Suing Chinese Drywall Manufacturers

An international litigator I know just emailed me an article on Chinese Drywall, with the question, “why do you think these lawyers are spending so much money to serve the Chinese defendants.” My short answer is that I do not know.

I will backtrack a bit first.

The article is Chinese-Made Drywall: A Multi-Defendant, Multi-Claim, Multi-District Litigation Has Litigators Multi-Tasking, [link no longer exits] and it is more a pitch for lawyer seminars than an article designed to impart real information. With that caveat, here are the “offending portions.”

Ervin Gonzalez dug in to the potential defendants, starting with a primer on how the product is made. Gypsum is mined from a quarry, heated to dry, then rehydrated to form a slurry, a paste that is then sandwiched between materials. The mining process raises questions as to whether the contaminants are natural or whether pollutants migrated from, say, a nearby farm where pesticides were used. The ingredients are supposed to be inert, he said, but there is a high level of active ingredients that, when hit with water or humidity, release sulfur gas.

“So manufacturers are on the front line,” he said, naming Knauf companies, which are German-based with subsidiaries in China. Knauf Plasterboard Tianjin Co. Ltd. and Knauf Tianjin have been sued. Taishan Gypsum, a China company, is another defendant.
Other potential defendants listed on the call included builders, developers, subcontractors, shipping companies, importers, distributors, architects, directors & officers, and others – with a great deal of liability shifting expected.

*   *   *   *

Types of claims raised or anticipated include strict liability, negligence, nuisance, extension of privity through warranty, medical monitoring, and requests for injunctive relief. Gonzalez said most states are still following the Restatement of Torts, while others are looking at the Third Restatement which, he said, requires analysis of a safer product.

The international aspect of this litigation further complicates matters, especially in dealing with companies based in China and Germany. Levin noted the high cost of simply serving these foreign defendants, saying it cost his firm $15,000 to serve a complaint, a process that took weeks. He warned anyone serving a defendant in China NOT to make reference to the Republic of China or Taiwan. Simply state that the defendant is a “foreign corporation,” otherwise the ministry there will not accept service – the government only recognizes one China. Mullen questioned whether non-U.S. insurers also will be brought in as claims are filed.

Now for the analysis.

I am not sure whether the person who wrote me the email was asking about the $15,000 cost or why the service was being done at all, so I will answer both questions.

If the $15,000 was for service of the complaint alone, it is way out of line. Serving a foreign complaint in China is not all that difficult and it should not be nearly that expensive. China is party to the Hague Convention on Service Abroad of Judicial and Extra-Judicial Documents in Civil and Commercial Matters and it accepts service of process made through its Central Authority. There are a few tricks to making sure the forms are filled out properly and payment also must be paid a certain way, but once you have done this a few times, it becomes pretty much rote. But what probably pushed the costs so high is the requirement the pleadings served be in Chinese. Good legal translations cost real money. So far so good.

Now the big question and the one nobody seems to want to answer is why bother suing the Chinese defendants at all? I have twice been interviewed by legal publications on this and both times I said I thought it would be difficult for anyone to collect money from the Chinese companies involved in this simply by suing them in the United States. I also asked both of them to ask the other lawyers they were interviewing how they planned to collect from the Chinese companies.

During the tainted pet food litigation, I called up a plaintiff’s lawyer who had sued one of the Chinese companies in a U.S. court and asked how he planned to collect on that judgment. His response was that he was going to worry about that only after he got the judgment. I suspect a lot of that is going on here as well. I can only tell you that my law firm’s international litigators get calls all the time from lawyers offering us a percentage of whatever we can collect on their US judgment against a Chinese company. If the Chinese company does not have assets outside China, we usually politely decline, no matter what the percentage.

Now it is always possible to sue the Chinese drywall manufacturers in China and even to win. But the big problem with that is that the damages are not likely to be nearly as high as they would be in the United States.

There are times when it makes sense to sue a Chinese manufacturer for insurance purposes or just to let a US jury know that you tried. Is that what is going on in the drywall cases?

The bottom line is that Chinese courts do not enforce US judgments, so unless you have some way to use a US judgment to get at the assets of a Chinese company in some country other than China, a US judgment will likely not do you any good. Since the Chinese manufacturers of this drywall presumably are no longer doing business in the US, there very well may be no way to get at those companies’ assets.

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