In 2009, the Chinese government committed to spend RMB 850 billion ($124 billion) to develop China’s healthcare system and improve universal healthcare access. Medical device providers, especially high-end product producers, are the main beneficiaries of this decision. According to Espicom, a business intelligence provider, the expected value of China’s medical device market will reach $28 billion by 2014. Companies from Japan, Germany, and the United States currently control 90 percent of the high-end medical device market. These companies are expected to continue to dominate this premium market in the near future.

China’s 2010 Tort Liability Law Increased the Potential Product Liability for Medical Device Manufacturers and Distributors.

China’s Tort Liability Law took effect on July 1, 2010. The law is a response to several safety scandals that captured Chinese and international attention such as the 2008 melamine-tainted milk scandal and the 2009 drywall scandal. Prior to the Tort Liability Law, legal rules addressing medical product liability were scattered throughout several Chinese laws including the Product Quality Law, General Principles of the Civil Law, and the Law on Protection of Consumer Rights and Interests. The special statutory provisions governing tort liability in other laws still apply but general provisions of the Tort Liability Law supersede earlier contrary laws.

Compared to the old rules, the Tort Liability Law brings major changes to product liability that have significant impact on the manufacturers and distributors of medical devices. Those changes include the imposition of punitive damages, mental damages, and mandatory product recalls.

A. Punitive Damages.

Punitive damages were generally unavailable under Chinese law before the implementation of the Tort Liability Law. Article 47 of the Tort Liability Law provides that when a party knowingly produced or sold defective products that caused injury to life or health, the injured party has the right to claim punitive damages. The Tort Liability Law does not limit the amount of punitive damages. Medical device manufacturers and distributors are vulnerable to high punitive damages due to the risk of causing injury to life or health. The key term in Article 47 is “knowingly.” Article 47 only provides general instruction, and no judicial interpretation or case law that explains its meaning is available yet. It is advisable for companies to keep track of legislative and judicial developments regarding this issue because it will affect their policies governing internal communications and constructive knowledge gained from outside sources.

B. Mental Damages.

For the first time in Chinese legislation, the Tort Liability Law makes mental damages a major form of damages in tort. However, mental damages have been recognized in judicial practice and were covered in a detailed opinion issued by the Supreme People’s Court in 2001. Under Article 22 of the Tort Liability Law, when the harm inflicted upon the personal rights or interests of another person causes serious mental suffering, the victim is entitled to demand compensation for mental damages. It is still unclear whether Article 22 includes damages for pure emotional distress without physical contact, and not solely mental damages in conjunction with actual physical harm. However, it is highly likely that defective medical devices would cause serious mental damages in conjunction with physical harm.

There are two issues that companies should closely follow that have still not been clarified: The first issue is whether a family member of the tort victim may claim mental damages; for example, it is unclear whether an individual whose spouse dies may have a claim against the tortfeasor for mental damages on grounds of loss of consortium or companionship. The second issue is how the appropriate compensation will be determined. In practice, the Supreme People’s Court adopted a factor analysis approach in its 2001 opinion which includes the degree of fault of the tortfeasor; the means, places, and method of the tort committed; the consequences of the tortious conduct; the benefit the tortfeasor obtained; and the financial ability of the tortfeasor to assume liability. In addition, some provinces and major cities have imposed caps on compensation that range from RMB 50,000 to RMB 100,000 ($8,000 to $16,000). However, to what degree the Tort Liability Law will change these practices remains to be seen.

C. Mandatory Warning and Recall System.

Article 46 of the Tort Liability Law provides that the manufacturer or seller should take remedial measures such as warning and recall in a timely manner when, after the product is placed into the stream of commerce, a defect is discovered. Before the adoption of the Tort Liability Law, recall obligations were included in administrative regulations and applied only to certain products. Article 46 establishes a general unified nationwide recall system for defective products. Partially due to theTort Liability Law, the Ministry of Health of China promulgated the Tentative Measures on the Administration of Recalls concerning Medical Devices, which took effect on July 1, 2011. They provide a detailed roadmap for recalls related to medical devices. Similar to the negligence per se principle (wherein an act is considered negligent because it violates a statute or regulation) in U.S. law, violations of these recall rules will be used as dispositive evidence in medical negligence suits. In addition, Article 46 imposes a duty to provide warning in a timely manner after the sale and upon the discovery of the product defect. As more legislation and case law on the Tort Liability Act accumulate, companies may be required to enact a product-tracking system in order to actively monitor possible defects.

Despite the courts’ reluctance to order costly recalls, the threat of punitive damages and mental damages may provide enough incentive for companies to rigorously follow the rule.

Liability for Defective Products is Extended to Medical Institutions and Other Third Parties.

Besides increasing their risk of being exposed to product liability claims, the Tort Liability Law helps manufacturers and distributors by providing them with additional options as to how to allocate their risks.

A. Product Liabilities Extend to Medical Institutions.

Before the adoption of the Tort Liability Law, product liabilities extended only to manufacturers and distributors, and not to medical institutions. However, in many cases a medical institution is neither a manufacturer nor a distributor but it is the user of a defective medical device. Article 59 of the Tort Liability Law addresses this question by stating “if a patient suffers damage due to defective drugs and medical devices … he or she may seek compensation from the manufacturer … as well as from the medical institution. If the said patient seeks compensation from the medical institution, the medical institution is entitled to, after compensation, claim reimbursement from the manufacturer … liable for the damage.” This is also the first time that the legislature has addressed defective medical device liability.

This rule gives medical institutions another incentive to choose high-quality medical devices. But when an injury occurs, the key issue is how to determine who caused the injury. Unlike in the United States, where parties rely on experts chosen by them, in China, the determination of who is qualified to appraise a medical tort depends on whether the tort is “medical accident” or “medical negligence.” The former needs to be appraised by local medical associations, and the latter needs to be appraised by other certified social appraisal institutions. Each institute has its pros and cons. Medical associations have more expertise in the medical field, but it is harder for doctors to remain neutral when they appraise their peers. Furthermore, the experts who make the appraisals are not available for questioning in court. On the other hand, certified social appraisal institutions may not have the required knowledge and skills to conduct sophisticated medical appraisals, but their appraisals are more easily admitted in court. It is still unclear as to how the new laws following the Tort Liability Law will solve this dichotomy. However, it is clear that whoever has the upper hand in the judicial appraisal will be in a greater position for medical device tort disputes.

B. Product Liabilities Extend to Other Third Parties.

Before the Tort Liability Law was adopted, the Product Quality Law did not directly address product liability caused by third parties except for manufacturers and distributors. The Tort Liability Law provides clarification in Article 44, through stating that if injury to other persons is caused by defects resulting from third-party transportation or storage services, the producer and seller of the defective product have the right to seek contribution from the responsible third party.

Special Concerns to U.S. Companies.

U.S. companies exporting products to China from the United States are no longer isolated from judgments against them delivered by Chinese courts. Furthermore, the public generally holds higher expectations toward American companies.

A. Enforcement of Chinese Judgments in the United States is a Possibility.

In 2009, the Central District of California held that a money judgment of $6.5 million against a U.S. helicopter manufacturer issued by a Chinese court regarding a product liability dispute was enforceable under California’s Uniform Foreign Money Judgments Recognition Act (UFMJRA). In 2011, the judgment was affirmed by the U.S. Court of Appeals for the Ninth Circuit. This is the first-ever U.S. appellate ruling that affirmed the enforcement of a Chinese court judgment in the United States. The UFMJRA has been adopted by approximately 30 states, including New York, Texas, Delaware, Florida, Georgia, Illinois, Maryland, Massachusetts, New Jersey, and Minnesota. Therefore, the companies in these states should take note of the increased legal risk caused by defective products that are sold to consumers in China.

B. Higher Expectations with Regard to U.S. Companies.

Chinese consumers are more willing to sue a U.S. company than a domestic company. They assume U.S. companies are running their business according to a higher standard and that U.S. companies are prepared to pay if they fail to meet the standard. This view is fueled by highly publicized cases that result in significant (sometimes multimillion-dollar) awards.

With that in mind, U.S. companies should pay more attention to any potential product liability issue and err on the side of caution.

What Can Companies Do?

Besides keeping track of the latest developments in Chinese product liability laws, medical device companies should very carefully review the contracts they enter into. Under the Tort Liability Law, defective medical devices may expose manufacturers and distributors to significant product liability claims. Because an injured party could seek damages from either the manufacturer or the distributor of a defective product, the Tort Liability Law makes it very important to include well-drafted indemnification and contribution language in contracts with the upstream and downstream business partners. It is also preferable to have a so-called “insurance provision” in related contracts to ensure that business partners have sufficient insurance coverage for damages they may cause.

Chinese product liability law continues to evolve and is intertwined with departmental statutes and provincial regulations. The medical devices industry is emerging but is under heavy regulations. Thus, it is well advised for medical companies who want to manufacture and sell products in China to fully assess the legal risks that could be involved before they enter the Chinese market.

Nan Zhang, Summer Associate.