How to Reduce Your Foreign Manufactured Product Liability Risks

How often do you stop to think about the ubiquitous “Made in China” label? If you are buying products from China, you should think about this all the time. The same holds true if you are buying your products from any third party manufacturer anywhere.

To convince recalcitrant clients of the need for product liability protection for the products they are having made overseas, 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 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 unit 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 Foreign Suppliers

Manufacturers run the gamut from superb to criminal (as in criminally negligent). This means you must thoroughly check out your product suppliers in advance. At minimum, you should do a due diligence check on your supplier, as these are almost invariably 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 that you do not want to have to explain to a judge or a jury.

A due diligence check will also usually give you a good sense for 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 will also usually reveal lawsuits involving your potential manufacturer. Do you want to have to explain to a jury why you went with XYZ company to make your widgets even though XYZ company had already been sued eight times for selling unsafe/defective widgets?

It also often makes sense to check U.S. import records to see whether other American companies get product from your potential  supplier and then contact those American companies for information about the supplier. Just learning that a well-regarded company has been purchasing product from an overseas factory without major problems for the last five years is itself a very good sign. For more on what is typically entailed with due diligence on foreign manufacturers and the costs and various benefits that come with that, I urge you to check out Foreign Company Due Diligence Reports and also review this example of a due diligence report our international lawyers compiled for a client looking to determine whether to move forward with a particular manufacturer.

2. Quality Control

It is essential you take responsibility for quality control. Most consumer products arrive in the U.S. already packaged for retail sale, making inspection outside the country of manufacture cost-ineffective. You therefore should institute a statistically valid inspection system in the country in which your products are being made to validate the safety and quality of your product.

By way of an example, the Chinese government has its own relatively effective inspection system for food and drug products, but to reduce costs, many Chinese suppliers intentionally avoid the Chinese government procedures. The Chinese government itself used to estimate that 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 you are buying, it is your job to make sure your supplier is licensed to manufacture and export the product you are buying from it and to make sure the product you are buying went through proper foreign government inspection before its export. You cannot rely on your supplier for any of this. When someone gets injured from your product, it will be you who is sued.

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 law firm’s international manufacturing attorneys deals with a major supply chain problem, the American/European/Australasian 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 xix months 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 foreign product suppliers should focus in detail on safety and quality control issues. These contracts should be clear and specific as to quality and safety expectations. They also should make clear your right to inspect the products and delineate responsibility for injuries and recalls. Using just Purchase Orders will not cut it.

Equally important, you must do what your contracts provide. If your contracts state that you are responsible for inspection, 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 foreign product manufacturer can either shift liability towards you or away from you. You must recognize, however, that most courts will be reluctant to see an injured party walk away with nothing. Therefore, no matter how good a contract you have with your foreign manufacturer, you still must not abandon your other protections. But see China Factory Indemnification: Yeah, Whatever.

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. For more on product liability insurance, check out China Manufacturing and Product Insurance.

6. Marketing

I had a client whose product brochure sported a cover touting it having the “best built______ in the world.” This company made a relatively dangerous product in an industry rife with product liability lawsuits. The plaintiffs’ lawyers that sued would almost invariably contend that my client should be held to a higher standard because it had expressly warranted its product to be better built 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 products than just abiding by that 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?