Coronavirus Legal Issues Around the World, Part 5: Getting Products from Overseas has Never Been Riskier

For the last three or so months, our China lawyers have been confronted with a host of legal issues related to the coronavirus. This should not be surprising because China was the seminal coronavirus epicenter. For the past two months or so, our Seattle lawyers have been working on a host of legal issues related to the coronavirus. This too should not be surprising because Seattle was the initial U.S. coronavirus epicenter. For the past month or so, all this has become true for our Spain lawyers as well, as Spain too became an epicenter and a few weeks ago went into a full lockdown as well. Our Los Angeles, San Francisco and Portland lawyers have also in the past few months been hit with a slew of coronavirus related legal matters.

The coronavirus has and will continue to impact all societies and economies and this has meant our law firm has been seeing and dealing with the same sort of legal issues in all the countries in which we work. This sameness of legal issues around the world has led us to create a cross-border multi-disclipinary legal team to assist companies with their legal issues arising from or related to the coronavirus, using the knowledge and experience our lawyers have gained in one jurisdiction to determine best practices in the other jurisdictions.

In this series of posts, we’ve been discussing the legal issues our lawyers in China, the United States, and Spain have been confronting, with the goal of making this blog a repository of information on coronavirus law and especially on how to handle legal matters that have arisen due to the coronavirus.

In Part 1, we focused on employment law issues because those were the first issues we saw and those are the issues that continue to arise most often. In Part 2, we looked at force majeure “in real life.” In Part 3, a couple of our international trade lawyers analyzed how coronavirus is impacting tariffs and duties in the short term and how we see it impacting tariffs, duties and global trade in the future. In Part 4, one of our insurance coverage lawyers discussed key insurance coverage matters  stemming from COVID-19 because a massive number of companies have or will have coronavirus insurance claims and insurance coverage lawsuits. In this Part 5, we discuss how the coronavirus is giving nearly free license to foreign manufacturers to provide bad product, counterfeit product, or no product at all and this is especially the products most needed to fight against the virus: surgical masks, N95 masks, ventilators (really anything PPE), and cleaning products. Your IP has also never been at greater risk.

Times of crisis help separate the proverbial wheat from the chaff, and the COVID-19 emergency is no exception. On the one hand you have tons of companies acting wonderfully, like the following:

• A restaurant owner (Federico’s)  in New Jersey who took out a $50,000 line of credit to ensure his 20 employees keep getting a paycheck.
• A Spanish bridalwear company, Pronovias, that is providing free wedding dresses to brides-to-be in the healthcare sector.
• An incredibly long list of U.S. retailers that have vowed to pay their employees while their stores are closed.
• A student- formed group that helps the elderly with their shopping.

These are just some of the literally millions of things being down in all countries around the world to help care for for people during the coronavirus. These are the sorts of things we focus on outside our jobs as lawyers, but as lawyers, our role is to try to protect our clients so we invariably find ourselves having to focus on the less salutary things we see.

The manufacturing sector has its share of both wheat and chaff. Los Angeles Apparel, which manufactures its products in South Central L.A., “has offered up its workforce and management team . . . to manufacture masks or other medical products” for the government and they are certainly not alone in this. Though many manufacturers are doing their part to help, as Interpol bluntly put it, “Criminals are cashing in on COVID-19.”

U.S. Customs and Border Protection (CBP) recently seized counterfeit test kits sent to the United States. On February 26, the Chinese authorities reported seizing “over 31 million fake or inferior face masks” (presumably, that number has grown since then). An Interpol operation against the illicit online sale of medicines and medical products “resulted in 121 arrests worldwide and the seizure of potentially dangerous pharmaceuticals worth more than USD 14 million.”

The risks to product buyers are further aggravated by increasing reliance on e-commerce, and in particular third-party sellers via platforms such as eBay, Alibaba, and Amazon. Buying from vendors overseas exposes customers to massive counterfeiting risks. Adding to the hazards, impromptu middlemen are leveraging contacts overseas (usually in China) to find suppliers for facemasks and other coronavirus-related products. It is right now very tough to know which sellers are legitimate. This is true even for buyers with the technical knowledge to be able to discern the real from the fake because travel restrictions are making most factory visits difficult or impossible.

These are stressful times for manufacturers, especially in China where nearly all factories were closed for months due to the coronavirus in China and which are now facing plunging demand due to the spread of the coronavirus in the rest of the world. Most Chinese factories are under intense financial pressure to get orders and many have started making in-demand medical and other products with which they have no previous experience. On top of the COVID-19 stresses, Chinese factories are also having to deal with U.S. tariffs and so foreign companies moving away from Chinese factories. Desperate factories cut corners.

In addition to the increase in counterfeit and defective products, our lawyers are also seeing a massive increase in cases of companies paying a Chinese factory to get products  made, only to later learn that the Chinese factory shut down weeks before it requested payment or days after payment was received. Truth is that buying products — especially high demand products — from overseas has never been riskier. To sort of quote from the movie Spinal Tap (see the classic scene above), we are at an 11 out of 10 right now.

And once you have been ripped off by a shipment of fake products or by products that are never delivered, recouping your money is tougher than ever as well. The courts in China and the United States are not functioning well right now and cases involving rip-offs from overseas are not a high priority right now.

IP theft has also massively increased. We’ve consistently stressed the link between difficult economic times and IP theft. In China Trademark Theft. It’s Baaaaaack in a Big Way, we noted that “many (most) Chinese factories are hurting and they desperately want to improve their profit margins. What better way to do so than to sell a product under a prestigious or well-known American brand name — or even just any American brand name?”

A few months ago, in Tariffs Against China Increase China IP Problems, we wrote how the trade war too was increasing IP theft:

Many Chinese companies are hurting and that explains the increase in IP theft, but of course many are hurting because of the trade war. But even beyond that, Chinese companies view foreign companies — especially US and Canadian companies — as looking to leave China, and that is because so many US and Canadian (and many European companies too) are indeed looking to leave China, or at least reduce their footprint there.

In response to so many foreign companies having one foot out the China door, many Chinese companies no longer consider their relationships with foreign companies as long-term. When a Chinese company does not believe its relationship with its foreign company counterpart will be a long term one, its incentives for stealing the foreign company’s IP greatly increase. It does not make economic sense to steal IP worth a million dollars from a company from which you can make $500,000 in yearly profits for the next ten years, but it does make economic sense to steal IP worth a million dollars from a company you believe will be jettisoning you within the next year.

In pretty much every speech I give on how to protect your IP from China, I include this PowerPoint slide, that says “Structure your deal and write your contract so that your Chinese partner believes it will make more money with you than without you.” Way more Chinese companies today than two years ago rightfully believe they can make more money without their foreign company counterpart than with them, and the way for them to make more money without the foreign company is by taking the foreign company’s IP.

There are though ways to protect your company and your IP even in the time of coronavirus.

To protect our clients buying medical supplies from China (of which we have had many over the last month), our international manufacturing lawyers typically go through the following questions, nearly all of which are relevant for all products these days:

1. Is it legal for the company overseas to sell you this product? As an example, China wants its PPE products (things like surgical masks, N95 masks, and ventilators) going to countries it perceives as China-friendly and it does not want its products going to countries (like the United States) it perceives as unfriendly to China.
2. Does the company from which you are buying this product actually exist? Is it licensed to make the product you plan to buy from it? In other words, is it legitimate? How can you be sure you will get the product you order and pay for? In China Company Research: The 101 we talked about the sort of  basic research our lawyers do to determine whether a Chinese company is real or not and we do the same sort of research to determine this in every country. Well over 90 percent of the cases our lawyers see where someone sent money and got unusable product or no product at all could have been prevented with basic company research that would have revealed the company selling the product was itself a fake.
3. Is it legal for you to import this product? Does it meet your own country’s standards? Just this week, a company called us after having bought products that did not meet its own country’s standards and were therefore essentially worthless. It had received vague email confirmations from its Chinese supplier that the product met “international standards,” but because it had nothing in its contract making clear that the product met its own country’s standards, it had a very weak legal case against its suppliers.
4. How can you be sure your supplier will send you the quality of product you will be ordering and paying for? Quality control inspections and properly drafted and relevant contracts are the keys here. See THE Rules When Manufacturing Overseas.
5. How can you prevent your supplier from copying your product and selling it all over the world? See How to Prevent China Factory Problems and Trademark Theft That is Happening Like Never Before.

You will need to rely even less on local authorities than in pre-COVID-19. IP raids are way down on the list of pretty much all governments’ current priorities right now. Governments are trying to kickstart their economies, and as we noted in Don’t Despair. China Isn’t Going Away Anytime Soon, “China has to rebound because the CCP needs China to rebound to stay in power, and keeping the people’s bellies full and their minds busy with labor (and some ‘wholesome’ entertainment) are the foundation of any good communist playbook.” Nonetheless, there are still certain things you pretty much MUST do even to have a fighting chance. For example, if you have not already done so already, this is a good time to record your IP with China Customs, so it can watch out for counterfeits of your products coming and going from China’s ports of entry. See The Four Best Ways to Protect Your IP from China.

This is also a good time to make sure your contracts with your existing overseas factories are in good order and to guard against the impulse to paper over legal discussions with possible new suppliers. Go read THE Rules When Manufacturing Overseas. We are finding ourselves more than ever these days telling companies that if they are not going to spend the time and money to do whatever they can to ensure their product purchases end up with their getting the actual products, they should not make the purchase at all.

In Advice for Buying Face Masks in China without Losing your Shirt, Renaud Anjoran, who heads up a top-tier international sourcing and quality control company, paints a dystopian yet accurate picture of the realities of buying face masks from China that applies to buying just about anything from China these days. Renaud too is seeing “a lot of people sending money, receiving substandard products, or not receiving anything at all.” His article then nicely sets out the specifics of buying face masks from China and how best to protect yourself from the bad actors that purport to sell such products.

Buying products from overseas has always been risky, but COVID-19 puts us at an 11 out of 10.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.