Importing products: legal risks and defense strategies.

• Author: Fujimoto, Michelle

THE YEAR 2007 may go down as the year of the recall. Companies recalled products ranging from tires to toothpaste to electrical products. (1) Recalls involving lead paint in children's toys garnered particular attention, due in large part to their emotional appeal. But the recalls were most memorable due to their frequency--there were five times more recalls in 2007 than in the previous year. (2) For legal practitioners and clients, the alarm sounded loudly because the vast majority of these recalls involved products manufactured outside the United States. Given the increasing importance of foreign vendors, American manufacturers, importers and retailers need to consider the legal risks of importing products and strategies for minimizing these risks.

1. Legal Fallout

   Product recalls invariably inspire litigation. The 2007 recalls were no exception. The significance, however, lies in the number of recalls and the fact that the legal ramifications have taken many paths. There have been relatively few traditional individual personal injury cases to date. The primary recourse has been via class actions (medical monitoring and consumer remedy), multi-district litigation, attorney general actions and shareholder litigation.

   1. Class Action Lawsuits

      A class action was filed in California based on the toy recalls on behalf of consumers seeking a variety of remedies, including preventative medical screening and monitoring funds. (3) The claims alleged--strict product liability, negligence and violations of the unfair competition laws--are illustrative of those filed in other jurisdictions. Class actions have also been filed in Pennsylvania (4) and Illinois. (5) The unique challenge lies in teasing out the jurisdictional requirements for class certification from the standards of proof for medical monitoring, and from the burden of proof for establishing exposure, injury and damages. How will exposure to lead paint on toys be proven'? How do you monitor for things like mental function, loss of I.Q. points, or developmental delay? If you can show change, how do you parcel out other causal exposures?

   2. Multi-District Litigation

      Another legal path has been coordinated proceedings and multi-district litigation. The pet food lawsuits against Menu Foods have been consolidated for pretrial proceedings in the District of New Jersey. (6) The approximately 100 cases relate to the recall of pet food products that were allegedly tainted by melamine in wheat gluten imported from China.

   3. Attorney General Actions

      The legal fallout has also extended to actions by the government. Recently, a federal grand jury in Kansas City indicted two Chinese businesses and a U.S.-based firm, as a result of the recall of the tainted pet food. (7) The allegations are that the companies knew of the problem and covered up, rather than remedied, the problem.

      In addition, the California Attorney General has filed an action against Mattel based on the toy recalls. (8) In a creative twist, the complaint alleges violations of Proposition 65, which is California's Safe Drinking Water and Toxic Enforcement Act, violations of the Federal Consumer Product Safety Act (CPSA) and violations of the California Unfair Competition Law. The Attorney General is attempting to bootstrap alleged violations of Proposition 65 and the CPSA as "unlawful acts" under the Uniform Competition Law. An injunction and statutory damages of $2,500 per violation are sought. When millions of toys are involved, small incremental statutory violations can add up to millions, if not billions, of dollars. Companies need to be counseled regarding the political overlay that influences the course and resolution of AG actions. The putative role of the Attorney General is to protect the public, so their goal is often public awareness through headlines rather than money.. Recognition of this can assist clients in creative business solutions.

   4. Shareholder Lawsuits

      The legal fallout has also included shareholder lawsuits. Following the recall of millions of Mattel toys last summer, the shareholders filed a derivative suits accusing the company of misleading investors by failing to report the alleged defects in a timely way. (9) They also accuse board members of insider trading, claiming they allegedly sold a substantial number of shares before the recall was announced. The action seeks compensatory damages, an order for the stock sellers to disgorge profits and, of course, attorneys and expert fees. The Mattel shareholder lawsuits...