An FAQ on China PPE

Last week, Fred Rocafort (one of our international trade lawyers), Dan Pak (a VP of Procurement at a large East Coast hospital chain) and I put on a 90+ minute webinar on navigating PPE purchases from China. Based on the feedback we have received and the fact that a number of webinar companies have asked us to reprise it for them, we think it was a success. And by success, I mean only that those who attended left the webinar (though staying at home) with actionable information.

The company that put on the webinar — a leading legal webinar/seminar company  — told us they had never put on an event where so many questions were asked. The webinar was about 45 minutes of the three of us talking and then another 45 minutes of us answering questions, but even that was not enough. We got so many questions that we promised to answer them here on the blog and we do that below.

We also have gotten a whole host of emails from people who could not make it to the “live” session but would like to listen to a recording of it. The good news is that there is now a recording of this event online and we can get you 20% off the $175 cost if you type in HB20.

But without further ado, here are the additional questions we have received since the webinar concluded. with our brief answers to the same in bold italics.

How should foreign company PPE distributors that need proof of license and certification from their Chinese suppliers to prove their products’ legitimacy navigate these conversations if the supplier refuses to provide this proof until a purchase order is submitted?” The contradiction here is that without proof of licensure to prove legitimacy to our buyers, our buyer will not buy the products. And if we must purchasing up front for an order of $1 million dollars and then if orders are not up to standards, we take the loss. As we mentioned during the webinar, there is no good reason for suppliers to hold these documents back and those that do are likely engaging in fraud or, at minimum, choosing the PPE manufacturer at the last second. 

For distributors in the United States will an MOU suffice when distributing to governments, and hospitals? Or should distributors require a more comprehensive contract to protect themselves. This will depend on the terms of the MOU and the specific jurisdiction. Generally, MOUs are not binding, and some will explicitly clarify their non-binding nature. Certainly a contract will be less risky, not only for this reason, but for many others. 

As you mentioned, the written law and the realities (especially in China) can be very different. How do we vet the information out there? Talk to reliable sources who are experiencing the issues first-hand, including people and companies who are actually buying; established intermediaries who are not trying to pull the wool over your eyes; and, of course, lawyers experienced with PPE. Keep in mind that not all experiences will correspond to your situation. For example, larger companies, especially those with a presence in China as taxpayers/employers, will enjoy certain leverages that other players will not. And government buying is not the same as hospital buying, which is not the same as charity buying, which is not the same as private company buying. 

For new distributors in the US that do not have much bargaining leverage when procuring PPE, what are some of the methods for negotiating price points, or payment delivery for suppliers that are asking for 100% payment upfront? The harsh truth is that most Chinese suppliers will insist on 100% upfront because they can. Keep in mind that finding a reliable supplier —or even one that has a high chance of being reliable—is a tall order and payment terms may in some instances become a secondary concern—again, assuming the supplier itself is reliable. In some instances, buyers may consider placing smaller order first at unfavorable payment terms and once some mutual trust is established, progressive improvement in payment terms can be sought. Also consider ways of increasing your leverage. For example, if applicable, consider offering licensing or similar opportunities or joining up with other buyers for bigger purchases. If you are going to pay 100% upfront, the key is that you have a contract that makes clear that you are entitled to a refund if your products do not ever leave China. For our own clients, we have sought out Chinese suppliers that will sign contracts making clear they must refund any money paid if their products do not clear China customs. 

Have there been indications Chinese authorities (customs or otherwise) are “scrutinizing” products destined to countries not currently considered in “good relations” with China? (US/Canada due to political tensions)?Yes, but due to the very nature of this selective enforcement, it is pretty much impossible to find concrete evidence, but anecdotally this appears to be the case—and it would be FULLY consistent with Chinese authorities’ M.O. Let’s just say, you would be hard pressed to find anyone involved with PPE who does not believe this is happening. We also believe that countries out of favor with the CCP are considerably more likely to get cheated and to receive bad product.

Can a supplier with an EN149 – FFP2 rating supply US medical institutions as part of the EUA? Yes, according to Table 1 of EUA.

What are your opinions of a factory asking for proof of funds for an order before confirming delivery dates? With such a sellers’ market at the moment, the last thing factories want to do is waste time on leads that go nowhere, especially when the logistics of getting PPE product out of China are so chaotic. Our PPE lawyers generally view such requests as reasonable due diligence on the factory side and not as red flags.

Can you share a Term Sheet template with questions to answer to submit for contract drafting, Sorry but we cannot. In China Contract Templates for $99 Each and in International Manufacturing Contracts: Why Templates are a No-Go we explain why we have never and will never use or sell a template, nor will we give them away for free, especially since we don’t have any. In A China Manufacturing Term Sheet we explain some of what often goes into China manufacturing term sheets. This might prove somewhat helpful to you, but it also highlights why templates are so dangerous in that most of the things we list in that post are either not relevant to PPE or would drive away most legitimate PPE buyers. What I can also tell you is that what went into the typical PPE term sheet two months ago is different than what is going into those today. In the end, it is just too risky for our law firm to provide templates without our first writing out pages and pages of instructions, waivers and disclaimers. 

What is preventing bad actors from under-labelling its PPE products while marketing and selling them to us as medical? Absolutely nothing and scenarios such as these are precisely why—even in the “best” of circumstances—both due diligence on your suppliers and product inspections are critical. I also suggest you read How to Buy PPE from China Without Getting Ripped Off and New and Improved China PPE Scams.

What about European companies sourcing from China? How do these tactics apply? The same basic principles apply to all transactions with Chinese entities. 

We are hearing that FEMA seized PPE product in Michigan and Delaware. How is FEMA making these decisions and what can we do to prevent PPE seizures? Dot your ‘i’s and cross your ‘t’s. FEMA has legal authority to examine exports to determine if PPE should be “allocated” to the government or returned to the US market—make sure you can document the provenance and destination of your products, i.e. they are not exports. Likewise, the FBI is on the lookout for price-gouging—make sure you can demonstrate your products are not headed for the black market. Same goes for intellectual property rights—if a factory offers “3M” products, do not buy them.

What type of registration do importers/middlemen need?  LLC or specific FDA registration?” In the United States, importers and middlemen must register with the FDA. These sorts of rules can and do differ greatly by country.

What would you recommend we put in contracts with our suppliers? What about with our customers? There is no way we can answer these questions without knowing a lot more and even then it would take us hours. Generally speaking, the good contract anticipates all possible scenarios. But also, generally speaking there are a lot of things that would and should ordinarily go into your Chinese supplier contracts that simply cannot in the PPE context due to time constraints and due to the fact that putting them in there will only cause your Chinese supplier to move on to another buyer. This is why it is so important you work with lawyers experienced with Chinese PPE supplier contracts. I would though urge you to read The Five Keys to A China Contract That Works because even with PPE these five things still hold true. 

Are you able to share the names of Chinese companies that supply good PPE product?  Our due diligence is highlighting differences between suppliers—good, bad and ugly—but we cannot share this information if it has come to us from a client because to do so would be to violate the attorney-client privilege. We do though share with our clients the suppliers that we have found independently of our clients and we also have some clients that allow us to release supplier names under proscribed circumstances. 

Since NIOSH N95 masks are not considered medical masks in China, can I claim them as non-medical masks when going through China customs and then import them under FDA EUA for medical use? China recently announced quality inspections for non-medical masks as well. But in any case, it is not a question so much of what you “claim”.  If China Customs considers a mask to be medical, it will treat it as such, regardless of what the exporter claims. Similarly, US (and other country) Customs will make its own determinations as well, irrespective of what the exporter or China Customs says.

I’m a supplier, what’s the best way to get in touch with American buyers? I tried Government procurement forms and contacted hospitals but had few responses. There are countless buyers that badly want PPE product and we work to match up our clients that want product with those that sell product. But what we often see is a seller asking $7 for a product and a buyer that has product on hand and will only pay $5 for that product. I wonder if your lack of response is due to pricing or some other factor, rather than any lack of desire by these governments and hospitals to secure product. 

Many hospitals have policies  that say they will only pay with purchase orders (Net 10) after inspecting the PPE. However, Chinese suppliers typically require large upfront payments. How do we resolve this?  Does the importer typically have to pay upfront and then the hospital pays it back unless they can negotiate for an escrow or Letter of Credit? We cannot stress this enough: Chinese PPE manufacturers and sellers have the leverage and buyers must play by the Chinese suppliers’ rules. Letters of credit and escrow were very rare even in pre-COVID-19 times and they are pretty much non-existent now. Hospitals and governments that buy direct from China are getting better terms, especially if they commit to long-term contracts. 

What if my PPE product gets seized – either by US customs/strategic stockpile or by the Chinese government? Obviously, you should first do whatever you can to prevent that from happening and on that front, our best advice is to know the current rules before you act, and by current rules, I do not mean what you find in just English with a Google search. I suggest you read Will Your PPE Pass China Customs? If your PPE product is seized in China, our first step is to call the right people at China customs to see why that happened. The same is generally true if your PPE product is seized by the US government; our initial first step is to try to ascertain the facts. 

Can you show the language of China’s Announcement 53? For more on Announcement 53, check out China PPE: Just When You Thought it Might be Safe to Go into the Water and Will Your PPE Pass China Customs?

Could you elaborate on how to deal with force majeure clause in contracts with Chinese manufacturers? We suggest you read Do Not Let Force Majeure be a Major Force In Your China Contract.

In drafting remedies in PPE contracts do you recommended ICC long term arbitration or specific language due to the customs situation? There is no one answer here. Not even close. Your contract should reflect the particular circumstances, including your home country, the seller’s home country, the product destination country, what you are trying to protect against, what is custom for the particular sort of contract, etc. See China Dispute Resolution Clauses, where we discuss this generally. 
Most Chinese factories require an MOQ (minimum order quantity) of like 500K to 1M Surgical Masks or even KN95. Is that bull—t or is actually real and how do you usually handle that? Many Chinese suppliers are requiring these sort of big orders, but there are some workarounds, including buying large quantities over time or pooling your order with others. Our China PPE lawyers work directly with China PPE suppliers to convince them that our client is serious about buying more over time

In Dan’s blog post, he said Chinese companies do not tend to take escrow payments. What can assist in negotiating that payment method? Probably nothing. Even under the “best” circumstances, this is not a practice Chinese companies favor. Under current circumstances, Chinese PPE suppliers are even less likely to agree and why should they when there is a line of buyers waiting to pay top dollar for their product. The key is to conduct due diligence on your Chinese seller and to use your contract to protect you against paying and then getting nothing. 

“There is a list of 10 US HTS codes that fall under “medical.” What’s the value of the notification “non medical” on the boxes ?  Does this impact on whether they are inspected ? And second question on US HTS codes:  If I use 62101050, which is coverall for use in contaminated area (duty 0%), I’m told they need extra checks in China. Is that correct ? Because alternatively they are classified as 6310109010 (other overalls and coveralls) and then the import duty is 16%…” In times like these, with so much scrutiny of medical products, US CBP is not likely to pay much heed to box labels or to claimed HTS codes. We have no information regarding treatment of specific HTS codes in China—but there too we are dubious that codes are an important driver of inspection decisions.

If I buy PPE from a Chinese company, and store them with a logistics service provider in China, am I then allowed to export that PPE to a company inside our group in any part of the world ?  Or would that not be possible because we don’t have the export license ourselves ? Intra-company exports are still exports and they will be subject to the exact same China rules and restrictions as inter-company exports. In the United States, the government is exempting intra-company exports from the Defense Production Act restriction, but there is no indication China is doing anything of the sort.

I have a Chinese friend who can obtain 1,000 masks at a time but he said he cannot ship more than that per day due to restrictions. Would you have any idea whether he can ship multiple shipments to different addresses or do you think he will still have an issue getting more than 1,000 daily sent out?” We have not heard of any such numerical restrictions and 1000 seems like a very low, impractical number for even an “informal” restriction imposed at a particular Customs port.

“Can you send me the “official China list”? Please treat this only as a starting point, as there are many bad actors out there who claim to be XYZ company on this list when they are not. See New and Improved China PPE Scams.

The following questions were posed of us before the webinar and we answered them in the webinar. We would like to answer them here, but we cannot because that would violate our terms with the webinar provider company. We also answered a ton of other questions posed to us during the webinar. If you want answers to the below questions and to those posed during the webinar you can wait at least 30 days for us to publish them here or you can sign up now for the recording of the webinar and then send any additional questions you might have to the webinar company.

1. How can we ensure that a shipment will not be seized by the federal government en route to its final destination after passing through US customs? If, as FEMA themselves suggest, these are the actions of their “anti-price gouging task force.” How are these determinations being made? How can vendors protect themselves and their buyers?

2. Is there a repository of known fake certificates to check against? Or a register of Chinese certifiers?  Little information seems to be available about them online, even on the Chinese internet.

3. Was wondering if Harris Sliwoski is doing pro bono or discounted work for non-profits? We are discounting all COVID-19-related work by 25%.

4.  What are China’s requirements for boxes to ship out of customs now? Does the chop have to be on every box ?

5. If a manufacturer delivers defective product or fails to deliver at all, what are the remedies?

6.  Have you heard anything about the US DOJ restricting the use of the middlemen in PPE transactions?

7.  What are the major differences between successful and unsuccessful China PPE deals?

8. What one big tip do you have for us?