China's newest export: lawsuits

Fortune's Roger Parloff looks at who ends up paying the bill when products are defective.

By Roger Parloff, Fortune senior editor

(Fortune Magazine) -- Not since exploding Ford Pintos in the 1970s has there been as incendiary a catalyst for recalls as China's recent spate of consumer product scares. Since March a cluster of incidents involving potentially deadly, defective, or contaminated products imported from China - pet food, toys, tires, toothpaste, cough syrup, shrimp - has awakened both that country and the United States to a latent crisis.

The larger question is just who is legally responsible when a chemical used in antifreeze ends up in a tube of toothpaste. U.S. companies are starting to find out as the lawsuits roll in that the tainted ingredients may come from China, but the liability is here.

U.S. regulators - the FDA, the Consumer Product Safety Commission, and the National Highway Traffic Safety Administration - generally hold U.S. importers responsible for ensuring that foreign-made products meet American safety standards.

But often the importer doesn't have nearly the wherewithal to do so. Foreign Tire Sales (FTS), a 16- employee, family-owned business that operates from a basement in Union, N.J., is now hurtling toward bankruptcy as it begins a recall of 450,000 Chinese-made tires at a projected cost of $90 million. As things stand, when the money runs out, the recall will end.

In May, FTS was sued in state court in Philadelphia after its tires allegedly caused an accident last year in which two passengers were killed and one severely brain damaged. FTS has sued the manufacturer, Hangzhou Zhongce Rubber Co. Ltd. (HZ), in federal court in Newark, and the victims' families have sued HZ in state court in Philadelphia. So far, HZ has responded to neither action, and it has angrily denied any defect. Even if the U.S. plaintiffs win default judgments against HZ, it's unclear whether they will be able to enforce them anywhere.

Menu Foods, the Ontario petfood maker whose China-sourced, melamine-laced gluten poisoned dozens of brands of American pet food, already faces more than 100 class-action suits. In its case, the big-name brands and retailers that it supplies - Procter & Gamble (Charts, Fortune 500), Wal-Mart (Charts, Fortune 500), Safeway (Charts, Fortune 500), Kroger (Charts, Fortune 500) - are showing up as defendants too, and could become the crucial deep pockets if Menu Foods runs out of insurance coverage. San Francisco plaintiffs lawyer William Audet explains, "For most states there's a duty on the seller to distribute a product that doesn't have poison in it." Indeed, with few exceptions, the retailers are typically on the hook, says Sheila Birnbaum, head of product-liability defense at Skadden Arps Slate Meagher & Flom.

They can seek indemnification from their Chinese exporters, but that will be their problem. (No American lawyer interviewed for this article was contemplating suing Chinese entities in Chinese courts, where tiny damage awards and frequently hostile local judges often make litigation pointless.) One way or another, if they want to stay in business, Chinese exporters will have to become accountable for injuries to U.S. consumers and businesses.

"If China wants to stay in the world market as a player, it's going to have to stand behind the products its companies manufacture," Birnbaum says. That means stronger regulation, more legal accountability - and maybe even more Chinese personal-injury lawyers. Top of page