On March 14, 2008, the U.S. Food and Drug Administration (“FDA”) received approval from the U.S. State Department to place eight full-time, permanent FDA employees at U.S. diplomatic posts in the People’s Republic of China, pending authorization from the Chinese government. The FDA will also be hiring five local Chinese nationals to work with the new FDA staff at the U.S. Embassy in Beijing and the U.S. Consulates General in Shanghai and Guangzhou. The FDA expects to be fully staffed in China within 18 months.
In China, the proposed permanent offices are intended to allow the FDA greater access for inspections and increased interactions with manufacturers to help assure products shipped to the United States meet U.S. standards for safety and manufacturing quality. With the opening of an FDA China Office, the FDA’s enforcement arm will more easily extend across the globe and bring some benefits as well as greater challenges for global life sciences companies. The FDA is clearly positioning itself for the demands of the current economy. According to a statement from FDA’s deputy commissioner for International and Special Programs, Murray M. Lumpkin, M.D.:
In an age when a border is not a barrier, the globalized economy demands nothing less than heightened regulatory interoperability, information exchange, and cooperation, especially on product quality and enforcement matters.
The FDA’s “Beyond the Borders” initiative is intended to facilitate the building of stronger cooperative relationships with the FDA’s counterpart agencies around the world, and to enhance technical cooperation with foreign regulators.
Private Sector Responsibility for Import Safety
Although the FDA’s announcement of a permanent presence in China is the latest indication of significant U.S. administrative activity on import safety, ultimate responsibility for product safety and regulatory compliance still generally rests with the private sector manufacturers, importers, distributors, and retailers. The private sector may look to government initiatives for guidance, but must simultaneously employ corporate best practices to contract safely with Chinese manufacturers and suppliers. Such best practices include an appropriate level of due diligence, contract terms that highlight product safety and protect the company, implementation of import compliance procedures, enhanced safety through independent testing, and development of a recall strategy in the event imported products are determined to be unsafe or fail to meet quality standards.
Due Diligence
Proper due diligence must be undertaken with respect to the overseas suppliers or manufacturers. Begin with the basics—know the manufacturer’s name, address, telephone number, fax number and e-mail address. Understand how the manufacturer is incorporated, organized, and registered to do business. Know how the manufacturer is owned—whether it is government-owned, owned by government officials, or otherwise. Understand who owns the manufacturer’s parent company, and the citizenship of any individual owners. Have a handle on the manufacturer’s profile—does it have the expertise and capacity to undertake the work required? Where does the manufacturer bank? Has the manufacturer been involved with any criminal charges, convictions, bankruptcies, or cases of civil litigation in which the company has been a defendant?
Other questions to ask include: What is the manufacturer’s record of and reputation for product safety, plant safety, workers’ rights, and environmental protection? What can be discovered through business references, personal references, and financial references? What information can you obtain from public sources, the local chamber of commerce, the diplomatic corps, from a media search of local and international press accounts, or from lawyers and consultants who are knowledgeable about Chinese manufacturers?
Contracting. As a threshold matter, importers should include clear specifications and safety or quality standards that are to be met by the supplier. The supplier should warrant and certify that it understands and will comply with the applicable specifications or standards. Contracts should include testing procedures and an agreement as to how testing will be accomplished. The contract should include terms about the rejection of non-conforming goods and resulting remedies.
The contact should provide the purchaser with visibility into the supplier’s own supply chain. Importers may insist that the supplier certify facts or make warranties regarding the source of raw materials, manufacturing techniques, or the chain of custody of particular products, such that the manufacturer assumes liability in the event that any of this information is false and the products cause harm.
If intellectual property or know-how is to be exchanged, then the contract should account for and protect those assets. The contract should specify the supplier’s duty to complete the paperwork and assign liability for any failure. The contract may require the inclusion of information required by customs on invoices, such as the date of sale, the identity of the seller, Harmonized Tariff Schedule (“HTS”) classification and valuation of the items, and the port of entry. The contract should require the provision of country-of-origin markings as required.
Child or prisoner labor issues should be verified along with the conditions of general workers’ rights. Environmental degradation possibilities should also be investigated and addressed in contracts. The contract may rightly address local anti-corruption compliance in addition to these other “social” concerns.
An importer should be sure that the Chinese supplier has indemnified it for any harm that may be caused by the products being supplied. This warranty may require the supplier to submit to jurisdiction in the United States for disputes arising under the contract, particularly if the supplier has U.S.-based fixed assets. If the supplier has no fixed assets anywhere other than China, international arbitration is probably preferable to attempting to collect a foreign judgment in China itself.
Import Compliance. In general, it is advisable to have an import compliance program. Such a program should cover overall importation requirements such as shipping, entry, inspection, and related business aspects. An import program should include classification (what is the unique HTS number the product falls under?), appraisal (how much in import duties must be paid based on the tariff rate and value of the imported product?), and country of origin (where does it come from and does it need to be marked “Made in China”?). An import compliance program should address all customer recordkeeping requirements (essentially five years for key documents supporting the entry process). The compliance program should also address what to do in the case of an audit or enforcement action involving customs issues.
Inspections/Audits. An important provision of the written agreement between the parties should allow the importer to have access to the supplier’s or manufacturer’s facility and records for purposes of inspecting the manufacturing operations and evaluating the level of regulatory compliance. Regulatory agencies such as EPA, FDA OSHA, USDA, etc. have broad inspectional authority in the United States. Through memoranda of understandings, certain agencies such as the FDA are allowed to inspect foreign manufacturing sites that produce products or ingredients destined for import into the United States. The reach of these ex-U.S. inspections, although greater with the opening of the FDA office in China, remains much less than in the United States. Allowing a firm’s own employee auditors or third-party auditors retained by a firm to be on-site to observe manufacturing operations and review production records can provide an “early warning” of potential issues to be addressed or avoided.
Product Testing and Systems Evaluation. Product safety and product testing must be an integral part of any supplier or manufacturing contract. This product testing procedure should set forth who will conduct the testing, whether opposite party verification will be available, what party or non-party entity will conduct the testing, and which party will be responsible for payment of testing costs. Parties will need to understand which regulatory industry standards apply, how those standards will be monitored, and how those standards will be extended and enforced though the supplier-sub-prime supplier supply chain—think lead paint on children’s toys.
Importers should consider utilizing “pre-approved” testing facilities such as those identified by National Oceanic Atmospheric Administration and the Consumer Product Safety Commission as identified above. Importers should also consider separate independent testing to be utilized should a level of doubt be raised as to the safety of a particular product or line of products.
In addition to product testing, mechanisms should be put in place, through contract, that allow for the evaluation of the quality control processes extant at the supplier’s operations. This access affords an opportunity to identify potential deficiencies in production, quality control, inspection, and quality assurance/tracking. These mechanisms can be included as part of the provisions allowing for inspections or audits of manufacturers’ facilities.
Recall Strategies. Prudent importers should have a plan in place to minimize the impact of shortcomings in their import safety measurers. That plan should include a recall strategy that addresses the products at issue and the relevant government agencies, such as the CPSC, USDA, and NHTSA, or the FDA. Likewise, the plan should include a tailored approach to address the particular safety risks at issue. The FDA has several levels of recalls that should be addressed—Class I for the recall of products that could cause serious health problems or death, Class II for recall of product that may cause a temporary health problem, and Class III for those recalls involving minor labeling violations. Devising tailored recall plans requires an understanding not only of the company’s supply chain, but also of its distribution chain, and might rightly even include discussions with cognizant governmental recall officials prior to any recall event occurring.
Reed Smith’s Life Sciences Practice In China
Through its offices in Hong Kong and Beijing, Reed Smith represents many life sciences clients regarding their activities in China. From pharmaceutical and medical device companies to distributors, hospitals and physicians, Reed Smith’s lawyers in China advise on foreign direct investment, corporate organization, business operations, securities, protection of intellectual property, technology transfer, mergers and acquisitions, drug registration, product registration, distribution, clinical testing, regulatory compliance, regulatory approval, employment, and dispute resolution. Two members of Reed Smith’s life sciences team in China are dual-qualified physicians and lawyers.
Chris Howse heads up Reed Smith’s leading medical/product liability practice in Hong Kong, advising doctors, hospitals, device and pharmaceutical companies in matters involving the Medical Council, and in civil and criminal litigation disputes.
Hugh Scogin has been based in Beijing for 20 years and is recognized as one of the foremost authorities on Chinese law in the United States, having taught at leading law schools including Yale Law School and New York University School of Law. Hugh’s clients include medical device and diagnostic product manufacturers, and he advises on numerous China-related medical device issues, mergers & acquisitions, foreign direct investment, technology transfer, business operations, securities, and employment and dispute resolution.
