Contents of this Article:
- For-Profit PPE Buyers
- The Medical Provider/Government PPE Buyers
- China’s New PPE Rules
- How to Increase The Odds of Your PPE getting Through China Customs
- Getting Your China PPE Through U.S. Customs
- Buying products from China has always been risky, but COVID-19 puts us at an 11 out of 10
- We Want to Help. We Really, Really Do
The below is a compilation of what we have been writing over the last few months on what it takes to get PPE from China successfully. We have done this compilation so that there would be one place where people buying PPE for export from China for import into the United States or the European Union would be able to gather actionable information.
On January 19, 2020, a 35-year-old man who had just come from China was diagnosed in suburban Seattle with the coronavirus. Within days of that event our law firm was representing companies seeking to buy large quantities of personal protective equipment (PPE) from China. It quickly became apparent these sourcing projects would require a panoply of China lawyers, paralegals, and business specialists to help clients who needed fast and decisive assistance in buying PPE, mostly from China.
Our law firm quickly assembled what we call our “PPE team.” The first thing our team needed to do was to decide exactly the sort of help our PPE-buying clients needed. Most of our PPE buyers are hospitals, hospital chains, and consortiums of hospital buyers, but we also are working with states, countries, charities, and brokers. What all have in common is the desire to get good product at anything approaching reasonable prices.
For most companies, our law firm’s highest and best use on PPE projects involving China is the following (per the template letter we send to those seeking our assistance):
a. Making sure the Chinese company proposing to sell the medical products is authorized by the Chinese government to export those medical products. This usually takes very little time. If we find the Chinese company is not authorized to export the products you are seeking to buy from it, we usually will go back to you and suggest you ask the company how it proposes to get you the products when it is not on the list of companies authorized to export those products from China. If we find that the Chinese company is authorized to export the medical products you seek, we will usually immediately move on to #2 below. These authorizations are a constantly moving target, and today China yet again further restricted the products that can be legally exported. See China Tightens Customs Checks for Medical Equipment Exports.
b. Conducting a basic due diligence investigation on your potential sellers and providing you with a report on our findings. This investigation typically consists of our reviewing various Chinese government databases to confirm that the Chinese company from which you are seeking to buy PPE products actually exists and is licensed to sell what it is proposing to sell to you. These investigations also seek to determine whether the Chinese company is well capitalized, is in good standing with the Chinese government regarding fines and taxes, and is not involved in lawsuits that would make us doubt its reliability. We also look at the company’s ownership because that sometimes gives us additional good insight about the company. After we search the Chinese government databases, we do a quick internet search on the company in Chinese and in English to try to get information about its overall reputation. We then provide you with a 3-5 page report on our findings. Our typical turnaround time on these is 5-8 hours. Not surprisingly, we are finding that the better the company, the greater the likelihood the products will clear customs in China and in the importing country.
c. Conducting searches to determine whether the products you will be buying can be imported into the particular country in which you will be importing them. We also provide high-level customs advice for products imported into the United States and the EU, and, in tandem with associated lawyers, we can usually provide this advice for other countries as well.
d. Drafting purchase and sale agreements between you and your Chinese sellers. This includes our providing you with legal counsel regarding terms and payment issues, such things as letters of credit.
e. Assisting you in securing capable QC assistance in China. It helps to have someone in the factory watching how your PPE is made and making sure that what is shipped is what you bought. There is no substitute for this step, even and especially in times like this.
We also often find ourselves consulting with these buyers regarding countries other than China that are selling smaller quantities of (but often better quality) PPE. I’ve started to only half-jokingly refer to myself as a face mask lawyer. I’ve been saying this because I’ve been spending 8-16 hours every day working with companies that want to buy face masks and other personal protective equipment (PPE) from China and with companies that think they want to buy PPE from China.
Though we have written extensively about sourcing PPE, we get many emails every day asking that we write more on this. The problem is that whatever we write today will almost certainly be outdated a week from now, but here goes. Before reading the below — which consists mostly of updates — I urge you to read our previous posts as well.
Our China lawyers are getting a steady stream of calls and emails regarding face shields, gloves, goggles, glasses, gowns, head covers, masks, respirators, and shoe covers. We are also working with companies trying to source ventilators. At the same time we are also being regularly contacted by phone, email, and (mostly) WeChat by individuals and companies in China looking to sell PPE to the United States or to Europe.
Our China transactional lawyers are mostly dealing with two buckets of PPE buyers:
- The person or company that “knows someone in China who has a large quantity of PPE they want to sell” and wants to quickly profit from buying that PPE and reselling it, mostly to hospitals or government entities.
- Medical providers (mostly hospital groups) and government entities that desperately want PPEs to protect their medical personnel or citizens.
1. For-Profit PPE Buyers
This sort of buyer usually calls or emails seeking legal help with one question — a question which is often not even relevant. This buyer emphasizes that they “need” to buy a huge quantity of PPE from China “fast” and they “need” our China lawyers to get back to them right away because their PPE deal needs to close really soon. Then they often ask how they can determine whether their Chinese PPE supplier has U.S. FDA approval for surgical masks or whether our law firm can set up an escrow account for them.
Our response to these inquiries is to tell them that FDA approval is generally not required for surgical masks and that they should first ask their Chinese surgical mask supplier whether it would agree to an escrow buying arrangement because we are not aware of any that have done so.
We usually start our emails to these sorts of buyers with something like the following.
I understand that you called our office today looking for legal help to buy and import surgical masks from China. I am guessing you are seeking to do so as soon as possible. Did you read our very recent article on the difficulties and the risks inherent in buying product from China these days, especially PPE? If not, I urge you to do so.
We are representing many companies looking to buy masks from China right now. We have completed a number of PPE deals so far and we are in various stages in working with large hospital groups on hundreds of millions of dollars in purchases. Sadly, very few of the potential PPE sellers we investigate in China check out as legitimate and so in the end very few deals actxually go through. We see our job as lawyers to protect our clients from the ton of bad and incompetent actors out there in PPE right now. Do you want this sort of help?
When our law firm is retained for on a China PPE deal, the first thing we usually do is conduct due diligence on the Chinese PPE seller(s) to determine whether they are legitimate or not. We have even tasked a special team of our lawyers and paralegals (all bilingual in Chinese and English) to investigate the PPE factories in China and any brokers as well. It is necessary to investigage all participants in the supply chain because — to use the old cliche — a chain is only as good as its weakest link.
Many times we are finding that the company that claims to be the Chinese factory making the PPE in China is really just a broker hoping to be able to secure product if and when it gets an order or maybe it is just a con artist planning to keep the money no matter what (see below).
Some time ago the United States FDA loosened its restrictions on some PPE, but to import certain types of masks both the masks and the Chinese company must meet NIOSH requirements. Roughly 90 percent (yes, 90 percent) of the certifications our China due diligence team have reviewed have been faked.
One of the problems we keep seeing is Chinese companies that make socks or toys are now out in the marketplace purportedly selling masks. This can and has been problematic on many levels. China has its own general manufacturing requirements and its own requirements regarding PPEs. On the one hand, China does not want crooks out there selling bad products and hurting China’s reputation.
On the other hand, China would prefer to see its good quality PPE go to countries it likes and not to countries it doesn’t like. Like its Belt and Road Initiative, China has been using PPE as a geopolitical tool, and we do not see that strategy ending any time soon.
In our experience, even the best of the Chinese companies selling PPE are not fully aware of how much the Chinese government does NOT want them selling these things to the United States or Canada – as opposed to selling to countries like Italy or Spain that China badly wants to influence. Speaking of Spain (where we actually have an office doing some of this same work), it recently spent a small fortune buying coronavirus test kits that simply do not work. See this article for some background on this.
Then there is the issue of what will be accepted into the United States or the EU and what you can legitimately sell in these places. With the current mix China factories that turn out to be merely brokers or con artists and actual China factories that have no clue how to make the product ordered (because they were sock factories until recently) and other China factories that don’t know how to make products that meet US or EU requirements, it is a complete mess out there.
To top it all off, selling PPE and delivering nothing to the person or company that paid for them is THE perfect scam right now in this seller’s market where demand far outstrips supply.
In the last two weeks I have spoken with three companies that each lost more than a million dollars buying masks. Two of these companies were buying from their regular supplier that did not specialize in manufacturing PPE. These two companies had been doing business with their Chinese suppliers for at least five years and then they ordered and paid for more than a million dollars in masks. One got literally nothing and the other got dusty moldy Halloween masks. The company that got Halloween masks did not have a China-appropriate contract making clear exactly what it was buying. See China Contract Specificity and North Carolina Blue. See also The Five Keys to A China Contract That Works.
I urge you to read this and then note that just about every manufacturing company in China is hurting badly right now, and selling a huge amount of face masks (that they neither make nor have) has become the perfect swan song. For a good article on just how badly China’s manufacturing economy is doing, check out The Second Virus Shockwave Is Hitting China’s Factories Already.
Our China manufacturing team has for nearly two decades been dealing with Chinese factories, so we have lived through many China economic slowdowns. We know what happens when China’s economy dives, and this one is different only in its depth and its breadth. I urge you to read this article I wrote for the Wall Street Journal during a previous China economic slowdown.
As one of our China lawyers said here in reference to buying medical products from China: “We are finding ourselves more than ever these days telling companies that if they are not going to spend the time and money to do whatever they can to ensure their product purchases end up with their getting the actual products, they should not make the purchase at all.”
Verification of the legitimacy of your PPE seller is a necessary first step, but there are many other issues involed with buying PPE from China. To protect companies buying medical supplies from China, our international manufacturing lawyers typically go through the following questions:
a. Is it legal for this particular Chinese to sell you this PPE product and will it get Chinese government approval to do so? Again, China wants its PPE products (things like surgical masks, N95 masks, and ventilators) going to countries it perceives as China-friendly and it does not want its products going to countries (like the United States) that it perceives as unfriendly.
b. Does the Chinese company from which you are buying PPE product actually exist? Is it properly registered and licensed to make the product you plan to buy from it? In other words, is it legitimate? How can you be sure you will get the product you order and pay for? In China Company Research: The 101 we talked about the sort of foreign company due diligence our law firm does to determine whether a Chinese company is real or not, and we do the same sort of research to determine this in every country. In well over 90 percent of the cases our lawyers see where someone sent money and got unusable product or no product at all, the debacle could (and should) have been prevented with due diligence that would have revealed the company selling the product was itself a fake.
c. Is it legal for your company to import this product? Does it meet your own country’s standards? Just this week, a company called us after having bought products that did not meet its own country’s standards and were therefore essentially worthless once delivered. It had received vague email confirmations from its Chinese supplier that the product met “international standards,” but because it had nothing in its contract making clear that the product met its own country’s standards, it had a very weak legal case against its suppliers.
d. How can you be sure your supplier will send you the quality of PPE product you will be ordering and paying for? Quality control inspections and properly drafted and relevant contracts are the keys here. See THE Rules When Manufacturing Overseas.
e. How can you prevent your supplier from copying your product and selling it all over the world? See Manufacturing in China: Minimizing Your Risks by Doing Things Right.
If all the above checks out, then comes the supplier agreement. Our China legal team has been doing 5-10 China manufacturing contracts every month for more than 15 years, and that means we know not only what to do to protect our clients, we also know what is reasonable for China and what Chinese companies will and will not accept.
I understand that many companies are hoping to use an escrow account to buy PPE products from China. That is great if it works, but we are just not seeing those right now from legitimate Chinese PPE manufacturers. Why should a top-tier Chinese PPE manufacturer accept an escrow payment arrangement when they have an incredibly long line of buyers willing to pay massively inflated prices for their PPE wares? Even our big hospital chain buyers are at best getting terms of 50% upfront/50% upon arrival (one small deal was 25%-75%, but that was with a long-time supplier). For a general idea of what these supplier/manufacturer agreements look like, check out Overseas Manufacturing Contracts (OEM, CM and ODM).
2. The Medical Provider/Government PPE Buyers
This sort of buyer usually calls or emails us because they are at wits’ end. This buyer is also usually in a COVID-19 hotspot and staring down the face of an impending and dangerous PPE shortage. This buyer is getting massive pressure from its own personnel to “do something.”
This buyer is also being told by many of its own personnel of someone they know “who knows someone in China who can send a large quantity of PPE.” This buyer is usually an experienced procurer of medical supplies and it knows it will not be that easy.
It is for this sort of buyer that we have set up what is essentially a China PPE buying and due diligence team. This team is tasked with gathering key information about each proposed China PPE seller and then making an initial “yes” or “no” determination as to its legitimacy. If the decision is “no”, the team stops there. If the decision is “yes” we then talk with our client regarding next steps.
If the client is buying only a small quantity of product (this is rarely the case) that it desperately needs fast, we might advise they have our lawyers quickly put together a basic Chinese language contract and the purchase goes forward quickly. If the purchase is considerably larger, we might advice doing additional due diligence on the Chinese supplier (again, as quickly as possible), which might involve sending someone to the factory, or talking with the supplier’s bank or a trusted government official to find out more. The contract for this transaction likely will be more involved, as well.
With all of these deals we lawyers need to be mindful of the end goal. These are not deals where our clients and those in their care (their patients or their citizens) can be as deliberate and careful as we (or they) would normally like. This is a classic situation where we cannot let the perfect be the enemy of the good. We tell these clients there is no way we can reduce their risk to zero and that we see our job as reducing their risks as much as possible, while being ever mindful of the larger goal: saving lives.
Regarding your IP during this hectic period, it is worth repeating what we said recently in Coronavirus Legal Issues Around the World, Part 5: Getting Products from Overseas has Never Been Riskier:
In this hectic period, you will need to rely even less on local authorities than in pre-COVID-19 times. IP raids are way down on the list of pretty much all governments’ current priorities right now. Governments are trying to kickstart their economies, and as we noted in Don’t Despair. China Isn’t Going Away Anytime Soon, “China has to rebound because the CCP needs China to rebound to stay in power, and keeping the people’s bellies full and their minds busy with labor (and some ‘wholesome’ entertainment) are the foundation of any good communist playbook.”
Nonetheless, there are still certain things you pretty much MUST do to even have a fighting chance. For example, if you have not already done so, this is a good time to record your IP with China Customs so it can watch out for counterfeits of your products coming and going from China’s ports of entry. See The Four Best Ways to Protect Your IP from China.
This is also a good time to make sure your contracts with your existing overseas factories are in good order and to guard against the impulse to paper over legal discussions with possible new suppliers. Go read THE Rules When Manufacturing Overseas.
In Advice for Buying Face Masks in China without Losing your Shirt, Renaud Anjoran, who heads up a top-tier international sourcing and quality control company, paints a dystopian yet accurate picture of the realities of PPE from China that applies to buying just about anything from China these days. Renaud is also seeing “a lot of people sending money, receiving substandard products, or not receiving anything at all.” His article nicely sets out the specifics of buying PPE from China and how best to protect yourself from the bad actors that purport to sell such products.
3. China’s New PPE Rules
As the world looks to China to provide PPE for dealing with the coronavirus pandemic, a series of problems has resulted. In Europe, huge quantities of Chinese coronavirus test kits and medical use masks have been rejected as defective. See Europe turned to China for coronavirus testing help. Why some are now regretting it and Netherlands recalls defective masks imported from China. Throughout the world, buyers have been deluged with offers for sale of various counterfeit products. Many have bought and paid for PPE and never received a thing. All of this has been big news and has further damaged the reputation of China and legitimate Chinese manufacturers.
In response to this situation, the Chinese authorities issued an Order that tightly regulates PPE exports from China. Under this Order, Chinese exporters of listed medical devices must meet two requirements. First, the device must be registered in China through a Medical Device Product Registration Certificate. Second, the exporter must prove that the device complies with the regulations of the importing country that apply to that device. Compliance with these requirements will be difficult or impossible for many otherwise legitimate Chinese manufacturers. This will constrict supply just when demand is exploding.
This is obviously not a good situation and many believe China has done this not so much to protect buyers, but to keep PPE products in China at the ready if and when the coronavirus flares up again in China. By spinning its Order restricting PPE as having been motivated by a desire to protect foreign buyers, rather than to choke off exports, China figures it will look better internationally. No matter what China’s motive really is, the impact of its tightening PPE export laws will be the same. Just when countries around the world desperately need more PPE, China has to a large extent cut them off.
Details of the Order are as follows:
The title is Order Concerning the Orderly Export of Medical Supplies 关于有序开展医疗物资出口的公告.
The Order was issued effective April 1, 2020 jointly by the Ministry of Commerce, the Customs Bureau and the National Medical Products Administration. The Order is temporary and can be expanded or revoked at any time. The text of the Order and its supplementary exhibits can be found here (in Chinese only).
The Order applies to the export of the following medical supplies:
a. Novel Coronavirus Test Kits 新型冠状病毒检测试剂.
b. Medical Use Face Masks 医用口罩.
c. Medical Use Protective Clothing 医用防护服.
d. Ventilators 呼吸机.
e. Infrared External Thermometers 红外体温计.
For the listed products, the exporter must meet two requirements. First, the product or device must be registered in China via a PRC Medical Device Product Registration Certificate. The Chinese PPE exporter must provide the registration number for the product/device as a requirement for export. As an exhibit to the Order, a spreadsheet is provided that lists all entities that have obtained this required certification. For many products, the number of certified companies is very small. Second, the product or device must comply with the quality standards of the importing country. How this proof is to be provided is not stated.
The Chinese exporter is required to submit a signed form to China customs stating the required information and affirming its accuracy. A copy of this form is included as an exhibit to the Order. Exporting under an inaccurate or falsified statement subjects the exporter to liability under Chinese law.
This Order raises three important issues. First, most Chinese manufacturers that manufacture PPE for export do not bother to obtain domestic Chinese registrations. Since they manufacture exclusively for export, no such certification was ever required for their business and so they do not have one. This then means that most Chinese exporters of PPE and medical devices cannot comply with this Order. For example, The South China Morning Post writes that only 21 of 102 Chinese medical device companies with EU medical device certifications are licensed to sell their devices within China. In other words, 81 of these companies will now no longer be able to sell their medical devices to the EU.
Huge numbers of Chinese companies that are now barred from exporting their products have already entered into agreements and been paid to supply those products. China’s new medical products Order will stop these already placed product orders, leading to a cascade of defaults down the supply chain for these products.
Second, Chinese manufacturers that have obtained certification for exporting their medical products are companies focused on the Chinese market. This makes sense because these are the companies that deemed it worthwhile to incur the time and money necessary to acquire domestic Chinese certifications. Many of these companies are neither interested in exporting their products not do they even really know how to do so. They simply are not experienced with international sales that are conducted very differently than sales of medical supplies within China.
Third, the scope of this medical products Order is not clear. For example, what is a “medical use mask”? Does this apply to the simple cloth masks often referred to as “surgical masks”? What is “medical use protective clothing”? Does this apply to simple gowns often referred to as “medical gowns”. Countless U.S. hospitals and other companies have pending orders or are working now to make major purchases of “surgical masks” and “surgical gowns” from China. Will these products fall under this new Order? Will confusion concerning the Order delay the export of these “medical” supplies to the U.S. and other countries?
Will Chinese customs officials revert to form and essentially freeze up when they see these sorts of products set to leave China, figuring their job is to prevent further embarrassment for China of the type already seen with Spain, the Netherlands, Slovakia, Turkey, and the Czech Republic, among others. China realizes that selling coronavirus test kits with accuracy rates less than flipping a coin is not good for Made in China branding and its customs officials have likely gotten this message. Has China customs also been given the message to err on keeping these key medical products within China to the extent possible so as to save them for China? Has — as has constantly been rumored — China customs been instructed to be particularly tough regarding exports to countries with which China has poor relations, such as the United States, Canada, and many in the EU?
Now consider how all this can play out in the currently confused market for Chinese manufactured medical supplies. Now that the U.S. FDA has approved the sale of NIOSH certified masks to healthcare providers, interest in importing NIOSH certified masks from China is intense. The basic facts regarding NIOSH certified masks are as follows:
a. Chinese-made NIOSH masks are not certified in China because they are not a “medical device”.
b. Chinese-made masks can be imported into the U.S. as NIOSH masks.
c. Chinese-made NIOSH mask can be sold for use by HCP (Health Care Personnel) in the U.S. under the TEMPORARY FDA letter rule.
So in principle, China’s new Order should not restrict exporting the following from China:
a. NIOSH certified “industrial safety masks”. It is important to keep clear that NIOSH is a work place safety certification; it is not a medical device certification. This is why the FDA has been reluctant to treat NIOSH and related foreign certifications as the equivalent of a medical certification. As we have seen, the FDA letter is a source of substantial confusion on the certification issue.
b. “Surgical masks”, since most of these are nothing more than clothing not requiring medical registration in many countries, especially if not for hospital use.
c. “Surgical gowns”, since most of these are nothing more than clothing not requiring medical registration in many countries, especially if not for hospital use.
d. “Surgical gloves”, since most of these are nothing more than clothing not requiring medical registration in many countries, especially if not for hospital use.
e. Gauze and bandages and other “medical supplies” that have a medical use but that are not a “device” requiring registration in many countries, especially if not for hospital use.
But is this how PRC customs officials will interpret this new Order? Or will they look at the export documentation and see the term “surgical” or “medical” and decide on their own that certification is required? They should not do this, since China in general wants to export. But the answer is unclear and China’s desire to keep these products in China for its own citizens and/or to wield them for geopolitical purposes only adds to the potential confusion.
Making things even more complicated for PPE buyers is that PRC customs officials at one Chinese port may make one decision and PRC customs officials at a different Chinese port may make the exact opposite decision. At minimum, this risk suggests you should exercise care in how your PPE products from China are identified and labeled. For example, there is no reason to use the term “surgical” or “protective” if that is not required. But at the same time, you need to be cognizant of the import labeling and identification requirements of the country to which your medical products from China will be going.
To add even more confusion, there are bandages registered with the U.S. FDA when they move beyond simple gauze. But these bandages are not for sale in China and they are not registered in China. In the coronavirus sector, consider this example: take a proprietary U.S. designed ventilator that is made in China. It is not registered in China because it is not sold in China. The ONLY buyer of this ventilator is the U.S. importer. Will that ventilator now be blocked from leaving China? Per China’s new Order the answer is yes, but this makes no sense at all. But those of us who have been dealing with Chinese government officials for decades know that what is written pretty much always takes precedence over what makes sense. Chinese government officials are given almost no discretion so as to be sure to follow all orders from Beijing and so as to reduce corruption. A Chinese customs official that allows this hypothetical ventilator to leave China will incur far more personal risk than a Chinese customs official that blocks it from leaving. How about a U.S. designed thermometer? Same for other U.S. proprietary devices that might fall within this Order or a future, expanded Order. China as factory to the world then becomes a big problem.
So much that arises from this new order is unclear. The above are just a few of the more central issues. Our lawyers are furiously working to try to get clarity on the new Order from Chinese government officials who, for the most part are saying they too do not know the answers. Most likely answers to what this Order really means will come the way answers to China’s new laws usually come: via what actually happens in real life. But this will probably take weeks and in the meantime more will become infected and more will die.
China’s message with this Order is clear. It cares more about its reputation than about human lives outside China. Our message should also be clear. Anyone looking to buy medical products from China, be it PPE or testing kits or thermometers or whatever must do their research and plan and contract carefully. Importing from China will not be easy or simple and it is not for the faint of heart.
4. How to Increase The Odds of Your PPE getting Through China Customs
In light of China’s new rules and regulations on the exporting of PPE and in light of what we are hearing on the ground in China, from PPE sellers, PPE buyers and Chinese officials, our China transactional lawyers are recommending PPE buyers be certain of the following:
a. The company that is manufacturing the PPE product you will be buying from China is licensed to make that product.
b. The company that is exporting your PPE product from China is authorized to export that product from China. Note: Many PPE items that did not have this requirement a week ago have that requirement now
c. Your paperwork is perfect.
d. Your PPE product is of good quality and not counterfeit.
e. The country to which the PPE product can legally be sent that particular PPE product from China and can legally receive it.
In the end though, no PPE shipment from China should be considered “safe” until it has cleared customs and been loaded on to the airplane or ship that will take it to the country you want it to go. But even after clearing customs, there is always a slight risk of a seizure. It is unlikely PPE product would be removed from a vessel that has not sailed or an aircraft that has not taken flight, but with all that is going on in the world surrounding the coronavirus and PPE, even that could happen in China.
So the best PPE contract you can have would provide for no payment until the PPE product you are trying to buy has cleared China customs and been loaded onto the carrier and that carrier has departed Chinese waters or airspace. In other words, no payment until the PPE product has “crossed the rail” in FOB terms. For air freight, this means no payment until the product has cleared customs and an air waybill has been issued.
The problem though is that virtually no Chinese PPE factories will accept these terms. A Letter of Credit can be set up to guarantee the factory will get paid, but virtually no Chinese PPE factories will accept these terms. An escrow arrangement can be devised, but no Chinese PPE factory will agree to that.
The typical Chinese PPE factory will seek to load all of the risk of its own government’s actions onto the foreign buyer and they can get away with this these days because of the global shortage of PPE products. So usually the best we can do for our clients is a contract provision stating that if the shipment is held up by Chinese customs, our client gets all or nearly all of its payment back. If this is going to be your only remedy, you had better be sure you are dealing with a legitimate and reputable Chinese supplier. This is why we recommend to all our clients that they have our lawyers conduct due diligence on their Chinese PPE supplier.
This due diligence investigation typically consists of our reviewing various Chinese government databases to confirm that the Chinese company from which the PPE products will be bought actually exists and is licensed to sell what it is proposing to sell. These investigations also seek to determine whether the Chinese company is well capitalized, is in good standing with the Chinese government regarding fines and taxes, and not involved in lawsuits that would make one doubt its reliability. We also look at the company’s ownership because that sometimes gives us additional good insight about the company. After we search the Chinese government databases, we do an internet search on the company in Chinese and in English to try to get information about its overall reputation.
I am often asked whether these due diligence investigations of PPE suppliers give comfort and the answer is an emphatic yes. We have done PPE due diligence searches that have revealed the following PPE suppliers
a. A PPE supplier that has been making medical products since 1972, has 8 factories throughout China and around $15 million in registered capital. This sort of company is a yes.
b. A PPE supplier that was until three months ago a clothing manufacturer, but pivoted to make masks. It has one factory and about $1 million in registered capital. This sort of company is a probably yes, at least so long as the PPE shortage prevails.
c. A broker that was formed two months ago. This sort of company is a no unless it will reveal the name of the factory and permit our client-buyer to contract directly with the factory (which now must check out).
Just in case you want to read more about the chaos that is the China PPE market, I suggest the following:
- Wall Street Journal: Faulty N95 Masks Hamper Hospitals on Coronavirus Front Line
- Los Angeles Times: Faulty masks. Flawed tests. China’s quality control problem in leading global COVID-19 Fight.
- South China Morning Times: Inside China’s “Wild West”, where mask machines are like cash printers
- Wired Magazine: Everybody and His Dog Is Trying to Sell Medical Equipment
- Japan Times: Politics aside, U.S. relies on China supplies to fight coronavirus
- Los Angeles Times: States battle for coronavirus supplies in a chaotic market
5. Getting Your China PPE Through U.S. Customs
According to press reports, the U.S. Food & Drug Administration (FDA) has withdrawn its authorization for dozens of China-made respirators, “after government testing found many didn’t work properly.” This is reflected in the FDA’s own thinning list of China-made respirators covered by the relevant Emergency Use Authorization (EUA), the current iteration of which lists only 14 manufacturers, down from a peak of around 60. The EUA was originally issued on April 3, 2020, but was reissued yesterday, May 7, 2020:
In response to questions and concerns that have been received by FDA since issuance of the [original EUA] and having concluded that revising the April 3, 2020 EUA is appropriate to protect the public health or safety . . . FDA is reissuing the April 3, 2020 letter with certain revisions. Specifically, FDA has revised the April 3, 2020 EUA for clarity and to address concerns about sub-standard products, which includes revising the third criterion for eligibility and adding a process for removal from Appendix A.
Regarding that third criterion, under the updated EUA, a China-made respirator is eligible for authorization if:
it was previously listed in Appendix A under the April 3, 2020 letter of authorization as an authorized respirator because it demonstrated acceptable performance to applicable standards as documented by test reports, has had particulate filtration efficiency assessed by NIOSH using a modified version of NIOSH’s Standard Test Procedure (STP) TEBAPR-STP-0059 within 45 calendar days of the date of issuance of this EUA, and has results of NIOSH testing that indicate a minimum and maximum filtration efficiency greater than or equal to 95 percent.
The language of the original EUA was much vaguer, giving much more leeway as to what test reports had to show.
To be clear, this decision only affects respirators “intended for use by health care personnel in healthcare settings.” Masks intended for use by the general public are outside the purview of the FDA. This means that respirators manufactured by the companies removed from the authorized list can still be imported for use by, say, painters and others dealing with smoke or fumes. Whether valved respirators are suitable for use in everyday settings is a different question, which we will leave to the experts.
It is also worth clarifying that China-made respirators that meet regular FDA standards are A-OK. What the EUA sought to do was open the market to the large universe of China-made respirators manufactured for use within China and/or third countries, recognizing that at least some of them might be of sufficient quality.
In addition to the obvious relevance for those who were planning to import and/or use respirators on the basis of the EUA, there are three general takeaways here:
One, everything about China PPE, both at the China and U.S. ends, is in constant flux. As we stress every time we talk about the subject, it is important to check all relevant regulation and appended lists constantly, because they are changing constantly. In China PPE: Just When You Thought it Might be Safe to Go into the Water, we noted that, when “advising clients on importing face masks and other PPE products from China, our PPE team advises that one of the biggest risks is that the export/import rules constantly change.”
Two, with regard to the FDA’s authorizations, as their name indicates, they have been issued in the context of an emergency. As that emergency subsides, it is to be expected that the government restores normal standards. After all, there are reasons why the respirators covered by the EUAs were not authorized for use in health care settings before the COVID-19 emergency. Moreover, even if the underlying public health situation remains fraught, increased domestic production could also allow the FDA to restore normal standards.
6. Buying products from China has always been risky, but COVID-19 puts us at an 11 out of 10
As I recently have been writing to clients:
It is important to keep in mind that this is a fluid situation, which is likely to change as the emergency subsides and/or domestic production ramps up. It is fair to expect that the FDA will begin to curtail the scope of the EUAs as respirators that meet its normal standards come to market and/or are provided by the government.
Finally, this is yet another reminder of the continuing quality problems with Chinese products. As we pointed out in Fighting Fake and Bad Quality PPE with QC Inspections, “bad quality PPE is everywhere in China; even in FDA-certified factories.” As the author of the post, Sajag Agarwal of Movley explained
We routinely see QC issues with [PPE], whether they are standard civilian grade or medical items. For example, we recently inspected Class II FDA (Product Code: MSH) KN95 masks, and found over 7% had holes in them large enough to easily see with the naked eye. Just because a supplier is FDA-registered does not mean their product quality is good.
COVID-19 has changed a lot, but as far as shoddy and counterfeit products coming from China go, it’s business as usual.
Just to be clear: there are brokers who get real product for real buyers all around the world, and we have clients who have gotten real products from brokers. But I am pretty sure that every instance involving a brokered deal that went through the client knew the broker before the coronavirus began in Wuhan.
Brokers/sourcing agents have always made us nervous, even before the coronavirus. We wrote about this on December 26, 2019, which can be considered pre-coronavirus times. In that post, entitled, Sourcing Agents INCREASE Overseas Manufacturing Risks (Most of the Time) we opined as follows:
About all I can tell you here is that there are a ton of bad sourcing agents and a few great ones, and choosing a bad one will nearly always be far worse than choosing your overseas manufacturer yourself. So if you do decide you need a sourcing agent, choose a good one. A really good one.
It then quotes extensively from a Quality Inspection Blog article entitled Sourcing from China 101, Part 1: Do You Need a Sourcing Agent? that quotes me saying the following about sourcing agents:
I often describe China sourcing agents with the following: Ninety percent are crooks or incompetents, and most are both of these things. But ten percent are worth more than their weight in gold.
When it comes to PPE, I’d bump the number up to 98%. How then can you be sure you are dealing with the 2%? You cannot be sure unless you truly know the sourcing agent with which you are dealing. There are ways, though, to be sure you are not dealing with a reputable sourcing agent, and one of the biggest tells is when that agent tries to make you believe they are the manufacturer when they are not. But even sourcing agents you know and trust can increase your risk when buying PPE, especially if you do not know from exactly where your agent is getting the PPE.
I say this for two reasons. One, in the end, the chances of whatever PPE you buy being allowed to leave China and enter the country of its final destination will hinge on the actual manufacturer. Makes sense right? And two, most sourcing agents, whether good or bad, honest or dishonest, do not have much in the way of assets. As I mentioned above, one of the things we do for all our clients buying PPE from China is to conduct due diligence on their sellers. Sometimes the seller has been around since the 1970s and has $10 million in registered capital and a bunch of factories scattered throughout China. Other times, they’ve been around since 2016 and they have $1 million dollars in registered capital and one factory. But even the best and most honest sourcing agent rarely has more than $250,000 in registered capital and a few computers housed in a rented office. If you get bad product and need recourse, you are going to be much better positioned to go after a deep-pocket manufacturer than against a near judgment-proof sourcing agent.
But what can go wrong out there? Well, like everything.
The below email is a slightly revised version of what our PPE lawyers have been telling our clients who are looking to do brokered PPE deals:
The big risk is that we have no proof the broker has any relationship at all with the manufacturer. In a normal deal like this where the broker will never take possession of the goods, we would require confirmation of the relationship between the broker and the manufacturer. This would usually be either a copy of a contract or a written confirmation. Neither will want to reveal the price terms of their arrangement and that’s normal and fine. But it is important to know whether the factory: (1) has actually agreed to produce the quantity you want to order; (2) can and will provide the product according to the time frame required; and (3) will ship the product directly to you even though it is not getting payment directly from you. These sorts of things will reduce the risk of you showing up at the factory to have the factory tell you that they have no clue who you or the broker even are. Or, only slightly better, that they know who you are but your product will not be ready for six months.
In Faulty N95 Masks Hamper Hospitals on Coronavirus Front Line, the Wall Street Journal (Austen Hufford) today explained some of the things that can and have gone wrong for those trying to secure PPE from China:
CoxHealth, a hospital system based in Springfield, Mo., recently bought 100,000 N95 masks from a reseller outside its normal supply chain. After one of those masks failed what’s called a “fit test” to assure it is operating effectively, the reseller offered to buy them all back—and sell them to another hospital, said CoxHealth’s president, Steve Edwards. He decided to keep them.
“These aren’t perfect but they have some protection,” Mr. Edwards said. “Everything about it looks legit. But the product itself is clearly not.”
Mr. Edwards said CoxHealth paid around $4 each for the faulty masks, at the low end of a range up to almost $7 a mask that contracting-data provider GovSpend said it has found for N95 masks. That compares with about $1 each for N95 masks before the pandemic, GovSpend said.
Some hospitals in the U.S. are turning to a cast of smaller producers and shadowy middlemen. “We are getting a lot of ‘guy who knows a guy’ stories,” Mr. Edwards said. “We go down every rabbit hole.”
It then quotes me on some of what our coronavirus law team has been seeing out there:
Dan Harris, a lawyer in Seattle who is helping hospitals verify mask sellers in China, said he has reviewed the same “proof of verification” certificate more than a dozen times, indicating it is fake or copied.
“They are either hucksters or con artists,” Mr. Harris said. “Normal safeguards are being ignored right now.”
It then discusses many instances where hospitals and states bought what turned out to be defective masks, and it cites to a company that tests incoming masks and is “finding a crazy amount of bad masks in the market.”
I was also quoted today on PPE in a Los Angeles Times article by Anna M. Phillips, Del Quentin Wilber, and Jie Jenny Zou out today, for an article entitled, States Do Battle for Coronavirus Protective Gear in a Market Driven by Chaos and Fear. I love how this article begins:
The text messages and emails come in the middle of the night from strangers claiming to be middlemen and manufacturers. Deals are cut quickly; millions of dollars are wired overseas. Sometimes the supplies arrive; other times, the too-good-to-be-true offers prove to be just that.
It then discusses how the PPE market mystifies would-be buyers:
In interviews, state and local officials around the country depicted a market that even the most seasoned say has astonished them by its logistical challenges, lack of transparency, and potential for fraud.
Prices of surgical gowns, gloves and N95 masks have skyrocketed. The masks, which used to sell for between 50 cents and a dollar apiece, are now on offer for $5 or $6, officials said.
Government employees have been told that if they don’t pay 50% of the cost upfront, and the rest before the shipment has even arrived, they will lose deals to other bidders. Fearful of having orders seized by the federal government, desperate city and state officials have called members of Congress and other elected officials to ask them to sweet-talk U.S. customs officials.
The experience has been an emotional roller coaster for state and city officials. Working on the scantest of information and often with brand-new suppliers, they have had to disregard longstanding rules in order to act quickly. Too much hemming and hawing, and they could wind up with nothing to show for their efforts.
But without careful investigation, they might buy defective equipment, endangering hospital workers, police officers and paramedics.
“It has been crazy,” Illinois Assistant Comptroller Ellen Andres said.
The article then points out the issues with “middlemen and brokers who hold themselves out as specialists in connecting American buyers to foreign manufacturers” and how “some are legitimate actors working around the clock to track down supplies” and others “are opportunists cashing in on a global pandemic” and it is difficult to tell them apart. It then notes how “some states and cities have refused to work with sellers they don’t know or those who demand payment upfront,” while others “don’t have that luxury.” Buyers often have to sift through “several middle people who then have another relationship with someone who has a relationship with someone in China, who then has a relationship with an actual manufacturer,” to determine “the actual person producing this.” Some “governments and hospitals have hired lawyers and consultants to help them vet suppliers”:
Hartford HealthCare, a network of seven hospitals in Connecticut, is working with Dan Harris, an attorney who specializes in doing business with China, to help verify potential brokers. Since the pandemic unfolded, Harris said his inbox has been flooded with dubious would-be brokers and middlemen looking to offload supplies.
Harris said he suspects that the rising cost of medical supplies is mostly a result of price gouging and profiteering, not an increased cost of doing business. Prices are expected to continue to increase following new export protocols enacted by the Chinese government this month, which will likely limit the number of companies cleared to send medical goods to the U.S.
“Every hospital is dealing with this on their own, there’s really no coordinated effort to weed out these bad actors,” said Dan C. Pak, the network’s vice president overseeing procurement, who has been calling Chinese factories to vet his orders with middlemen. “We are literally at the mercy of these brokers.”
I found myself disagreeing with the following quote in this article: “’The market is completely opaque,’” said task force member Alex Dixon, who leads West Coast operations for PureStar, a major linen supplier to Vegas hotels.” The market is not completely opaque if you have dealt with China suppliers for decades and you can read the Chinese laws, regulations, rules and pronouncements regarding the export of PPE and you have the ability to identify the real Chinese manufacturers with good reputations and 20 years of business operations as opposed to a broker who decided to move from sourcing golf balls to sourcing PPE three weeks ago.
It is tough out there, no doubt, and there is not sufficient time or money to eliminate all risk when buying PPE, but there is a ton that can be done to greatly reduce that risk.
Alice Su, China correspondent for the Los Angeles Times just came out with an article on the massive risks buyers face from defective PPE and coronavirus testing kits, entitled, Faulty masks. Flawed tests. China’s quality control problem in leading global COVID-19 fight. The below from this article succinctly and accurately describes the PPE chaos:
A growing list of foreign complaints about faulty medical gear and testing kits imported from China has upset Beijing’s designs. Within the last few weeks, scientists and health authorities in Spain, the Czech Republic, Slovakia, Turkey and Britain have complained of faulty antigen or antibody coronavirus tests purchased from Chinese companies — in some cases, costing these governments millions of dollars. Georgia has canceled a contract with the Chinese company that sent flawed test kits to Spain, and Malaysia has opted to buy testing kits from South Korea instead of China because of the Chinese tests’ reported low accuracy rate.
Last week, the Netherlands asked to return 600,000 face masks purchased from China that had inadequate filters and fit incorrectly. On Tuesday, Finland tested a shipment of personal protective equipment, or PPE, from China and found the items unsuitable for hospital use. Australian border officials have also reportedly seized 800,000 faulty or counterfeit masks from China.
The problem is worse at home. On March 12, officials at a State Council press briefing announced that authorities had seized more than 80 million counterfeit or faulty masks and 370,000 defective or fake disinfectants and other anti-coronavirus products in the prior month alone.
Beijing has also tightened export standards in recent days, requiring domestic certification as well as foreign licenses for medical products shipped abroad. Previously, exported medical products only had to have the certifications in receiving countries, such as the European Union’s CE certification, which could be easily counterfeited in China.
But the desperation of states, nations, hospitals and individuals competing worldwide, shelling out millions of dollars to get medical gear as people die by the thousands each day, has created a scammer’s paradise.
“It’s a complete mess,” said Dan Harris, a lawyer whose firm, Harris Sliwoski, has advised companies on sourcing from China for more than 15 years. He called the current situation “unprecedented,” especially as frenzied Chinese suppliers attempt to recoup losses after months of quarantine.
“A year ago, Chinese companies were fine. Now they’re desperate,” said Harris. “A lot of them know they’re going to be bankrupt in a week. A lot are going to be bankrupt already. So they’re selling bad product, fake product” — and the whole world is buying those products, regardless of how they’re made.
Many of those calling Harris’ firm for help are hospital purchasing managers who are under pressure from overwhelmed doctors asking, “Where the hell are the masks?”
Then there are the middlemen, including experienced distributors and longtime sourcing agents who think it’s easy to shift into PPE. And a smattering of “crooks, who go to the hospital and say, ‘I can get you 5 million face masks’ … And they have no clue what they’re doing,” Harris said.
Meanwhile in China, many factories have pivoted into PPE manufacturing under government encouragement, even though they lack capacity and quality control.
“Everybody is jumping on this market and they have zero understanding of quality,” said Renaud Anjoran, a manufacturing supply chain auditor based in Hong Kong. “But these are high-risk items. If they don’t work, people might die.”
It’s common for Chinese suppliers to export a product under one licensed company’s name, but to source their products from second, third or fourth factories, like a chain of Russian nesting dolls, with little to no traceability down the chain of supply.
“In China, nothing is really black and white,” said Anjoran. “You have manufacturers selling you stuff they don’t really manufacture. They’re making it somewhere else, but you don’t know where.”
There are many ways medical product exporters could get away with counterfeited or substandard goods even with the certification requirements, Anjoran said: Certificates can be faked. Certificates can be real, but altered to display another manufacturer’s name.
Certificates can be valid, with goods made at the factory, but the manufacturer may not be checking the quality of its raw materials — especially the filter material in masks, the most important factor in protecting medical workers from the coronavirus. Testing filter material can take up to two weeks and cost more than $2,000.
“You’ve got speed and greed,” said Harris. “It’s perfect for con artists.”
Many of the newly set-up mask factories also operate in unhygienic conditions, with no process to keep the air clean, Anjoran said, based on his own auditing visits.
7. We Want to Help. We Really, Really Do
Representing companies seeking to buy PPE from China is incredibly stressful and time-consuming work, but it makes our lawyers feel good to be helping — to be doing something/anything to move the ball forward on something so critically important. We are so passionate about helping companies with coronavirus related work that we discount our rates on these deals to try to give back to our communities and our countries and — most especially — to the medical personnel and first responders who put their own lives on the line and work absolutely unbelievable hours in an effort to save lives and relive suffering. Though we know that what we as lawyers are doing is nothing compared to what these medical care providers are doing, we are happy to be able to help, if only just a little.
So keep calling and emailing us with your PPE deals. We desperately want to help you do your PPE transacations the right way.