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?