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The Next Big Import: Lawsuits

The Next Big Import: Lawsuits

By Caitlin Liu, Portfolio.com
Aug 2, 2007

On the heels of deadly pet food, defective tires, tainted toothpaste and now lead-contaminated Mattel toys, another wave of imports are likely to hit U.S. shores: class action product-liability lawsuits.

"The general law is, if you're in the business of selling something and it's defective, you're liable" -- even if you had no idea that the merchandise was unsafe, said Boston University Law Professor Keith Hylton, an expert on product liability law. "With all these defective products from China ... that's a scary thing for American businesses.

In the latest scandal, Mattel is recalling nearly 1 million Fisher-Price toys, including Sesame Street dolls, because their surface paint might contain hazardous levels of lead.

The Chinese imports scandal has already spurred class-action lawsuits against Canadian pet food maker Menu Foods and wrongful death claims against a New Jersey tire distributor called Foreign Tire Sales. Class actions have also been filed against RC2, the company that had to recall toy trains in June this year after they were found to contain excessive levels of lead.

And Mattel might well be next. Experts say the larger the corporation and deeper the pockets, the more likely it will end up a target.

Plaintiffs attorneys have been so flooded with calls that one Chicago law firm, which already represents hundreds of pet owners, set up a toll free number for new clients. A San Diego law firm, which filed a separate class action against Menu Foods, is collecting additional class members through ads on the Internet.

Short of losing sleep, what can U.S. sellers of imported goods do to protect themselves from ruinous litigation?

"When you're outsourcing the manufacture of a product, you want to know what their reputation is," said Hal Stratton, a former chairman of the U.S. Consumer Products Safety Commission who now counsels private clients at the law firm Dykema Gossett in Washington. "You want to make sure the manufacturer is complying with U.S. safety standards and regulations."

Sounds like a no-brainer. But experts say they're astounded by how little some American companies know about the factories and middlemen in their international trade tango.

Kenneth Ross, a product liability prevention specialist at Bowman and Brooke in Minneapolis, has seen American corporate officials shower millions of dollars worth of business on foreign companies with little more than a handshake. A sales contract might be as rudimentary as a mass-produced order form with boilerplate terms and conditions printed on the back.

It's almost as if some companies are loath to do more. "They think when you start 'lawyering up,' it gets in the way of business relationships," Ross said. "It's very hard to get people to pay attention ... After a problem arises, people say, 'Gee, do we have a contract?'"

A good contract should obligate a foreign supplier to do the following: Comply with U.S. safety standards, pay the cost of any recall and indemnify the importer if there is a lawsuit, experts say. It should also stipulate international arbitration or U.S. courts as the forum for resolving legal disputes.

But in the often murky business world of developing countries like China, even contracts that seem iron-clad may still not be enough.

"Yes, it's possible in theory to seek indemnity but also unwise to rely on that," said Creighton Magid, co-chair of the product liability group at Dorsey and Whitney in Washington. "If you have a supplier in China, Pakistan, what-have-you -- how do you sue them? How do you make the judgment stick? That's one of the vexing pieces of our increasingly globalized economy."

Many companies in developing countries like China are government-owned -- which greatly restricts, under international law, the ability of U.S. companies to sue them. Even if the factory or assembly plant is privately owned, American companies sometimes can't figure out which business entity to haul into court. Just delivering legal notification to the correct defendant -- a prerequisite for commencing a lawsuit -- can be a challenge.

"It's not a transparent system," said Jim Dorr, a partner at Wildman Harrold in Chicago. "There are a lot of shell companies. The names of companies change. If one is in trouble, it'll shut down and they open a new one. It's not at all what we're used to here in the United States. The corporate entity is ever-shifting."

Dorr, a product liability defense litigator who has worked on dozens of cases involving companies in China, could not recall a single instance where the plaintiff or a U.S. company was able to recover damages from the foreign supplier.

"Even if you can get jurisdiction over them, they may not have any assets that you can go after," Dorr said. "Even if you get a judgment here in the U.S. over a foreign company, the judgment may not be enforceable over there. That means you have to deal with their laws and their case system."

Is it any wonder, then, that plaintiffs and their attorneys find American firms more appealing to sue?

One safeguard for U.S. corporations is to carry liability insurance. Importers can also ask their foreign vendors, before they do business, to provide proof of liability coverage from a U.S. insurance company. But even the most comprehensive insurance policy would not restore a company's tarnished brand name or reputation in the event of serious consumer injuries or deaths.

The best remedy, experts say, is to try to prevent unsafe products from getting imported in the first place.

Ross once had a client who contracted with a Chinese manufacturer to make playground equipment. Within a few weeks, the manufacturer -- without telling the American company -- began ignoring the agreed-upon specs and safety standards. Factory management began substituting cheaper ingredient materials that altered the chemical composition of the molded plastic, resulting in products that were not as sturdy as it should have been.

By the time the American company discovered the chemical switcheroo, the playground equipment had already entered the stream of commerce. The company had to issue a recall.

"I've seen estimates that say recalls cost 25 times more than the cost of selling the product," Ross said. "That leaves aside the costs to your reputation."

To deter foreign manufacturers from cutting corners, more and more U.S. companies now dig into their own pockets to station quality-control inspectors on the supplier's factory floor, experts who advise them say.

But even corporate citizens like Mattel -- known in the toy industry for having tight quality controls in its overseas plants and owns some manufacturing facilities -- isn't immune to defective products slipping through to U.S. store shelves.

The El Segundo, California, toy giant -- which also makes Barbie dolls and Hot Wheels -- told reporters that the recalled toys were made by a third-party supplier in China with whom the company had a long business relationship, and that the recall could cost $30 million.

For others that neglected to do its homework on the supply chain, attempted no independent quality checks and carried insufficient liability insurance -- what more can a company do if it finds itself dragged into court?

Judges thunder and rail against the following tactic, but a battle strategy pursued by savvy litigants is "forum shopping." That is, when possible, wrangle to move the lawsuit to a jurisdiction where the legal environment would be more favorable to your side.

When it comes to product liability lawsuits, not all states offer the same playing field. True, "strict liability" -- the doctrine that can hold unwary sellers of a defective product responsible for up to 100 percent of damages -- is the law of the land in most of the country. But a few state legislatures have enacted "innocent seller" statutes to shield unknowing retailers and distributors from liability. Those states include New Jersey, Michigan, Missouri, Mississippi and Texas.

Consider how Houston lawyer Rob Ammons recently collected a $1.5 million wrongful death settlement for the family of a young man who died in a truck rollover accident caused by a defective tire. The money ultimately came from the foreign manufacturer, a publicly traded Taiwanese corporation. The tire retailer and distributor in El Paso, which had been named as co-defendants in the lawsuit, paid nothing.

"The laws in Texas are written to protect an innocent retailer," Ammons said. "It could be anyone, from Joe's Machine Shop that sells tires to Wal-Mart or Sears."

Still, in the wake of the recent frenzy of front-page articles, headline news and blog posts about tainted imports from China, some legal experts predict American businesses -- even in forgiving states -- could have a tougher time shrugging off responsibility in court.

"You can't claim that it caught you by surprise," Magid said. "The jury's going to say, 'What did you expect? What did you do to police that? We're not going to buy the [innocent seller defense] anymore. Weren't you reading the paper?' Now, it's going to be incumbent upon American companies to police their entire supply system -- and not just got for the lowest price."

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