International Product Sourcing Consultants and the Liabilities THEY Face

Our international lawyers often work with many really experienced and really good international product sourcing consultants. These consultants are usually really good for the following reasons:

• They know the ins and outs of what it takes to succeed in buying products from foreign countries.
• They know the ins and outs of how to find good companies for whatever transaction their clients are seeking to do because they know how to distinguish between a good and a bad manufacturer.
• They know the ins and outs of how to negotiate with manufacturers.
• They know when to bring in a lawyer to assist.

Of course I had to add that last one and — no surprise — it is on this last one of which I am writing.

International product sourcing consultants too often fall short in the legal aspects of their own business. They’ve been “doing sourcing” for so long they sometimes lose sight of the fact that when push comes to shove (or as we lawyers like to say, when a deep and easy pocket needs to be found) they are the American/British/Canadian/Australian/European company that may need to answer for what happened.

If you are a product sourcing consultant, you need to understand that if something goes wrong for your client you will likely be your client’s first choice for legal redress. Not only is there a good chance you have the deeper pocket (or at least the easier pocket to reach into), but you will almost certainly be easier to sue because you will likely be nearby, not on the other side of the earth.

What can go wrong for international product sourcing consultants that leads them to incur liability? And what can you as a product sourcing consultant do to prevent or ameliorate such problems? Our first advice whenever any company comes to us with concerns about protecting against future liabilities is to engage in corporate structuring to protect company and personal assets. This is an absolutely necessary first step. Looking at securing insurance protections is oftentimes a good second step.

A typical international product sourcing project, might go down as follows:

1. Western company retains a product sourcing consultant to find the best widget manufacturer, based on cost, quality, and dependability.
2. The product sourcing consultant requests and secures a sample widget from a number of manufacturers, many of which it may have conducted business previously.
3. The consultant meets with countless manufacturers in search of the best one.
4. The consultant recommends company Z to manufacture 200 million widgets.
5. The consultant is to be paid a percentage of the manufacturing costs, oftentimes with that percentage set to decline over time.
6. Company Z starts manufacturing the widgets.

Now let’s deconstruct this hypothetical project above and note where the consultant has potentially harmed the client and needlessly taken on huge liabilities.

The consultant agreed to find “the best widget manufacturer.” Is that the best widget manufacturer in a particular country or the best in the world? What if one widget manufacturer charges one hundred dollars per widget for 200 million widgets, but your client’s competitor finds another widget manufacturer who will do it for ninety dollars? Is the consultant liable for the ten dollar difference? Even worse, what if a competitor of the consultant’s client gets the same widget manufacturer to manufacture its widgets for ten dollars less? Will a U.S. jury believe the consultant was doing its best on pricing when its fee ended up being higher because the manufacturer was able to charge more? Is the consultant responsible for the manufacturer’s late deliveries? Is the consultant responsible for the manufacturer’s bad product? Whose fault is it if 100 people are badly injured due to defective widgets? Is it clear exactly on what the consultant’s percentage is based? Is there anything to prevent the consultant’s client from entering into a new deal with the manufacturer the consultant found?

If you as the consultant show your client’s products or designs to potential manufacturers without having FIRST put various intellectual property safeguards in place, you are courting disaster. That product or design could be used for counterfeiting and the trademark on the sample (or even just your client’s name) could also be stolen. Just about whenever we write about how to protect IP when manufacturing overseas, we get a call or two from a product sourcing consultant wanting to know whether they can be held liable if their client’s lose their IP. Our answer is that usually depends on the contract they have with their clients and the role they play for their clients. Much of the time, these consultants have nothing in writing with their clients and they have touted their companies as a complete product sourcing solution for their clients.

And that right there is the big trap into which product sourcing consultants too often fall. In trying to secure clients they encourage their clients to believe they are experts on everything related to product sourcing/buying/manufacturing and that is what can come back to bite them.

I recently received an email from a product sourcing company regarding extremely complicated and potentially major intellectual property issues faced by one of its clients. I explained the issues its client would likely be facing and the consultant wrote back to tell me how it would be handling the situation. The consultant’s planned advice was not appropriate, so I wrote back something like the following:

This is incredibly complicated and the advice you plan to give your client is not good advice at all. My advice to you would be to stay completely away from ALL the legal issues and just let your client deal with those issues itself. Your client should not expect you to be giving it complicated cross-border legal advice and your doing so just increases the odds of your being blamed and sued when things go wrong.

And that is the point. As a product sourcing consultant it rarely behooves you to get in the middle of your client’s complicated international legal issues and your clients should not expect that of you. Even if you as their product consultant caused your client’s complicated international legal issues, you trying to solve them will likely just compound them.

So what is the solution for international product sourcing consultants? A written contract between your consulting company and your client before you start work. This contract should make clear what your consulting company will be doing and not doing for your client.

The problem we consistently see, however, is that product sourcing consultants usually oversee their clients’ international manufacturing agreements and doing that sets them up for major liability issues if those contracts are not up to snuff — and they virtually never are.

Too often, these product sourcing consultants use their own attorneys for these contracts and too often those attorneys are domestic attorneys in countries like China, India, Thailand, Mexico, Indonesia, etc. All of these countries have plenty of excellent attorneys, but the product sourcing consultant not only does not choose an excellent attorney (because they are usually very focused on costs), but that attorney is their attorney, and not the attorney for the client that actually signs the manufacturing contracts.

If your sourcing company is selling itself as the “product sourcing expert” or the experts for a particular country and your clients are counting on your company to guide it through the business minefields it will be facing, you need to recognize that your sourcing company will be expected to know anything and everything about what it takes to protect your client. And if something goes wrong, a Western court will likely expect you as “the expert” to have been the one who should have known better. For example, if your client loses its IP in Mexico because it believed its US or Canada or Australian or EU patents and trademarks extended to Mexico (they generally don’t), you as their sourcing consultant may find yourself on the hook for not having warned them otherwise.

Bottom Line: At minimum, product sourcing consultants should put in writing with their clients that they do not provide legal advice and that their clients should retain their own lawyers for that. And then stick by that and refuse to provide any such advice.

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.