What Asian Manufacturers Should Know About U.S. Markets

Headline-grabbing U.S. regulatory actions and litigations against companies like Takata and Samsung have highlighted Asian manufacturers’ exposure to U.S. product safety regulation and litigation. Add in an aggressive U.S. litigation environment—over 42,000 product liability claims were brought in U.S. federal courts in 2017, a nearly three-fold increase since 2000—and it is clear that Asian manufacturers, whose home country’s legal regimes are often radically different from that of the United States, should act now to assess and manage legal and reputational risk when operating in U.S. markets.

TOP RISKS FOR ASIAN MANUFACTURERS

GROWTH IN U.S. REGULATORY ENFORCEMENT

Complying with complex U.S. regulatory requirements and navigating overlapping U.S. agency jurisdiction is essential. Whereas Asian governmental regulation of product safety, intellectual property, and competition is now typically largely concentrated in one agency, such as China’s State Market Regulatory Administration, eight U.S. agencies share direct oversight of consumer product safety alone.

As in major Asian economies, quality-control issues are a major U.S. regulatory focus, and pressure on manufacturers is increasing. Civil penalties issued by the U.S. Consumer Product Safety Commission (“CPSC”) to companies for failing to report product defects increased from $3.68 million in 2008 to $31.25 million in 2016—including a record $15.45 million against Hong Kong-based Gree Electric Appliances for failing to report safety hazards in its dehumidifiers.

CLASS ACTION LITIGATION

A consumer with a $15 product safety claim in an Asian jurisdiction is unlikely to bring litigation. Not so in the U.S., where class actions, in which plaintiffs bring a lawsuit based on common claims as a “class” rather than as individuals, distinguish the American legal system. Although China permits plaintiffs to represent groups of individuals, claimants must opt-in to the litigation. In the U.S., similarly situated individuals must generally opt out. Thus, although a large representative litigation in China may involve hundreds of claimants, U.S. class actions may have hundreds of thousands or even millions of claimants.

The number of class actions filed in U.S. federal courts has recently increased, and companies may face pressure to settle when confronted with gigantic claims. In July 2018, Lenovo agreed to pay $7.3 million to approximately 500,000 class members for allegedly including harmful software in certain computer models, based on damages per computer as low as $16. Manufacturers whose securities trade in the U.S. may also face class action litigation if their securities lose value as a result of fallout from a product defect.

NEW TECHNOLOGIES

U.S. regulatory agencies are only beginning to address “smart” technologies, raising significant uncertainty. Additionally, manufacturers of internet-connected devices face complex design, monitoring, and data security obligations. After a hacker stole the personal information of customers of Hong Kong-based VTech Electronics’ internet-connected digital learning toys, the company faced class action litigation based in part on its alleged failure to protect data. Although a judge dismissed the claims, partly because the data was never distributed beyond the hacker and a journalist, VTech was forced to settle a Federal Trade Commission privacy complaint for $650,000.

MANAGING RISK AND MINIMISING EXPOSURE

Asian manufacturers can minimise regulatory and litigation exposure by engaging legal counsel throughout the product life cycle and maintaining a risk management plan. Companies must carefully assess promises made to U.S. consumers and investors in advertisements and other disclosures. These disclosures often are the basis for lawsuits when product issues arise. It is particularly important to engage counsel as soon as a product defect is discovered, to determine when and how to disclose the defect to regulators and the public, and remediate it. Certain product defects must be disclosed within as little as 24 hours of discovery to regulators and, for companies participating in U.S. securities markets, to investors. Failing to meet disclosure requirements can expose companies to greater liability, including securities fraud or even treble damages under the Racketeer Influenced and Corrupt Organisations Act.

The 2016 CPSC penalty settlement with Gree Electric Appliances provides a cautionary tale. The CPSC alleged that Gree lied to the agency during its investigation—an aggravating factor in a record-setting penalty. Even the best-intentioned companies can misstep. Samsung quickly issued a recall when battery defects caused Galaxy Note 7 smartphones to combust. Not only were the replacement batteries defective, exposing the company to further litigation and reputational risk, but the CPSC admonished Samsung for conducting the recall without first informing the regulator.

Experienced counsel can help companies preserve their reputations—and save millions, if not billions, of dollars—by assessing risks, managing disclosures and working directly with regulators on companies’ behalf.

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Partner, Sullivan & Cromwell (New York)

Partner, Sullivan & Cromwell (New York)

Associate, Sullivan & Cromwell (New York)