What to do when facing a lawsuit overseas? Deciphering the "Four Firewalls" for enterprises to avoid product quality disputes | Overseas Expansion Pr

In June 2025, the U.S. Department of Justice issued an announcement stating that two senior executives of Gree Electric Appliances were sentenced to 38 months and 40 months in prison respectively, plus three years of probation, for failing to timely report information related to defective dehumidifiers associated with multiple residential fires to the U.S. Consumer Product Safety Commission (CPSC). They are also required to pay fines of $5,000 and $12,000 respectively.

This is the first time that a U.S. court has held an individual criminally liable for product safety, breaking the traditional perception that product quality disputes only result in civil penalties for enterprises. This means that overseas quality disputes are no longer limited to economic compensation at the enterprise level, and senior executives may also bear criminal liability due to compliance omissions of the enterprise.

Product quality is an important lesson related to the survival of an enterprise and the future of senior executives, which must attract the high attention of all employees in the enterprise. At the same time, the complex legal system regarding product quality in overseas markets makes quality disputes a stumbling block for enterprises going global: a single compliance omission or a vague contract may ruin years of accumulated overseas business.

The Investment Promotion Center of Zhejiang Province, in collaboration with the Comprehensive Service Port for Zhejiang Enterprises Going Global, has specially invited King & Wood Tongda Law Firm to conduct a training lecture on 「Product Quality Litigation for Cross - border Enterprises Going Global」 to interpret the legal rules, defense systems, and coping strategies for product quality disputes in the U.S. market.

(The following content is compiled based on the lecture.)

U.S. Product Liability

Three Liability Attribution Principles

01

To effectively handle product quality litigation in the U.S. market, one must first understand the underlying legal rules, especially the liability attribution principles for product liability. For example, in the United States, product liability mainly includes three liability attribution principles:

(1) Strict Liability

This is the most stringent liability attribution principle for enterprises in U.S. product quality litigation. The core feature is “no need to prove the enterprise's fault.” As long as a product has a defect and causes personal injury or property damage to consumers, the enterprise is likely to bear compensation liability. For example, if an electrical appliance produced by an enterprise causes a fire due to a manufacturing defect, burning down a consumer's house, the enterprise may still be held liable even if it can prove that it has exercised reasonable care in the production process.

(2) Warranty Liability

If a product fails to meet relevant standards or promises but does not cause serious personal or property damage, warranty liability usually applies. In this case, the plaintiff needs to bear the burden of proof to prove that the enterprise has violated the warranty. Warranty liability is further divided into express warranty and implied warranty. An express warranty is a clear commitment made by the enterprise to the product, while an implied warranty is a default obligation stipulated by law, including that the product should meet the general use and market standards of such products.

(3) Negligence Liability

Negligence liability requires the plaintiff to prove that the enterprise “failed to exercise reasonable care” in product design, production, sales and other links and is at fault. Under this liability attribution principle, the plaintiff has a higher burden of proof. Common situations include: the enterprise fails to establish a perfect quality inspection system, resulting in substandard products entering the market.

Product Quality Disputes

“Four Firewalls”

02

(1) Before Going Global: Compliance and Market Access

“Passports” for market access, such as the EU CE certification, U.S. FCC and UL certifications. Different countries and regions have different mandatory quality certification requirements for products. Without obtaining relevant certifications, products are legally “illegal products” and cannot enter the local market. In addition to mandatory certifications, if products or raw materials involve U.S. technology, enterprises also need to comply with U.S. export control laws such as the Export Administration Regulations (EAR) and the International Traffic in Arms Regulations (ITAR) to avoid compliance risks caused by technology control issues.

The “amulet” for quality management. Enterprises not only need to establish the internationally recognized ISO9001 quality management system but also meet the specific standards of the destination country. Such as the EU RoHS and REACH environmental protection requirements, and the chemical substance warning requirements of California Proposition 65 in the United States. These standards are often more stringent than international general standards.

The “liability boundary” of the supply chain. The supply chain is an important source of product quality, and many enterprises are involved in quality disputes due to problems with upstream suppliers. Therefore, enterprises need to review the legal qualifications and compliance records of suppliers, check whether they are on the international sanctions list, etc. When signing contracts with suppliers, clearly stipulate that suppliers need to meet the certification standards of the destination country. In addition, the contract should include a recourse clause: If a dispute arises due to defects in the raw materials/components provided by the supplier, the supplier shall bear the compensation liability to avoid the enterprise taking the blame for the supplier.

(2) During Production: Internal Quality Inspection and Evidence Retention

Enterprises need to establish a full - process quality inspection system of “incoming material inspection - in - process inspection - outgoing product inspection”. Each link needs to be strictly controlled and written records should be retained to ensure that product quality is controllable.

Incoming material inspection: Conduct sampling inspections on raw materials provided by suppliers to ensure that raw materials and components are qualified, eliminating problems from the source.

In - process inspection: Conduct on - site inspections and sampling inspections on the production line to promptly detect and correct process deviations.

Outgoing product inspection: Conduct 100% full inspections or strict sampling inspections based on statistics on finished products to ensure that they meet technical specifications and customer requirements.

(3) During Transactions: Risk Isolation and Evidence Fixation

Enterprises need to focus on designing three types of clauses in the contract. Through reasonable contract clause design and full - process evidence fixation, effectively isolate quality risks and provide a basis for dispute resolution:

Liability cap clause: The contract must set a cap on compensation liability. For example, “The total compensation liability of the seller shall not exceed XX% of the total amount of this contract.” This is the key to preventing a single dispute with unlimited liability from bringing down the entire company.

Liability division clause: Clarify that if the defect is not caused by the enterprise, the other party shall bear the liability. For example, stipulate that “If the product defect is attributed to the design scheme, technical specifications approved by the customer or the materials provided by the customer, all legal liabilities, compensation and expenses shall be borne by the customer, and our company shall only provide necessary technical assistance for defense.”

Law choice and jurisdiction clause: It is preferable to stipulate the application of Chinese law or international commercial arbitration rules. Choose the Chinese mainland or Hong Kong, China as the jurisdiction to avoid litigation in the other party's home court (such as a U.S. court).

All key communications and operations during the transaction process must be retained in writing to avoid the lack of evidence caused by oral approval:

Document technical communications: Communications with customers regarding technical parameters, performance requirements, and design changes should be carried out through emails and formal letters, and the records of exchanges between the two parties should be retained.

Document product acceptance: After product delivery, the enterprise must obtain written acceptance confirmation from the customer, clearly recording whether the product quantity, quality, and technical indicators meet the agreement.

Document risk notifications: If the customer's requirements may affect product quality, safety, or compliance, the enterprise needs to prompt the risks in writing and obtain written confirmation from the customer.

(4) After a Dispute: Crisis Response and Loss Control

Even if an enterprise has established a perfect pre - emptive defense system, it may still face quality disputes due to unexpected situations. Proper post - dispute response can help enterprises minimize losses. The 48 hours after a dispute occurs are the critical golden time. Enterprises need to quickly activate an emergency response mechanism and take a series of measures to control the expansion of risks and retain evidence.

Step 1: Emergency Response (Golden 48 hours)

Seal up evidence: Immediately seal up all evidence related to the involved product, and strictly prohibit anyone from modifying, destroying, or transferring the evidence without authorization. At the same time, freeze the work emails and chat records of relevant employees to avoid the loss of evidence due to employees' operational errors.

Unify the statement: Strictly prohibit any employee from expressing any views or providing information about the incident to the outside world without authorization. Designate the business leader and legal affairs leader as the only external communication channels, and unify the communication statement to ensure the accuracy and consistency of external information.

Internal assessment: Immediately organize an internal technical team, quality team, and legal team to form a crisis group to conduct a preliminary assessment of the incident. Based on the assessment results, decide whether to actively recall the product to prevent the expansion of losses.

Step 2: Assemble a Professional Response Team

Enterprises need to assemble a response team composed of domestic lawyers, local lawyers, and third - party experts, each performing their own duties and forming a joint force.

Domestic lawyers: Domestic lawyers are mainly responsible for overall planning and coordinating all parties' resources. Domestic lawyers are familiar with Chinese laws and the actual situation of the enterprise, and can play a bridging role in cross - border communication, helping the enterprise understand the suggestions of local lawyers and make decisions.

Local lawyers: Local lawyers are more familiar with local legal rules, litigation procedures, and the judging habits of judges and juries, and can formulate the most practical response suggestions for the enterprise according to the local situation.

This article is from the WeChat public account “Hangzhou Qiantang Service Base for Enterprises Going Global”. Author: Zhejiang Enterprises Going Global. It is published with authorization from Qiantang.