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How To Avoid A Made In America Lawsuit For Your Made In China Product

Posted in China Business, Legal News

How often do you stop to think about the ubiquitous “Made in China” label? If you’re a China lawyer, you should think about it almost every day.

To convince recalcitrant clients of the need for product liability protection for the products they are having made in China, I sometimes send them the following deposition questions asked of a U.S. manufacturer whose China-made product had badly injured a child:

1. How did you choose your China product supplier in the first place? What sort of due diligence did you do on that supplier?

2. Did you clearly put your specifications in your contract with your Chinese supplier? Was your contract written so as to actually bind your manufacturer under Chinese law? How do you know that it was?

3. Can you show me the provisions in your contract relating to product quality and safety? What product specifications did you require of your Chinese manufacturer? Is this in your contract with them? Where?

4. Did you just go with what your Chinese supplier was telling you about the safety of its product or did you test it yourself? Please describe each and every product test you conducted.

5. What exactly did you do to make sure that the product you were getting from China confirmed to your contract and to applicable U.S. product safety regulations?

6. What made you first suspect problems with the product? Did you at that time  immediately cease importing them?

7. What would it have cost you per product to fix the problems?

Once clients read the above questions, they get it almost immediately. And their next question is invariably, “What can I do?” At this point we provide them something along the following lines:

1. Know Your Chinese Suppliers. Chinese suppliers run the gamut from superb to criminal (as in criminally negligent). This means that you must thoroughly check out your potential suppliers in advance. At minimum, you should do a basic check on your supplier, as these typically cost less than $1,500 and are often quite revealing. Such a check usually can reveal whether your potential product supplier company is in fact the factory owner, or just some broker posing as the factory owner. It can also tell you whether the company is properly registered for manufacturing the product you will be buying from it. If your potential supplier of toasters is in the dog-walking business (which once happened to one of our clients), you know you have a problem.

This basic check sometimes also gives you some idea regarding your potential supplier’s financial viability. A manufacturer that pays its bills is less likely to risk its reputation by cutting corners than a company on the verge of going under.

It also often makes sense to check U.S. import records to see whether other American companies get product from your potential Chinese supplier and then to contact those American companies for information about the Chinese supplier. Learning that a well-regarded Western company has been purchasing product from a Chinese factory without major problems for the last five years is itself a very good sign.

2. Quality Control. It is absolutely essential that you take responsibility for quality control. Most Chinese products arrive in the U.S. already packaged for retail sale, making inspection outside China cost-ineffective. You therefore should institute a statistically valid inspection system in China for validating the safety and quality of your 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. In other words, regardless of the product, it is your job to make sure your Chinese supplier is licensed to manufacture and export the product you are buying from it and to make sure that the product you are buying went through proper Chinese government inspection before export. You cannot rely on your Chinese supplier for any of this. When someone gets injured from your product in the United States, it will be you who is sued, not the Chinese company that actually made it.

3. History. If you have been using five suppliers for the last few years and four are good and one is not, dump the worst one as quickly as possible. It seems every time one of my firm’s China attorneys is called in to deal with a major supply problem, the U.S. company says something like, “We should have known we would have a problem with this supplier.”

You know who your problem suppliers are. Replace them now before they cause you even bigger problems. Ask a product liability defense lawyer how a bunch of e-mails from you complaining of “continual quality shortfalls” will affect a product liability lawsuit against you. Actually, don’t bother, because you already know the answer.

4. Contracts.  Your contracts with your Chinese suppliers should focus in detail on safety and quality control issues. Your contract with your Chinese supplier must be clear and specific as to quality expectations. It 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. For more on what goes into a China manufacturing contract, check out China OEM Agreements: Ten Things To Consider.

Your contract with your Chinese manufacturer can either shift liability towards you or away from you. You must recognize, however, that U.S. courts will be reluctant to see an injured party walk away with nothing. Therefore, no matter how good a contract you have with your Chinese manufacturer, you still must not abandon your other protections.

5. Insurance. Insurance is not a replacement for the above; it is your backup. Insurance rarely covers your time spent defending lawsuits or your damaged reputation. Make sure your policy fits your situation.

6. Marketing. I had a client whose product brochure sported a cover claiming it made the “toughest” product in the industry. When it had a product problem, the plaintiffs’ lawyers argued that my client should be held to a higher-than-normal standard because it had expressly warranted its product to be tougher than its competition. Make sure you are not making claims about your product you cannot back up.

There is obviously more to protecting your company from dangerous China product than just abiding by what I have set forth above, and many of the things you do to protect yourself will be industry and company specific. But you should be reviewing at least these aspects of your business.

What do you think? What would you add to the above?
  • Ward Chartier

    Regarding specifications, it is necessary (as I learned in legal action in China) to use Chinese specifications. For example, requiring adherence to an ASTM specification, for example, has no legal weight in China. It is necessary to require adherence to the Chinese specification, which may very well just be a copy of the ASTM specification, as I learned.

    For additional protection, strongly suggest designing products using the metric system and using materials readily available in China. For example, it is common for certain products in the US to specify using 16 ga cold rolled steel, but that is not available in China even though it might often be milled there. Similarly, specify metric hardware sizes, M5 for example, instead of SAE sizes like 6-40.

    More often, engineers in the West design products for manufacturability and sometimes safety, but haven’t yet learned how to routinely design for quality and the capabilities of their employers’ preferred supply bases.

  • Lo Kok Kee

    Is it SOP then to make it compulsory for the Chinese supplier to take out product liability insurance, and what good will that do if the originating law suit is overseas against the merchant that sold the goods, not the manufacturer?