16 March 2016

The Boundary between Public Welfare Donation Provided by Pharmaceutical Companies and Commercial Bribery

This article was written by Mark Zhang(partner), Lingbi Li(associate), Shiyun Wang(assistant associate)

On 26 August 2015, the National Health and Family Planning Commission of the PRC (NHFPC) and the State Administration of Traditional Chinese Medicine of the PRC (SATCM) jointly promulgated the Administrative Measures for Acceptance of Public Welfare Donations by the Health and Family Planning Institutions (for Trial Implementation) (the “New Donation Measures”). The New Donation Measures came into effect on its promulgation date and supersedes the Interim Administrative Measures for Acceptance of Social Donations and Financial Aid by Medical Institutions (the “Previous Donation Measures”), which had been in effect for eight years.

It has been quite difficult for certain marketing promotion activities widely adopted by pharmaceutical (including medical device) companies, such as granting funds to HCPs to attend academic activities held by third parties, paying speaker fees to HCPs, setting up exhibition booths in academic activities held by medical institutions or other associations, or providing grants to or sponsoring scientific research activities conducted by medical institutions, to be conducted in the name of “donations” under the laws and regulations. On one hand, many practices in such marketing promotion activities adopted by pharmaceutical companies are inconsistent with the requirements for providing “donations” pursuant to the laws and regulations (e.g. in practice the pharmaceutical companies usually grant funds to a particular department of the hospital rather than the hospital (as an independent legal person)); on the other hand, there is an irreconcilable conflict between the commercial purpose of such marketing promotion activities and the nature of “non-profit” and “public welfare” of the “donation” as required by law. Such conflict fails to be reconciled under the Previous Donation Measures and contributes to the compliance risk that the mentioned marketing promotion activities, which are beyond the scope of “donations” under laws and regulations, being deemed as commercial bribery. Meanwhile, as providing public welfare donations is an indispensable method for pharmaceutical companies to undertake their social responsibilities and establish corporate reputation, which in a way facilitates business development, pharmaceutical companies highly value making public welfare donations. However, the anti-bribery storm against the pharmaceutical industry in recent years has made numerous pharmaceutical companies (especially the foreign-invested pharmaceutical companies) and medical institutions more prudent to their marketing promotion activities as well as public welfare donations. In light of the above, although neither the New Donation Measures nor the Previous Donation Measures directly applies to pharmaceutical companies (both of them apply to the donees, i.e. the health and family planning institutions as defined under the law), they are playing an irreplaceable role as guidance for pharmaceutical companies.

Compared with the Previous Donation Measures, the New Donation Measures brings changes on the scope of donees, the conditions and procedures of accepting the public welfare donation, the use of donated property as well as information publicity, which will affect the practice of pharmaceutical companies.

1 The New Donation Measures Expands the Scope of Donees

The New Donation Measures not only applies to medical institutions of all kinds and at all levels as provided in the Previous Donation Measures, but also applies to public welfare social associations, foundations and other public welfare social organizations administrated by NHFPC and SATCM and their local counterparts at all levels (collectively as the “Health and Family Planning Institutions”). Prior to the promulgation of the New Donation Measures, the donations provided by pharmaceutical companies to the public welfare social associations, foundations and other public welfare social organizations shall comply with the Public Welfare Donation Law (the “Donation Law”) promulgated by the Standing Committee of the National People’s Congress. Comparing with the New Donation Measures, the Donation Law has more general provisions and lower requirements for the purpose of donations, the use and management of donated properties, which leaves greater room for pharmaceutical companies to negotiate with the donees on many donation matters. After the promulgation of the New Donation Measures, pharmaceutical companies should take a stricter scrutiny on donations to be granted to such donees, including without limitation to examining whether a proposed donation falls into the scope that prohibits the Health and Family Planning Institutions from accepting such proposed “donation” under the New Donation Measures.

It is noteworthy that the system of the administrative authorities of associations, foundations and other social organizations in China is complicated. As the New Donation Measures only applies to public welfare associations, foundations and other public welfare social organizations administrated by NHFPC or SATCM and their local counterparts at all levels, pharmaceutical companies should, when a proposed donee is a social organization, further identify whether such proposed donee is administrated by NHFPC or SATCM to avoid any mistake in the application of law. For example, the Chinese Red Cross Foundation, the Red Cross Society of China and their local counterparts at various levels as well as the national Red Cross Societies of different trades and professions are neither administrated by NHFPC nor SATCM (according to the introduction on the official website of the Red Cross Society of China, since the end of 1999 the Red Cross Society has no longer been “temporarily administered by the Ministry of Public Health (recognized as the former Ministry of Health)” but been “coordinated by the State Council of the PRC”). In case the donee is a member of the above-mentioned Red Cross associations, the New Donation Measures shall not apply. Another example is that the ThinkTank Research Center for Health Development is a social organization administrated by NHFPC, thus the New Donation Measures applies if it is the donee.

2 The New Donation Measures Puts More Restrictions on Accepting Donations

(1) More Prohibitions on the Purpose of Donations

The New Donation Measures adds more prohibitions on the donation, among which we would like to draw your attention to the prohibition that the donee shall not accept donations that are attached with rights and claims for economic benefits, intellectual property, scientific research achievement, industrial data and information that are related to the donation. We noted that, in practice some pharmaceutical companies will grant funds or assets to the Health and Family Planning Institutions to support or jointly conduct a research or technical development program, for which the parties may enter into an agreement providing the ownership of relevant intellectual property, scientific research achievements or research data. The aforementioned prohibitive provision under the New Donation Measures does not inevitably result in prohibition on such practice, however, it clarifies that the financial aid granted by pharmaceutical companies for the said joint research/co-development program to the Health and Family Planning Institutions shall not be provided under the name of a “donation”. The significance of such distinction is that the provision of donations under the New Donation Measures is clearly defined as a unilateral legal act, distinguishing from the bilateral legal act that granting financial aid and obtaining research/development achievements. Furthermore, the grant provided for the joint research/co-development program usually goes with the ownership of the achievements of the joint research/co-development (in other words, the achievements of the joint research/co-development usually belong to the pharmaceutical companies who grant financial aid). In case no real or justifiable intellectual property, scientific research achievements or research data is made (whether theoretically under the contract or actually in practice) to pharmaceutical companies as consideration to their granting under the said joint research/co-development program (which could not be interpreted as a “donation” under the New Donation Measures any longer), it is highly likely that the so called joint research/co-development program would be deemed as commercial bribery under the name of “joint research/co-development”.

Besides, the New Donation Measures also prohibits donees from accepting donations involving for-profit business activities in principle. However, the definition of “for-profit” lacks clarity under the New Donation Measures. It is difficult to determine whether or not some practices widely adopted by pharmaceutical companies, such as granting specific HCPs to attend academic activities held by third parties or pharmaceutical companies, or setting up exhibition booths or advertising space in academic activities held by the donees, belong to “for-profit” business activities under the New Donation Measures, which are to be interpreted by the supervising authorities (NHFPC or industry and commercial authorities) through enforcement practices in the future.

(2) Further Restriction on Individuals Accepting Donations

The Previous Donation Measures in principle prohibited any internal functional departments or individuals of the donees from accepting donations; however it leaves room for the individual accepting donations “under special circumstances”. Given that in practice there are many cases where pharmaceutical companies directly donate to a department of a medical institution or HCP(s) in violation of laws and regulations which were deemed as commercial bribery, the New Donation Measures closes the door for individuals receiving donations, and requires that donations can only be provided to the Health and Family Planning Institutions and accepted by their donation management department. It is worth reminding that the pharmaceutical companies shall ensure that the counterparty who enters into the donation agreement and accept the donation should be the Health and Family Planning Institutions (as an independent legal person) rather than any internal department or HCPs of the Health and Family Planning Institutions.

3 The New Donation Measures Further Elaborates the Procedure of Accepting Donations

Basically, the New Donation Measures has followed the general procedures of accepting donations provided under the Previous Donation Measures, i.e. pre-examination by the relevant departments of the donee → entering into a written donation agreement → accepting the donation, taking possession and managing the donation uniformly and invoicing the receipts. Based on the above-mentioned procedures, the New Donation Measures further specifies detailed requirements for the procedure of accepting donation, among which the following three points are worth noticing:

(1) Establishment of the Donation Pre-evaluation System

The Previous Donation Measures provides that the supervision department of the donee jointly with its financial department and business department shall examine the donation plan of the proposed donation, and propose their opinion and report to the leadership of the donee for collective review and approval, after which the procedures of accepting donations could be officially commenced. The New Donation Measures further requires that the Health and Family Planning Institutions should establish a pre-evaluation system for each proposed donation, and third party institutions and competent authorities may be involved in such evaluations if necessary.From a practical standpoint, the requirement for establishing a pre-evaluation system under the New Donation Measures will not lead to a material change for medical institutions which have already conducted pre-examinations according to the Previous Donation Measures (although the New Donation Measures itemizes the key points of pre-evaluation in detail (e.g. whether the purpose of the donation involves for-profit business activities), the donees should conduct necessary pre-examination for the relevant matters anyway even if there is no requirement for establishing a pre-evaluation system). It appears that the significance of the pre-evaluation system is to make the previous pre-examination requirement under the Previous Donation Measures systematically under the law, which, to some extent, will urge all Health and Family Planning Institutions to establish and attach importance to the pre-evaluation system internally. In practice, more and more donees may require pharmaceutical companies to make undertakings and warranties for certain pre-examination matters, e.g. to make a separate undertaking in writing that the proposed donation will not involve any for-profit business activities, so as to comply with the donee’s internal requirements for the pre-evaluation. We suggest pharmaceutical companies have a good understanding of the donee’s detailed requirements for pre-evaluation (especially the procedures and necessary documents that need pharmaceutical companies’ cooperation) when discussing with the donee in advance in order to facilitate the donation procedure.

(2) New Requirements for the Written Donation Agreement

Besides the essential contents of the written donation agreement (e.g. the amount, value and purpose of the donated property) provided under the Previous Donation Measures, the New Donation Measures further requires other necessary contents that shall be specified in the donation agreement, among which the following four points are worth noticing:

  • The undertaking on the legality of sources of donated properties should be provided under the written donation agreement (we understand that such requirement may aim to prevent and prohibit money laundering by pharmaceutical companies through donation activities);
  • The breakdown of budget or plans should be attached if a donation purpose is specified under the written donation agreement;
  • The requirements for the management of donated property should be agreed (in practice, such requirements would probably be agreed based on relevant existing internal requirements and rules of the Health and Family Planning Institutions); and
  • The term of implementation of the donation (permanently or in a certain period) should be provided.

Moreover, the dispute resolution and the liability of breach of contract should also be provided in the donation agreement. We kindly remind pharmaceutical companies to cover the newly required contents as listed above into the donation agreement when drafting and reviewing the same to meet the compliance requirement.

(3) Methods of Providing Donations

The pharmaceutical companies need to meet the following requirements under the New Donation Measures in the future:

  • As for donations in cash, in principle such donation should be made by the donator via wire transfer to the bank account of the donee;
  • As for donation in kind, the donee may engage, or require the pharmaceutical company to engage, a third-party evaluation agency to evaluate, confirm, or notarize the value of the donated properties in kind according to its internal requirements as the case may be.

4 The New Donation Measures Regulates the Use of Donated Property and the Information Publicity System

(1) For the use of donated properties, based on the relevant provisions under the Previous Donation Measures (e.g. without the consent of the donator, the donee shall not change the donation purpose), in view of whether the donation purpose is specified or not, the New Donation Measures further provides that: (i) if the donation purpose is not specified, the donee should use the donated properties in a reasonable and efficient way pursuant to the general provisions of the New Donation Measures; while (ii) if the donation purpose is specified, the New Donation Measures requires the donee to lay down measures on the use and management of the donated properties, specifying the scope and procedures of using the donated properties and other relevant matters. Together with other relevant provisions on the donation with specified purpose under the New Donation Measures, it shows that the donee will face more restrictions and requirements when accepting donation with specified purpose (e.g. as mentioned above, in case the written donation agreement specifies a purpose, the breakdown of budget or plan should be provided). In practice, it is possible that the donees may transfer such restrictions and requirements to pharmaceutical companies, e.g. a donee may request a pharmaceutical company to assist in drafting and enter into certain plans or measures on the use of donated properties when entering into a written donation agreement.

(2) For the information publicity system, the New Donation Measures provides stricter requirements to donees, for example, the New Donation Measures specifies the detailed timeline for donees to disclose information of acceptance of donations, i.e. to disclose the information of donated properties accepted by the donees, the use and management of the donated properties for the previous year before 31 March annually, as well as to disclose the information of acceptance of donations within thirty (30) business days upon completion of an audited report and performance appraisal of a donation project. The requirements for the information disclosure under the New Donation Measures, on one hand, enhance the publicity and transparency of donation information in the whole industry and, on the other hand, pharmaceutical companies may make better use of relevant public channels to seek relevant information.

Generally speaking, instead of changing the principle and whole structure under the Previous Donation Regulation, the New Donation Regulation has provided more specified and detailed guidelines for what and how donations to the Health and Family Planning Institutions are permissible, which will likely bring more scrutiny to donations by the competent authorities in the future. Such scrutiny may make the Health and Family Planning Institutions more passive to accept payments made by pharmaceutical companies in various marketing promotion activities under the relationship of donation with such pharmaceutical companies. Meanwhile, considering the nature of commerciality of the marketing business activities, although the New Donation Measures does not clearly prohibit such activities, it seems that the New Donation Measures tends to give a more passive answer by prohibiting donations “involving for-profit business activities” and enhancing control over the conditions and procedures of receiving donations. Having that said, as the New Donation Measures has only been implemented for a short time, it is to be observed what changes or influences will actually be brought to the actual practices of the supervising authorities, donees and pharmaceutical companies. We will continue to pay close attention to future practices and cases.

Editor’s note: This article was simultaneously published on Chinalawinsight.com

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