Defective China products

I have been practicing law long enough to have seen my share of product recall disasters. The most recent was a situation involving a food company client. Our client had contracted out with another company for the manufacturing of a particular processed food product. The food product was determined to be tainted with very low levels of a potentially harmful substance and our client informed its distributor of the problem and the distributor agreed it would alert the grocery stores at which the product was sold.

And it mostly did.

Unfortunately, however, this distributor “forgot” to alert one very large grocery store that went on to sell all of the product before learning of the recall. Needless to say, this very prominent and respected grocery store became very angry at our client upon learning of its not having been alerted to the recall. This grocery store then told other grocery stores of what had happened and our client’s reputation precipitously declined and its profits sunk.

I mention all this because the issue of product recalls/product safety is so obviously front and center these days in China and I recently attended a conference on this topic.

The issue of how to respond to defective products is a hot issue in China. The recent Sanlu Dairy melamine contamination case highlights how China does not have a clear and effective system for recalling dangerous products. Even when a company in good faith seeks to recall a defective product, such a recall is simply not a practical possibility. In response to this issue, the PRC Product Quality Commission released in September of 2008 a set of draft regulations for establishing a nationwide product recall system, the 《缺陷产品召回管理条例(征求意见稿)》Regulations for Management of Defective Product Recall: Comment Draft, which can be found here. This draft regulation is based on the regulations concerning the recall of defective automobiles issued in 2004: 缺陷汽车产品召回管理规定, The Regulations for Recall of Defective Automobiles, which can be found here [link no longer exists].

On Sunday, I attended a major conference here in Qingdao, hosted by the Qingdao Office of Consumer Protection. Even though the conference was held on a Sunday, the meeting room was packed with over 100 participants, including government officials, major consumer product companies, consumer advocates and various domestic and international law firms. The various presentations revealed two things.

First, there is strong interest in China in using product recall as a tool for confronting the continuing problem of unsafe products within China. Second, China is a long way from developing a comprehensive product recall system.

My own comments on the draft regulations were as follows:

1. The regulations do not provide creating a single regulatory body similar to the U.S. Consumer Product Safety Commission. Where there is multiple and overlapping central and local jurisdiction over these kinds of issues, the result is usually chaos, not effective action. This was shown quite clearly in the Sanlu melamine situation. The proposed rules exacerbate this situation rather than improve it.

2. Manufacturers and retailers will only cooperate with product recall if they believe it is to their economic benefit to do so. The proposed regulations rely entirely on administrative sanctions to achieve compliance. However, the proposed fines are too low. Since there are numerous obstacles to product liability litigation in China, there is little to coerce or convince Chinese companies to comply with any regulations that are actually adopted.

3. A major target of the recall system is foreign manufacturers. In several recent cases in China, foreign manufacturers intended to include China in worldwide product recall campaigns. In each case, they abandoned their China recall program because of the lack of any system within China. The Chinese authorities do not want this to happen again. It is clear that the first target for effective implementation of the recall system will be foreign manufacturers, particularly manufacturers of big-ticket items like automobiles.

As foreign manufacturers begin to have increasing success in penetrating the Chinese market, they need to be aware of the extensive and growing body of China’s product safety laws and regulations. The new recall rules are one of many sets of rules that are likely to be enacted and enforced with particular enthusiasm against foreign manufactured products in China.

For more on food safety in China, check out my recent Wall Street Journal article, Food Fumble.