HNB Home · Heated Tobacco and Vaping Industry NewsChinese
Home›Vaping News›Vaping Lawyer: Bottom-Line Risk Control for Vape Exporters Working with Small and Medium-Sized Overs
Vaping News · vaping
Vaping Lawyer: Bottom-Line Risk Control for Vape Exporters Working with Small and Medium-Sized Overs
H cink2023-09-06Views 285Source 未知
Key point: Summary: The Guidelines on Promoting the Construction of Quality Assurance Systems for Exported Vaping Products, issued in July 2023, show that the first phase of domestic regulatory actions and objectives in the vaping industry has become very
Summary:
The guidelines released in July 2023 on promoting the construction of a quality assurance system for electronic cigarette products indicate that the first phase of domestic regulation in the electronic cigarette industry may have reached a temporary conclusion, and compliance regulation regarding the quality, processes, and intellectual property of exported electronic cigarettes is likely to become the next regulatory focus. Moreover, while it is difficult to say that the overseas electronic cigarette market has entered a silver age, the increasing number of competitors has made this market less of a "gold rush," which may turn the cooperative relationship between electronic cigarette exporters and customers into one of the operational risk points that require sufficient attention.For some medium-sized or smaller electronic cigarette brand exporters, how to deal with small and medium channel customers may be the most pressing issue in daily operations. It is not easy to fully develop and expand channel customers while maintaining bottom-line risks under the domestic regulatory system.In the past, when the overseas market was performing well and domestic regulation on exporting electronic cigarettes was not very strict, the risks of civil or administrative regulation for electronic cigarette exporters were not prominent.However, the guidelines released in July 2023 indicate that the first phase of domestic regulation in the electronic cigarette industry may have reached a temporary conclusion, and compliance regulation regarding the quality, processes, and intellectual property of exported electronic cigarettes is likely to become the next regulatory focus. Moreover, while it is difficult to say that the overseas electronic cigarette market has entered a silver age, the increasing number of competitors has made this market less of a "gold rush," which may turn the cooperative relationship between electronic cigarette exporters and customers into one of the operational risk points that require sufficient attention.This article mainly discusses how electronic cigarette exporters can control bottom-line risks when dealing with small and medium customers, based on the legal and risk issues raised by our electronic cigarette clients in daily consultations.1. Civil Dispute RisksWhen the market is not booming, the relationship with downstream channel customers can become delicate. Disputes over payment, deposits, returns, quality issues, cargo damage, after-sales returns, and other principle-related disputes may arise one after another.In our view, regardless of the circumstances, electronic cigarette companies are advised to make the following agreements and preparations when cooperating with downstream channel customers, especially small and medium customers:(1) Control Payment SecuritySome electronic cigarette exporters operate on a model of deposit stock + full payment shipment or full payment before stock shipment, which is relatively secure for payment. However, if special circumstances arise, such as customers requesting deposit shipments or what to do if the customer cancels the order after the deposit stock is prepared?We recommend considering the following agreement options in such cases:In the absence of other guarantees, if the customer has a domestic operating entity or a domestic actual controller, it is advisable to include the domestic operating entity as one of the contract parties and, if possible, include the domestic actual controller as one of the contract parties (e.g., as a guarantor).In such cases, many of these small and medium customers' overseas trade entities may be shell companies, making it difficult to verify their ability to bear responsibility. Furthermore, even if a breach occurs, pursuing the responsibility of the overseas company can be time-consuming and labor-intensive. Therefore, in situations where electronic cigarette exporters face significant payment risks, it is a safer choice to require the domestic entity and actual controller of the customer to bear responsibility, although this should also be considered in light of the company's negotiating position. Additionally, relatively strict and clear penalty clauses for breaches are also essential risk control measures.(2) Control the Cost and Method of Dispute ResolutionThe choice of dispute resolution institution, location, and applicable law can significantly impact the cost and outcome of dispute resolution. For example, if a company, as a Chinese entity, can resolve disputes in Chinese courts or arbitration institutions and apply Chinese law, the cost and efficiency of dispute resolution may be more suitable for Chinese companies. However, China does not apply an evidence disclosure system. If a company wants to conduct extensive evidence disclosure and is less concerned about costs to discover evidence as much as possible, choosing U.S. courts and U.S. law for dispute resolution may be a more suitable option. The specific choice still needs to be considered based on the regions involved in the transaction and the company's demands. Therefore, the choice of dispute resolution institution, location, and applicable law will significantly affect the cost and outcome of future disputes. For electronic cigarette exporters, due to the involvement of foreign cooperation, the uncertainty of dispute resolution institutions, locations, and applicable laws may become significant. Thus, we recommend that these three dispute resolution points be agreed upon in advance, and regarding the dispute resolution institution, we suggest that agreeing to resolve disputes through arbitration institutions may be a better choice, given their confidentiality, speed, and flexibility, which may be key concerns for electronic cigarette exporters.(3) Control Acceptance Processes and After-Sales ProcessesFor electronic cigarettes, which are mass-consumed electronic products, it is inevitable that there will be some quality defects, damage during transportation, and after-sales returns during the acceptance process. However, in the context of long-term international logistics, how to define and handle these "defective products" can become contentious, especially as small issues accumulate over time, turning into larger issues, increasing economic interests, and making facts difficult to ascertain, leading to disputes. In this regard, we recommend the following:1. Set "Product Quality Standards" and "Product Sampling Inspection Standards" as attachments to the main contract. For large quantities of goods, sampling inspection is generally used. Determining whether the sampled products are qualified, how to ensure the sampling is representative, and how to determine the severity of non-conformity will be challenging factual issues. At this time, product quality standards and sampling inspection standards will be key evidence for determining facts (regarding sampling inspection standards, there are relevant national and industry guidelines);2. In the acceptance process, set an "acceptable non-conforming product rate," meaning that within a reasonable ratio of non-conforming products during acceptance, the seller will not be considered in breach of contract, and no contract termination or penalty clauses will be triggered. Both parties should separately agree on how to compensate;3. In the acceptance process, set an "acceptance objection period," meaning that the recipient should conduct acceptance and raise objections within a specific time frame upon arrival. If no acceptance or objections are raised, the products will be deemed fully qualified, and future objections will not be accepted;4. In the after-sales process, clarify the responsible party for after-sales responsibilities (e.g., after-sales quality issues or damages caused to consumers). If it is agreed that the electronic cigarette exporter will bear after-sales responsibilities, the relationship between this responsibility and breach of contract should be clarified. For example, if a customer returns goods due to quality issues, can the downstream customer use this to demand compensation or further breach of contract? How to determine the extent of quality issues that constitute a breach? How to confirm the existence of quality issues? It is important to note that when agreeing to such after-sales responsibilities, it is advisable to clearly stipulate the time limits for downstream customers to report after-sales events and requests for compensation or breach claims, and to agree that overdue reports will not be accepted to avoid backlog of after-sales events, which may become disputes that both parties must address in the future.(4) Intellectual Property IssuesExporting electronic cigarettes involves multiple countries, and during cooperation with small and medium customers, disputes may arise regarding intellectual property issues, including patents, designs, and trademarks. This mainly includes two aspects: 1. If the customer participates in the design or makes minor customizations, who owns the intellectual property? In principle, in the field of intellectual property, jointly created intellectual property belongs to both parties, and intellectual property created by the trustee for the client belongs to the trustee. Of course, other agreements may specify otherwise. To avoid future disputes, it is advisable for both parties to agree in advance on the ownership of relevant intellectual property for the products. 2. If intellectual property infringement disputes arise in the selling or producing country, who will bear the responsibility and what kind of responsibility will be assumed?Since products may be sold in multiple countries, and the intellectual property regulations and rights situations in each country are not uniform, if intellectual property infringement disputes arise in the producing or selling country, such as patents, designs, trademarks (trademarks are relatively rare and usually searched first), or even copyright issues, especially when the customer participates in customization or the infringement point is based on materials provided by the customer, who will bear the responsibility? What kind of responsibility will be assumed? We recommend that in such cases, based on the provider of relevant materials and intellectual property, clearly stipulate the responsible party for intellectual property disputes and the scope of that party's responsibility, which should cover reasonable expenses incurred by the non-responsible party in response to the incident, such as attorney fees, litigation costs, and compensation for losses. If necessary, it can be agreed that the responsible party will bear other economic losses suffered by the "innocent party" due to the infringement incident.2. Administrative Regulatory Penalties and Criminal RisksRegarding this part, during cooperation with small and medium customers, domestic administrative regulation, penalties, and criminal issues mainly need to pay attention to cross-border diversion and backflow issues. The compliance risks and responses involved are discussed in detail in our other article "Vaping Lawyer: Compliance Risks and Responses Related to Cross-Border Diversion of Exported Electronic Cigarettes." Interested readers can refer to that.Additionally, based on multiple consultations, it seems that licensed electronic cigarette companies cannot sell electronic cigarette products to unlicensed domestic trading entities (including transit sales for export purposes), which has become a unified standard among regulatory authorities. Therefore, electronic cigarette exporters should also avoid trade cooperation with such unlicensed domestic trading entities to prevent unnecessary regulatory risks.
At the same time, based on the current compliance status and regulatory trends for exporting electronic cigarettes, we are also considering building a "compliance database for exporting electronic cigarettes" together with everyone to respond to the ever-changing domestic and international policy trends. Lawyers, legal professionals, or those involved in electronic cigarette business compliance are welcome to contact us to create a shared and collaborative compliance information platform for electronic cigarette exports.
Lawyer Deng Hongchang is a partner at Shenmei Law Firm. He is a qualified patent agent and a member of the Royal Institution of Chartered Surveyors (MRICS), selected as a "Shenzhen Entrepreneurship Mentor" by the Shenzhen Human Resources Bureau and a mediator at the Futian District Court in Shenzhen. He has also been selected as an expert by the Guangdong Province Intellectual Property Protection Association and a rising talent in foreign-related law in Shenzhen. He has represented numerous intellectual property-related cases that have won awards such as "Guangdong Province Business Secret Protection Major Events" and "Top Ten Typical Cases of Intellectual Property Handled by Shenzhen Lawyers." Lawyer Deng has long served electronic cigarette companies and focuses on legal research in the electronic cigarette industry.
