AGA Medical dealing with fallout from Chinese deal

An obscure, sparsely attended hearing at U.S. District Court in Minneapolis on Tuesday may provide a cautionary tale for smaller companies hoping to dip a toe into the rapidly growing Chinese market.

The two-year-old case pits Plymouth-based medical device maker AGA Medical Corp. against its onetime distributor in China, the Beijing Since Medical Scientific Co. (BSMS). U.S. District Judge James Rosenbaum issued an injunction Tuesday prohibiting BSMS from representing itself as AGA's distributor.

Although this particular business relationship soured, China still represents vast opportunity for many American businesses. The Chinese economy, the world's third-largest, grew 11.4 percent in 2007, the fastest pace in 13 years and three to four times that of the United States and world economies in recent years.

Although the pace of growth is expected to slow slightly this year, a burgeoning Chinese middle class has emerged hungry not only for Western consumer products, but with a growing need for Western-style health care.

AGA Medical makes minimally invasive devices that repair congenital heart defects. Its Amplatzer line of devices are used by doctors to close abnormal holes in patients' hearts, avoiding open-heart surgery. The company's products are distributed around the world.

Until 2005, the company distributed its products in China, Hong Kong and Mongolia through BSMS, which is owned and operated by Dr. Larry Meng. (Both are named as defendants in AGA's lawsuit.)

AGA claims that it terminated the agreement in April 2006 because BSMS owed the company more than $2.6 million for products that had already been shipped to China. The company's lawsuit also alleges that BSMS refused to open its books to AGA officials.

BSMS has filed several counterclaims alleging breach of contract. Among other allegations, BSMS said in court documents that after a 2004 AGA recall of a device delivery system, it was not able to sell the company's products. Lawyers for BSMS could not be reached for comment Wednesday.

Despite that, AGA says it learned in 2007 that BSMS "continued to hold itself out to the public as 'the only agent of AGA' in China." When AGA hired another distributor, it says it was told by a quasi-governmental body called the Red Cross Information and Technology Co., which tracks medical devices, that BSMS is the only registered agent to sell AGA's devices in Shanghai and other areas of China.

Because of the legal dispute, AGA says the Red Cross Information and Technology body froze AGA's account -- meaning the company and its new distributor cannot sell its products in Shanghai, a key market of some 20 million people.

"AGA's sales into the China market have fallen precipitously," legal documents state. "Sick people in China will either go without medical treatment or will have to undergo open heart surgery."

The relationship between a U.S. company and a Chinese distributor can be problematic, said Seth Werner, a lecturer at the Carlson School of Management at the University of Minnesota. Barriers include language differences, the sheer geographic size and distance between the two parties, and potential misunderstanding about how contracts work.

But Werner, who was not familiar with the AGA case, thinks the considerable effort needed to sell in China is worth it for many companies. "But I think firms have to do due diligence just as they would anywhere else. They need to understand who they're dealing with and who else [the distributor] is dealing with, as well as whether your distributor's goals match up with your own."