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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

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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)

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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

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NHTSA‘s 2012 Counterfeit Airbag Tests

In another context, this would be considered an IED(„improvised explosive device“)

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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?

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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

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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 !

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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

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As of 05 April 2013

SMITH LEGAL LLP

Strümpfelbacher Strasse 171384 Weinstadt, Germany

www.smithlegalgroup.com