Legal and Ethical Risks of Healthcare Businesses in China

by Dechert LLP

Recent disputes and controversies involving Chinese subsidiaries of foreign pharmaceutical companies have sounded warning bells on legal and ethical issues regarding participation in China’s rapidly growing and evolving pharmaceutical market. This OnPoint explores various scenarios and provides some insight for preemptive measures that can be taken in China.

Anti-bribery initiatives

While pharmaceutical companies have been well aware of the Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act — and the consequences of non-compliance with those laws — many were taken by surprise when they became the focus of investigations and enforcement actions by Chinese authorities in June 2013. These investigations and actions revealed practices that were often excused as “customary” in China, but constituted violations of longstanding anti-corruption laws that traditionally had not been vigorously enforced against bribe-givers. The ensuing arrests and detentions of executives and other employees of the pharmaceutical companies shook up the global pharmaceutical industry. Prosecutions and convictions, if they occur, will have significant consequences for the companies and individuals involved. Apart from fines, the companies and individuals concerned could also be blacklisted and banned from selling their products regionally and nationally (if convicted again within five years). Individuals could also be imprisoned for up to ten years. Given the significance of such prosecutions and convictions in one of the largest drug markets in the world, pharmaceutical companies need to reconsider their operations and business development strategies in China, and to ensure compliance with its anti-corruption laws.

Protection of company secrets

In a decision by the Shanghai First Intermediate Court in August 2013,1 Eli Lilly successfully obtained an interlocutory injunction in a trade secret theft claim against its former chief research chemist in China, who had allegedly downloaded a number of “core confidential business documents” without authorization and refused to destroy such documents.2 The injunction was the first granted in the Shanghai court for this type of case. While the injunction represents a breakthrough in the court’s efforts to protect companies from trade secret theft, and paves the way toward improved protection of trade secrets in China, one cannot overlook that corporate espionage is a serious threat in China’s extremely competitive pharmaceutical industry. Given that trade secret theft can cause irreversible damage to companies, pharmaceutical companies should proactively implement preemptive measures.

Sometimes the risk of trade secret theft does not arise from within, but is rather committed by employees of commissioned agents. In a case adjudicated in 2012,3 a junior researcher of Wuxi AppTec, the biggest contract research company (CRO) in China that is publicly listed in the NYSE, was convicted of stealing samples of two patented proprietary compounds made for a leading multinational pharmaceutical company and selling them on the Internet. Despite the seriousness of the criminal conduct, the punishment for the misappropriation was not severe — the employee was sentenced to 18 months suspended imprisonment.

The R&D of the pharmaceutical industry has also suffered from data integrity scandals in China. Two recent cases illustrate that the manipulation of research data can negatively impact drug development schedules.

In the first case, a foreign pharma company discovered that certain data in a research article published in Nature Medicine in 2010 had been “misrepresented” — the study that had apparently been conducted by research staff of a foreign pharmaceutical company in China claimed to have found a potential therapeutic target in the treatment of multiple sclerosis. However, a self-instigated investigation revealed that the samples used in the experiments were either from healthy donors or “cannot be documented at all,” which seriously affected the credibility of the data and its effectiveness in the treatment of the disease. As a result, the foreign pharmaceutical company had to suspend the phase 1 clinical trial of the drug candidate on multiple sclerosis to assess whether the clinical study would be undermined. 

In the other case, a series of technical blunders at its clinical trial study sites, which included reported fraud at its study site in Shanghai, were discovered by the commissioning party. According to the report published by the FDA, the sponsors of the clinical trial noticed that the staff at the Chinese site had altered subject records in an attempt to cover up violations of GCP. As a result, the FDA issued a three-month extension to assess the impact of the incident on the clinical study, and the incident resulted in a nine-month delay in the FDA granting its marketing approval.

Inventor Remunerations

One aspect often overlooked by pharmaceutical companies with R&D operations in China that sometime results in corrupt behavior, such as theft of trade secrets, is providing reasonable remunerations to employee-inventors as required by the PRC patent laws. Specifically, in the absence of any agreements or employee guidelines, the Implementing Regulations of the PRC Patent Law prescribe a certain “statutory minimum” of default remuneration to entitled employee-inventors. For example: for issuance of patent, no less than RMB3,000 (~USD500); for exploitation of the patented subject matter, no less than 2% of the profits; for license of the patented subject matter, no less than 10% of the royalty income.

In the past, courts have awarded as much as three times the “statutory minimum” to employee-inventors. The Shanghai High Court recently issued guidelines for the determination of reasonable remuneration for service inventions. Most notably, the guidelines state that the remuneration provided does not need to be money, but may be in the form of stocks, options, promotions, salary increases, paid leave, bonuses, etc. Furthermore, if the statutory remuneration applies, the “statutory minimum” should be awarded, and the court should not entertain any request beyond that amount. Nonetheless, a mutually agreed remuneration lower than the “statutory minimum” would be acceptable (provided that there is justification for the arrangement based on the industry and the circumstances surrounding the R&D activities). The guidelines also clarify that the service-invention remuneration is a statutory benefit especially for employees of patent owners. As such, while contract workers may be entitled to such remuneration, a commissioned entity and/or its employee is not.

Mitigation of legal and ethical risks

As foreign pharmaceutical companies expand in China (regardless of whether the growth relates to R&D, clinical trials, manufacturing or sales operations), many have entrusted their business and operations to local employees or commissioned contractors who, while well versed with “customary” practices, may not be imbued with a culture of compliance. The resultant corruption risks and integrity issues have the potential to bring serious negative repercussions to the global operations of a company. More effective oversight and implementation of compliance policies and procedures — including employee vetting, implementation and strict compliance with internal policies, verification for publications, protection of confidential materials and exit audits — are essential in minimizing these legal and ethical risks.

In view of this, we present some practical tips for pharmaceutical companies to minimize the risks:

  • Understand the local laws and implement more effective oversight and internal controls. China’s anti-corruption laws, while similar to foreign anti-corruption laws, have unique differences. Additionally, “customary” practices, such as gift giving, extravagant entertainment or exchange of favors, while often adopted, are not always compliant with local laws. As such, policies and procedures of foreign companies may need to be tailored to ensure that they comply with both international and local standards, and provide guidance for dealing with “customary” practices. More proactive implementation of effective oversight and internal controls to ensure compliance is also key.
  • Foster company culture and good business practices. Policies and procedures encouraging best business practices are only effective when the staff choose to implement them in their day-to-day activities. As social conventions are vastly different in China, local staff may need to be trained so that they understand the reasons and appreciate the importance of such measures, and are encouraged to comply with them. Fostering a positive company culture, combined with a fair remuneration scheme, will also help instil loyalty in staff and deter them from acting against the interests of the company, such as paying bribes to secure sales or committing intellectual property theft.
  • Background screening. While this is a standard protocol in the selection of senior staff with higher security clearance to sensitive business information, establishing a standardized protocol for the hiring of all staff is advisable, particularly where more junior staff will also have exposure to company secrets and sensitive materials.
  • Security of intellectual property. This is a key aspect of operating in China that must be kept in mind. Companies should adopt both physical and electronic security measures where intellectual property is kept, as well as encrypt and label confidential information.
  • Agreement on service invention remunerations. Subject to the manner of R&D in China (e.g., through establishing its own R&D units or commissioning a CRO), it is crucial for a pharmaceutical company to implement employment policies that account for reasonable remuneration for service inventions. Mere silence, or specific denial of any remuneration, may lead to potential claims.



See news from Shanghai First Intermediate Court, August 7, 2013


See news from State Intellectual Property Office of China dated August 15, 2013


Shanghai Pudong New District People’s Court, Criminal Division, First Instance Judgment No. 1616 of 2012.


Shanghai Pudong New District People’s Court, Criminal Division, First Instance Judgment No. 1616 of 2012.


Crucial role of interleukin-7 in T helper type 17 survival and expansion in autoimmune disease. Nature Medicine, 2010, 16: 191-197.


See news blog of Nature Medicine dated June 10, 2013


See FierceBiotech dated June 13, 2013


See Pharmaceuticals Approvals Monthly dated June 18, 2013


See P. 12, medical review report in relation to the anti-coagulant drug as published on the FDA website


See Prescription Drug User Fee Act. Under the act, the FDA will normally be given 10 months to review new drugs, or 6 months for drugs qualifying for priority review.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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