Landmark Whistleblower Program for China’s Healthcare Sector: Proposed Maximum Reward of 1 Million RMB

On October 10, 2024, the National Medical Products Administration (NMPA) released the Draft Rule on Rewarding Internal Whistleblowers for Reporting on the Quality and Safety Issues of Drugs and Medical Devices (the Draft Rule) for public comment, due by November 9, 2024.¹ The Draft Rule marks a milestone in the development of China’s regulatory system for pharmaceuticals and medical devices and reflects Chinese regulators’ increasing use of best practices from other jurisdictions as well as their continued focus on the healthcare sector. Once effective, the Draft Rule may lead to more enforcement actions by Chinese authorities. Pharmaceutical and medical device companies operating in China should continue to monitor the development of the Draft Rule.

This Advisory will introduce the Draft Rule’s background and applications, as well as the channels for reporting issues, methods for handling reports, rewards for whistleblowers, and the confidentiality and anti-retaliation provisions set forth in the draft, along with our recommendations.

Background

Although other jurisdictions have had whistleblower protection legislation since the 1980s,² in China, the term “whistleblower” first officially appeared in the Guiding Opinions on Strengthening and Standardizing Regulation During and After the Matter, issued by the State Council in September 2019. This document introduced the concept of establishing a whistleblower system at the national level. The Interim Measures for Rewarding Whistleblowing against Major Illegalities in the Market Regulation Field, implemented on July 30, 2021, outlined the conditions, criteria, and procedures for whistleblower rewards, but did not specifically address drugs and medical devices. Although China’s Drug Administration Law and the Regulations on the Supervision and Administration of Medical Devices both stipulate that regulatory authorities should reward whistleblowers if reported information is verified, they do not have specific implementation rules. Currently, reports of rewards for whistleblowing related to pollution, manufacturing accidents, and traffic violations are quite common, while reports of whistleblowing rewards in the healthcare sector are relatively limited.

The Draft Rule represents a significant milestone in the development of China’s regulatory program for the pharmaceutical and medical device sectors. It is anticipated that once implemented, the Draft Rule will lead to an increase in reports concerning the quality and safety of medical products, resulting in stricter supervision and more frequent enforcement actions.

Application

The Draft Rule applies to internal whistleblowers from pharmaceutical and medical device-related enterprises who report major violations of drug and medical device quality and safety issues to regulatory authorities. The key terms defined in the Draft Rule include:

• “Related enterprises” include enterprises engaged in research on, manufacturing of, sales of, or use of pharmaceuticals and medical devices, as well as online pharmaceutical and medical device trading platforms.
• “Internal whistleblowers” include “internal employees” and “related informants.” “Internal employees” are defined as individuals who have signed employment contracts with an enterprise, receive social insurance benefits from an enterprise, or have an actual employment relationship with an enterprise. “Related informants” refers to individuals who have terminated their employment contracts with an enterprise within one year, individuals with business interactions with an enterprise relating to drug and medical device quality and safety, and temporary employees. 
  
  In addition to “internal whistleblowers,” the Draft Rule also provides rewards for reports from “related informants,” such as journalists and others with knowledge of safety and quality issues relating to pharmaceuticals and medical devices.

• “Major violations” refers to illegal activities suspected of constituting a crime or being subject to administrative penalties such as orders to stop manufacturing or stop business operations, orders to shut down an enterprise entirely, revocation of licenses, and substantial fines. Examples of major violations include manufacturing counterfeit drugs or medical devices that do not meet standards, conducting clinical trials without approval, and selling medical devices without a license.

Although the Draft Rule only applies to reports related to the “quality and safety” of drugs and medical devices, it does not define the term “quality and safety.” In practice, regulatory authorities, enterprises, and whistleblowers will likely refer to China’s existing regulatory scheme³ and the requirements for “quality and safety” stipulated in GxP regulations for drugs and medical devices, such as Good Manufacturing Practice and Good Supply Practice.

Reporting Channels

The Draft Rule provides multiple channels for whistleblowers to report issues, including in-person reporting to regulators as well as mail, phone, and online reporting. While the Draft Rule encourages enterprises to prominently display these reporting channels at their premises, it does not mandate this requirement. Enterprises can establish their own reporting policies and encourage employees to report through internal channels in order to discover and remediate issues in a timely fashion.

Handling of Reports

The Draft Rule provides that authorities will process whistleblower reports in accordance with relevant regulations⁴ and that authorities will prioritize investigation and handling of reports that involve significant illegal activities. Furthermore, if authorities identify potential safety hazards related to drugs or medical devices, they are required to respond promptly, take immediate measures to address the issues, eliminate any hazards or prevent hazards from spreading, and inform relevant entities or report the situation promptly to other government agencies.

Rewards

Whistleblowers are only eligible for rewards if they meet the following three conditions: (1) they must provide clear information about the entity involved, specific illegal acts or leads, and crucial evidence; (2) the reported matter must not be already known to regulators; and (3) the reported matter must have been investigated and resolved by regulators, resulting in administrative or criminal penalties. Regulators should inform the whistleblower within 15 working days after closing their case. At the whistleblower’s request, the reward for each case may be up to one million RMB (approximately US$160,000). Additionally, with the whistleblower’s consent, authorities may provide commendations or other forms of public recognition.

Confidentiality and Anti-Retaliation

The Draft Rule stipulates that the authorities must strictly maintain the confidentiality of whistleblowers and take measures to enhance the protection of and tightly control access to their personal information. Without a whistleblower’s consent, their personal information must not be disclosed in any way, and whistleblowers’ legal rights and interests must be protected by law.

The Draft Rule also prohibits enterprises from retaliating against whistleblowers, including by terminating or altering their employment contracts. Moreover, if enterprises retaliate against whistleblowers by refusing to cooperate with regulatory inspections, or by falsifying, destroying or concealing evidence, their conduct will be considered as an aggravating factor in any penalties imposed. This means enterprises must take precautions to treat whistleblowers fairly to avoid potentially serious consequences from careless or inappropriate actions.

Internal Reporting Mechanisms

The Draft Rule also encourages enterprises to establish internal mechanisms to encourage employees to report potential safety issues relating to drugs or medical devices, to timely review and correct any issues, and to reward whistleblowers when appropriate. Like the Draft Compliance Guidelines for Healthcare Companies to Prevent Commercial Bribery Risks recently published by the State Administration for Market Regulation, the Draft Rule is another example of Chinese regulators continuing to adopt best practices from other jurisdictions. While Chinese regulators continue to use their traditional approach of enhanced law enforcement, they are also starting to encourage private enterprise to act as the first line of defense against misconduct by identifying and resolving potential risks through their internal compliance mechanisms.

Conclusion

The Draft Rule represents a significant milestone for China in establishing a whistleblower system for the pharmaceutical and medical device industries, signaling a new trend in regulatory practices within China.

In addition to potentially submitting comments on the Draft Rule, companies may wish to take this opportunity to review their internal quality and safety systems as well as their internal reporting systems for their China operations.

If you have any questions about the above topics, please feel free to contact the authors of this Advisory or other members of Arnold & Porter’s Life Sciences & Healthcare Regulatory or White Collar teams.

© Arnold & Porter Kaye Scholer LLP 2024 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.