Introduction and Background

The Shanghai Administration for Industry and Commerce (“AIC”) has penalized a U.S.-China pharmaceutical joint venture (“the JV”) for providing travel costs to a Shanghai hospital official to attend a European medical conference. During that time, the hospital purchased pharmaceutical products from the JV. In its administrative decision (the “Decision”), available in Chinese here, the AIC ruled that the travel violated the prohibition in the PRC’s Pharmaceutical Administration Law against pharmaceutical companies providing benefits to health organizations or pharmaceutical purchasers. This action is consistent with prior AIC actions in the health care and life sciences industries.

This article reviews the Decision, similar previous decisions and associated penalties, the interplay between the Pharmaceutical Administration Law and China’s revised Anti-Unfair Competition Law (“AUCL”), and issues companies in China need to remain mindful of so as not to fall target to similar sanctions.

The AIC Decision

According to the Decision, the JV arranged for the director of the cardiovascular and internal medicine department of a hospital affiliated with Shanghai’s Jiaotong University to attend a cardiology conference in London. The JV paid for the director’s business class airfare and other travel expenses, which totaled RMB 57,095, or approximately USD 8,600. During that time, the hospital purchased cardiological medication from the JV for RMB 772,536.25, or approximately USD 117,000.

The AIC determined that these acts violated the PRC Pharmaceutical Administration Law (available here, in Chinese). Article 58(2) of the Pharmaceutical Administration Law prohibits pharmaceutical companies and their representatives from providing any benefit or thing of value to a responsible person of a health organization, a purchaser of pharmaceuticals, or medical practitioner (the Pharmaceutical Administration Law also prohibits those persons from receiving the relevant thing of value or benefit). The AIC ordered the confiscation of the JV’s proceeds, equal to the RMB 772,536.25 in pharmaceutical sales made to the hospital, along with the imposition of a RMB 10,000 fine.

Analysis

Other local AICs have previously taken similar actions regarding travel by doctors and their relatives for medical conferences and related activities:

  • In 2010, the Beijing Xicheng District AIC fined a multinational pharmaceutical company RMB10,000 for offering conference travel, in violation of the same prohibition in the Pharmaceutical Administration Law. The traveler in that case was an anesthesiology expert at a hospital that used the multinational’s anesthesiology products. The multinational arranged for the expert to attend the 12th World Congress on Pain held in the U.K. and covered the registration fee, travel and lodging, which totaled RMB 30,000, or approximately USD 4,531.
  • In 2012, the Beijing Changping District AIC fined the Beijing branch of a multinational RMB 150,000 (approximately USD 22,700) for violating the same prohibition. According to the decision, the Beijing branch organized travel for doctors to attend academic conferences on cardiology, bone and mineral, and hypertension held in France, the United States and New Zealand. The Beijing branch additionally organized local sightseeing tours for sponsored attendees. The conference fees totaled RMB 3,996,647.60 (approximately USD 665,000), with an additional RMB 2,450,348.81 in expenses (approximately USD 370,000).
  • In 2010, the Beijing Shijingshan District AIC fined a local medical device company RMB 100,000 for violating the Anti-Unfair Competition Law (“AUCL”) (“the 2010 Beijing Decision”). The medical device company sought to maintain and expand business opportunities by reimbursing doctors and their relatives’ travel expenses for trips to Singapore, Bali, Hong Kong and Macau, totaling RMB 21,060 (approximately USD 3,181).

As the 2010 Beijing Decision shows, companies must consider not only the Pharmaceutical Administration Law, but also the anti-bribery provision under the AUCL, which was recently revised. The revised AUCL came into effect on January 1, 2018, and categorizes commercial bribery recipients into the following three categories (an O’Melveny client alert on the revised AUCL may be found here):

  • any employee of the counterparty to a transaction;
  • any entity or individual authorized by the counterparty to a transaction to handle relevant affairs; and
  • entities and individuals who use or take advantage of public powers or influence to affect a transaction.

While there is a view that under the revised AUCL, the counterparty itself cannot be deemed a recipient of commercial briber recipient; nonetheless, there would still be an individual (counterparty employee) who participates in the travel. Thus, travel will likely remain a compliance issue for pharmaceutical sales in China under the AUCL.

Conclusion

The Decision demonstrates that the AIC continues to enforce s the Pharmaceutical Administration Law’s prohibition against providing travel for pharmaceutical sales, even if that travel is for academic or educational activity. The penalties can include fines and disgorgement of sales proceeds. As the pattern of enforcement shows, multinationals can expect that local AICs will scrutinize their business promotion activities. Companies with operations in China will want to consider the effects of that law, as well as the revised AUCL’s anti-bribery provisions and implementing regulations.