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Chinese Competitors Registering .CN Domain Names in Your Company’s Tradema...

July 12, 2018| Mr. David A. Dodge, Esq. | Uncategorized

We recently received an email from a well-established American company perplexed that they had registered several TM’s in China but still found their company’s .cn domain name had been registered by a Chinese competitor.

Our email response:

“Thank you for your message regarding the TM infringement / domain name matter.

CNNIC (the China Internet Network Information Centre) is a non-profit organization authorized by the Ministry of Information Industry to operate and administer China’s domain name registry for China’s country code top level domain known as “.cn”

In China, a brand name or trademark registration in China is independent from domain name registration. Brand name and trademark registration are administered by the Trademark Office of China (CTMO) administered under the State Intellectual Property Office (SIPO). It is important to note that both registrations are on a first-to-file system.

We advise our clients who are multinational corporations operating in China to have registered a number of “.cn” domain names (even in the hundreds) that contain the keywords of their brand names or trademarks in order to secure their distinct identity and avoid them being registered by others.

In terms of the current situation, we can assist your company by:

1. Working with your IT team to add additional hyphens, letters or numbers to make several new domain names and registering them in China;
2. Negotiating with the registrant entity to transfer the domain name to your company and/or to cease and desist violating our rights to our trade name by forwarding to competitor companies that are violating our TM;
3. Initiating dispute resolution, as called for by the CNNIC, and following the dispute resolution procedures as to behavior which violates IP rights.

CNNIC regulations provide that if a company determines that its legal rights and interests have been breached as a result of a particular domain name being registered by another party, either of the two CNNIC accredited domain name dispute resolution institutions should be contacted. One of those is CIETAC which we are familiar with.”

Registering a TM in China DOES NOT equate to securing your company’s .cn domain name or variants thereof.

 

 

Getting Money Out of China — Legally Expatriating Corporate Profits from C...

June 28, 2018| Mr. Bowen Zhang, Esq. | Uncategorized

From the end of 2016 to present, China has been increasingly tightening its capital controls. Faced with an outflow of money resulting from a depreciating yuan, Chinese officials are restricting the flow of money into foreign currencies such as the US dollar, causing severe complications to businesses with a large portion of international operations and profits in China from moving their profits to their home jurisdictions.

Recently, one of our firm’s client, who is a foreign investor, wanted to use their Chinese WFOE to invest in a country outside of China. Such a transaction generally requires the approval of at least four (4) regulating entities: Applications with Ministry of Finance (MOF), Peoples Bank of China (PBOC), State Administration of Foreign Exchange (SAFE) and the National Development and Reform Commission (NDRC). As a result of the complexities involved in this process, it took nearly half a year for our firm to obtain approval for this transaction.

Also, adding to business uncertainty in the process, during the process of receiving approval from the above-stated formal entities no one can confidently say whether such approval will be granted or not. Based on our experiences in several cases we have handled, we would like to summarize the following factors, at bare minimum, regulators would want to evaluate surrounding a client expatriating money from China:

1. The nature of the transaction;

2. The nature of the parties (a lot more than just their corporate structures);

3. The histories of the parties;

4. The location of the parties;

5. The nationalities of the parties (especially the receiving party);

6. The source of funds to be demonstrated; and,

7. That all involved entities demonstrate that they have paid sufficient tax in China to the relevant taxation authorities.

These are some other restrictions to consider:

1. The government will not allow money to exit China destined to certain countries deemed at high risk for fake transactions unless there is conclusive proof that the transaction is bona fide — in other words, requiring significantly more proof than would otherwise be required.

2. Money will not be cleared for transfer outside China for certain types of transactions, especially services, which are often used to disguise moving money out of China illegally unless there is a lawyer who can document that the relevant services were indeed rendered.

Under the most restrictive regulations, there are still some legitimate alternative methods we have pursued to get large sum money out of China:

1. A WFOE or shareholder, if it turns a profit, can legitimately repatriate (expatriate from China) its profits as dividends to the overseas holding entity. This incurs a tax burden – both the profits of the business, and the dividends paid to the holding company of the WFOE in China, incur tax (which is 25%). The operation of repatriating profits can be administratively complicated and requires completion of the annual full company audit and a lawyer’s certification;

2. The WFOE can lose in a foreign arbitration and, thus, be required to pay litigation costs and liabilities outside China. This approach is complex and requires particularized advice and consultation;

3. Money can be paid to an overseas service provider, including for services such as consulting, training, design, and the like. Tax rates depend on the nature of the service, and whether withholding taxes are due, but can be less than 7%. This is a legitimate channel for payments overseas, but tightly regulated. SAFE would be responsible for approving each payment, which requires some complex legal work and takes approximately 2-3 weeks; and,

4. Each Chinese citizen has an annual exchange allowance of $50,000 USD, which can then be transferred overseas. This exception to restrictions can be used to operate what is known as “Smurfing”, whereby anyone requiring funds overseas would pool the personal allowance of friends and family — eventually fanning the payments out to all the contacts in this network.

Of course, there are some electronic methods such as Bitcoin and other electronic “money” that can assist in such a transfer. However, such electronic “money” can only be transferred with a high degree of risk of some or total loss. The value of Bitcoin has dropped significantly during the last half year. Our firm strongly recommends against becoming involved with any illegal, tax evasive activities that could result the in the risk of loss of a company’s monies and/or incurring criminal and tax liabilities when attempting to expatriate capital outside of China without seeking legal advice as to how to properly proceed.

Issues in International Licensing and Sublicensing

June 18, 2018| Mr. David A. Dodge, Esq. | Uncategorized

Issues and questions pertaining to licensing and sublicensing are becoming increasingly common in our practice as companies outside the PRC that we assist with successfully obtaining duly registered and approved PRC trademarks, copyrights and patents in China seek to further expand their business by contracting with Chinese companies, third parties and/or subcontractors in order to sell their products to Chinese consumers.

Obtaining favorable terms to these licensing and sublicensing agreements is critical to both protecting a licensor entity’s rights and assuring a strong future royalty stream. Having a clear policy that supports a strong negotiating position toward sublicensing is the first step in dealing effectively with this sometimes contentious issue.

There are several issues to be aware of when contemplating the granting of license and sublicenses in the China context.

Royalty Structures and Sublicensing  

Sometimes the head license agreement will provide that the licensor receives a royalty on the sale price of the sublicensee.  Alternatively, the license agreement may provide that the licensor receives a percentage of the royalty that the licensee gets from the sublicensee.  In other agreements, a hybrid arrangement may be agreed, whereby the licensor receives milestones at different stages of development of licensed products, whether by the licensee or a sublicensee.  The licensor does not receive a percentage of milestone payments received by the licensee from the sublicensee. but does receive a percentage of royalty payments received by the licensee from the sublicensee calculated on the sale price of licensed products (sometimes known as running royalties).  All of these provisions require very careful drafting.  We have occasionally been asked by clients to base royalties on the ultimate sale price to the consumer for example by a retailer who may have purchased the products from a sublicensee.  It may be very difficult to audit such sales, so such a structure should usually be avoided unless the licensor has strong auditing rights granted in the sub-licensing agreement and a monthly or bi-annual right to inspect the sub-licensees books.

Prohibiting License Assignment

One of the first priorities in constructing sublicensing terms and conditions is to distinguish clearly between sublicensing and assignment.

Due to the complexity of international enforcement issues and the potential for complex legal maneuverings by licensees, assignment of a license should simply be prohibited. That advice is sometimes difficult for licensors to enforce, however. Licensors should prevent sublicensees from automatic assignment but may permit assignment under specific circumstances.

For example, licensors can ordinarily permit assignment of a sublicense by the sublicensee in the context of mergers and acquisitions of the entire business to which it pertains, except in the event that the proposed M&A partner is a direct competitor of the patent or trademark owner.

Licensees Should Seek Notification and/or Approval

Licensors generally differ on whether to ask for notification or approval of sublicensing rights. Most licensor companies are reluctant to grant the open-ended right to approve sublicenses. Further, licensees are often reluctant to seek that right, preferring instead to seek notification and ensure original license agreements stipulate that sublicenses comply with the original license terms.

Most licensors should ask for a complete, nonredacted copy of the sublicense in their licensing agreements. Licensors should also add language in the license agreement that the sublicensee will be bound by all of the terms and conditions in the original license agreement.

Licensors should also consider having a pro forma sublicense document attached as an exhibit to their licensing contracts, so the parties have agreed in advance to the terms and conditions of the sublicense.

Require Reporting of Sublicense Income

Reporting and payment of sublicense income is another area that requires due diligence on the part of the licensor. Irregularities in reporting sublicensing income occur often, so licenses should allow for regular audits of sublicensing income.

Generally, licensors should put in a provision where the licensor will pay the cost of any audit of sales unless it shows an underpayment of 5% or more under the agreement in which case the licensee will be responsible for the cost of the audit and will pay the amount of the deficiency plus a penalty which is usually prime plus 4%.

Licensors should also consider requiring that any royalty report is signed by the licensee’s and/or sublicensee’s chief financial officer, ensuring that there the licensee and/or sublicensee is more careful about the accounting. Thus, if a licensor finds irregularities in the sublicensing data, the licensee would have the right to audit their sublicensee or allow for the licensor to conduct an audit at the licensors and/or sublicensors expense.

Should the License Extend to Affiliates of the Licensee? 

Understandably, many licensees wish the license to extend to their group companies.  This can be addressed in different ways.  If affiliates are “automatically” covered by the head license (for example, by defining the Licensee to include Affiliates), this raises contractual questions including: (a) can the licensor sue an affiliate for breach of contract, indeed is the affiliate bound by the terms of the license; (b) can an affiliate sue the licensor to enforce its rights (whether as a party or third party beneficiary); and (c) if affiliates are directly parties to the license agreement, does the person signing on behalf of the licensee have signing authority on behalf of every affiliate?  Sometimes, these issues are glossed over, which in our view is undesirable.  Instead, it may be preferable to include a provision in the license agreement allowing sublicensing to affiliates of the licensee.

Sublicensing and Subcontracting 

Licensees sometimes assume that they are entitled to subcontract manufacturing or other rights under the license to a third party.  If the grant clause includes a specific right to “have made”, then subcontracting of manufacture is permitted.

A fairly recent trend in license grant clauses is to provide that the licensee may not only “have made” but may also “have sold”.  Depending on how the clause is worded, this is potentially troubling for a licensor, as if a licensee appoints someone to make and sell the licensed product on the licensee’s behalf, this could amount to sublicensing via a back-door route.

Sublicensing Conditions 

A licensor may wish to impose conditions on sublicensing, including ensuring that the sublicensee is bound by certain terms of the head license.  Template license agreements often include detailed provisions in this area.  An important issue is whether the sublicense survives termination of the head license by the licensor.  From the sublicensee’s perspective, the sublicense may be of limited value if it can be terminated due to no fault on the sublicensee’s part, for example, if the head licensee is in breach of the terms of the head license agreement.  Sometimes, a sublicensee will enter into a side agreement with the head licensor to ensure that the sublicense continues in such circumstances.

 

International Trademark Classes

June 18, 2018| Mr. David A. Dodge, Esq. | Uncategorized

Here are the forty-five so-called “Nice classes” into which trademark applications are classified. The classes are named after the city of Nice, France, where the first listing of classes was negotiated in 1957.

Please note that the terms in the class headings or short titles of the classes are generally too broad to be used alone as your actual description of products or services. Also, an international class number alone is never an acceptable listing.

Product (“Goods”) Classes

Class 1: Chemical Products
Chemicals used in industry, science and photography, as well as in agriculture, horticulture and forestry; unprocessed artificial resins; unprocessed plastics; manures; fire extinguishing compositions; tempering and soldering preparations; chemical substances for preserving foodstuffs; tanning substances; adhesives used in industry.

Class 2: Paint Products
Paints, varnishes, lacquers; preservatives against rust and against deterioration of wood; colorants; mordants; raw natural resins; metals in foil and powder form for painters, decorators, printers and artists.

Class 3: Cosmetics and Cleaning Products
Bleaching preparations and other substances for laundry use; cleaning, polishing, scouring and abrasive preparations; soaps; perfumery, essential oils, cosmetics, hair lotions; dentifrices.

Class 4: Lubricant and Fuel Products
Industrial oils and greases; lubricants; dust absorbing, wetting and binding compositions; fuels (including motor spirit) and illuminants; candles and wicks for lighting.

Class 5: Pharmaceutical Products
Pharmaceutical and veterinary preparations; sanitary preparations for medical purposes; dietetic substances adapted for medical use, food for babies; plasters, materials for dressings; material for stopping teeth, dental wax; disinfectants; preparations for destroying vermin; fungicides, herbicides.

Class 6: Metal Products
Common metals and their alloys; metal building materials; transportable buildings of metal; materials of metal for railway tracks; nonelectric cables and wires of common metal; ironmongery, small items of metal hardware; pipes and tubes of metal; safes; goods of common metal not included in other classes; ores.

Class 7: Machinery Products
Machines and machine tools; motors and engines (except for land vehicles); machine coupling and transmission components (except for land vehicles); agricultural implements other than hand-operated; incubators for eggs.

Class 8: Hand Tool Products
Hand tools and implements (hand-operated); cutlery; side arms; razors.

Class 9: Computer and Software Products and Electrical and Scientific Products
Scientific, nautical, surveying, photographic, cinematographic, optical, weighing, measuring, signalling, checking (supervision), life-saving and teaching apparatus and instruments; apparatus and instruments for conducting, switching, transforming, accumulating, regulating or controlling electricity; apparatus for recording, transmission or reproduction of sound or images; magnetic data carriers, recording discs; automatic vending machines and mechanisms for coin operated apparatus; cash registers, calculating machines, data processing equipment and computers; fire extinguishing apparatus.

Class 10: Medical Instrument Products
Surgical, medical, dental, and veterinary apparatus and instruments, artificial limbs, eyes, and teeth; orthopedic articles; suture materials.

Class 11: Environmental Control Instrument Products (lighting, heating, cooling, cooking)
Apparatus for lighting, heating, steam generating, cooking, refrigerating, drying, ventilating, water supply, and sanitary purposes.

Class 12: Vehicles and Products for locomotion by land, air or water
Vehicles; apparatus for locomotion by land, air, or water.

Class 13: Firearm Products
Firearms; ammunition and projectiles; explosives; fireworks.

Class 14: Jewelry Products
Precious metals and their alloys and goods in precious metals or coated therewith, not included in other classes; jewelry, precious stones; horological and chronometric instruments.

Class 15: Musical Instrument Products
Musical instruments

Class 16: Paper and Printed Material Products
Paper, cardboard and goods made from these materials, not included in other classes; printed matter; bookbinding material; photographs; stationery; adhesives for stationery or household purposes; artists’ materials; paint brushes; typewriters and office requisites (except furniture); instructional and teaching material (except apparatus); plastic materials for packaging (not included in other classes); printers’ type; printing blocks.

Class 17: Rubber Products
Rubber, gutta-percha, gum, asbestos, mica and goods made from these materials and not included in other classes; plastics in extruded form for use in manufacture; packing, stopping and insulating materials; flexible pipes, not of metal.

Class 18: Leather Products (not including clothing)
Leather and imitations of leather, and goods made of these materials and not included in other classes; animal skins, hides; trunks and traveling bags; umbrellas, parasols and walking sticks; whips, harness and saddlery.

Class 19: Non-Metallic Building Material Products
Building materials (non-metallic); nonmetallic rigid pipes for building; asphalt, pitch and bitumen; nonmetallic transportable buildings; monuments, not of metal.

Class 20: Furniture Products
Furniture, mirrors, picture frames; goods (not included in other classes) of wood, cork, reed, cane, wicker, horn, bone, ivory, whalebone, shell, amber, mother-of-pearl, meerschaum and substitutes for all these materials, or of plastics.

Class 21: Houseware and Glass Products
Household or kitchen utensils and containers; combs and sponges; brushes (except paint brushes); brush-making materials; articles for cleaning purposes; steel-wool; unworked or semi-worked glass (except glass used in building); glassware, porcelain and earthenware not included in other classes.

Class 22: Ropes, Cordage and Fiber Products
opes, string, nets, tents, awnings, tarpaulins, sails, sacks and bags (not included in other classes); padding and stuffing materials (except of rubber or plastics); raw fibrous textile materials.

Class 23: Yarns and Threads
Yarns and threads, for textile use.

Class 24: Fabrics and Textile Products
Textiles and textile goods, not included in other classes; beds and table covers.

Class 25: Clothing and Apparel Products
Clothing, footwear, headgear.

Class 26: Lace, Ribbons, Embroidery and Fancy Goods
Lace and embroidery, ribbons and braid; buttons, hooks and eyes, pins and needles; artificial flowers.

Class 27: Floor Covering Products
Carpets, rugs, mats and matting, linoleum and other materials for covering existing floors; wall hangings (non-textile).

Class 28: Toys and Sporting Goods Products
Games and playthings; gymnastic and sporting articles not included in other classes; decorations for Christmas trees.

Class 29: Meat and Processed Food Products
Meat, fish, poultry and game; meat extracts; preserved, frozen, dried and cooked fruits and vegetables; jellies, jams, compotes; eggs, milk and milk products; edible oils and fats.

Class 30: Staple Food Products
Coffee, tea, cocoa, sugar, rice, tapioca, sago, artificial coffee; flour and preparations made from cereals, bread, pastry and confectionery, ices; honey, treacle; yeast, baking powder; salt, mustard; vinegar, sauces (condiments); spices; ice.

Class 31: Natural Agricultural Products
Agricultural, horticultural and forestry products and grains not included in other classes; live animals; fresh fruits and vegetables; seeds, natural plants and flowers; foodstuffs for animals; malt.

Class 32: Light Beverage Products
Beers; mineral and aerated waters and other nonalcoholic drinks; fruit drinks and fruit juices; syrups and other preparations for making beverages.

Class 33: Wines and Spirits (not including beers)
Alcoholic beverages (except beers).

Class 34: Smoker’s Products
Tobacco; smokers’ articles; matches.

Service Classes

Class 35: Advertising, Business and Retail Services
Advertising; business management; business administration; office functions.

Class 36: Insurance and Financial Services
Insurance; financial affairs; monetary affairs; real estate affairs.

Class 37: Construction and Repair Services
Building construction; repair; installation services.

Class 38: Communication Services
Services allowing people to communicate with another by a sensory means.

Class 39: Transportation and Storage Services
Transport; packaging and storage of goods; travel arrangement

Class 40: Treatment and Processing of Materials Services
Treatment of materials.

Class 41: Education and Entertainment Services
Education; providing of training; entertainment; sporting and cultural activities.

Class 42: Computer and Software Services and Scientific Services
Scientific and technological services and research and design relating thereto; industrial analysis and research services; design and development of computer hardware and software.

Class 43: Restaurant and Hotel Services
Services for providing food and drink; temporary accommodations.

Class 44: Medical and Beauty Services and Agricultural Services
Medical services; veterinary services; hygienic and beauty care for human beings or animals; agriculture, horticulture and forestry services.

Class 45: Personal, Legal and Social Services
Legal services; security services for the protection of property and individuals; personal and social services rendered by others to meet the needs of individuals.

Do I Really Need Underwriters Laboratories (UL)?

May 1, 2018| Operatechina.com | Uncategorized

Underwriters Laboratories (UL) is one of seventeen privately owned companies in the United States approved by the U.S. government to perform safety tests on products sold in the United States. Since UL is only one of the several companies approved to perform these tests, in many cases, you do not need to obtain a UL safety certification in order to sell your products in the United States. You can obtain safety certificates from other approved companies such as MET, NSF, TUV Rheinland and CCL. However, in many cases you will simply have no choice but to “choose” a safety certificate through UL. To understand why, you need to know more about the way the U.S. safety certifiers market works.

The United States safety certification market often fails to provide the maximum value for the money U.S. customers eventually pay for safety certification. Changing the current situation is a task for politicians, but for several reasons, the solution is not likely to appear soon. Nonetheless, if you need your products to have a safety certification, knowing how the safety certification market works can help you save time and money. The following is meant for those of you who intend to develop products and import them to the United States.

United States Safety Standards

Safety standards are standards designed to ensure the safety of products, activities, or processes. They set the standards for safety tests made by safety certifiers. The job of safety certifiers is to test for any foreseeable hazard such as fire, shock, sharp edges, radiation and so on. They look for the worst possible condition, simulate it, and test it to make sure that if a product fails, it fails safely. They provide assurance that the products they certify meet basic safety requirements.
Companies that sell products notify the customer that their product meets the safety standards by making sure that the product is marked by the mark of the safety certifier who tested the product. Each safety certifier company has its own unique mark. These marks signal to the customer that the product is safe to use.

Since almost everything we use poses a certain amount of risk, safety certifiers’ marks can be found almost everywhere. You will find them on the alarm clock that rousts you out of bed in the morning, on the reading lamp you turn off at night, on your coffee maker, toaster, refrigerator, stove, gas grill, television, CD player, telephone, computer monitor, automated bank tellers, vending machines, window glass, roof shingles, wallboard, bulletproof vests, safes, locks, pinball machines, vacuum cleaners, pizza cookers, hair dryers, flashlights, medical beds, garage doors, adhesives, yachts and even on pet-bed warmers.

In many countries, safety standards are set by the government with some industry involvement. In addition, the safety tests for making sure that these standards are met are conducted by the government. In the U.S, government involvement exists but is very limited and performed through the U.S. Consumer Product Safety Commission (CPSC). The CPSC is charged with protecting consumers from hazardous products. Most safety standards in the U.S. are set by the private industry, and the CPSC imposes federal regulations only when it believes that the industry’s voluntary efforts are insufficient. As a result, U.S. safety standards are divided into two types: advisory and compulsory by law.

The United States legally requires that safety testing be performed by safety certifiers. This places product safety in the hands of the private sector because these certifiers are privately owned companies. In order for a company to become an approved certifier, it must meet the requirements of the U.S. federal agency Occupational Safety and Health Administration (OSHA). OSHA maintains a list of approved safety certifiers which are known as Nationally Recognized Testing Laboratories. This list can easily be found on the Internet.

The administrator and coordinator of the U.S. voluntary standardization system, the American National Standards Institute (ANSI), is also not a federal agency. The ANSI is a private organization supported by a diverse constituency of private and public sector organizations. This description sounds vague for a reason.

ANSI does not directly develop standards; instead, it facilitates the development of standards by establishing consensus among the groups who are interested in safety certification. These are producers, users, government agencies and safety certifiers. In practice, safety certifiers are not just testing standards and providing safety certifications, but they are also the main source for developing the standards.

The system described above is intended to provide users (customers, companies, organizations, and insurance companies who rely on certification to control losses) with products that are safe to use. This is meant to ensure that obtaining the safety certification is done effectively and for a fair and reasonable price.

In addition, the system provides the standards for government agencies so they can use them to assess regulatory compliance in cases where meeting the standard is required by law.

The Game and Inherent Problems

The players in the game of private safety certifiers are divided into four categories:

a) The Customers (who purchase and consume certified products)

b) Manufacturers (of raw material, components, and finished goods)
c) Certifiers

d) Other Players: companies and organizations who buy directly from manufacturers, importers and distributors, brand names, store chains, government agencies, states, cities, local authorities, and insurance companies

Private certification harnesses market demand for safety certification. Without sufficient demand, private safety certifiers would not be able to profit from the service, and private certification would not exist. It is market demand that gives manufacturers the incentive to pay for product testing. Those who form the demand for safety certification seek the assurance provided by safety certifiers, and companies that fail to obtain certification risk losing market share. Companies rely on safety certification when obtaining inputs and choosing suppliers. Government agencies use it to assess regulation compliance.

Since the products customers buy are not purchased directly from manufacturers, certifiers aim their marketing efforts towards the players in category (d) above. This way, they don’t have to convince the final customer that their safety certification is better than the safety certifications of other certifiers. Demand in the model above is not created by the final customers but by those who lie in the layers between the manufacturer and the final customer.

However, the model described above has a few inherent problems. The first problem is related to the question: “How much safety is enough?” While it is obvious that products with certification are safer to use than products without certification, it is not clear how to compare the benefits of safety certification to the cost of obtaining the certification. This problem makes the entire safety certification business vague. It creates fertile ground for the decision-making process in companies, organizations, and government agencies to be based more on personal network relationships within the system rather than on objective criteria.

Second, those who eventually pay for safety certification (the final customers who buy the product which carrying the safety certification mark) are not those who pay the certifiers directly for safety testing (the manufacturers of the products). This necessarily means a waste in the safety certification process, which then translates to higher prices for the consumer.

Third, certifiers write many of the standards in the United States which implies that there are too many standards. By writing more standards, certifiers increase their income from manufacturers who are then required to meet the new standards.

Under a truly competitive market for private safety certifiers, private certification may offer a better alternative to government regulation. Ideally, it means faster testing, lower costs for testing, superior technical expertise, better inspections, and increased responsiveness to consumers. Under a truly competitive market, the inherent problems listed above would not be very significant.
Unfortunately, the private safety certifiers market in the U.S. is far from being competitive. The dominance of UL has been indisputable for almost 100 years. Under these conditions, the above list creates a significant problem of which U.S. consumers are not aware and therefore don’t care about. This system feature helps UL improve its grasp on the industry and continue increasing its market share. Despite this issue, none of the involved entities are speaking up: manufacturers, consumers, and government agencies. In fact, the United States government benefits from private certification because it offers a comfortable solution that involves less responsibility.

UL’s market share does not reflect the quality of the safety tests carried out by UL. All safety certifiers perform the same tests and get the approval to operate based on the same criteria. UL’s market share is the result of factors that have nothing to do with the services offered: a) Their investment in marketing and branding, b) Their operation times, and, c) The fact that they were the first in the business when safety standards began to be enforced. The fact that they were the first allowed them to adopt safety – a public domain – as their own domain. As a result, UL is essentially a branding business that uses safety as a cover to continuing exploiting the system.
Some would say that this is a legitimate operation within a capitalist system. However, safety is not a product that this company has invented. One can argue that safety is a public domain, and no one entity should have a monopoly on safety just as no one should have a monopoly on the air we breathe.

The Market Share of UL and History

It all started at the end of the 19th century with standards for fire safety. At the end of the 19th century, fire ravaged many American cities (Ex: The Great Chicago Fire of 1871 and similar scale fires in cities from Boston to Seattle). Fire risks varied unpredictably from building to building, and effective policies required extensive information gathering and vigilant compliance monitoring – all of which did not exist at that time.

The initial demand for safety standards did not arrive from customers or government. It came from insurance companies who were looking for ways to price risk and reduce losses caused by fire. To investigate fire and determine what caused them, insurance companies sponsored laboratory research to analyze building materials and firefighting equipment. The first to write safety standards in the United States were underwriters in insurance companies. Insurance companies placed conditions on coverage based on adherence to these standards and conducted routine inspections of buildings covered by their policies.

As part of their efforts to determine what caused fires, they also invested money in research conducted by individual experts. In 1895, they funded an engineer named William Merrill to conduct fire safety testing on building materials and electrical appliances. Using a budget of USD300 (USD6,000 in 2016 dollars), Merrill and his small staff completed seventy-five safety tests.

Two year later, Merrill published a list of “approved fittings and electrical devices” which he distributed to fire underwriters at insurance companies and municipal fire service officers. The small operation of Merrill was incorporated in 1901 under the name “Underwriters Laboratories”, or in short: UL. The underwriters in the name of UL are the insurance fire underwriters who were the first to use safety standards in the U.S.

Having no government regulation in the field of fire safety, UL fulfilled the need of insurance companies and flourished. By 1905, UL published 75,000 reports, and its annual budget was 5.5 million USD in terms of 2016 dollars. In 1916, UL ended its financial dependence on the insurance industry and relied exclusively on fees from manufacturers for testing, factory inspection, and labeling. Fire insurance companies continued to use conditional coverage on the use of UL approved building materials, and the local government incorporated UL standards into their building codes. The government role in regulating fire safety continued to be zero, and UL played the “good boy” role and submitted its safety standards to the American National Standards Institute to establish nationally recognized standards.
The first claims against UL as a monopoly started to appear in 1922. But by that time, it was too late. UL had a firm grasp on the safety certification system, and it was already too strong to reverse. The proof is the current condition of private safety certification in the U.S. Ninety-five years later, UL is still dominating the market in more than just fire safety.

Until 1935, UL operated as a not-for-profit-organization which helped position it as something similar to a public organization. At the same time, it was a fast-growing business with goals that had very little to do with the public welfare. In 1935, the IRS revoked the tax-exempt status UL enjoyed as a not-for-profit-organization on the grounds that it was more of a commercial business than a scientific endeavor. UL appealed but was turned down due to an opinion which stated that UL did not operate on the basis of science for the sake of science, but was science for the sake of business. As a result, UL switched tactics to change the rules of the game, and in 1954 it obtained once again tax-exempt status after Congress amended the tax laws to include organizations “testing for the public safety”. The organizations held the same nonprofit status as religious groups, educational institutions, and charities. No explanation was provided for the change in the law.

Today, UL certifies more than 20,000 types of products, not just building materials and electrical devices. What started in 1893 as a two-person operation with $350 worth of equipment, by marketing and branding safety as their own, has now grown into a corporation with more than 12,000 employees and 64 certification facilities. It oversees more than 700 safety standards. The managers who lead UL appear online as heroes. The average American home contains more than 125 UL markings which most customers don’t bother to notice. Whether they take time to notice or not, they pay the full price for this mark.

Summary

The current system of safety certifiers in the U.S. charges a price that is too high for the service it offers, produces too many standards and invests too much money in marketing and branding that have nothing to do with the quality of the service certifiers offer. In addition, the system encourages personal relationships within the certification system network and leads to political corruption intended to preserve the current situation.

MET, NSF, and CCL are just as good as UL. It is ridiculous that UL is permitted to play the game it plays, but given the roots it has in the safety certification system, it’s almost impossible to fight.
Individuals who develop products and import them to the U.S. belong to a new, rapidly growing breed. Given the current safety certification market in the United States, here are my personal two tips to conclude this blog:

A safety certificate can be obtained for a raw material, a component in a product, and the product itself. In cases where the certification is not for the product itself, you will likely get a cheaper deal without sacrificing quality if you choose a certifier who is not UL.

As for certification for the product itself, choosing a certifier is more difficult and depends on your cost-benefit analysis. The cost includes the additional cost in obtaining a UL certificate versus a certificate of a competitor. The benefit is the contribution a UL mark will add to your sales. If you don’t expect that a UL mark will open additional sales channels, there is no reason not to choose certifier from the remaining sixteen certifiers.

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