A Comparative Study of Product Liability of the United States and China

A Comparative Study of Product Liability of the United States and China Zhen He Department of Industrial Engineering, School of Management Tianjin University Tianjin, 300072, China Hong Liu Department of Engineering and Technology Western Illinois University Macomb, 61455, USA Abstract The paper makes a comprehensive study of the product liability system of the United States and China. The comparative study includes the scope of product, definition of defect, liability principles and exemptions. Based on the analysis of the historical evolution and its influence of product liability system in the United States, the paper presents some reform suggestions of product liability system reform in China. Keywords Product liability, defect, negligence, strict liability 1. Introduction With China s entry to WTO, the trade between the United States and China will be increasing. More and mo re Chinese products are being marketed in The US and vice versa. The product liability law suites for products designed and/or produced in one country but sold and used in the other are increasing. Due to the differences of legal system between China and the US, the product liability systems of them are not the same. It s very important for companies of one country to understand the product liability system of the other s if they are going to sell their product in the other country s market. Qi Zhang [1] made a comparative study of the concepts of product defects between China and the US. Li Chen[2] compared the product liability legal system between China, the US and Europe. In 2000, the People s Republic of China on Product Quality was amended. In 1998, the final Draft of the Restatement (3 rd ) of the US was approved and published. The comparison of the product liability systems will provide guidance to companies of the both countries to understand the legal environment that their products are facing and how to respond accordingly. It can also provide guidance for Chinese product liability reform in the future. 2. Comparison of the Product Liability System The law and legal system of the United States evolved from the British legal system. The development of the product liability system generated three theories, negligence liability, warranty theory and strict liability in tort. Strict liability began with a landmark case Greenman v. Yuba Power Products, Inc. in 1963 in California. From then on, many manufacturing companies in the US were badly knocked to their knees by the product liability lawsuits

and lost millions of profit. It is estimated the product liability costs government, manufacturing and insurance companies over $100 billion annually, more than the profit of the United States top 200 corporations and it continues to mount [3]. Obviously product liability is one of the most controversial topic now in the US. There are many claims to reform product liability system[4]. Anyway, the emergence of strict liability theory is far-reaching. Many countries in the world have adopted it including Europe, Japan and China. In China, there were very few product liability lawsuits before the 1990s, and there was no specific law to deal with product liability cases. There is only one article (No.122) in The Principles of Chinese Tort Law saying that the producers and sellers are liable for the property damage and personal injury caused by defective products. Before 1990s China was in a state of scarcity of economy and the producers and sellers dominated the market. Product quality was very low at that time and there were many forgery products. Even though there were many accidents caused by the defective products or forgeries, many plaintiffs were not able to get their losses recovered. The scarcity of economy ended in the early 1990s and consumerism began to develop. There was a big demand for protecting the legal right of consumers. To strengthen the supervision and control over product quality, to improve product quality, to define the liability, to protect the legitimate right and interest of users and consumers and to safeguard the economic order, China adopted The Law of the People s Republic of China on Product Quality in 1993 and in the same year enacted Law of the People s Republic of China on Protecting Consumer s Right and Interests. In 2000, the product quality law was amended. Currently the settlement of product liability cases is mainly based on the law of product quality. In fact, China has not much experience in dealing with product liability and it does not have so many product liability lawsuits as the US does. When enacting the law, China learned the experience from the western countries. Due to the gap of economic development between the US and China, Chinese product liability system has some differences from that of the US. The purpose of the comparison is not to find out which one is better than the other, but to provide mutual understanding. The authors strongly believe that with the economic development of China, its product liability system needs further reform. 2.1 Comparison of the Scope of Products The scope of product in the US is quite broad. Product liability has extended tangible goods to include intangibles such as electricity after it has been delivered to the consumer (Houstin Lighting & Power Co. V. Reynolds, Tex. 1988). In deciding whether the law of product liability should apply, the issue should not be restricted the inquiry of whether a product is involved. Rather the inquiry should be directed to whether or not the defendant is in the best position to spread the loss and prevent injuries[5]. Product referred in Chinese product quality law means a product which is processed or manufactured for the purpose of sale. The law does not apply to construction projects, but the materials and facilities used in the construction are applicable. Any products such as raw minerals that are not processed or manufactured are not included. Even though the definition of product here in China seems quite specific and clear, there are some debates on the definition of being processed or manufactured. Generally raw agricultural products are not included. As we can see, the scope of product in terms of product liability in the US and China is quite similar. The scope of the US is much wider. For software product and other intellectual product, there is no statutes or explanations in Chinese law. 2.2 Defect Identification

Determining if a product has defect is one of the most difficult and time consuming problem in a product liability lawsuit. In the US, a defective product means that the product is in a defective condition unreasonably dangerous to the user or consumer. Defect is generally classified into three types: (1) Manufacturing defect meaning that product departs from its intended design. If a product has manufacturing defect, strict liability theory is applied and there is no requirement that the plaintiff prove the departure rendered the product unreasonably dangerous (Restatement 3rd ). (2) Design defect meaning the foreseeable risk of the product could have been reduced or avoided by the adoption of a reasonable alternative design. If the plaintiff can present a practical and technologically feasible design without having to present a prototype, the product is proven to be defective based on strict liability theory. (3) Warning and instruction defect standing for the defect that could have been reduced or avoided by the provision of reasonable instructions and warnings. In Chinese product quality law, defect is defined as the unreasonable danger existing in a product which endangers the safety and human life or another person s property, where there are national or trade standards with a view to safeguarding the health of people and safety of human life and property, defect means any inconformity to such standards. The first part of the definition is quite similar to that of the US. The latter part adds some ambiguity in determining defect. It brings about advantages as well as disadvantages. One advantage is that it is easy to identify the product to be defective if it is proven to be inconformity to a certain standard. The disadvantage is that if the product has reached the standards but caused damages or injuries, it may be very difficult for the plaintiff to prove that the product is defective and it s easy for the defendant to defend. In addition, because some standards are first established by the manufacturers and then adopted and approved by the government or agencies, it is not advantageous for consumer protection. Another confusion is that in some cases inconformity to standards does not necessarily means the product is defective, and it may not cause damages or injuries. It is an inferior product rather than a defective one. 2.3 Liability Parties and Exemption Parties subjected to product liability in the US can be any persons from product design to the delivery or installation of the product. Any party can be sued on any of the liability theory. In China, the scope of the law includes activities of production and sale of products conducted within the territory of the People s Republic of China (Hong Kong and Macao are not included). Based on chapter 3 of product quality law (liability and obligation of producers and sellers concerning product quality), negligence theory is applied to sellers and strict liability to producers. There are no regulations on the liability of business entities that are successors to the manufacturers or that are apparent manufacturers. Both liability systems allow for development risk defense (state of the art defense). The producer or seller can also defend themselves if the product has not been put in circulation or the defect causing the damage did no exist at the time when the product was put in circulation. 2.4 Damage Compensation Damage compensation is the key point of product liability lawsuits. In the US, different states have their own product liability law and damages compensation could be quite different for a similar case from state to state. In general, the compensation includes economic damages and non-economic damages such as pain and suffering, emotional distress and punitive damages. With more and more criticism of the US product liability system, some states have enacted statutes placing a cap on the amount of non-economic damages.

Damage compensation in China is rather low compared with that of the US. Generally it only includes economic damages. Even though some plaintiffs claimed for emotional distress recovery, the court did not approve it. There is no punitive damage either. 2.5 Legal Environment Some authors claim that the US is the most litigious country in the world[3]. In fact, the product liability system in the US is well-developed and comprehensive. Also the US legal environment makes it easy for one person to sue another. The high damage compensation and plenty of lawyers are two important factors contributing to the flourishing of product liability lawsuits. On the contrary, in China there are not many product liability lawsuits. There are many reasons for this. First, Chinese people don t have strong legal consciousness. Second, the damage compensation is not so lucrative as that of the US and the court process is time consuming. Third, the bureaucratic practice of some courts and local government protection for its local companies make it very difficult for the plaintiff to get recovery from the court. Besides the legal system, News media play an important role in the settlement of product liability lawsuits as well as customer protection. In the US, 96% of the product liability cases were settled out of court. Most companies are afraid of being exposed of product liability cases which will bring bad effect to its business image and marketability. This loss will be much bigger than the damage compensation ruled by the court. This is true both in China and the US. 3. Suggestions for Chinese Product Liability System Due to the gap of economic development and the overall product quality level between the US and China, China can not fully adopt American product liability system. But the current product liability statutes in Chinese product quality law are too general. Many key points in product liability lawsuits are not covered or addressed. To meet the requirements of economic globalization and to protect the consumer s legitimate right and enforce producers and sellers to improve product and service quality, the authors present the following suggestions for Chinese product liability reform. (1) Expand the scope of liability parties. Currently the product quality law only applies to the producers and sellers within China. It is not applicable for Chinese consumers to sue a foreign manufacturer for product liability recovery. Now more and more foreign products are being sold in Chinese market and sellers only have negligence liability. It is not easy for Chinese consumers to sue foreign manufacturers. (2) Liability of business successor should be addressed. With the rapid economic development of China, business merge or taken over by another company is quite common. In the current Chinese law, there are no statutes about liability of business successor. This is disadvantageous to consumers and users. (3) Identify the liability of apparent manufacturers and actual manufacturers. OEM manufacturing is now very common in China. But in Chinese product quality law, there is no explanation about what producer really means. The general practice is that the producer includes actual manufacturer(who actually manufactured, processed or imported the product) and apparent manufacturer(who put his name or trademark on the product). Apparent manufacturer should have the same obligation as the actual manufacturer in product liability cases unless there is an agreement between them saying the actual manufacturer is liable. (4) Identify the liability of suppliers. In many companies especially assembly-type manufacturing companies, material or part quality has a significant impact on final product quality and many product defects are caused by

the materials or parts from the suppliers. Which liability theory should be applied for suppliers has not been included in Chinese quality law. 4. Conclusions In the United States, product liability is a controversial topic. But the product liability system in the US is the most comprehensive and detailed. The purpose of the research is to provide mutual understanding the two product liability systems. Based on the comparison, the authors point out the inadequacies of Chinese current product liability system. In fact, the main purpose of enacting product quality law in China is to force companies to improve quality and punish forgery and other malpractice. So product liability issue was not fully addressed in this law. With the economic development and increasing of legal awareness of the public, product liability problems will cause more attention in the future. 5. Acknowledgement The paper is supported by Chinese High-Tech Program (863/CIMS) and the National Natural Science Foundation of China (No. 70101007). References 1. http://www.njj.com/content/study/law/lawfrmeset.htm 2. Chen, L.,1999, Comparison of Product Liability Law and its Legal Applicability (in Chinese), FUDAN Journal(Social Science), 5, 20-25. 3. Goodden, R.L., 2000, Product Liability Prevention, ASQ Quality Press, Milwaukee, Wisconsin. 4. Hunziker J.R., Jones, T.O.(eds.), 1994, Product Liability and Innovation, National Academy Press, Washington, D.C. 5. Phillips, J.J.,1998, Product Liability, ST. Paul, MINN: West Group.