The Administration for Market Regulation of Jing’an District in Shanghai (AMR) on May 7 announced an administrative penalty decision against the Shanghai branch of a multinational pharmaceutical company (the Branch) for speaking fees it paid to physicians. According to the decision, the AMR found that the speeches in question never actually occurred and that the “speaking fees” were actually bribes. The AMR held that the physicians had utilized their official positions to unduly influence patients to purchase medical products promoted by the Branch, and that the payment of the fees constituted commercial bribery in violation of Article 7, Section 1(i) of the Anti-Unfair Competition Law of the People’s Republic of China (the AUCL).

The payment of speaking fees in the pharmaceutical industry has attracted heightened scrutiny from the Chinese government in recent years, and this case is not the first time the Shanghai AMR has targeted the practice. In July 2018, a well-known pharmaceutical company, Lepu Medical Technology (Shanghai) Co., Ltd. (Lepu Medical), was ordered by the AMR of Shanghai’s Qingpu District to pay a fine of RMB 150,000 (about $21,700) because of speaking fees it had paid to physicians. Lepu Medical sponsored a conference where it arranged for seven physicians to give presentations. The company assisted the physicians by preparing handouts and presentation materials that included product information and statistics for a pacemaker sold by the company. The company paid speaking fees to the participating physicians, which it then recorded as sales expenses and conference fees. In that case, the AMR of Shanghai’s Qingpu District ruled that Lepu Medical’s conduct had unduly influenced the physicians with the goal of gaining an unfair competitive advantage, and that the speaking fees constituted commercial bribery in violation of Article 7, Section 1(iii) of the AUCL. (Please refer to Shanghai Regulator: Speaking Fees to Physicians Constitute Bribery for additional details.)

Both the current case and the Lepu case shed light on how the Chinese authorities evaluate physician speaking events and the characteristics of a typical investigation:

  • As an initial matter, the authorities will evaluate the authenticity of the underlying event. Even if the event is found to be genuine, the authorities will also investigate whether the company paying the speaking fees has exercised an undue influence over the speakers. Here, the AMR’s finding that the speaking events in question never actually occurred was the basis of its holding that the speaking fees constituted commercial bribery. However, in the Lepu Medical case, you can see that the authority dove deeper to examine more facets of the targeted speaking event. While the events themselves were found to be genuine, the AMR scrutinized the manner in which Lepu Medical exercised influence over the contents of the speeches, and found that this exercise of undue influence was sufficient basis for a finding a commercial bribery. It can be inferred from above that the authenticity of speaking events is an essential condition for the payments of speaking fees to physicians but may not be sufficient. To ensure compliance, companies should not only ensure that any speaking fees paid to physicians correspond to actual events, but should also ensure that the company does not influence the content of the physicians’ presentations.
  • In its decision in the current case, the AMR did not describe the steps in its investigation or its formula for calculating the penalty amount. Reading between the lines of the decision, however, it appears that the AMR sought to obtain documentary evidence of the events, including onsite photos or attendance forms signed by the physicians, to determine the authenticity of the events. In the Lepu Medical case, the authority listed the investigative methods it employs in a typical dawn raid investigation, including interviews of employees, and a review of documentary evidence regarding the events in question, including any financial records.

    For pharmaceutical companies in China that often hold or sponsor speaking events, the lessons learnt from the two enforcement cases should be noteworthy. Companies should keep these steps in mind in order to be prepared for any potential government action, and should maintain complete and accurate records at all times in order to demonstrate the authenticity, necessity, and compliance of the events.

  • Finally, we note that while both of these cases involved the payment of speaking fees to physicians, the respective AMRs in each case invoked different subdivisions of Article 7 of the AUCL, demonstrating that the government has multiple legal mechanisms for enforcement action against the practice. In the Lepu Medical case, the AMR invoked Article 7, Section 1 (iii), under which it classified the physicians as “individuals likely to take advantage of power or influence to affect a transaction.” By contrast, in the present case, the AMR relied upon Article 7, Section 1(i), under which it classified the physicians as “employees of the counterparty to a transaction.” The adoption of these two distinct legal theories demonstrates the government’s increasing focus on this practice, and companies should carefully review and implement compliance safeguards in order to mitigate any commercial bribery risks in their operations.

Below is the full text of the administrative penalty decision.

Decision on Administrative Penalty by the Administration for Market Regulation of Jing’an District, Shanghai

The Party: [redacted] (Beijing) Pharmaceutical Consulting Co., Ltd. Shanghai Branch (Shanghai Branch) Certificate: Business License Unified Social Credit Code: [redacted] Business Place: [redacted] Person in Charge: [redacted] ID Card Number: [redacted] Contract Number: [redacted] Other Contract Method: No Contract Address: Room 1503, No. 511 Weihai Road, Jingan, Shanghai

The Administration for Market Regulation of Jing’an District, Shanghai (AMR) received a complaint that [redacted] (Beijing) Pharmaceutical Consulting Co., Ltd. Shanghai Branch (“Branch” or the “Party”) bribed physicians in the form of speaking fees. After investigation and verification, the AMR found that the Party, in the process of promoting medicines, paid to the physicians at the above level of clinical physician the so-called speaking fees directly or through their attendance of relevant meetings, so as to increase the number of prescriptions made by physicians. Such behaviors are suspected of violating Article 7, paragraph 1, item (i) of the Anti-Unfair Competition Law of the People’s Republic of China (the“AUCL”), thus the AMR launched an investigation against the Party upon approval on November 14, 2018.

Upon investigation, the Party is a branch entity of [redacted] (Beijing) Pharmaceutical Consulting Co., Ltd. established in Shanghai, whose parent company, [redacted] is a pharmaceutical company, and its main products sold in China are [redacted]. The Party does not engage in sales of medicines directly, while the products of its parent company are sold by [redacted] (Shanghai) Pharmaceutical Co., Ltd. as the sales agent. The main business of the Party is to carry out the promotion work for the products of its parent company.

Upon investigation and verification, the Party was entrusted by its parent company [redacted] to promote their medicine. From January 2018 to the time of the investigation, the Party convened a number of conferences inviting relevant physicians of the hospitals in this city to attend and paid them speaking fees. The Party signed a service agreement with each physician who was paid speaking fees, and such agreement stipulated that the purpose and content of the services provided by the physicians were all academic lectures. The Party’s staff signed an external labor service agreement with the physician after the conference, and then they made financial statements before the financial department of the Branch together with the external service agreement, the physician's check-in form and the photos of the physician's lecture. Afterwards, the Party’s financial staff transferred the amount of the speaking fees to the physician's personal bank account through the company's account. In the above-mentioned conferences, the relevant physicians of the hospitals in this city did not give lectures but received speaking fees six times.

From January 2018 until the start of the investigation, the Party realized the total sales amount of RMB 1,170,503.44 for the products of [redacted] Pharmaceutical Company through promotion service activities.

The above facts are evidenced by such evidentiary materials as inquiry records of the Party's attorney, payment forms of speaking fees, bank transfer vouchers, external labor service agreements, service agreements, medicine sales reports, conference schedules, check-in forms and business licenses of the Party.

On April 29, 2019, the AMR sent the Notice on Administrative Penalty Hearing to the Party. The Party failed to make statements or defenses within the statutory time. The AMR considered its silence as its waiver of the relevant rights.

The Party paid the speaking fees to the physicians in the name of false lectures, and the physicians utilized the job convenience of the medical service to facilitate the patient’s purchase of relevant medicines that were promoted by the Party. Such behavior violated Article 7, paragraph 1, item (i) of the AUCL (revised in 2017), which provides that “a business operator shall not use assets or other means to bribe any of the following entities or individuals to seek for transaction opportunities or competitive advantages: (i) employees of the counterparties to the transaction…”, and thus constituted commercial bribery.

Article 19 of AUCL (revised in 2017) provides that “a business operator who offers bribes to others in violation of Article 7 herein shall have its illegal gains confiscated by the relevant supervision and inspection department, and be given a fine of not less than RMB 100,000 but not more than RMB 3 million. Under grave circumstances, the business operator shall be revoked of its business license.” Article 23 of the Law of the People's Republic of China on Administrative Penalty provides that “when enforcing an administrative penalty, the administrative organ shall order the party to correct his illegal acts or to do so within a time limit”. Accordingly, the AMR decides to order the Party to correct its illegal acts immediately, and to impose the administrative penalty as follows:

A fine in the amount of RMB 480,000.

The Party is required to bring the Notice on Payment of Fines and Confiscation… and pay the fine to the specific collecting agency of the Industrial Commercial Bank of China or the China Construction Bank in this city within 15 days from the date of receipt of this Decision. If the Party fails to fulfil the administrative penalty decision, the AMR will be entitled to impose an additional fine at the rate of 3% of the amount of the fine per day pursuant to Article 51, item (i) of the Law of the People's Republic of China on Administrative Penalty.

If the Party refuses to accept this Decision, the Party may apply for administrative reconsideration to the People’s Government of Jing’an District, Shanghai or Shanghai Administration for Market Regulation; the Party may also directly bring an administrative lawsuit to the People’s Court of Minhang District, Shanghai. If the Party refuses to accept this Decision and applies for an administrative reconsideration or brings an administrative lawsuit, the administrative penalty shall not be suspended, except as otherwise provided by the law. If the Party fails to apply for an administrative reconsideration or bring an administrative lawsuit within the statutory time limit, and the Party fails to fulfil the administrative penalty decision, the AMR is entitled to apply for enforcement of the People’s Court within three months from the expiration. If the Party indeed has financial difficulties and needs to postpone payment of the fine or pay it in installments, the Party may submit application within 15 days from the date of the receipt of this Decision. Upon the approval of the Bureau, the Party may postpone the payment of the fine or pay it in installments.

Attachment: Notice on Payment of Fines and Confiscation Issued by the Administration for Market Regulation of Jingan District, Shanghai (Document No.: Hu Jian Guan Jing An Jiao Zi (2019) No. 0602018004224)

The Administration for Market Regulation of Jingan District, Shanghai (Chop) May 7, 2019

(The Administration for Market Regulation will publish this administrative penalty decision to the public in accordance with the law.)