On January 19, 2020, a 35-year-old man who had just come from China was diagnosed in suburban Seattle with the coronavirus. Within days of that event our law firm was representing companies seeking to buy large quantities of personal protective equipment (PPE) from China. It quickly became apparent these sourcing projects would require a panoply of China lawyers, paralegals, and business specialists to help clients who needed fast and decisive assistance in buying PPE, mostly from China.
We quickly assembled what we call our “PPE team.” The first thing our team needed to do was to decide exactly the sort of help our PPE-buying clients needed. Most of our PPE buyers are hospitals, hospital chains, and consortiums of hospital buyers, but we also are working with states, countries, charities, and brokers. What all have in common is the desire to get good product at anything approaching reasonable prices.
For most companies, our law firm’s highest and best use on PPE projects involving China is the following (per the template letter we send to those seeking our assistance):
- Making sure the Chinese company proposing to sell the medical products is authorized by the Chinese government to export those medical products. This usually takes very little time. If we find the Chinese company is not authorized to export the products you are seeking to buy from it, we usually will go back to you and suggest you ask the company how it proposes to get you the products when it is not on the list of companies authorized to export those products from China. If we find that the Chinese company is authorized to export the medical products you seek, we will usually immediately move on to #2 below. These authorizations are a constantly moving target, and today China yet again further restricted the products that can be legally exported. See China Tightens Customs Checks for Medical Equipment Exports.
- Conducting a basic due diligence investigation on your potential sellers and providing you with a report on our findings. This investigation typically consists of our reviewing various Chinese government databases to confirm that the Chinese company from which you are seeking to buy PPE products actually exists and is licensed to sell what it is proposing to sell to you. These investigations also seek to determine whether the Chinese company is well capitalized, is in good standing with the Chinese government regarding fines and taxes, and is not involved in lawsuits that would make us doubt its reliability. We also look at the company’s ownership because that sometimes gives us additional good insight about the company. After we search the Chinese government databases, we do a quick internet search on the company in Chinese and in English to try to get information about its overall reputation. We then provide you with a 3-5 page report on our findings. Our typical turnaround time on these is 5-8 hours. Not surprisingly, we are finding that the better the company, the greater the likelihood the products will clear customs in China and in the importing country.
- Conducting searches to determine whether the products you will be buying can be imported into the particular country in which you will be importing them. We also provide high-level customs advice for products imported into the United States and the EU, and, in tandem with associated lawyers, we can usually provide this advice for other countries as well.
- Drafting purchase and sale agreements between you and your Chinese sellers. This includes our providing you with legal counsel regarding terms and payment issues, such things as letters of credit.
- Assisting you in securing capable QC assistance in China. It helps to have someone in the factory watching how your PPE is made and making sure that what is shipped is what you bought. There is no substitute for this step, even and especially in times like this.
We also often find ourselves consulting with these buyers regarding countries other than China that are selling smaller quantities of (but often better quality) PPE.
Though we have written extensively about sourcing PPE, we get many emails every day asking that we write more on this. The problem is that whatever we write today will almost certainly be outdated a week from now, but here goes. Before reading the below — which consists mostly of updates — I urge you to read our previous posts, all of which we have translated into Spanish because we are doing quite a lot of work with Spanish-speaking buyers as well, which is no surprise because we have long-standing offices in Spain and many of our US-based lawyers and paralegals are fluent in Spanish, as well.
- Buying Face Masks and Other PPE from China: Not For the Faint of Heart.
- Buying Face Masks and Other PPE from China Just Got a LOT Tougher
- Compra de mascarillas y equipo de protección personal en China: No apto para miedosos
- Comprar mascarillas y equipo de protección personal es ahora MUCHO más difícil
Now for the latest on what is going on out there and what our PPE team is seeing and hearing.
The PPE market is a complete mess. Every day I wake up to at least 25 emails from someone claiming to have PPE (almost always masks), who I am 99.9% certain does not have anything more than a desire to do a PPE deal. These are people who say they can get KN95 masks for (let’s say) $4 each or N95 masks for $8 each. Virtually none of these people are connected with legitimate manufacturers of these products; they are brokers who think they might be able to score some masks if they are paid in advance to do so or crooks who intend to just take the money and run.
How can I be so sure? Because the companies making the real thing would do not need to reach out to a US law firm to sell their products; they have people lining out their (virtual) door begging to buy their products. I have gotten nearly a thousand of these emails in the past two months, and I have responded to three of them. One was from a US company that had recently pivoted to make face shields. The other was from a US company that just started making face masks. The third was from a close friend with serious connections in Mexico. The rest I ignore. Might there have been a diamond in those other approximately 997? I doubt it. All I know is that it would not have been worth the massive time required to sort them out.
Just to be clear: there are brokers who get real product for real buyers all around the world, and we have clients who have gotten real products from brokers. But I am pretty sure that every instance involving a brokered deal that went through the client knew the broker before the coronavirus began in Wuhan.
Brokers/sourcing agents have always made us nervous, even before the coronavirus. We wrote about this on December 26, 2019, which can be considered pre-coronavirus times. In that post, entitled, Sourcing Agents INCREASE Overseas Manufacturing Risks (Most of the Time) we opined as follows:
About all I can tell you here is that there are a ton of bad sourcing agents and a few great ones, and choosing a bad one will nearly always be far worse than choosing your overseas manufacturer yourself. So if you do decide you need a sourcing agent, choose a good one. A really good one.
It then quotes extensively from a Quality Inspection Blog article entitled Sourcing from China 101, Part 1: Do You Need a Sourcing Agent? that quotes me saying the following about sourcing agents:
I often describe China sourcing agents with the following: Ninety percent are crooks or incompetents, and most are both of these things. But ten percent are worth more than their weight in gold.
When it comes to PPE, I’d bump the number up to 98%. How then can you be sure you are dealing with the 2%? You cannot be sure unless you truly know the sourcing agent with which you are dealing. There are ways, though, to be sure you are not dealing with a reputable sourcing agent, and one of the biggest tells is when that agent tries to make you believe they are the manufacturer when they are not. But even sourcing agents you know and trust can increase your risk when buying PPE, especially if you do not know from exactly where your agent is getting the PPE.
I say this for two reasons. One, in the end, the chances of whatever PPE you buy being allowed to leave China and enter the country of its final destination will hinge on the actual manufacturer. Makes sense right? And two, most sourcing agents, whether good or bad, honest or dishonest, do not have much in the way of assets. As I mentioned above, one of the things we do for all our clients buying PPE from China is to conduct due diligence on their sellers. Sometimes the seller has been around since the 1970s and has $10 million in registered capital and a bunch of factories scattered throughout China. Other times, they’ve been around since 2016 and they have $1 million dollars in registered capital and one factory. But even the best and most honest sourcing agent rarely has more than $250,000 in registered capital and a few computers housed in a rented office. If you get bad product and need recourse, you are going to be much better positioned to go after a deep-pocket manufacturer than against a near judgment-proof sourcing agent.
But what can go wrong out there? Well, like everything.
The below email is a slightly revised version of what our PPE lawyers have been telling our clients who are looking to do brokered PPE deals:
The big risk is that we have no proof the broker has any relationship at all with the manufacturer. In a normal deal like this where the broker will never take possession of the goods, we would require confirmation of the relationship between the broker and the manufacturer. This would usually be either a copy of a contract or a written confirmation. Neither will want to reveal the price terms of their arrangement and that’s normal and fine. But it is important to know whether the factory: (1) has actually agreed to produce the quantity you want to order; (2) can and will provide the product according to the time frame required; and (3) will ship the product directly to you even though it is not getting payment directly from you. These sorts of things will reduce the risk of you showing up at the factory to have the factory tell you that they have no clue who you or the broker even are. Or, only slightly better, that they know who you are but your product will not be ready for six months.
In Faulty N95 Masks Hamper Hospitals on Coronavirus Front Line, the Wall Street Journal (Austen Hufford) today explained some of the things that can and have gone wrong for those trying to secure PPE from China:
CoxHealth, a hospital system based in Springfield, Mo., recently bought 100,000 N95 masks from a reseller outside its normal supply chain. After one of those masks failed what’s called a “fit test” to assure it is operating effectively, the reseller offered to buy them all back—and sell them to another hospital, said CoxHealth’s president, Steve Edwards. He decided to keep them.
“These aren’t perfect but they have some protection,” Mr. Edwards said. “Everything about it looks legit. But the product itself is clearly not.”
Mr. Edwards said CoxHealth paid around $4 each for the faulty masks, at the low end of a range up to almost $7 a mask that contracting-data provider GovSpend said it has found for N95 masks. That compares with about $1 each for N95 masks before the pandemic, GovSpend said.
Some hospitals in the U.S. are turning to a cast of smaller producers and shadowy middlemen. “We are getting a lot of ‘guy who knows a guy’ stories,” Mr. Edwards said. “We go down every rabbit hole.”
It then quotes me on some of what our coronavirus law team has been seeing out there:
Dan Harris, a lawyer in Seattle who is helping hospitals verify mask sellers in China, said he has reviewed the same “proof of verification” certificate more than a dozen times, indicating it is fake or copied.
“They are either hucksters or con artists,” Mr. Harris said. “Normal safeguards are being ignored right now.”
It then discusses many instances where hospitals and states bought what turned out to be defective masks, and it cites to a company that tests incoming masks and is “finding a crazy amount of bad masks in the market.”
I was also quoted today on PPE in a Los Angeles Times article by Anna M. Phillips, Del Quentin Wilber, and Jie Jenny Zou out today, for an article entitled, States Do Battle for Coronavirus Protective Gear in a Market Driven by Chaos and Fear. I love how this article begins:
The text messages and emails come in the middle of the night from strangers claiming to be middlemen and manufacturers. Deals are cut quickly; millions of dollars are wired overseas. Sometimes the supplies arrive; other times, the too-good-to-be-true offers prove to be just that.
It then discusses how the PPE market mystifies would-be buyers:
In interviews, state and local officials around the country depicted a market that even the most seasoned say has astonished them by its logistical challenges, lack of transparency, and potential for fraud.
Prices of surgical gowns, gloves and N95 masks have skyrocketed. The masks, which used to sell for between 50 cents and a dollar apiece, are now on offer for $5 or $6, officials said.
Government employees have been told that if they don’t pay 50% of the cost upfront, and the rest before the shipment has even arrived, they will lose deals to other bidders. Fearful of having orders seized by the federal government, desperate city and state officials have called members of Congress and other elected officials to ask them to sweet-talk U.S. customs officials.
The experience has been an emotional roller coaster for state and city officials. Working on the scantest of information and often with brand-new suppliers, they have had to disregard longstanding rules in order to act quickly. Too much hemming and hawing, and they could wind up with nothing to show for their efforts.
But without careful investigation, they might buy defective equipment, endangering hospital workers, police officers and paramedics.
“It has been crazy,” Illinois Assistant Comptroller Ellen Andres said.
The article then points out the issues with “middlemen and brokers who hold themselves out as specialists in connecting American buyers to foreign manufacturers” and how “some are legitimate actors working around the clock to track down supplies” and others “are opportunists cashing in on a global pandemic” and it is difficult to tell them apart. It then notes how “some states and cities have refused to work with sellers they don’t know or those who demand payment upfront,” while others “don’t have that luxury.” Buyers often have to sift through “several middle people who then have another relationship with someone who has a relationship with someone in China, who then has a relationship with an actual manufacturer,” to determine “the actual person producing this.” Some “governments and hospitals have hired lawyers and consultants to help them vet suppliers”:
Hartford HealthCare, a network of seven hospitals in Connecticut, is working with Dan Harris, an attorney who specializes in doing business with China, to help verify potential brokers. Since the pandemic unfolded, Harris said his inbox has been flooded with dubious would-be brokers and middlemen looking to offload supplies.
Harris said he suspects that the rising cost of medical supplies is mostly a result of price gouging and profiteering, not an increased cost of doing business. Prices are expected to continue to increase following new export protocols enacted by the Chinese government this month, which will likely limit the number of companies cleared to send medical goods to the U.S.
“Every hospital is dealing with this on their own, there’s really no coordinated effort to weed out these bad actors,” said Dan C. Pak, the network’s vice president overseeing procurement, who has been calling Chinese factories to vet his orders with middlemen. “We are literally at the mercy of these brokers.”
I found myself disagreeing with the following quote in this article: “’The market is completely opaque,’” said task force member Alex Dixon, who leads West Coast operations for PureStar, a major linen supplier to Vegas hotels.” The market is not completely opaque if you have dealt with China suppliers for decades and you can read the Chinese laws, regulations, rules and pronouncements regarding the export of PPE and you have the ability to identify the real Chinese manufacturers with good reputations and 20 years of business operations as opposed to a broker who decided to move from sourcing golf balls to sourcing PPE three weeks ago.
It is tough out there, no doubt, and there is not sufficient time or money to eliminate all risk when buying PPE, but there is a ton that can be done to greatly reduce that risk.
UPDATE: Alice Su, China correspondent for the Los Angeles Times just came out with an article on the massive risks buyers face from defective PPE and coronavirus testing kits, entitled, Faulty masks. Flawed tests. China’s quality control problem in leading global COVID-19 fight. The below from this article succinctly and accurately describes the PPE chaos:
A growing list of foreign complaints about faulty medical gear and testing kits imported from China has upset Beijing’s designs. Within the last few weeks, scientists and health authorities in Spain, the Czech Republic, Slovakia, Turkey and Britain have complained of faulty antigen or antibody coronavirus tests purchased from Chinese companies — in some cases, costing these governments millions of dollars. Georgia has canceled a contract with the Chinese company that sent flawed test kits to Spain, and Malaysia has opted to buy testing kits from South Korea instead of China because of the Chinese tests’ reported low accuracy rate.
Last week, the Netherlands asked to return 600,000 face masks purchased from China that had inadequate filters and fit incorrectly. On Tuesday, Finland tested a shipment of personal protective equipment, or PPE, from China and found the items unsuitable for hospital use. Australian border officials have also reportedly seized 800,000 faulty or counterfeit masks from China.
The problem is worse at home. On March 12, officials at a State Council press briefing announced that authorities had seized more than 80 million counterfeit or faulty masks and 370,000 defective or fake disinfectants and other anti-coronavirus products in the prior month alone.
Beijing has also tightened export standards in recent days, requiring domestic certification as well as foreign licenses for medical products shipped abroad. Previously, exported medical products only had to have the certifications in receiving countries, such as the European Union’s CE certification, which could be easily counterfeited in China.
But the desperation of states, nations, hospitals and individuals competing worldwide, shelling out millions of dollars to get medical gear as people die by the thousands each day, has created a scammer’s paradise.
“It’s a complete mess,” said Dan Harris, a lawyer whose firm, Harris Bricken, has advised companies on sourcing from China for more than 15 years. He called the current situation “unprecedented,” especially as frenzied Chinese suppliers attempt to recoup losses after months of quarantine.
“A year ago, Chinese companies were fine. Now they’re desperate,” said Harris. “A lot of them know they’re going to be bankrupt in a week. A lot are going to be bankrupt already. So they’re selling bad product, fake product” — and the whole world is buying those products, regardless of how they’re made.
Many of those calling Harris’ firm for help are hospital purchasing managers who are under pressure from overwhelmed doctors asking, “Where the hell are the masks?”
Then there are the middlemen, including experienced distributors and longtime sourcing agents who think it’s easy to shift into PPE. And a smattering of “crooks, who go to the hospital and say, ‘I can get you 5 million face masks’ … And they have no clue what they’re doing,” Harris said.
Meanwhile in China, many factories have pivoted into PPE manufacturing under government encouragement, even though they lack capacity and quality control.
“Everybody is jumping on this market and they have zero understanding of quality,” said Renaud Anjoran, a manufacturing supply chain auditor based in Hong Kong. “But these are high-risk items. If they don’t work, people might die.”
It’s common for Chinese suppliers to export a product under one licensed company’s name, but to source their products from second, third or fourth factories, like a chain of Russian nesting dolls, with little to no traceability down the chain of supply.
“In China, nothing is really black and white,” said Anjoran. “You have manufacturers selling you stuff they don’t really manufacture. They’re making it somewhere else, but you don’t know where.”
There are many ways medical product exporters could get away with counterfeited or substandard goods even with the certification requirements, Anjoran said: Certificates can be faked. Certificates can be real, but altered to display another manufacturer’s name.
Certificates can be valid, with goods made at the factory, but the manufacturer may not be checking the quality of its raw materials — especially the filter material in masks, the most important factor in protecting medical workers from the coronavirus. Testing filter material can take up to two weeks and cost more than $2,000.
“You’ve got speed and greed,” said Harris. “It’s perfect for con artists.”
Many of the newly set-up mask factories also operate in unhygienic conditions, with no process to keep the air clean, Anjoran said, based on his own auditing visits.
“But this is not even on the radar of most buyers these days,” he said. “They’re like, ‘But did you see the masks were dirty? No? OK, who cares! It’s going to save lives. Don’t be picky.’”
Two of our PPE lawyers and a hospital chain VP of procurement will on Thursday, April 23, be putting on a Webinar on how to navigate PPE purchases from China. We will be speaking for 45 minutes and then spending an additional 45 minutes answering audience questions. Go here to read more about that webinar and to sign up it as I am sure it will prove helpful to you.