How to Protect Yourself When Selling Foreign Products
A quick look through recent 2024 recall notices posted on the website of the U.S. Consumer Product Safety Commission (CPSC) reveals that a majority of recalled products were manufactured in China.1 And a recent analysis of 1st quarter 2024 recalls by Sedgwick Brand Protection reveals the following products with the highest number of recalls – sports and recreation, children’s products, electronics, toys, and home appliances.2 Most of these products are manufactured in China or other locations in Asia.
The Hong Kong Trade Development Council (HKTDC) analyzed recalls in 2021 and had the following conclusions:
According to information collected from the CPSC consumer product recall database, there were 155 recalls involving nearly 36 million units during January‑August 2021 that either violated mandatory standards or presented a substantial risk to the public.
Imported products accounted for approximately 85.8 percent of the recalls issued (133) and about 89.1 percent of the total number of units recalled (31.8 million) during the first eight months of the year, while U.S. products accounted for 16.1 percent of the recalls issued (25) and approximately 10.9 percent of the total number of units recalled (3.9 million).
Mainland China remains the supplier with the largest number of recalls and recalled units, with its products having been involved in eighty-six recalls affecting some 28.4 million units during January‑August 2021 (four of these recalls were shared with products from other locations). Mexico ranks third in terms of the total number of recalls behind mainland China and the U.S., with nine recalls involving 87,759 units during January‑August 2021, while Vietnam and Taiwan rank fourth each with eight recalls affecting some 1.5 million units and India ranks sixth with seven recalls affecting about 146,400 units.
And an analysis of 2023 recalls by Don Mays revealed that “four of the top five recalls citing injuries were for small appliances, all of which were manufactured in China.” Mays also said:
Most of the products named in recalls were manufactured in China. This indicates that robust supply chain controls and adequate risk management procedures may be missing from importing companies’ product safety programs. Relying on foreign manufacturers requires an extra level of due diligence to ensure problems won’t be encountered once the products get to the US market.3
Given this reality, there are a number of issues that manufacturers and product sellers have to face when trying to prevent future product safety and product liability problems caused by foreign-made products.
Where to Buy Products or Components
The first issue is whether it is advisable to buy safety-critical products, component parts, or raw materials from China or any other country with a less sophisticated and less robust safety and quality system. Usually, U.S. manufacturers or product sellers do not buy from foreign sources to buy better-quality products. Rather, they hope to achieve an acceptable level of quality and safety at a lower price.
So, given the increased risks and increased costs of dealing with foreign manufacturers, especially those companies not known for producing high-quality products, can you save enough money by buying from foreign manufacturers to justify the risk? You can spend most or all of your profits on one product liability case or recall if the foreign supplier does not take care of the entire cost, including administrative costs for your employees. And this cost does not include damage to the U.S. manufacturer’s or retailer’s reputation in the marketplace.
Despite this risk, U.S. manufacturers and retailers will continue to buy all kinds of raw materials, component parts, and finished products from China and elsewhere. And these numbers will continue to increase as long as there is no backlash from consumers. In that case, U.S. manufacturers need to be prepared to provide assurances to their immediate customers (i.e., retailers) and the ultimate customer about the safety and quality of these products.
In addition, U.S. manufacturers and retailers need to take extra precautions to minimize the risk to an acceptable level and to be prepared to convince government agencies and consumers that their products are safe. So, let us examine some well-known prevention techniques and see what else can and should be done when foreign-made products are imported into the U.S.
Contracts and Insurance
U.S. manufacturers and retailers should have more detailed contracts and specifications when dealing with foreign suppliers. Most contracts and specifications for U.S. and foreign suppliers are inadequate when dealing with some safety issues, such as recalls and defending product liability lawsuits. Since a U.S. based supplier usually can be sued in all states in the U.S., it is a bit easier to deal with issues that are not in the contract and to get the attention of domestic suppliers if something bad happens.
With foreign manufacturers who have no assets or employees in the U.S., and therefore possibly no U.S. jurisdiction in which they can be sued, it is harder to enforce contracts in general and certainly harder to deal with issues not explicitly set forth in the contract.
Some of the issues that could be included in such contracts and specifications involve required certifications or other safety and quality testing, documentation that must be sent to the U.S. in English to support the certifications and testing, confirmation of the foreign manufacturer’s understanding of U.S. safety regulatory issues, and clear terms that address when they must tell you about a post-sale safety or quality issue.
You should be sure to include in the contract remedy and damage provisions that are acceptable to you. For example, you may not want the foreign manufacturer to disclaim consequential damages or to argue that repair or replacement is the only remedy. This is especially true for component parts, where the additional costs of repair, replacement, or refund can be enormous. In addition, do you expect the foreign manufacturer to pay for all costs of a recall? If so, be sure it is clearly set forth in the contract.
Of course, the foreign manufacturer should indemnify you and hold you harmless in the event of a product liability claim or lawsuit. However, do you really want them defending the case, or do you want it clear that you control the defense or at least are able to participate in it, even if their insurance applies? Their insurance company should be U.S.-based and financially capable of responding in the future. And you should require a relatively low self-insured retention. Last, it would be good to get the foreign manufacturer’s insurance company to pay for your attorneys to help defend the case.
You should think about how you are going to enforce this contract if necessary. Will you have to sue in China? Or will they agree to jurisdiction in the U.S.? And is the foreign company financially capable of paying for any recall or any deductible in an insured matter? If the company goes bankrupt or closes its doors, the insurance premium is not paid and there is no one other than the U.S. manufacturer to pay for the recall. Maybe the foreign manufacturer should be required to post some type of bond with provisions for when the U.S. manufacturer can access the proceeds of the bond.
And the foreign manufacturer needs to agree to cooperate with the U.S. manufacturer in all respects during production, during any product liability case, and during any government inquiry. They need to timely provide documents in English and provide personnel who can explain in a U.S. court of law or in a deposition why their product was reasonably safe.
It is true that many foreign companies will not agree to these contractual and insurance provisions. In that case, the U.S. company must either decide to take the risk, especially if the component is safety-critical, or must increase its review and analysis of the safety and quality of the purchased products so that they meet the requirements of the U.S. company.
See “Manufacturing in China: Minimizing Your Risks by Doing Things Right”4 by China law expert Dan Harris for a further discussion of contracting issues with the Chinese.
Design Procedures
Safety and quality procedures for foreign manufacturers should not be any different than those applicable to U.S.-based manufacturers. However, it is more important that you know what the foreign manufacturer is doing and how they are documenting the results.
Some additional questions to consider asking foreign manufacturers include:
- Do they do a hazard analysis, a failure mode and effects analysis, a design review? Do they document these procedures? Do they train their personnel in how to do them? What level of safety is acceptable? Is it up to the foreign manufacturer to decide on levels of safety or do they need your approval for the final design?
- Do they get certifications from respected testing agencies? Do they give these agencies all the necessary information? Are they possibly supplying misleading or incomplete information that potentially jeopardizes the certifications? Is it possible that these certification agencies are inappropriately or incorrectly certifying the product as a result of bribes or incompetence? Should these certifications be done in the U.S. or Canada?
- Should the foreign company just comply with regulations and standards, or should they exceed them? Who decides that, and who decides on how much safer the product must be?
How do you know that the foreign manufacturer continues to comply with the design approved by the certifying agency? Do you confirm compliance on a periodic basis?
Manufacturing Issues
What type of quality testing do they do – full, partial, random? What do they consider a product that meets specifications? Do they believe that “close enough” is acceptable? Is that acceptable to you?
Should you do full, partial, or random incoming inspection testing of the product or component part? Do you confirm that the foreign manufacturer has not changed the raw material in the part or product they sell you after you or the certifying agency has approved? There are many horror stories of changes made in material or manufacturing processes after approval.
Should you have full-time people at the plant in the foreign country monitoring their manufacturing and quality control processes? Or how often should you visit their facilities, and should the visit be unannounced?
Warnings and Instructions
Do you review and “approve” the warnings and instructions provided by the foreign manufacturer? Do you require them to utilize the services of a competent native English speaker to draft the warnings and instructions? Do you require them to retain a competent U.S.-based attorney to provide advice on the legal adequacy and defensibility of the warnings and instructions?
The U.S.-based manufacturer should not generally undertake the rewriting of the warnings and instructions of a supplier, U.S. or foreign. Doing that makes them more potentially liable. It is better to require the foreign manufacturer to utilize competent people to assist them. They know their products best and should be required to provide you with a component part or finished product that is safe in its design, manufacture, and warnings and instructions.
Post-Sale Issues
The foreign manufacturer needs to have competent personnel in-house to receive and evaluate post-sale safety and quality issues. They have to agree to allow you to review this information if it is appropriate. And there should be some agreement on when it is appropriate.
For example, if a Chinese manufacturer sells the same component to ten manufacturers and has a problem with products sold to one or more of those manufacturers, it should be required to tell you about the problems, even if you have not had any with their component. The goal is for you to be able to prevent problems before they happen.
Certainly, you need to be notified immediately if the component part has been inserted into a product made by another manufacturer and has been recalled or repaired anywhere in the world because of a problem with that component. And you should be sure that the supplier’s personnel or their advisors are familiar with the U.S. government reporting responsibilities and know what to tell you and when.
The foreign manufacturer’s design and manufacturing processes should enable them to narrow the potential universe of problem products so as to allow you to correct or retrieve only those products that need to be dealt with. This includes traceability and marking procedures that are appropriate for the risk level of the particular product.
Defending the Product
U.S. manufacturers do not want to be in a position in which their only defense is blaming a foreign supplier. This is especially true if the manufacturer is not in the courtroom with you.
So, while you are evaluating who to do business with and what procedures you want them to adhere to, also consider how they will appear in court if they have to defend the adequacy of their part or product. Are the people who would testify sincere and knowledgeable, and can they speak well (preferably in English)? Do they have documents that have been written carefully and that correctly present what they did to produce a safe and quality product? Will your witnesses be able to understand and use these documents to defend the adequacy of the product or part?
For an informative discussion of these and other risk mitigation techniques when dealing with China-based manufacturers, see the blog “Reducing Your Product Liability Risks from Overseas Products” by Dan Harris.5 Also, see a webinar presented by this author and Dan Harris on these topics.6
Conclusion
All of the techniques and concerns mentioned in this article are also important for U.S.-based suppliers. However, given the location of manufacturers who are producing products with problems, it is even more important to go the extra mile with foreign suppliers.
Ultimately, the manufacturer or product seller gets to make a business decision on whom to buy from and what to require them to do. Since it may well be impossible to find a foreign manufacturer that is willing to do all of the things detailed in this article, the company will need to decide what preventive techniques are priorities and when or if the lack of a technique is a deal breaker. In that way, U.S.-based companies will be better prepared to make a rational business decision and assume a future risk that they deem acceptable.
Endnotes
https://business.cpsc.gov/Recalls/rrcpsc.aspx
https://www.sedgwick.com/brandprotection
https://productsafetyinsights.com/publications
https://harris-sliwoski.com/chinalawblog/manufacturing-in-china-minimizing-your-risks-by-doing-things-right (December 26, 2023)
https://harris-sliwoski.com/chinalawblog/reducing-your-product-liability-risks-from-overseas-products (September 6, 2023)
“Product Sourcing & Contracting Overseas to Reduce Product Liability and Product Safety Risks,” https://www.productsafetyprofessionals.org/webinar-archive (March 20, 2024)
