The long-standing and dysfunctional approach to subrogating against foreign manufacturers has become the primary reason why pursuing Chinese manufacturers is difficult and expensive. Many insurers, corporations, and law firms continue to implement tired and ineffective tools in pursuit of these claims. When a catastrophic fire loss is caused by a defective laptop battery manufactured in Asia, lawyers are quick to engage in the penance necessary to serve an Asian company, encounter the stumbling blocks represented by The Hague Convention, and become sucked into the legal labyrinth involving civil jurisdiction over foreign companies. Many clients are not told, until it is too late, that even if service is painstakingly accomplished and a default judgment is obtained, collecting on the judgment becomes even more difficult than getting the judgment. Many lawyers seem unaware or unwilling to say it, so let us be clear – China will not enforce your U.S. judgment. Period.
It is time for the subrogation industry to move beyond a perpetual discussion of why pursuing Chinese/Asian companies is different and difficult and toward a discussion and implementation of new ideas that work.
Given the rapid growth of the Chinese manufacturing section, property claims caused by such products will only continue to rise, making the development of effective new approaches to recovery a worthwhile goal. Matthiesen, Wickert & Lehrer, S.C. (MWL) is focused on leading this effort.
The China Manufacturing Sector
China has been the world’s manufacturing epicenter for decades. There are more manufacturing employees in China today than in the U.S., France, Germany, Italy, Japan, Korea, and the UK combined. Bureau of Labor Statistics (as of 3/14/14), see HERE. China surpassed the U.S. in 2013 as the world’s largest trading nation, a position anchored by its manufacturing base. Did you know China manufactures:
- 320.4 million PCs per year, representing 90.6% of PC global trade;
- 51.5 million tons of pork, representing 49.8% of the global total;
- 74% of all solar cell production;
- 85% of all Christmas lights;
- 70.6% of all cell phones; and
- 60% of the world’s cement.
Business Insider, “10 Mind-Boggling Facts About China’s Massive Manufacturing Sector,” Mamta Badkar, 8/1/2013, see HERE.
The Rise in Claims
Claims against Chinese manufacturers for property damage caused by products have been sharply on the rise. There are both obvious and obscure reasons for this trend.
First, it is natural that claims involving Asian goods will rise as the number of such products in the marketplace increases. Lag time between dates of manufacture, dates of loss, and claims-made dates mean claim data may mirror, but trail, manufacturing data. Relatedly, insurer “tolerance” for such claims may also be a factor. Foregoing pursuit of one, two, or three claims involving foreign manufacturers can be justified by “horror stories” learned at the standard seminar on the topic given by attorneys. But, as claims pour in involving heaters, fans, plumbing parts, construction materials, etc., insurers are less willing to forego pursuit of subrogation.
Recent tort reform also plays a role. Many states now require claims to be pursued against manufacturers directly rather than against the retailer. So-called “distributor statutes”, “innocent seller statutes”, and “closed box seller” provisions passed in many states provide relief to U.S. retailers against product liability actions, so long as the retailer has not modified the product. Many of these statutes allow pursuit of the U.S. retailer only if the plaintiff can demonstrate the manufacturer is unavailable to be sued or is judgment proof. Many states have passed innocent seller laws, including Arizona, Florida, Indiana, Kentucky, Ohio, Texas, and Wisconsin.
The Mistakes of the Past
The current approach is based on the mistaken premise that what works in other subrogation settings will work with respect to claims against Asian manufacturers. Many familiar tools to subrogation professionals, however, have little application in this specialized setting. Our experience indicates the following tactics are rarely successful: sending conclusory demand letters in English, using threatening language, communicating in “legal-ese”, sending an unfiled draft of a complaint, and attempting to default a manufacturer and collect on the judgment.
A major mistake of the current approach is the focus on securing a judgment against an Asian manufacturer in a U.S. court without putting in the work up front to know what benefit the judgment can provide. A U.S. judgment will not be enforced in China. As such, the judgment may not be worth obtaining in the first place. This is difficult for attorneys to accept, because unless he or she has experience with other solutions, it is akin to saying, “I can’t help, you shouldn’t hire me.”
To fill the industry toolbox with new solutions that work, subrogation attorneys and insurers need to support creative new ideas. “Creative” does not necessarily mean complex. I recently had a conversation with the head of a subrogation department. The company is struggling with property claims involving Asian manufacturers. I asked: “Why are you not writing these companies in Chinese?” She laughed and said, “We do not have anyone who speaks Chinese.” “Isn’t that a problem?” I asked. She had never given much thought to engaging someone or hiring someone who can communicate directly with the companies she was pursuing. She was stuck in the mindset that “the playbook is the playbook” no matter how often she banged her head against the wall using it.
A Game Plan That Works
Creativity needed to stem the tide of bad results is going to take many new ideas. Perhaps sharing pieces of MWL’s approach can work for others or can spur on others to come up with new ideas suited to their strengths.
Our approach focuses on my ties to insurance and manufacturing circles in Asia. It is relationship based, because Asian business, as a whole, is relationship based. Our first goal is to identify and reach out to a key person either within the company or trusted by the company. Insurance brokers and others in the insurance industry are solid starting points. I lived and worked in Asia for five years, speak Mandarin Chinese, and have contacts on which we can rely, all of which helps.
While we comb contacts to find a connection to the company, we also research the company relentlessly online. This takes no special talent. We want to know its customers, likely asset locations, countries to which it has ties, judgments, new stories, etc. It all helps to build a game plan up front, which is critical. We also pick up the phone. Many firms and insurers do not even allow international dialing. How many claims get resolved without a phone call?
The goal is to understand what levers move the company and how to gain an audience. A face-to-face meeting in Asia is a perfect result and we build the meetings into my quarterly trips to Asia. Our experience is that if you gain the ear of the company, you will resolve the matter amicably if you treat the company respectfully, appreciate cultural differences, and exercise patience. An in-person meeting is an excellent sign.
More New Techniques Needed
Attorneys and insurers willing to move away from the old, dated approach will be the biggest winners. My experience is that approaches focused on meeting the target company on its terms or “playing in their sandbox” are most likely to succeed. A “well, this is how it works in America” attitude is likely to fail. My belief is that the most successful approaches developed to address product liability subrogation claims against Asian manufacturers long-term are likely to share the commonality of being less confrontational and adversarial and more problem-solution driven.
Recognizing this reality, what I communicate in Chinese, during Asian business hours, leverages my ties to the region. I let the company know I’ll be in the area and am available. I never make threats. My experience is that inviting a legal fight with an Asian manufacturer gets you a legal fight with an Asian manufacturer, which should be a last resort.
As an example, on a recent large loss involving a fire caused by a laptop battery that overheated, when I received the file the only efforts noted on subrogation were some threatening letters to the manufacturer from an attorney, to which a response was never received. The file also contained a later letter from the attorney advising subrogation was not possible. The problem was not with the file, but with the approach.
I called the manufacturer and apologized. I explained there was a problem and we were hoping they could help us on a solution. I provided the evidence, but was not accusatory. There is no need to be, and it is only perceived as trying to make the company lose “face”, which must be avoided. I learned the insurance carrier through a broker friend. I arranged a meeting with the carrier and a lunch with the carrier and company. The next day our client received a six-figure wire. Not all claims are so easy. The point is your approach has to give you a chance at success, and the approach currently used by many industry members too often does not.
Confronting the “Do Nothing” Manufacturer Response and Going the Distance
Even when you do all you can to make things easy for the manufacturer, you still may have less than a 50/50 chance at actively engaging the company in negotiation. This is because Asian companies utilize a standard, but flawed, response to the standard and flawed approach by our industry. They are told to do nothing – to ignore the problem and hope it goes away.
I believe this response is a result of the current approach poisoning the well. It has been conditioned by the standard approach our industry utilizes. The success of the “do nothing” response is what has led to its prevalence, but the “do nothing” response only works because the standard subrogation approach is so flawed. Outside of the subrogation context, there are examples of Chinese companies that did nothing and lost big against an adversary that was not reading from our industry’s outdated play book.
Until manufacturers are taught, consistently, that silence will not work, you must anticipate silence and plan accordingly. At MWL, we have the advantage of strong Asian local counsel firms who contact the companies in their own backyard and who are known in the region. I ask for meetings, set up dinners, and make it clear the problem is not going to go away, but while respecting important cultural differences. I also work hard to maintain a reputation in Asia whereby insurers and manufacturers understand negotiating with us is much better than ignoring us.
When all else fails, we litigate in Asia. It is not easy and we are fortunate to have ties to tremendous attorneys experienced in litigating in Asia. The advantage of being willing to litigate in Asia, win or lose, makes all the difference in the world.
The MWL Asia Claim Recovery Program
The philosophy and strategies outlined above are incorporated into the MWL Asia Claim Recovery Program (“ACRP”). We do all we can upfront to resolve claims amicably. We respect our counterparts. If we cannot work toward a mutual solution to the problem, we are willing to go the distance and litigate in Taiwan. Our approach is based on recognition of the importance of relationships and credibility. Our results are much better than the tired standard approach. However, it, too, is a work in progress. Only when the industry at large dedicates itself to improving these recoveries will whole-scale improvements be seen. The good news is that our experience demonstrates it is possible to improve results if we get creative and are willing to challenge traditional notions of how these claims should be handled.
If you are interested in taking a peak “behind the curtain” at how some of the industry’s best are improving results on claims involving foreign manufacturers, we invite you to attend our free one-hour webinar entitled “Suing Asian Product Manufacturers: A New Approach” on May 8, 2014, at 10:00 a.m. (Central time) where we will focus on answering the question which has long evaded effective answers, “How do you get money in the door when subrogating Asian manufacturers?” To obtain more information on this webinar and/or to register for it, please click HERE.
If you have any questions regarding this article or MWL’s ACRP, please contact Richard Schuster at [email protected].