Chinese makers of shoddy goods rarely face U.S. sanctions

Brittany Baker, sitting in what was to be the nursery for her unborn baby, moved out of her home when she learned it may have drywall made in China, which has been reported to be the cause of illness and other problems.
Brittany Baker, sitting in what was to be the nursery for her unborn baby, moved out of her home when she learned it may have drywall made in China, which has been reported to be the cause of illness and other problems. Tiffany Tompkins-Condie / Bradenton Herald / MCT

WASHINGTON — Chinese manufacturers made more than half of the goods that the U.S. Consumer Product Safety Commission recalled last year, but few of them paid any price for producing defective wares.

The long list of faulty products included Chinese-made highchairs whose seat backs failed, steam cleaners that burned their users, bikes whose front-wheel forks broke, saunas that overheated, illuminated exit signs that stopped working when commercial power failed, dune buggies whose seat belts broke on impact and coffee makers that overheated and started fires.

It also included loosely knotted soccer goal nets that entrapped and strangled a child and a toy chest whose poorly supported lid fell on a toddler's neck and killed him, according to CPSC filings.

The difficulty in recovering damages is a lesson that U.S. homeowners who are stuck with defective and possibly toxic Chinese drywall are likely to learn in the coming months. Builders installed the drywall in 2004-5 when the home building boom outstripped U.S. drywall supplies. The CPSC and the Environmental Protection Agency are investigating the consequences.

While everyone involved is likely to be sued — installers, contractors, distributors, importers and Chinese manufacturers — the last are the hardest to reach by far.

For starters, suing a Chinese company in a Chinese court isn't a good idea for most American plaintiffs, said Michael Lyle, a seasoned international lawyer. "It's like suing Michael Jordan in Chicago."

Yet many Chinese manufacturers also evade trial in the U.S. simply by persuading judges that their companies had no substantial business presence in the states in which they've been sued. That's not hard for Chinese manufacturers, which typically rely on independent importers to sell to the American market.

A Senate Judiciary subcommittee is considering measures to make that defense — which has been invoked in scores of product liability suits — more difficult. For now, however, it's so effective that many U.S. tort lawyers won't take cases against Chinese products unless there are American co-defendants. Further, if the U.S. defendants are forced to pay up, the likelihood of their successfully suing the Chinese manufacturers is as distant as the customers'.

Lyle — the managing partner of the Washington office of the New York firm Weil, Gotshal & Manges — and other international lawyers say the larger problem is that the growth of globalized trade has outrun the legal systems that were created to check its excesses.

"It's in the nature of economic development that systems of remedy develop out of the need to fix what's gone wrong, so they develop more slowly," said Charles Toy, the manager of a Washington-based international private-equity fund who once practiced law in Hong Kong and Beijing.

That's no comfort to American defendants who must accept court judgments that Chinese manufacturers can flout.

Moreover, without the threat of high-dollar damage claims, Chinese and other foreign manufacturers can continue to produce shoddy and dangerous goods undeterred. That's clear from another part of the CPSC's list of recalls. It cites 2008 makers of faulty and sometimes deadly products that the agency deemed defective years ago but are still being shipped here. They included breakable toys on which infants can choke, lead toys, toys painted in appetizing lead-based colors and cribs whose slats are far enough apart to trap babies' heads.

To be sure, the frequency of recalls that involve Chinese makers reflects the country's outsized role in supplying Americans with low-priced goods. Roughly 40 percent of imported U.S. consumer goods are from China.

Their recall rate is much higher than 40 percent, however. In 2007, the CPSC named Chinese makers in 69 percent of all recalls, of both imported and domestically produced goods. In 2008, China's share was 53 percent.

There are four impediments to lawsuits by American plaintiffs that lawmakers would like to remedy:

First, some imports say only "Made in China" on them and don't name the manufacturers. That's the case for lots of the drywall that the CPSC links to gases and corroded metals in hundreds of new homes, mainly in Florida and other Southeastern and Gulf Coast states. Producers can be tracked through retailers, wholesalers, importers and exporters, but it's expensive and time-consuming work, said Chuck Stefan, a principal in The Mitchell Co. of Mobile, Ala., a Southeastern homebuilder tagged with defective drywall problems in 45 homes.

Second, once a foreign maker is identified, the suit must be translated into the native language, delivered to the manufacturer's home government and served on the company by an agent of the home government. In China, this usually takes a year. When a powerful government-owned company is involved, as China's biggest gypsum producer allegedly is in the drywall case, serving legal papers can take much longer.

Third, U.S. state and federal courts vary in their standards of how much business foreign manufacturers must conduct in a state before it's fair to sue them. Is it enough, for example, if a company's products have been offered at a convention in the state? Or if the territory of a distributor includes the state? If a judge deems the ties inadequate, a foreign company "may not be able to be sued in the U.S. at all," said Louise Ellen Teitz, a specialist in transnational litigation at the Roger Williams University School of Law in Bristol, R.I.

Fourth, even if a U.S. court finds a Chinese manufacturer liable for a defective product, getting money from the company is difficult if it has no American assets. Moreover, no agreement exists between the U.S. and China when it comes to enforcing judgments. So an American plaintiff, in many cases, would have to refight the case in a Chinese court to recover damages.

In addition to encountering these obstacles in suits that involve foreign manufacturers, plaintiffs' lawyers also are faced with their use as negotiating tools by Chinese companies' attorneys, said Thomas Gowen, a specialist in international product-liability claims at the Lock Law Firm in Philadelphia. "They say, 'You're never going to collect, so you might as well take what we're offering you.' And this is often less than what the case might be worth.''

Some help may come from Democratic Sen. Sheldon Whitehouse of Rhode Island, the chairman of the Subcommittee on Administrative Oversight and the Courts. He's preparing a bill that would require foreign manufacturers to:

_ Register their companies in the U.S. if they sell here.

_ Retain American agents who could be sued.

_ Consent to jurisdiction in single states.

More aggressive steps, such as requiring foreign manufacturers to take out liability insurance that's sufficient to cover judgments against them, seem unlikely. That's largely because American manufacturers fear that other countries might impose similar measures on imports from the United States.


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