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Emerging PL Risks Update

Emerging PL Risks Update. Today‘s topic: Counterfeit products and their effect on PL claims Specific examples – fake safety-related car parts Why should you care? Big, big money involved Now effecting all industry sectors

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Emerging PL Risks Update

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  1. Emerging PL Risks Update • Today‘s topic: • Counterfeit products and their effect on PL claims • Specific examples – fake safety-related car parts • Why should you care? • Big, big money involved • Now effecting all industry sectors • Government agencies are now sharing recall info with their counterparts • i.e., in the car world, the NHTSA, the VOSA, the KBA and the „AQSIQ“ • Significant potential impact on international PL and class action cases

  2. Example – the car industry: why care about fake parts? • Big money • Fake car part sales exceeded USD$45 billion globally in 2011 • Fake parts cost the American supplier industry $12 billion annually worldwide and $3 billion in the U.S. alone • A growing safety / PL risk • Counterfeitors used to focus on „wear and tear“ items (cash cows like spark plugs, filters, hoses, seals, etc.) • Criminals are now also faking safety-related parts and diagnostics • Brake pads • Window and windshield glass • SRS components, including seat belts, belt pretensioners and airbags • Diagnostic tools and systems, including IP-protected repair shop hardware and software (often w/o the ability to download and install any updates)

  3. Vehicle regulatory agencies are starting to take serious notice • Saudi Arabia • “Half the deaths in traffic accidents in Saudi Arabia are caused by fake car parts.” - Presiding Jeddah Judge Ahmad Bin Dhaifallah Al-Ghamdi • Saudi authorities seized more than 8 million fake car parts just in the first half of 2010 • United States • The Obama Administration in 2012 estimated that "tens of thousands of counterfeit air bags” are now unknowingly in use in American automobiles - and may not inflate or inflate properly in the event of a crash • Considered not just an OEM problem, but a public safety issue

  4. NHTSA‘s 2012 Counterfeit Airbag Tests In another context, this would be considered an IED („improvised explosive device“)

  5. Legal issues re counterfeit parts • Duty to affirmatively monitor field for fakes (to have „a system“)? • Duty to take affirmative action against counterfeitors? • Duty to develop and implement countermeasures? • Unique on-product markings • Serial / tracking numbers • Counterfeit-resistant packaging • Radio frequency identification tags • Halograms • Duty to actively audit dealer network for fake parts? • The major problem in a lot of countries • Duty to warn (user manual, etc.) v. anti-competition laws?

  6. The problem is „Made in China“ • 88%+ of all fake car parts are made in China • The AQSIQ is trying but has been ineffective and is overwhelmed • 2011‘s „Operation Sharp Sword“ seized 25 million fake car parts and shut down 134 workshops in only 3 provinces • In 2011-12, siezed more than $2 billion worth of spare car parts • 1,690 raids in 2011 • 2,347 raids in 2012 (up 39%) • The AQSIQ is currently focused on implementing China‘s brand new auto recall law • The fight in China is often against local culture and interests • „In some places, protectionism disrupts law enforcement.“ • Yin Fengmin, AQSIQ‘s Director of Law Enforcement (23 Jan 13) • Bribery and political influence on law enforcement remain a real problem

  7. The scope of the fake car parts problem in China is hard to fathom • 179 companies made vehicles in China in 2012 • The number of legitimate suppliers of authentic parts to these companies is in the tens of thousands • Imagine the number of counterfeitors of those spare parts !

  8. Practical suggestions for PL counsel – e.g., fake airbags • Counterfeitors are focusing on higher-volume brands • But fake airbags of all brands are out there • Many fakes have stellar exterior appearance – but may not work • Many are crude technically and deploy (?) with unknown force • Some don‘t contain any pyrotechics or even a bag, designed simply to „trick“ electrical self-diagnostic / continuity checks • Begin educating dealer network, aftersales, warranty and PL inspection teams • Begin educating consumers and government agencies • Help industry collectively crack down on networks • Share experiences with fake safety-related car parts • Pass on information for collective use abroad

  9. As of 05 April 2013 SMITH LEGAL LLP Strümpfelbacher Strasse 1 71384 Weinstadt, Germany www.smithlegalgroup.com

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