It is impossible to ignore the recent media attention concerning the importation into the United States of defective products from China. Recalls of toothpaste containing DEG (a poisonous chemical used in antifreeze), pet food laced with industrial chemicals, and children’s toys coated with lead paint have provoked international reaction and a succession of voluntary recalls. The most recent example comes this week as toymaker Mattel, Inc. announced a voluntary recall of more than 9 million toys containing impermissible levels of lead paint or faulty magnets. This is Mattel’s second recall this month.
It is too early to accurately predict the full ramifications these recalls will present for companies that regularly import or distribute Chinese products. What is clear, however, is that these companies need to stay informed and begin taking steps to mitigate potential liability exposure.
II. Recalls and Lawsuits
The number of Chinese product recalls in the United States has doubled over the past five years. In 2006, the United States recalled a record 467 Chinese-manufactured products. It is clear that the trend continues in 2007. Recalls, both voluntary and mandated, not only are costly, but also nowadays are front-page news and thus can severely damage consumer confidence in your products and more easily spawn litigation. For example, Menu Foods, whose pet foods were contaminated by Chinese source products, announced a precautionary recall March 16, 2007 and had a class action filed against it by March 20, 2007. Literally a day after its second large toy recall this summer, Mattel faced press reports of lawsuits being imminently filed against it.
III. Governmental Activity
As a result of these high-profile product recalls, and in addition to the recall activities of the applicable regulatory agencies, other governmental officials also have taken some high-profile steps. For example, the President just last month issued an Executive Order establishing an Interagency Working Group on Import Safety that is entrusted with responsibility for identifying best practices for product inspections, as well as foreign manufacturer selections. More recently, a number of bills were introduced in Congress requiring independent third-party testing and certification of children’s products imported into the United States.
IV. Mitigating Liability Exposure
In light of this new climate, companies that regularly import or distribute foreign products should begin to assess whether they have any meaningful exposure to future recalls and lawsuits. These companies should take proactive measures now to limit future losses and liability.
For example, importers and distributors should conduct a careful re-evaluation of their selection of foreign manufacturers. Do you know enough about the company’s business practices? Does the company have a poor litigation history? Are they transparent? Communicative? Do they have a safety track record; is it verifiable; and what is it? If you do not know the answer to these and other questions, you will be accused of engaging in ostrich-like behavior that could prove costly if problems ultimately arise.
Assuming you feel comfortable with the Chinese or other foreign company with whom you are doing business, you should still take steps to independently evaluate the safety of the products you are purchasing. Do they consistently meet company specifications? United States safety standards? Do you have the documentation to prove it? Is the safety testing independently verifiable and verified? A meaningful, proactive investigation into the safety of the products you are importing not only helps prevent the ultimately costly introduction of defective products into the United States, but it also shows good faith that could be beneficial in any future litigation.
What the particular contours of such a third-party verification program should look like is likely to be industry, if not company, specific. However, given that Congress and the Consumer Product Safety Commission (CPSC) are already pushing to require independent third-party testing, it might behoove companies that may be impacted by such legislation or regulation to closely monitor what is being said and what is being done. Such companies should also consider becoming a part of the dialogue, either directly, or through trade associations or lobbyists. The last thing you want is to have decisions made for you and without your input that unnecessarily and adversely affect your bottom-line.
Finally, proactive steps can be taken on the contract-side of the table. For example, companies doing business in China should consider conducting an immediate review of their import contracts to ensure provisions that are as favorable as possible on issues relating to safety testing, jurisdiction, arbitration, insurance, and indemnification.
Of course, all of these prophylactic measures cannot guarantee problem prevention or financial security. A recall might be unavoidable. If problems do arise, you need to be prepared. For example, if a product of yours is deemed defective or does not comply with existing safety standards, and presents a substantial safety risk, timely reporting to the appropriate federal agency may be required–be it the CPSC, Food and Drug Administration, or the National Highway Traffic Safety Administration. In sum, know your reporting obligations and have mechanisms in place to ensure that your reporting decisions are done quickly and are consistent and principled. Cooperation and communication problems with federal agencies incur the ire of the agency officials, and invariably are used against you in subsequent private civil litigation, as well as in the court of public opinion.