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GlaxoSmithKline's China bribery case may have serious consequences for IP enforcement



Peter Leung


The arrest and upcoming trial of British journalist-turned-investigator Peter Humphrey highlights concerns about the ambiguous legal status of private investigators, a key part of the IP protection landscape in China

Humphrey and his Chinese-born American wife Yu Yingzeng were hired by GlaxoSmithKline April last year to investigate an email alleging that GSK employees were engaging in an elaborate bribery scheme. The detailed allegations also contained a video of GSK China head Mark Reilly in what appeared to be his Shanghai apartment. Soon after, GSK engaged Humphrey’s company ChinaWhys to investigate the allegations and find out who may have broken into Reilly’s home to make the video.

In July 2013 Chinese authorities arrested Humphrey and Yu. It is believed that they are accused of illegally obtaining private information during the course of their investigations. Humphrey soon after issued an apology on Chinese television for his company’s actions and said that he never intended to break Chinese law.

Peter Humphrey, apologising for his actions on Chinese television
Peter Humphrey, apologising for his actions on Chinese television

Meanwhile, Reilly and two other GSK executives are accused of paying and orchestrating RMB 3 billion ($485.3 million) in bribes to doctors, hospital administrators and government officials to increase sales. GSK has also admitted that its executives have broken the law.

More serious charges averted?

Humphrey’s trial is scheduled to begin on August 8 before the Shanghai Number One Intermediate Court. A conviction of some sort seems all but certain (Last year, Chinese prosecutors had a 99.93% conviction rate, with just 825 non-guilty verdicts out of 1.16 million criminal defendants), and several factors, such as Humphrey’s televised apologies, indicate that the defendants may have come to some sort of deal or may otherwise not be subjected to the most serious of charges.

"Fortunately, the prosecutor’s case against Peter [Humphrey] did not include allegations of 'illegal operations’ under Article 225 of the PRC Criminal Code, which would have been the most obvious provision upon which to target the private investigations industry," explains Joe Simone of Simone IP Services.

Article 225 of the Criminal Code sets forth criminal penalties for illegal acts in the operation of a business that disrupts the market order. "Serious" cases may result in up to five years of criminal detention and fines up to five times the amount of illegal gains. Cases deemed "especially serious" may result in more than five years of imprisonment as well as fines and confiscation of property.

Simone says that the defendants’ lawyers have been required to sign non-disclosure agreements so it is unclear as to the specific charges.

"But from what I’ve heard, there is reason to believe the level of buying and selling of protected information may not have risen to the level of a crime," he says. "Or at the very least, there is a high level of ambiguity over the criteria for determining whether a crime has been committed."

An industry on trial?

Humphrey’s trial is also raising questions about the status of the private investigation industry in China, an industry that international companies rely on for everything from due diligence on potential investments to screening possible business partners. Private investigation firms are especially important for IP protection. For example, Jimmy Kwok of HP told Managing IP that his company used 12 private investigation firms in China with up to 500 investigators in total. Tasks vary, but investigators are commonly used to track counterfeits up the supply chain in order discover and shut down the manufacturers of the infringing goods.

The Humphrey case is drawing attention to the legal ambiguity surrounding private investigation firms.

"The arrest of Peter and his wife has led many companies and practitioners to revisit the question whether the operation of a private investigations company in China is legal," Simone says. "There is a 1993 notice from the Ministry of Public Security suggesting it is not. But this is merely a notice, and not a law or even a regulation."

A director at an international risk management firm also told Managing IP that government scrutiny of the industry has increased in the last two years. He notes that his and colleagues in other foreign firms have been getting more visits from regulatory officials, though he says that he interprets these visits more as warnings than attempts to uncover wrongdoing.

"It’s not as if these officials are coming with accusations or demands for documents; it’s much more subtle than that," he says. "They almost always show up unannounced and they just ask pretty general questions about how things are going. It’s a way of letting us know that they’re watching."

"However, firms like mine are always aware of this. We know we are in a regulated industry and we have to be clear about what we can do and find legal workarounds to get the information we need."

Regardless of the outcome, the Humphrey case will be closely watched by private investigators and their clients. And like the recent scandal involving rotten meat supplied to McDonald’s and KFC in China, investigators may have to be extra careful about where it sources its information from.

"It may be that Humphrey may have tapped into this world of subcontractors that provide information to investigators," says the risk management director. "However, the old days of just paying for information, no questions asked, are gone."

"Hopefully the recent enforcement campaign against the companies that have leaked data to investigators like Peter will put an end to the practice," says Simone. "But it remains unclear whether lack of access to data on individuals and companies under the current system in China will hamstring investigators looking into bona fide targets."

UPDATE: Humphrey and Yu have been found guilty, following a one day trial. Humphrey received a 30 month prison sentence and a RMB 200,000 fine ($32,500), while Yu received a two-year sentence and a RMB 150,000 fine. Humphrey will also be deported.

Humphrey and Yu have 10 days to appeal.

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