Sunday, March 29, 2020

Buying Face Masks and Other PPE from China: Not For the Faint of Heart

Buying Facemasks and PPE from China
In the last couple of weeks I have started to only half-jokingly refer to myself as a face mask lawyer. I’ve been saying this because I’ve been spending many hours every day working with companies that want to buy face masks and other personal protective equipment (PPE) from China and with companies that think they want to buy PPE from China.
Our China lawyers are getting a steady stream of calls and emails regarding face shields, gloves, goggles, glasses, gowns, head covers, masks, respirators, and shoe covers. We are also working with companies trying to source ventilators. At the same time we are also being regularly contacted by phone, email, and (mostly) WeChat by individuals and companies in China looking to sell PPE to the US.
There are essentially two buckets of buyers:
  1. The person or company that “knows someone in China who has a large quantity of PPE they want to sell” and wants to quickly profit from buying that equipment and reselling it.
  2. Medical providers (mostly hospital groups) who desperately want PPEs to protect their medical personnel.
These are two very different sorts of buyers, and I will generalize about them below.
The For-Profit Buyers.
This sort of buyer usually calls or emails seeking legal help with one question, often one that is not even relevant. This buyer emphasizes that they “need” to buy a huge quantity of PPE from China “fast” and they “need” us to get back to them right away because their deal will be closing soon. Then they often ask how they can determine whether their Chinese supplier of surgical masks has FDA approval or whether our law firm can set up an escrow account for them.
Our response to these inquiries is to tell them that FDA approval is generally not required for surgical masks and that they should ask their Chinese supplier whether it would even agree to an escrow arrangement because we are not aware of any that have done so. We usually start our emails to these sorts of buyers with something like the following.
understand that you called our office today looking for legal help to buy and import masks from China, and I am guessing you are seeking to do so as soon as possible. Did you read our very recent China Law Blog post on the difficulties in buying product from China these days, especially PPE? If not, I urge you to do so.
We are representing many companies looking to buy masks from China right now. We have completed one large medical supply deal so far and we are in various stages in working with large hospital groups on hundreds of millions of dollars in purchases. Sadly, very few of the potential PPE sellers we investigate check out and so in the end very few deals go through. We see our job as lawyers to be to protect our clients from the ton of bad and incompetent actors out there right now. Do you want this sort of help?
When we get retained for these projects, the first thing we usually do is to research the seller(s) to determine whether they are real or not. We have even tasked a special team of our lawyers and paralegals (all bilingual Chinese and English) to investigate the factories in China and any brokers.
Many times we are finding that the company that claims to be the Chinese factory making the PPE in China is really just a broker hoping to be able to secure product if and when it gets an order or maybe it is just a con artist planning to keep the money no matter what (see below).
Some time ago the FDA loosened its restrictions on some PPE, but to import certain types of masks both the masks and the Chinese company must meet NIOSHA requirements. About 9 out of 10 of the certifications we have seen so far have been faked.
One of the problems we keep seeing is Chinese companies that make socks or toys are now out in the marketplace purportedly selling masks. This can and has been problematic on many levels. China has its own general manufacturing requirements and its own requirements regarding PPEs. On the one hand, China does not want crooks out there selling bad products and in doing so hurting China’s reputation, which has been occurring in Europe recently.
On the other hand, China would prefer to see its good quality PPE go to countries it likes and not  to countries it doesn’t like. Like its Belt and Road Initiative, China has been using PPE as a geopolitical tool, and I do not see that strategy ending any time soon, if ever.
In our experience, even the best of these Chinese companies are not fully aware of how much the Chinese government does NOT want them selling these things to the United States or Canada – as opposed to selling these things to countries like Italy or Spain that China badly wants to influence. Speaking of Spain (where we actually have an office doing some of this same work), the country itself recently spent a small fortune buying coronavirus test kits that simply do not work. See this article for some background on this.
Then there is the issue of what will be accepted into the United States or the EU and what you can legitimately sell in these places. With the current mix of so-called China factories (that turn out to be merely brokers or con artists) and actual China factories that have no clue how to make the product ordered (because they are are sock factories) and other China factories that don’t know how to make the products to meet US requirements, it is a complete mess out there.
To top it all off, selling PPE and delivering nothing to the person or company that paid for them is THE perfect scam right now in this seller’s market where demand far outstrips supply and probably will for the rest of 2020.
In the last two weeks I have spoken with three companies that each lost more than a million dollars buying masks. Two of these companies were buying from their regular supplier that did not specialize in manufacturing PPE. These two companies had been doing business with their Chinese suppliers for at least five years and then they ordered and paid for more than a million dollars in masks. One got literally nothing and the other got dusty moldy Halloween masks. The company that got Halloween masks did not have a China-appropriate contract making clear exactly what it was buying. See China Contract Specificity and North Carolina Blue. See also The Five Keys to A China Contract That Works.
I urge you to read this and then take note that just about every manufacturing company in China is hurting badly right now, and selling a huge amount of face masks (that they neither make nor have) has become the perfect swan song. For a good article on just how badly China’s manufacturing economy is doing, check out The Second Virus Shockwave Is Hitting China’s Factories Already.
Our China manufacturing team has for nearly two decades been dealing with Chinese factories, so we have lived through many China economic slowdowns. We know what happens during these dives, and this one is different only in its depth and its breadth. I urge you read this article I wrote for the Wall Street Journal during a previous China economic slowdown.
As one of our China lawyers said here in reference to buying medical products from China: “We are finding ourselves more than ever these days telling companies that if they are not going to spend the time and money to do whatever they can to ensure their product purchases end up with their getting the actual products, they should not make the purchase at all.”
Verification of the legitimacy of your seller is a necessary first step, but there are many other issues as well. To protect companies buying medical supplies from China, our international manufacturing lawyers typically go through the following questions:
    1. Is it legal for the company overseas to sell you this product, and will it get government approval to do so? Again, China wants its PPE products (things like surgical masks, N95 masks, and ventilators) going to countries it perceives as China-friendly and it does not want its products going to countries (like the United States) it perceives as unfriendly.
    2. Does the company from which you are buying this product actually exist? Is it properly registered and licensed to make the product you plan to buy from it? In other words, is it legitimate? How can you be sure you will get the product you order and pay for? In China Company Research: The 101 we talked about the sort of  basic research our lawyers do to determine whether a Chinese company is real or not, and we do the same sort of research to determine this in every country. In well over 90 percent of the cases our lawyers see where someone sent money and got unusable product or no product at all, the debacle could have been prevented with basic company research that would have revealed the company selling the product was itself a fake.
    3. Is it legal for you to import this product? Does it meet your own country’s standards? Just this week, a company called us after having bought products that did not meet its own country’s standards and were therefore essentially worthless. It had received vague email confirmations from its Chinese supplier that the product met “international standards,” but because it had nothing in its contract making clear that the product met its own country’s standards, it had a very weak legal case against its suppliers.
    4. How can you be sure your supplier will send you the quality of product you will be ordering and paying for? Quality control inspections and properly drafted and relevant contracts are the keys here. See THE Rules When Manufacturing Overseas.
    5. How can you prevent your supplier from copying your product and selling it all over the world? See How to Prevent China Factory Problems and Trademark Theft That is Happening Like Never Before.
And if all the above checks out, then comes the supplier agreement. Our China legal team has been doing 5-10 China manufacturing contracts every month for about 15 years, and that means we know not only what will work to protect our clients, we also know what is reasonable for China and what Chinese companies will and will not accept.
I understand that many companies are hoping to use an escrow account to buy PPE products from China. That is great if it works, but we are just not seeing those right now from legitimate Chinese PPE manufacturers. Why should the manufacturer accept an escrow payment arrangement when they have a long line of buyers willing to pay massively inflated prices for their wares? Even our big hospital chain buyers are at best getting terms of 50% upfront/50% upon arrival (one small deal was 25%-75%, but that was with a long-time supplier). For a general idea of what these supplier/manufacturer agreements look like, check out Overseas Manufacturing Contracts (OEM, CM and ODM).
The Medical Provider Buyers.
This sort of buyer usually calls or emails us because they are at wits’ end, usually in a COVID-19 hotspot and staring down the face of an impending and dangerous shortage in PPE. This buyer is getting massive pressure from its own medical personnel and executives to “do something.”
This buyer is also being told by many of its own medical personnel and executives of someone they know “who knows someone in China who can send a large quantity of PPEs.” This buyer is an experienced procurer of medical supplies and it knows it will not be that easy.
It is for this sort of buyer that we have set up what is essentially a PPE buying and due diligence team. This team is tasked with gathering key information about each proposed PPE seller and then making an initial “yes” or “no” determination as to its legitimacy. If the decision is “no”, the team stops there. If the decision is “yes” we then talk with our client about making a cost-benefit analysis regarding next steps.
If the client is buying only a small amount of product (this is rarely the case) that it desperately needs fast, we might advise they have our lawyers quickly put together a basic Chinese language contract and the purchase goes forward quickly. If the purchase is considerably larger, we might advice doing additional due diligence on the Chinese supplier (again, as quickly as possible), which might involve sending someone to the factory, or talking with the supplier’s bank or a trusted government official to find out more. The contract for this transaction likel will be more involved, as well.
With all of these deals we have to be mindful of the end goal. These are not deals where our clients and those in their care (their medical personnel and their patients) can be as deliberate and careful as we would normally like. This is a classic situation where we cannot let perfect be the enemy of the good. We tell these clients there is no way we can reduce their risk to zero and that we see our job to be to reduce their risks as much as possible, while being ever mindful of the larger goal: saving lives.
Regarding your IP during this hectic period, it is worth repeating what we said recently in Coronavirus Legal Issues Around the World, Part 5: Getting Products from Overseas has Never Been Riskier:
in this hectic period, you will need to rely even less on local authorities than in pre-COVID-19 times. IP raids are way down on the list of pretty much all governments’ current priorities right now. Governments are trying to kickstart their economies, and as we noted in Don’t Despair. China Isn’t Going Away Anytime Soon, “China has to rebound because the CCP needs China to rebound to stay in power, and keeping the people’s bellies full and their minds busy with labor (and some ‘wholesome’ entertainment) are the foundation of any good communist playbook.”
Nonetheless, there are still certain things you pretty much MUST do to even have a fighting chance. For example, if you have not already done so, this is a good time to record your IP with China Customs so it can watch out for counterfeits of your products coming and going from China’s ports of entry. See The Four Best Ways to Protect Your IP from China.
This is also a good time to make sure your contracts with your existing overseas factories are in good order and to guard against the impulse to paper over legal discussions with possible new suppliers. Go read THE Rules When Manufacturing Overseas.
In Advice for Buying Face Masks in China without Losing your Shirt, Renaud Anjoran, who heads up a top-tier international sourcing and quality control company, paints a dystopian yet accurate picture of the realities of buying face masks from China that applies to buying just about anything from China these days. Renaud is also seeing “a lot of people sending money, receiving substandard products, or not receiving anything at all.” His article then nicely sets out the specifics of buying face masks from China and how best to protect yourself from the bad actors that purport to sell such products.
Buying products from overseas has always been risky, but COVID-19 puts us at an 11 out of 10. 

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