These real life cases may help you make better decisions during claim settlement negotiations with a factory.
A Coffee Maker’s Glass Carafe breaks during operation. This is an example of major quality issue. It is also a typical example of quality deterioration by Chinese manufacturers.
Over about a 5-year period, our company purchased large quantities of a simple 10-cup coffee maker with a glass carafe. The total quantity exceeded 800K and we had no major quality problems with the product during that time. For that reason, it was decided to skip inspections in order to cut costs and maintain our competitive price.
Suddenly our customers began reporting a serious quality problem. The first time the coffee maker was used the glass carafe would break shortly after the machine was turned on.
Our customers returned all of the coffee makers to our warehouse and asked for replacements. Since that coffee maker had been distributed for a long time without any problems, the question needing an answer was what caused the unexpected problem?
Making the situation worse, several additional containers were already on the way from the Far East and our factory had produced additional quantities for future deliveries. By the time they were all counted, we had approximately 50K coffeemakers in our warehouse including those returned by customers.
We performed tests in our own lab that unfortunately confirmed our customers’ findings. In search of a fast solution for the problem, I went with one of our engineers and an interpreter to our supplier’s factory in China.
The case was even more complicated because we had been forced to buy the coffee makers through an export company because the manufacturer did not want to be directly involved with customers.
Of course, we filed our claim with the factory as soon as we became aware of the problem. The company owner showed zero cooperation and only briefly attended the meeting. He argued that they had not changed anything on the coffeemaker and rejected our claim.
We continued discussions with the vice president and some engineers. Our suspicion was that the manufacturer had exchanged the glass carafe for a cheaper and less heat resistant one to save costs. After the owner’s denial of this, it appeared not to be the situation. We did not reach a conclusion during that first meeting and decided to arrange another meeting after we had retrieved more samples from our head office.
After we received 20 samples from our head office, we again performed tests on few samples to confirm the problem was real.
During the next meeting at our supplier’s factory, we asked their engineers to test our samples under normal conditions (full water tank, paper filter, and coffee grounds). One by one, the glass carafes broke during the first minutes of operation, proving our case.
Additionally we drew samples from the completed production in the factory’s warehouse. After our German customers informed us about the problem, we had immediately stopped any further shipments, leaving us with an unlimited supply for further tests at the factory.
All tests confirmed the quality problem but nobody knew the cause of it. Once we had the factory’s attention, they spent extensive time investigating the problem.
We sent samples of the glass carafes to an internationally accredited lab in Hong Kong to verify the quality of the glass. The result that came back was the glass met the required quality standard but was at the lower end of the standard.
I visited the factory in China at least 3 more times and our engineer was there 2 more times. I point this out because factory claims usually cannot be solved in one day. Especially when technical issues have to be confirmed before any compensation negotiation can take place.
After various tests, the factory was able to determine the problem was created by a very small plastic valve (cost approximately US$ 0.05!!!) that did not work properly. It caused a slightly delayed water flow that allowed the glass carafe to heat up to a temperature that exceeded the temperature limit for that quality of glass. If the water flow had started on time, the water would have cooled the glass enough to prevent it from breaking.
Solving that problem would be very expensive because of the large quantities of defective coffeemakers in our warehouse in Germany.
At another meeting at our hotel that took place during the Guangzhou Trade Fair, we managed to come to agreement. The factory would send 50K higher quality glass carafes to our warehouse in Germany free of charge. Additionally the factory would change the faulty valve in all the coffeemakers still at the factory and a tight inspection was performed on the quantity before shipment.
Conclusion of the case:
- The customers were right with their claim
- We were negligent by not performing an inspection
- The factory was at first uncooperative
- Presenting the evidence in person convinced them
- Replacing the poor quality glass carafes with better ones avoided repairing 50K coffeemakers without affecting the end user
- We avoided a costly return shipment and time consuming rework at the factory
- We could continue our sales after the better quality glass carafes arrived at our warehouse and after receiving the reworked coffeemakers from the factory
Was it a good solution? Considering that the supplier rejected the claim at the beginning of the negotiations and that the factory was not our direct supplier (goods were exported by an export company) it was an acceptable solution. We did not recover the transportation charges that our customers had debited from us and also we could not recover any compensation for all our troubles.
As you can see, even after 5 years of cooperation and more than 800K purchased coffee makers, the factory owner did not fully cooperate and had to be convinced that his factory had made a mistake.
Case 2 – Telescopic Tube Patent Infringement
This case involves a vacuum cleaner telescopic tube patent infringement. This example of patent infringement involves an accessory for a vacuum cleaner.
Our company had continuously imported large quantities of a particular vacuum cleaner model from the greater Shanghai area. It had what is called a click-lock telescopic tube as one of the accessories. What we did not know was that a small German company (Carl Froh GmbH) had registered up to 20 different patents for the click-lock mechanism with European patent offices. Years had passed but this small company did not have the means to enforce their patent protection. Various Chinese manufacturers had copied part or all of Carl Froh’s patents and were selling these click-lock telescopic tubes to many importers all over Europe.
A Finnish company (Rautaruukki Corporation) bought the majority shares of Carl Froh GmbH and eventually discovered that an asset they had acquired was Carl Froh’s registered patents.
They did not take action immediately. Instead, they waited until the quantity of the imported click-lock telescopic tubes increased dramatically. Then they went into action by approaching all of the importers that had imported telescopic tubes for vacuum cleaners, thereby infringing on Carl Froh’s patents. Compensation was demanded.
You can imagine that all over Europe millions of vacuum cleaners had been imported with these telescopic tubes and for Rautaruukki Corporation it was pay time.
We asked our patent lawyer for advice but he informed us that there was no way of winning the case in court even if we did want to go through the legal steps.
We and many other importers had to negotiate with the Finnish company. This meant financial compensation for each imported vacuum cleaner with the telescopic tube. The total amount we had to pay to the Finnish company exceeded US$160,000 plus the cost of their and our lawyers.
The factory refused to repay any of the compensation payment. They told us that it was only an accessory that they had purchased from another company and that they were not liable for anything.
We employed an international law office in Shanghai and had several meetings with them. Our factory was in Suzhou, which is not too far from Shanghai. One of the lawyers even spoke fluent German making communications easier.
We provided them with all the evidence including copies of our P/Os clearly stating that we were indemnified against any third party rights violations. We also emphasized that considering the large amount of money involved, we were determined to proceed with a court case in China. Our lawyer helped convince the Chinese manufacturer to offer us an out of court settlement by refunding the requested amount.
The case was then settled amicably and we continued to purchase goods from that supplier.
Conclusion of the case:
- The patent owner was right in his claim
- We had not been negligent because nobody knew about the patents
- The factory was only cooperative after we employed a local law office
- Presenting our evidence did not convince them in the beginning
- End consumers and customers were not affected because an agreement was reached
- Since there was no comparable patent free replacement for the click-lock available, we could continue to import them but had to pay a royalty
Even after many years, your company can be sued for patent infringements because patent registrations cover long periods of time and you cannot escape your responsibility.
That means your supplier in China may no longer even exist or you are no longer doing business with him when a patent infringement is discovered.
If you want to have the slightest hope of recovering royalty fees paid in your home country, you must include indemnification clauses in all of your P/Os.
I am convinced that without the help of a local law office, we would not have succeeded in getting any money back. Through their arbitration, we averted a major disaster for our company. We were happy with the result because in the beginning we did not think any recovery could be achieved.
This case involves a vacuum cleaner non-compliant with the EMC Law. An electronic speed control caused a sales stop to be ordered by a local government authority.
We had sold more than 50K copies of a specific vacuum cleaner model with an electronic speed control feature to one of our German customers.
After some months the local government authorities (Bundesnetzagentur) approached our customer and informed them that they had tested several samples and found them to be non-compliant with the EMC laws (Electromagnetic Compatibility) because they exceeded specified emission limits. The electronic speed control feature was the culprit.
If it had been only one unit out of the five units tested, we could have argued that it was a single occurrence. Since all selected units showed the same problem, our customer was issued a complete sales stop for all EC countries.
At that time our customer still had approximately half of the imported quantity in stock and wanted to return approximately 25k vacuum cleaners to China.
This would have been a major disaster for us because their company policy requires that we refund the total amount before the vacuum cleaners are sent back to China for rework.
Sometimes, large powerful retailers do not want to accept reworked goods. In the event of a non-complying product, they have the law on their side when it comes to refusing reworked goods. They have also been known to first agree to the rework and later change their mind.
We had to find a fast solution that did not require returning the goods to China because that would require two ocean voyages plus the time for rework. The main point of the solution was to solve our customer’s problem with the sales stop.
I after several negotiation sessions with the factory owner, he finally agreed to rework all remaining vacuum cleaners at our customers warehouse in Germany.
That might sound easy but unfortunately it is not. The factory had to send 11 workers including supervisors to Germany and they all needed passports and visas. Some of the workers had to travel to their hometowns to apply for their passport and we had to provide supporting documentation.
The factory had to obtain and ship acceptable replacement modules for the electronic speed control unit for every single unit.
To make a real long story short, it took the workers approximately 6 weeks to rework all of the vacuum cleaners at our customer’s warehouse but they succeeded. Another lab test by the Bundesnetzagentur authorities confirmed the vacuum cleaners were now in compliance with the EMC regulation and the sales stop was lifted.
Total cost to the factory was approximately US$60,000.00 plus travel and accommodation costs but considering the complete order value of more than US $1,575,000 it was certainly the better solution.
Conclusion of that case:
- The customer and the Bundesnetzagentur authority were right in their claim
- We were not negligent because it is impossible to test every unit for EMC compliance during the Final Random Inspection that had been performed
- The factory was not cooperative at the beginning
- Presenting the evidence (breach of existing law in Germany) helped convince them
- A solution was too time consuming because our customer had to wait several months before the case was settled. A return of the goods for rework would have been very costly, complicated, and the time required would have been longer
- Our customer could continue with their sales as soon as rework progressed.
Our P/Os contained a clause that the factory must supply goods that comply with the existing laws at the destination country. The local government authorities proved with their own lab test report that the supplied units did not comply and were therefore not allowed to be sold in any EC country.
Our customer was forced to stop selling these goods in all of the 25 EC countries and had the option to return all unsold units to us or accept the rework.
Since the factory had agreed to our terms by signing our P/O, we had a stronger position to negotiate the rework deal with them.
For you as an importer, it is important to know that there are options to be considered other than only returning defective goods to your supplier, especially if the value is US$1 million or more.
We were satisfied with the result because it helped to cover most of our expenses.
A Deep Fryer with insufficient cooking temperature is an example of a major quality issue.
We had shipped larger quantities of a medium priced deep fryer under one of our customer’s own brand names. The same model had previously been carried for several years in our product catalog. This is important for you to know because it was essential to the solution of this problem.
Our customer had an authorized lab test several units of the current production and the results were acceptable to their internal standards.
At a later time, our customer’s QC reported high return rates caused by malfunction problems.
Our head office performed tests on the customer’s return goods and found that the performance of the two thermostats was not according to specifications. The main thermostat was turning off the heat element before the selected cooking temperature was reached. In other words, you could not cook meat or French fries sufficiently.
I negotiated with the factory for the return and rework of approximately 22k deep fryers to China.
The manufacturer was in Ningbo and one of our engineers and myself visited the factory three times before an acceptable solution was negotiated.
The last meeting was attended by the usual 3-4 factory engineers, the sales manager, and the company owner. Mysteriously, an unknown and unintroduced man also attended. We later learned the man was the factory’s lawyer and advisor to the company owner for important decisions.
The arguments and the samples that we provided along with written documents and test results, finally convinced the company owner to accept the return of the goods for rework.
His problem was that he was seriously concerned that the Chinese authorities would take punitive action against his company due to the large number of returned goods. He also told us that his reputation would be seriously damaged because other factories would use this case to convince customers to buy from them.
That is also something you must consider when negotiating with Chinese suppliers. Try to find the real reason behind their refusal to replace or take back goods from their customers. It is not always only about money alone.
The deep fryers were sent back and the factory replaced the malfunctioning thermostats with new ones. The deep fryers now cooked properly.
You would think that settled the case and the reworked goods would be send back to our customer in Germany. Unfortunately, this did not happen because as I mentioned in Case 2, retail organizations have the option of not accepting returned goods and can do this although they had agreed to accept the goods before.
That happened in this case when the head of the retail organization decided to drop their own brand of electrical products and they did not want to take the reworked goods back.
Since our company was doing a substantial amount of business with this customer and their market power is overwhelming, we had to accept their decision.
And because it was not the factories fault, we had to find another solution within our group of companies. The decision was to change the brand name and all of the packaging to our own brand name. Afterwards, the goods were finally returned back to our warehouse in Germany. The original retail organization then repurchased the rebranded and reworked deep fryers and put them back on their sales shelves.
Conclusion of the case:
- The customer was right in their claim
- We were not negligent because they pasted the Final Random Inspection
- The factory was not cooperative and it required three negotiation rounds to resolve
- Presenting the evidence to them finally produced a successful negotiation
- The customer was not cooperative when they did not follow through with the original agreement
- Sales could continue after every single unit had been reworked and rebranded
The negotiations with that factory owner were very tough. I was threatened and yelled at but kept my calm and finally succeeded. I met the company owner several months later at the Guangzhou Fair and he hugged me. Obviously, my patience had paid off and even gained the respect of the factory owner.
In this case, it was very important to provide evidence that the large quantity of deep fryers really had a problem. I mentioned that we had been buying this model for some time and had our defect statistics that did not show any abnormal problems.
One typical factory owner’s argument is that they are selling the model to many other customers around the world without any problems. That may even be true but it makes the negotiations even more difficult. You can imagine that when a factory owner secretly has a lawyer attending a meeting, anything could happen.
The factory obviously trusted their thermostat supplier from whom they were buying thermostats for many years. When incoming component inspection is not performed, defective goods can move undetected through the manufacturing and distribution processes all the way to the end user. That is what happened in this case. It should remind you not to take anything for granted.
In my other eBooks:
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I provide more detailed information about how factories must be evaluated and monitored to avoid their negligence from becoming your problem.
This claim was finally settled but the change of mind by our customer created extra problems for us and the factory because the rebranding took additional time and we had to keep the deep fryers in our warehouse for quite some time, which also cost us extra money.
Was that case solved? Yes, but not as we had expected and hoped and we were not satisfied with the result.
A stand mixer confiscated during an exhibit at a Trade Fair is an example of a copyright violation.
This case seems rather easy because it is only about a single unit but in reality, it caused us a lot of problems.
Several years ago we had a booth at the Domotechnica Trade Fair in Cologne. One of our exhibited models was a stand mixer that looked similar to a comparable model from Moulinex. The manufacturer, a large reputable Taiwanese company, had assured me that there was no copyright violation with Moulinex because they had investigated and did not find any problems.
On the second day of the fair, a lawyer employed by Moulinex and a bailiff from one of the Cologne courts came to our booth and confiscated our sample. They showed us a statement from the Moulinex designer confirming that our model violated his design because the resemblance was too great. Additionally they presented us with a court order enforcing Moulinex’s request.
Because our company was registered in Hong Kong, the bailiff demanded a bond of DM 2,000 payable in cash within half hour otherwise our booth would be closed down by him. We had also printed a photo of that model in one of our leaflets and we were required to black out the photo.
I immediately contacted our German patent lawyer and faxed him copies of the documents for his review. His immediate advice was to pay the bond and negotiate later. That is what I did.
The exhibition went on without further interruption for us but the case was not yet settled.
After returning to Hong Kong, I approached the German court for a refund of the bond but my efforts were in vain. Instead, they asked me to declare the number of stand mixers we had already sold and shipped to European countries, along with supporting evidence.
Fortunately, we had not sold or shipped a single unit. Because we only had the one sample from the factory, they finally gave up.
Conclusion of that case:
- Moulinex was right with their claim
- We were negligent by trusting our supplier’s statement
- The factory was cooperative and paid our expenses
- The German court was not cooperative because they did not refund the bond
Don’t rely on factory statements when they tell you they have already checked the product for copyright violations. Use your common sense instead. Look-a-likes that violate copyrights can be very expensive cases to resolve. We lost the DM 2,000.00 that was not refunded and we had lawyer fees. Had we shipped large quantities of that model to European customers, we surly would have had to pay substantial compensation to Moulinex in one way or another.
This case was actually not about larger amounts of money or products but should open your eyes to what you can expect if you purposely import counterfeit products.
The supplier that claimed that the stand mixer did not violate Moulinex’s copyright was requested to refund our expenses and he did to keep a business relationship with us. At least a little bit of a happy ending. All of these incidents really happened. I hope they help you avoid similar problems for your import business. Considering how much time and money is involved to resolve them, it is a much better business strategy to put the effort into avoiding them all together.