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September 23, 2014

No Better Time Than Now to Get Caught in China, Just Ask GlaxoSmithKline

By Stan Abrams 
China has fined UK pharmaceuticals firm GlaxoSmithKline $490m (£297m) after a court found it guilty of bribery.
The record penalty follows allegations the drug giant paid out bribes to doctors and hospitals in order to have their products promoted.
The court gave GSK’s former head of Chinese operations, Mark Reilly, a suspended three-year prison sentence and he is set to be deported. Other GSK executives have also been given suspended jail sentences. The guilty verdict was delivered after a one-day trial at a court in Changsha.
(via BBC News – GlaxoSmithKline fined $490m by China for bribery.)
The big news here that hit late last week does not exactly come as a great surprise. This case has been dominating headlines for well over a year and has highly influenced the current “We no longer feel welcome” meme that is being tossed around as prevalent among foreign-invested companies doing business in China.
So how big was this “big news” if everyone knew what was coming? Depends on how you look at it.
Certainly everyone was ready for a guilty verdict, which was never in doubt. A one-day trial is not a shock either, despite the complexity of the case – justice is swift here.

The prison terms and suspended sentences were not a shock either. Could have been even worse given the scope of the activities in question. Perhaps the suspended sentences were seen as sufficient since the GSK execs involved have already been put through quite a lot over the past year.

About the only thing that justifiably raised eyebrows was the amount of the fine, equivalent to USD $490m. That’s a record breaker, sure, but we should all keep in mind that we are dealing with pharma, GSK, and a huge country like China. Even if you do not take into account the serious nature of the charges (and the punitive component of the fine) and just focus on ill-gotten gains, hundreds of millions of dollars really should not shock anyone.

I’m sure some commentators, particularly those folks who have latched onto the current “The China foreign investment sky is falling” narration, will fear monger, predicting that huge penalties will now become the norm and that other MNCs should be on the lookout for gigantic monetary fines. (I know some law firms that will definitely shake that tree and see what sort of work falls out as a result.)

But I’m not so sure anyone should be more scared than they were before the verdict. China’s legal system is generally quite conservative and formalistic, which is one reason why it’s taken so many years for courts to award higher amounts in IP infringement cases. If you can’t prove direct damages via very explicit evidence, then you are shit out of luck. Yes, some of those rules change in high-profile, political cases, but those that are still essentially commercial matters are still heavily influenced by what can be demonstrated through documentation.

If you’re a foreign company that has a China annual turnover of a couple million selling RMB 30 widgets, don’t lose sleep worrying about getting hit with a GSK-style fine. That being said, if you are engaged in any dodgy practices, there’s never been a better time than now in China to get caught, and some of your people might end up in jail. Still quite a disincentive, come to think of it, GSK verdict notwithstanding.

About The Author - Stan Abrams is a Beijing-based IP/IT lawyer and law professor with an M.A. from Johns Hopkins in International Relations, a J.D. from Boston College Law School, a B.A. from Pomona College, and writes at China Hearsay.  (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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