forego the inspections and risk liability, 2) Contact the supplier and make it clear that the you (the supplier) are exercising your contractual rights (i.e., try to persuade them–with your contract as your backup), 3) Seek legal remedies(?), or 4) Find a new supplier. Obviously, the buyer cannot inspect every product–and to my knowledge, American law does not have that expectation. However, as Dan points out, it is incumbent upon the buyer to make sure that he/she has taken reasonable means to ensure the quality and safety of the product. “Quality” and “safety” are not ‘buzzwords’ here, and I imagine it will be up to the buyer to strike the right balance between the costs of having better information about its suppliers, and the costs of a lawsuit. Here, however, a couple things Dan has pointed out are instructive: 1)It’s easier to sue you than the supplier–and the plaintiff can likely extract more money out of you than the supplier. 2) In Dan’s experience, most clients believe the benefits of knowing the QC information greatly exceed the costs. This last point touches on one last thing–your peace of mind. To a great extent, that’s what lawyers provide to you–that’s what we’re here for. Remember that when you do your cost/benefit analyses.

  • http://www.chinalawblog.com China Law Blog

    Chip –
    It would not surprise me a bit.

  • ZKJ

    my sense is that nanheyangrouchan is right. Lawyers can help you cover your back and comply with the regulations, but they won’t ensure that your supplier is not poisoning your food. Because this is China.
    You could try a different country, or better still, use locally sourced food.

  • http://www.chinalawblog.com China Law Blog

    nh –
    Of course not. If your supplier does not let you see YOUR product before it ships to you, then you need a new supplier. Indeed, if your supplier does not let you “see the sausage being made,” you might want to consider termination.

  • http://www.chinalawblog.com China Law Blog

    Wendy –
    Very impressive (particularly for an Oberlin grad).

  • http://www.chinalawblog.com China Law Blog

    ZKJ –
    Of course your lawyer cannot ensure that your supplier is not poisoning your food, but even a contract can help a bit with that. But certainly putting someone in the factory to watch over it can go a long way towards ensuring this. The reality is that there are no guarantees on this (or on virtually anything), but companies that take this seriously reduce their risks tremendously.

  • Law Office of Todd L. Platek

    Wendy, am in agreement with all but one point. For the one or two items that slip through the QC net and cause injury, the injury plaintiff still can carry the day. Strict liability in American is strong medicine. And where one or two items caused problems, chances are fair that liberal discovery will raise more doubts about everything going on at the factory.

  • http://www.chinalawblog.com China Law Blog

    Todd Patek –
    You raise a very good (and complicated) point. You are right that a manufacturer can be found strictly liable here in the United States, which essentially means that if the product was defective, even though the manufacturer did everything possible to prevent it, the manufacturer can still be found liable. Nonetheless, doing everything possible is still absolutely critical, for at least two reasons. First off, the defendant can argue that it was not the manufacturer and thus may escape strict liability (I know I am ignorning that some states have laws saying that if the manufacturer cannot be found or cannot pay the importer or even the retailer may be found strictly liable). Second, if you do everything you can to prevent injury, you go a very long way towards avoiding being hit with punitive damages.
    Todd, Wendy, do you agree?

  • Law Office of Todd L. Platek

    Dan,
    Agree with both points; need to look at the relevant state law on strict liability, and the domestic importer and others in the distribution chain need to distance themselves as much as possible from the alleged wrongdoing by establishing their own diligent procedures. Most importers, wholesalers and retailers in the USA have product liability insurance, but too many Chinese factories do not. Suing or impleading the foreign manufacturer in the US action is not difficult; its refusal to appear and defend may result in a default judgment worthless in China, but potentially effective in the USA as between it and the plaintif and other links in the distribution chain, who may be able to enforce that default judgment here through garnishments, attachments, etc., on the foreign manufacturer’s assets, receivables, money transfers in the USA. (Again, complicated by whether states will recognize and enter sister states’ defaults judgments, and the time involved to obtain recognition.)
    But the fear of such, along with the possibility of losing good buyers by ignoring legal actions here and leaving their buyers to bear the brunt alone, may help to bring about some greater responsibility on their part. Such legal concerns can be built into contracts via defend, hold harmless and indemnification clauses, requiring Chinese manufacturers to bear their legal responsibility in US suits, thereby establishing a separate cause of action between manufacturer and US buyer when the manufacturer fails to honor that obligation.

  • http://transnationallawblog.typepad.com/jackson_profile/ Wendy Jackson

    Todd, Dan –
    Todd, yes, absolutely. But, if a manufacturer plays its cards right, it should be able to bifurcate those risks. Strict liability evolved because of the difficulties in proving negligence in the manufacturing process–the injured end-user simply cannot gather adequate information about the manufacturing activities to prove his/her case. Aside from that, at the end of the day, there is still a potentially seriously injured end-user. Strict liability assumes (regardless of any issues of negligence) that the manufacturer of the product is better able to absorb the loss, and thus places the risk (more-or-less squarely) on its shoulders. [Though strict liability is not a catch-all panacea; there are still substantial evidential burdens on the plaintiff (e.g. ruling out other sources of the injury, showing that the product was not tampered with after purchase, showing that the product was not misused, etc.)].
    Even if a manufacturer were to completely disregard monitoring costs and inspect every product, it would still be subject to strict liability if the product nevertheless caused injury in the end-user’s hands. That is–there may be nothing a manufacturer can do completely insulate itself from liability. But, I think that’s exactly where Dan’s point #5 comes in — Insurance. The reason we have insurance is to effectively spread the costs of unpreventable / unpredictable losses; it’s meant for just this type of risk. Just how much insurance is necessary will probably entail considerations of what sort of product you’re manufacturing/importing, its inputs, and what it’s used for.
    If we think back to the news cycle that has spurred this discussion–the melamine pet food crises–it’s fairly clear that a strict liability suit is not going to be necessary. Dan’s post addresses what a business can proactively do to protect itself from liability. Beyond insurance, most of those measures will be directly toward avoiding negligence. –And here is where I think you both make great points. If a manufacturer is hit with a strict liability suit, then shaky quality control and oversight mechanisms at the manufacturing facilities are not going to help his/her case. And, on the hand, if the strict liability suit is successful, adequate oversight and QC monitoring may prevent an award of punitive damages as well.

  • http://www.chinalawblog.com China Law Blog

    Todd Platek –
    Yes on all counts, except maybe one. You say “most importers, wholesalers and retailers in the US have product liability insurance” and I do not know if this is true or not. We have plenty of importer clients who insist they do not need such “expensive” insurance because they are not the manufacturer. I wonder the same thing about wholesalers and retailers.
    People?

  • http://www.chinalawblog.com China Law Blog

    Wendy Jackson –
    I agree with all of your points and I think you, Todd and I really do see these issues very similarly. But, why do you say a “strict liability suit is not going to be necessary” in the malamine pet food case?

  • Law Office of Todd L. Platek

    Dan, I recommend to all my clients involved in movement of product, no matter where in the chain of distribution, to buy product liability insurance. One hit can sink a small company, and if it has a reputation to protect and doesn’t want to close its doors to escape a judgment or otherwise attempt to seek protection in Bankruptcy Court, the premiums still make sense.

  • http://transnationallawblog.typepad.com/jackson_profile/ Wendy Jackson

    Dan –
    Let me take that back. As to the US pet food manufacturer that used the toxic additive, a strict liability suit may be necessary (I had been thinking of the original manufacturers).

  • http://www.chinalawblog.com China Law Blog

    Todd Platek –
    I completely agree with your recommendation, but I have my doubts as to whether all that many non-manufacturers in this country actually have the insurance.

  • http://www.chinalawblog.com China Law Blog

    Wendy Jackson –
    Okay, now I understand. Thanks.

  • nanheyangrouchuan

    Wendy, Dan and other legal types: What kinds of deflections can corporations here throw up regarding product liability lawsuits since they often don’t own the factories where this stuff is made? It seems they could say that they only have partial but not complete liability.
    On another note, the US/China trade war has begun:
    http://www.iht.com/articles/2007/06/08/africa/food.php

  • http://corporatevigilancecarnival.blogspot.com/2007/06/june-10-2007-edition.html Corporate Vigilance

    June 10, 2007 Edition

    Dan Harris presents How To Protect Your Company From Bad China Product posted at China Law Blog, saying, “Vigilence against bad/dangerous product from China.”

  • http://www.chinalawblog.com China Law Blog

    nh –
    I thought we answered this in the post and the comments.

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  • http://www.laundry-alternative.com Corey

    I am looking forward to further RMB increases which will hopefully make the market more competitive. I’ve made decent money here but had an important product copied/stolen by a Chinese partner who now wants to become my competitor (and they didn’t pay me back for a bad shipment). Unless you have have very good safeguards be careful about partnering. The level of dishonesty here is shocking. I am moving any production I can out of China due to this, even if I lose some money I’d rather deal with more honest business partners.

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