The Price of Cheap: When China's Products Fail, Americans Suffer

By Jessica L. Weinstein | FOX news
May 28, 2009

Even if an American company goes to court and beats a Chinese manufacturer for providing faulty products, it's virtually impossible to get the overseas company to make good on its legal debt.

It was a David and Goliath battle from the beginning: a small American photo paper distributor suing the largest national photosensitive materials manufacturer in China. Only this time, David may come up short.

In 2006, California-based Royal Marketing Inc. made a deal to distribute photographic paper made by China Lucky Film Corp. It wasn't long before Royal Marketing's customers started to complain that the paper was junk, and the company's vice president, Farshid Ourian, learned it did not meet U.S. quality standards.

So Royal Marketing sued China Lucky for negligent misrepresentation, breach of warranty and breach of the implied covenant of good faith and fair dealing -- seeking an award of over $135 million.

In March, China Lucky got lucky. Royal Marketing won its lawsuit, but a California jury awarded it only $3 million. And, so far, that's $3 million more than China Lucky has paid.

Ourian's 27-year-old business is now on the ropes -- its reputation damaged, its staff shrunk from 26 employees to five.

Meanwhile, China Lucky, which is nearly 50 percent owned by the Chinese government, continues to thrive.

"These people have come here, totally ruined our company and get away with that? Where is the fairness in that?" Ourian asks.

And Royal Marketing is not alone. Even if an American company goes to court and beats a Chinese manufacturer, it's virtually impossible to get the overseas company to make good on its legal debt.

"It's a great accomplishment, but you're not even half-way there. You have a piece of paper, what's that worth? You've got to collect it," says Stephen Ching, an attorney who represents both American and Chinese companies in lawsuits.

Experts agree that the only path to success is to put a lien on a Chinese company's American assets -- "But if it's an exporter from China, without any presence in the U.S. beyond its exports, then it's harder to attach the lien to anything, therefore harder to collect," says Gary Hufbauer, a China expert at the Peterson Institute for International Economics.

"They feel and act untouchable," says Jeffrey Killino, a product-liability attorney who's filed lawsuits against Chinese manufacturers of defective toys, tires and pharmaceuticals.

"They will tell me in meetings to my face, 'Look, my client's in China. You can't collect this judgment anyway.' They know there's no treaty."

So after investing hundreds of thousands of dollars in legal fees, and after winning its case in California Superior Court, Royal Marketing is unlikely to see a dime of the $3 million it won in damages. What's more galling is that China Lucky can continue to do business here.

"There should be a mechanism to force companies who have a judgment against them to pay it before doing business in the U.S.," said Daniel Krishel, Royal Marketing's attorney. "What's wrong is that they're allowed to continue selling their products in the U.S."

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