In June, Foreign Tire Service, Inc. (FTS) notified the National Highway Traffic Safety Administration (NHTSA) that up to 450,000 Westlake, Telluride, Compass and YKS tires it imported from a Chinese manufacturer (Hangzhou Zhongce Rubber Co., Ltd.) may be defective. According to FTS, these tires were supposed to contain a “gum” strip that prevents the belts from separating during use, but, at some point, the manufacturer omitted the gum strip from the product’s design without disclosing this fact to FTS. The tires are suspected of causing two accidents, one of which resulted in two fatalities. FTS has been sued in connection with this latter incident.

FTS harshly discovered this month that, as the importer of the defective tires, FTS is responsible under relevant US law to conduct and pay for a nationwide recall of these tires. This remains the case even though, as FTS asserts, it had no hand in causing the defect and it was unaware of the manufacturer’s decision to discontinue use of the gum strip. FTS has advised NHTSA that it is not capable of shouldering the enormous financial burden involved with a recall of this magnitude and, without some assistance, may be forced into bankruptcy.

The dilemma faced by FTS should serve as a stark reminder to all importers of motor vehicle equipment of the significant financial and legal risks they face in bringing foreign-made products into the US marketplace.

Importer’s Defect and Remedy Obligations Under NHTSA’s Regulations

Under the National Traffic & Motor Vehicle Safety Act (“Safety Act”), persons are prohibited from manufacturing for sale, offering for sale, introducing or delivering for introduction, or importing any motor vehicle or item of motor vehicle equipment unless it conforms to applicable Federal motor vehicle safety standards (FMVSS). 49 USC § 30112(a). In addition, the Safety Act defines a “manufacturer” to include “a person . . .importing motor vehicles or motor vehicle equipment for resale.” Id. at § 30102(5) (emphasis added). Thus, for purposes of complying with the Safety Act and NHTSA’s regulations, importers of motor vehicle equipment are placed in the same shoes as the manufacturer of that equipment.

This means that an importer must notify NHTSA and provide a free remedy to consumers in the event the importer determines that the imported products contain a safety defect or FMVSS noncompliance. Numerous other NHTSA regulations, including the early warning reporting rules, also apply to importers. Failure to timely fulfill these legal obligations can, as NHTSA reminded FTS in correspondence last week, subject importers to substantial civil penalties – up to $6,000 per violation (per item of motor vehicle equipment) and up to $16,375,000 for any “related series” of violations. 49 CFR § 578.6. Additionally, importers who intentionally violate defect- related reporting requirements face potential criminal fines, imprisonment of up to 15 years, or both. 49 USC § 30170(a)(1).

An example of NHTSA’s exercise of its civil penalty authority against an equipment importer came in 2003, when American Products Company was hit with a $650,000 civil penalty for importing and selling non-compliant lighting equipment. This equipment was sold by a variety of retailers and had been the subject of four recalls covering thousands of parts. And in 2004, NHTSA imposed a $100,000 penalty on a company that imported and sold noncompliant motorcycle helmets.

Product Liability Exposure

Legal duties under NHTSA’s regulations are only one component of the liability importers can find themselves subject to. Indeed, importers can also be found solely liable for civil claims brought by private individuals who are harmed by allegedly defective, foreign-made products.

In the US legal system, a court must have personal jurisdiction over the party that is the object of (defendant in) a lawsuit. Non-resident parties, such as a foreign manufacturer, may not always be subject to US jurisdiction. By way of example, in an Oregon case, a consumer sued Michelin Tire Company and its American importer, Michelin USA, for damages sustained when a defective Michelin tire that had been installed on the plaintiff's truck exploded. The court ruled that it did not have jurisdiction over the manufacturer, leaving the American importer solely liable for the injuries in question. (State ex rel. La Manufacture Francaise Des Pneumatiques Michelin v. Wells, 657 P.2d 207 (Or. 1982))

Similarly, in an important 1987 decision, the US Supreme Court ruled that, as a matter of constitutional law, a California court did not have jurisdiction over a Japanese manufacturer of a tire valve that had been incorporated into a motorcycle tire tube sold by a Taiwanese distributor and involved in a fatal accident in California. The Supreme Court held that jurisdiction by the California court was improper because the Japanese manufacturer had no reason to believe that the tire valve it sold to the Taiwanese company would subject it to suit in California, but had merely contracted to supply the Taiwanese distributor with tire valves for the assembly of tire tubes. The Court held that there was no jurisdiction even though the Japanese manufacturer knew that its parts eventually would end up in motorcycles sold in the US. (Asahi Metal Industry Co. v. Superior Court of California, 480 U.S. 102 (1987))

Complications arising from the need for personal jurisdiction over foreign manufacturers can place domestic importers in a very tenuous situation no matter how far down the distribution chain they are. Thus, an importer must face the possibility that, in the event one of its imported products proves defective, the importer may be the only party that will be held liable for resulting injuries.

Concluding Thoughts

Today, manufacturers and US importers face a wide array of legal risks arising from allegedly defective products. Products liability suits are increasing, consumers (and their attorneys) are becoming even more creative in fashioning the grounds for which they seek recovery for economic losses and personal injuries arising from defective products, and claims for strict liability, negligence, breach of contract and breach of warranty have become commonplace in civil actions for allegedly defective product performance. Because foreign-based manufacturers often fall outside the reach of the US legal system, domestic importers can be stuck cleaning up a mess they often had no hand in creating. To mitigate these risks, importers should take certain minimum precautions, including:

• Indemnification. Although an importer cannot contract away its NHTSA-imposed legal obligations (e.g. defect/compliance notification and recalls), the importer should obtain product recall and product liability indemnifications from the manufacturer. The manufacturer should also be required to back up these indemnifications with appropriate insurance or provide other assurances.
• Recall and Product Liability Insurance. The importer should also obtain its own insurance coverage for product liability claims and, if appropriate and cost effective, product recalls.
• Compliance Testing. For products that are subject to Federal motor vehicle safety standards, reliance on manufacturer-supplied compliance test reports alone may not be sufficient to shield an importer from penalties if a noncompliance is later discovered. Importers should consider whether to arrange independent testing at a US-based facility. This testing should occur not only at the front-end of a distribution relationship or new product launch, but also during the course of the supply relationship to ensure continued compliance. The foregoing also applies to applicable voluntary standards, such as those published by the SAE.
• Defect Monitoring. The importer should conduct defect screening of products in the field (e.g., by monitoring warranty claims and consumer complaints), as production irregularities or undisclosed design changes can render a once-safe item defective.

Please contact us for more information.

Marc L. Fleischaker
202.857.6053
fleischaker.marc@arentfox.com

Christopher H. Grigorian
202.775.5779
grigorian.chris@arentfox.com