The Price of Cheap: When China's Products Fail, Americans Suffer

It was a David and Goliath battle from the beginning: a small American photo paper distributor suing the largest national photosensitive materials manufacturer in China. Only this time, David may come up short.

In 2006, California-based Royal Marketing Inc. made a deal to distribute photographic paper made by China Lucky Film Corp. It wasn't long before Royal Marketing's customers started to complain that the paper was junk, and the company's vice president, Farshid Ourian, learned it did not meet U.S. quality standards.

So Royal Marketing sued China Lucky for negligent misrepresentation, breach of warranty and breach of the implied covenant of good faith and fair dealing -- seeking an award of over $135 million.

In March, China Lucky got lucky. Royal Marketing won its lawsuit, but a California jury awarded it only $3 million. And, so far, that's $3 million more than China Lucky has paid.

Ourian's 27-year-old business is now on the ropes -- its reputation damaged, its staff shrunk from 26 employees to five.

Meanwhile, China Lucky, which is nearly 50 percent owned by the Chinese government, continues to thrive.

"These people have come here, totally ruined our company and get away with that? Where is the fairness in that?" Ourian asks.

And Royal Marketing is not alone. Even if an American company goes to court and beats a Chinese manufacturer, it's virtually impossible to get the overseas company to make good on its legal debt.

"It's a great accomplishment, but you're not even half-way there. You have a piece of paper, what's that worth? You've got to collect it," says Stephen Ching, an attorney who represents both American and Chinese companies in lawsuits.

Experts agree that the only path to success is to put a lien on a Chinese company's American assets -- "But if it's an exporter from China, without any presence in the U.S. beyond its exports, then it's harder to attach the lien to anything, therefore harder to collect," says Gary Hufbauer, a China expert at the Peterson Institute for International Economics.

"They feel and act untouchable," says Jeffrey Killino, a product-liability attorney who's filed lawsuits against Chinese manufacturers of defective toys, tires and pharmaceuticals.

"They will tell me in meetings to my face, 'Look, my client's in China. You can't collect this judgment anyway.' They know there's no treaty."

So after investing hundreds of thousands of dollars in legal fees, and after winning its case in California Superior Court, Royal Marketing is unlikely to see a dime of the $3 million it won in damages. What's more galling is that China Lucky can continue to do business here.

"There should be a mechanism to force companies who have a judgment against them to pay it before doing business in the U.S.," said Daniel Krishel, Royal Marketing's attorney. "What's wrong is that they're allowed to continue selling their products in the U.S."

Booming Business

Chinese products account for more than 60 percent of U.S. recalls each year, according the Consumer Protection Safety Commission.

While Congress has made significant strides in regulating Chinese goods -- including enacting the toughest lead content laws in the world, and tougher standards on toys -- many argue that American product liability law is still the backstop of safety for American consumers.

"American citizens have been able to obtain compensation for injury while providing significant incentive for safer design and manufacturing of products by proving that they were negligently or defectively designed, manufactured or sold," product liability attorney Thomas Gowen said in congressional testimony last week.

Gowen, who has spent 30 years litigating cases from defective trampolines to hazardous lawnmowers, was among several attorneys who told Congress this week that it needs to provide new laws to hold Chinese manufacturers accountable. He called on America's lawmakers to create an import license, which would give U.S. courts jurisdiction over foreign manufacturers, requiring them to identify themselves on products and maintain product liability insurance.

A system of certification would "provide considerable incentive to foreign manufacturers to improve their design and manufacturing practices so that their products do not become the source of serious injury and death among the American public," Gowen said.

But such a bill, which could come as soon as next month, will not come cheap. "The cost of the American liability system can significantly increase the prices of products that are subject to it," warned Victor E. Schwartz, an attorney for the U.S. Chamber of Commerce.

U.S. regulation of Chinese imports has increased dramatically in the last year. In August, President Bush signed the Consumer Product Safety Improvement Act, which banned a toxic plastic component known as phthalates, mandated national standards for toy safety and created the toughest lead content laws in the world. The Consumer Product Safety Commission says it is now visiting China regularly to educate manufacturers on the tougher standards.

"At the source, at the factory, they not only have to build safety into the product, they have to build safety that's based on U.S. standards into their product," said Scott Wolfson, CPSC spokesman.

Others say that China is beginning to wake up to its own flaws -- and to the dangers in its products. At least six Chinese children died and hundreds of thousands of others became sick last year after drinking milk laced with melamine -- a deadly chemical that was manufactured in their own country.

While China initially resisted American inspectors, it eventually allowed them in, ultimately shutting down the manufacturers and banning melamine usage nationwide.

"While there's admittedly a long way to go, there are things that are going on that indicate that the Chinese are taking this seriously," said Erik Autor, Vice President of the International Trade Council at the National Retail Federation.

Increasingly, American law and American courts are recognizing that American distributors need to take responsibility for quality control as well.

"I'm not so sure that China is the demon that it's made out to be," said Sean Kane, president of Safety Research Strategies, a safety advocacy and consulting firm.

"There's a range of quality there. It's still up to the distributor to make sure that there's quality all the way until the product is delivered," he said. "You can't benefit from cheap labor in China and point the finger at them when something goes wrong and say it's all their fault. It's not."

Reason to Hope

Last week, two years after the U.S. recalled more than half a million tires made by Hangzhou Zhongce Rubber Company of China, the company settled for an undisclosed amount of money. Killino, the attorney who filed the lawsuit, says he had requested $100 million for the families he represents.

In 2006, two people died and a third suffered a brain injury when a tire on their van fell apart, causing the driver to lose control. The tires were found to have an insufficient gum strip -- a feature that helps to keep the tire belts from separating. Hangzhou Rubber both designed and manufactured the tires.

"This company got the message," Killino said. "You put a dangerous tire on a U.S. highway, you will have to pay. You will be held accountable."

That attitude inspires Royal Marketing, as it conducts a nationwide search for China Lucky Film Corporation's assets. Ourian says his company will go out of business if it can't collect the $3 million China Lucky owes it, but his fight won't stop there.

"This issue is far greater than a small company being so severely destroyed. If we cannot hold these people accountable for what I call their illegal activities, we as a nation lose. It is not acceptable for them to conduct themselves this way."