The China Syndrome: Will the U.S. Legal System Deal with Tainted Chinese Imports or Meltdown?

The 'classic' product liability lawsuit against the Chinese manufacturer raises many issues, including, but not limited to, jurisdiction, forum non conveniens, and the uncertainty as to whether traditional U.S. product liability or tort defenses apply. These defenses include product identification, state of the art, causation-in-fact, proximate cause, remoteness doctrine, product alteration, failure to maintain the product, assumption of the risk, and statute of limitations. Probably the most important issue, enforcement of any judgment in China, is also either unchartered or risky territory for a claimant.

Accordingly, the U.S. legal system may have to borrow from/rely on certain economic concepts to ensure that consumers of products made in China as well as U.S. entities in the stream of commerce have adequate remedies in the event that the products made in China are defective.

Myth Dispelling

Chinese law does exist to protect consumers against inferior and low-quality products.

In the People's Republic of China, product liability claims can be based on any one of three grounds: 1) strict product liability; 2) fault-based tort liability; and 3) contractual liability.

Strict product liability is set out in the PRC Product Quality Law ('PQL'). Under Article 41 of the PQL, a producer shall be liable for personal injury or property damage caused by a defect in its product if three elements are proved: 1) a defect in the product; 2) injury to a person, or damage to property other than the defective product; and 3) causation between the defect and injury or damage.

The General Principal Civil Law ('Civil Law') sets out the general rule of tort, that a tortfeasor should be held liable for injury to a person or damage to property if his fault contributed to the injury or damage. (See Article 106 of the Civil Law.)

Product liability claims can be based on the law of contract if: 1) a contract exists between a claimant and defendant; and 2) the supply of the defective product constituted a breach of contract. As in the U.S. system, contractual obligations may be created expressly between claimants and defendant (e.g., terms of quality or specifications). Under Chinese law, contractual obligations may also arise from statutory obligations or legal requirements (e.g., compulsory state standards for food safety).

Under the strict liability scheme, responsibility for defective products rests on: 1) the producers and/or 2) the sellers when their fault contributed to the defect. Producers include those who appear to be a producer by connecting their names, titles, trademarks, or other distinguishable marks to the defective products.

Manufacturers in China have several defenses available to them including, even in a strict product liability setting, that: 1) the claimant contributed to his/her own injury or damage; 2) a third party contributed to the claimant's injury or damage; and 3) the claim was made after the expiration of the limitation period.

The major differences between the U.S. and Chinese systems include very limited pretrial discovery (no depositions, no procedure whereby documents must be disclosed automatically to the opposing party), no jury, and punitive damages are permitted only when it is established that a business operator practices fraud in providing a commodity or service to a consumer, but any punitive damage award amount is severely limited.

Contingency fees are acceptable in China as long as the parties agree to it. A recent rule issued effective Dec. 1, 2006 by the Ministry of Justice requires contingency fees to be limited to the maximum of 30% of the value of the claim.

Thus, there are laws 'on the books' that provide remedies for defective products if a party wants to pursue a claim in China.

Regulatory Approach

Examples of U.S. regulatory agencies taking administrative actions to require a recall due to tainted food and defective consumer products arise daily. In response to the recent spate of recalls and safety issues involving toys and other children's products, particularly imports from China, U.S. Senator John Nelson (D-Florida) has proposed legislation titled the 'Children's Products Safety Act of 2007' (S. 1833). This proposal would amend the U.S. Consumer Product Safety Act by imposing new testing, labeling, and certification requirements for all children's products and prohibit importation of children's products that have not been certified by an independent testing authority. In fact, the U.S. Consumer Product Safety Commission ('CPSC') and the government of China have entered into agreements to share product safety data, engage in joint enforcement efforts, and pursue common goals regarding consumer product safety.

Additionally, the Federal Hazardous Substances Act (15 U.S.C. '1261 et seq.) has been used successfully to obtain permanent injunctions seeking to halt alleged violations. These actions are generally brought by the U.S. government and, though admirable, do not result in obtaining compensatory damages for consumers who are injured by defective products.

Certain Acts, such as the National Traffic and Motor Vehicle Safety Act, prohibit both the manufacture as well as the importation of motor vehicle equipment that does not conform to requirements of the Safety Act. Again, the penalties, though severe, do not address remedies for personal injury.

Issues also exist as to whether certain of these Acts would be applicable and enforceable against non-U.S. manufacturers.

A non-legal but economic resolution to ensuring the enforcement of U.S. regulatory schemes may require that major retailers of the United States voluntarily refuse to do business with certain Chinese manufacturers unless and until proper safeguards for consumer products are in place. The economic might of the Wal-Marts of the world may have an impact on certain Chinese manufacturers.

These regulatory schemes come up short when the target of the government action is a distributor or retailer that does not have the financial wherewithal to meet the monetary requirements of an agency's recall protocol or to pay the civil penalties that may be issued.

U.S. regulatory action ' irrespective of how effective it is ' does not, however, address the issue of compensating a consumer who incurs damage due to a defective made-in-China product.

Civil Lawsuits

The initial reaction to the question 'Why are the Chinese manufacturers not sued in the United States?' is generally met with the response that there are in personam jurisdiction, forum non conveniens, and enforcement issues. Two recently filed cases are taking on these issues.

New Jersey

The approach of using U.S. law is taken by Robert McCulley in a federal purported class action that was filed on June 26, 2006 against the Chinese manufacturers and U.S. distributors of Chinese-made light-belted truck, sport utility vehicle, and van tires due to an alleged manufacturing defect. (Robert McCulley v. Hanzghou Zhongce Rubber Co., et al., No. 1:07-cv-02993, D.N.J.)

In a case that has garnered notoriety in the popular press, Robert McCulley filed an action in the U.S. District Court for the District of New Jersey and has asserted allegations for breach of implied warranty, unjust enrichment, and violation of the New Jersey Consumer Fraud Act against the Chinese manufacturer and several U.S. importers and distributors. The putative class includes all individuals in the United States who purchased or incurred damages by the use of tires produced, manufactured, distributed, or sold by the defendants, including tires subject to a June 2007 recall. The tires allegedly were manufactured without a gum strip, a feature that helps keep the tire belts from separating.

The June 27, 2007 recall issued by the National Highway Traffic Safety Administration ('NHTSA') pursuant to 49 CFR 573 disclosed that data had established that vehicle rollovers had occurred and the tires were determined to have missing gum strips. One of the defendants, Foreign Tire Sales, Inc. ('FTS') made news by advising the NHTSA that it did not have the financial wherewithal to meet the financial requirements of the recall.

The naming of the Chinese manufacturer, Hanzghou Zhongce Rubber Co., and how the court addresses the anticipated various defenses that will be raised by Hanzghou may be instructive for future cases.

Unfortunately, the claims in McCulley do not include bodily injury and, therefore, the disposition of this case may be of limited utility. On the other hand, it is one of the first cases to name and pursue a Chinese corporation in a situation where the regulatory action undertaken, though well meaning, did not resolve the issue of the allegedly defective tires.

California

The approach taken by Julia Quintana in California ' in the only purported class action that was filed against the Chinese-based supplier and the California-based distributor of dog and cat food allegedly containing melamine, an industrial chemical used in plastics and fertilizer ' is to use both Chinese and California law. (Julia Quintana, et al. v. Binzhou Futian Biological Technology Co., Ltd., et al. San Francisco Superior Court action no.: C07-465924.)

Julia Quintana, on behalf of herself and all others similarly situated in California, seeks relief against Chinese-based defendant Binzhou Futian for violation of the Law of the People's Republic of China (Protection of the Rights and Interests of Consumers (effective Jan. 1, 1994)) and relief against all defendants for violation of California's consumer legal remedies (Civil Code '1750, et seq., Business and Professions Code ”17200, 17500 and common law.)

Quintana specifically alleges that in violation of Chapter 2 et seq. of the Laws of the People's Republic of China on the Protection of the Rights and Interests of Consumers, Binzhou Futian failed to 'make truthful' presentations or 'clear warnings' to consumers regarding the melamine contained in the pet food that it manufactured. The complaint also alleges that the defendant failed to provide 'truthful' information regarding the pet food. Under Chapter 7 of the Chinese Consumer Law, it is alleged that the pet food at issue was defective and did not function as 'expected.' Further, plaintiff Quintana alleges that pursuant to Chapter 7 of the Chinese Consumer Law, Binzhou Futian is obligated to compensate class members for injuries suffered as set forth in articles 41, 42, and 50 of the law.

The Binzhou Futian Company was shut down by the Chinese Government earlier this year after news reports that the industrial chemical, melamine, was found in wheat gluten from China.

How the California courts address the use of the Chinese law will be instructive. Again, as in New Jersey, the action does not involve claims of bodily injury and, therefore, the disposition of this case may also be of limited utility.

Conclusion

One of the ironies of 1979 was that a real-world nuclear incident occurred at Three Mile Island in Pennsylvania. The Three Mile Island incident became a rallying cry to shut down any advancement of the nuclear power industry in the United States. One could reasonably argue that the political/economic/ecological issues of today were strongly influenced by the failure to adequately address that China Syndrome.

Today's China Syndrome issues, although perhaps not as potentially catastrophic, are significant. First, pursuing an action in China or relying on regulatory action are not very attractive alternatives for injured consumers. The wholesalers, distributors, and retailers in the United States, which generally look for indemnity from the manufacturers of defective products, are being forced, under the current situation, to act as the 'insurers' of the Chinese manufacturers. This not only runs counter to several state statutory schemes (e.g., state of Washington's product liability law), but also violates the basic law of economics. One of the attractive features of manufacturing in China is the low cost. Increased exposure to wholesalers, distributors, and retailers will quickly eliminate that economic advantage currently held by Chinese manufacturers.

There are no easy answers to these issues. Counsel on both sides will have to be creative to best represent the interests of their respective clients.

Daniel J. Herling is a partner at Keller & Heckman LLP, based in San Francisco, and focuses his practice on the representation of non-U.S. companies in complex litigation with an emphasis on product liability and mass tort litigation in federal and state courts throughout the United States. He wishes to acknowledge the assistance of intern Kristof Schnitzler.

'The China Syndrome' refers to a possible extreme result of a nuclear meltdown. In the 1979 film, the terminology referred to a concept that if an American nuclear reactor melts down, it would melt through the earth until it reached China.

Twenty-eight years later, the China Syndrome has a different meaning. Chinese tainted foodstuffs and defective consumer products that have been imported to the United States have been the subject of numerous stories in both the popular and legal press. (Google lists 887,000 hits for 'Chinese tainted products.')

The U.S. legal system is only beginning to deal with these issues through both regulatory actions and civil product liability lawsuits. There is little history of successful enforcement of judgments against Chinese manufacturers. This reality has focused most efforts on the 'stream of commerce' defendants: the wholesalers, distributors, and retailers. This solution has a practical restriction. In some cases, the retailer does not have the financial wherewithal to fund a defense of the product adequately and/or provide a remedy to the injured claimants. For every Mattel that has worked admirably with the U.S. Consumer Products Safety Commission, there is also the Foreign Tire Sales, Inc. retailer who lacks sufficient assets to address issues raised by regulatory agencies such as the National Highway Traffic Safety Administration.

The 'classic' product liability lawsuit against the Chinese manufacturer raises many issues, including, but not limited to, jurisdiction, forum non conveniens, and the uncertainty as to whether traditional U.S. product liability or tort defenses apply. These defenses include product identification, state of the art, causation-in-fact, proximate cause, remoteness doctrine, product alteration, failure to maintain the product, assumption of the risk, and statute of limitations. Probably the most important issue, enforcement of any judgment in China, is also either unchartered or risky territory for a claimant.

Accordingly, the U.S. legal system may have to borrow from/rely on certain economic concepts to ensure that consumers of products made in China as well as U.S. entities in the stream of commerce have adequate remedies in the event that the products made in China are defective.

Myth Dispelling

Chinese law does exist to protect consumers against inferior and low-quality products.

In the People's Republic of China, product liability claims can be based on any one of three grounds: 1) strict product liability; 2) fault-based tort liability; and 3) contractual liability.

Strict product liability is set out in the PRC Product Quality Law ('PQL'). Under Article 41 of the PQL, a producer shall be liable for personal injury or property damage caused by a defect in its product if three elements are proved: 1) a defect in the product; 2) injury to a person, or damage to property other than the defective product; and 3) causation between the defect and injury or damage.

The General Principal Civil Law ('Civil Law') sets out the general rule of tort, that a tortfeasor should be held liable for injury to a person or damage to property if his fault contributed to the injury or damage. (See Article 106 of the Civil Law.)

Product liability claims can be based on the law of contract if: 1) a contract exists between a claimant and defendant; and 2) the supply of the defective product constituted a breach of contract. As in the U.S. system, contractual obligations may be created expressly between claimants and defendant (e.g., terms of quality or specifications). Under Chinese law, contractual obligations may also arise from statutory obligations or legal requirements (e.g., compulsory state standards for food safety).

Under the strict liability scheme, responsibility for defective products rests on: 1) the producers and/or 2) the sellers when their fault contributed to the defect. Producers include those who appear to be a producer by connecting their names, titles, trademarks, or other distinguishable marks to the defective products.

Manufacturers in China have several defenses available to them including, even in a strict product liability setting, that: 1) the claimant contributed to his/her own injury or damage; 2) a third party contributed to the claimant's injury or damage; and 3) the claim was made after the expiration of the limitation period.

The major differences between the U.S. and Chinese systems include very limited pretrial discovery (no depositions, no procedure whereby documents must be disclosed automatically to the opposing party), no jury, and punitive damages are permitted only when it is established that a business operator practices fraud in providing a commodity or service to a consumer, but any punitive damage award amount is severely limited.

Contingency fees are acceptable in China as long as the parties agree to it. A recent rule issued effective Dec. 1, 2006 by the Ministry of Justice requires contingency fees to be limited to the maximum of 30% of the value of the claim.

Thus, there are laws 'on the books' that provide remedies for defective products if a party wants to pursue a claim in China.

Regulatory Approach

Examples of U.S. regulatory agencies taking administrative actions to require a recall due to tainted food and defective consumer products arise daily. In response to the recent spate of recalls and safety issues involving toys and other children's products, particularly imports from China, U.S. Senator John Nelson (D-Florida) has proposed legislation titled the 'Children's Products Safety Act of 2007' (S. 1833). This proposal would amend the U.S. Consumer Product Safety Act by imposing new testing, labeling, and certification requirements for all children's products and prohibit importation of children's products that have not been certified by an independent testing authority. In fact, the U.S. Consumer Product Safety Commission ('CPSC') and the government of China have entered into agreements to share product safety data, engage in joint enforcement efforts, and pursue common goals regarding consumer product safety.

Additionally, the Federal Hazardous Substances Act (15 U.S.C. '1261 et seq.) has been used successfully to obtain permanent injunctions seeking to halt alleged violations. These actions are generally brought by the U.S. government and, though admirable, do not result in obtaining compensatory damages for consumers who are injured by defective products.

Certain Acts, such as the National Traffic and Motor Vehicle Safety Act, prohibit both the manufacture as well as the importation of motor vehicle equipment that does not conform to requirements of the Safety Act. Again, the penalties, though severe, do not address remedies for personal injury.

Issues also exist as to whether certain of these Acts would be applicable and enforceable against non-U.S. manufacturers.

A non-legal but economic resolution to ensuring the enforcement of U.S. regulatory schemes may require that major retailers of the United States voluntarily refuse to do business with certain Chinese manufacturers unless and until proper safeguards for consumer products are in place. The economic might of the Wal-Marts of the world may have an impact on certain Chinese manufacturers.

These regulatory schemes come up short when the target of the government action is a distributor or retailer that does not have the financial wherewithal to meet the monetary requirements of an agency's recall protocol or to pay the civil penalties that may be issued.

U.S. regulatory action ' irrespective of how effective it is ' does not, however, address the issue of compensating a consumer who incurs damage due to a defective made-in-China product.

Civil Lawsuits

The initial reaction to the question 'Why are the Chinese manufacturers not sued in the United States?' is generally met with the response that there are in personam jurisdiction, forum non conveniens, and enforcement issues. Two recently filed cases are taking on these issues.

New Jersey

The approach of using U.S. law is taken by Robert McCulley in a federal purported class action that was filed on June 26, 2006 against the Chinese manufacturers and U.S. distributors of Chinese-made light-belted truck, sport utility vehicle, and van tires due to an alleged manufacturing defect. (Robert McCulley v. Hanzghou Zhongce Rubber Co., et al., No. 1:07-cv-02993, D.N.J.)

In a case that has garnered notoriety in the popular press, Robert McCulley filed an action in the U.S. District Court for the District of New Jersey and has asserted allegations for breach of implied warranty, unjust enrichment, and violation of the New Jersey Consumer Fraud Act against the Chinese manufacturer and several U.S. importers and distributors. The putative class includes all individuals in the United States who purchased or incurred damages by the use of tires produced, manufactured, distributed, or sold by the defendants, including tires subject to a June 2007 recall. The tires allegedly were manufactured without a gum strip, a feature that helps keep the tire belts from separating.

The June 27, 2007 recall issued by the National Highway Traffic Safety Administration ('NHTSA') pursuant to 49 CFR 573 disclosed that data had established that vehicle rollovers had occurred and the tires were determined to have missing gum strips. One of the defendants, Foreign Tire Sales, Inc. ('FTS') made news by advising the NHTSA that it did not have the financial wherewithal to meet the financial requirements of the recall.

The naming of the Chinese manufacturer, Hanzghou Zhongce Rubber Co., and how the court addresses the anticipated various defenses that will be raised by Hanzghou may be instructive for future cases.

Unfortunately, the claims in McCulley do not include bodily injury and, therefore, the disposition of this case may be of limited utility. On the other hand, it is one of the first cases to name and pursue a Chinese corporation in a situation where the regulatory action undertaken, though well meaning, did not resolve the issue of the allegedly defective tires.

California

The approach taken by Julia Quintana in California ' in the only purported class action that was filed against the Chinese-based supplier and the California-based distributor of dog and cat food allegedly containing melamine, an industrial chemical used in plastics and fertilizer ' is to use both Chinese and California law. (Julia Quintana, et al. v. Binzhou Futian Biological Technology Co., Ltd., et al. San Francisco Superior Court action no.: C07-465924.)

Julia Quintana, on behalf of herself and all others similarly situated in California, seeks relief against Chinese-based defendant Binzhou Futian for violation of the Law of the People's Republic of China (Protection of the Rights and Interests of Consumers (effective Jan. 1, 1994)) and relief against all defendants for violation of California's consumer legal remedies (Civil Code '1750, et seq., Business and Professions Code ”17200, 17500 and common law.)

Quintana specifically alleges that in violation of Chapter 2 et seq. of the Laws of the People's Republic of China on the Protection of the Rights and Interests of Consumers, Binzhou Futian failed to 'make truthful' presentations or 'clear warnings' to consumers regarding the melamine contained in the pet food that it manufactured. The complaint also alleges that the defendant failed to provide 'truthful' information regarding the pet food. Under Chapter 7 of the Chinese Consumer Law, it is alleged that the pet food at issue was defective and did not function as 'expected.' Further, plaintiff Quintana alleges that pursuant to Chapter 7 of the Chinese Consumer Law, Binzhou Futian is obligated to compensate class members for injuries suffered as set forth in articles 41, 42, and 50 of the law.

The Binzhou Futian Company was shut down by the Chinese Government earlier this year after news reports that the industrial chemical, melamine, was found in wheat gluten from China.

How the California courts address the use of the Chinese law will be instructive. Again, as in New Jersey, the action does not involve claims of bodily injury and, therefore, the disposition of this case may also be of limited utility.

Conclusion

One of the ironies of 1979 was that a real-world nuclear incident occurred at Three Mile Island in Pennsylvania. The Three Mile Island incident became a rallying cry to shut down any advancement of the nuclear power industry in the United States. One could reasonably argue that the political/economic/ecological issues of today were strongly influenced by the failure to adequately address that China Syndrome.

Today's China Syndrome issues, although perhaps not as potentially catastrophic, are significant. First, pursuing an action in China or relying on regulatory action are not very attractive alternatives for injured consumers. The wholesalers, distributors, and retailers in the United States, which generally look for indemnity from the manufacturers of defective products, are being forced, under the current situation, to act as the 'insurers' of the Chinese manufacturers. This not only runs counter to several state statutory schemes (e.g., state of Washington's product liability law), but also violates the basic law of economics. One of the attractive features of manufacturing in China is the low cost. Increased exposure to wholesalers, distributors, and retailers will quickly eliminate that economic advantage currently held by Chinese manufacturers.

There are no easy answers to these issues. Counsel on both sides will have to be creative to best represent the interests of their respective clients.

Daniel J. Herling is a partner at Keller & Heckman LLP, based in San Francisco, and focuses his practice on the representation of non-U.S. companies in complex litigation with an emphasis on product liability and mass tort litigation in federal and state courts throughout the United States. He wishes to acknowledge the assistance of intern Kristof Schnitzler.