CN07 - Chinas top court deems patent settlement agreement anti-competitive

The Supreme People's Court of China ("SPC") issued a judgment on 21 March 2022 which found that a patent settlement between Shanghai Huaming Power Equipment Manufacturing ("Huaming") and Wuhan Taipu Transformer Switch ("Taipu") constituted a horizontal monopoly agreement in violation of China’s Anti-Monopoly Law ("AML").

Key takeaways

• Article 13 of the AML prohibits horizontal monopoly agreement among competing undertakings, including (among others) agreements that fix prices, limit production or sales volumes; and divide or segments sales markets (e.g., by geography, product or customer type).
• Pursuant to Article 55 of the AML, a right holder that oversteps the boundaries in exerting its exclusive intellectual property rights and abuses those rights in a manner that eliminate or restricts competition may be found to be in violation of the AML.
• In this case, a settlement agreement that was entered into between two parties to resolve a patent infringement dispute went beyond what was reasonably necessary to protect a patent holder's intellectual property rights. The agreement between two competing entities had the effect of dividing sales markets, restricting production and sales, and price-fixing in contravention of Article 13 of the AML.

The Supreme People's Court of China ("SPC") issued a judgment on 21 March 2022 which found that a patent settlement between Shanghai Huaming Power Equipment Manufacturing ("Huaming") and Wuhan Taipu Transformer Switch ("Taipu") constituted a horizontal monopoly agreement in violation of China’s AML.

Timeline of key events 

Set out below is timeline of key events in the lead up to the hearing before the SPC.

• 2008 - Taipu obtained a patent in relation to a certain type of off-load tap changer with shielding apparatus (a component used in electric transformers).
• December 2013 - Taipu discovered that Huaming was producing and selling off-load tap changers with cylindrical shielding apparatus which it believed had the technical features that fell within the scope of its patent.
• October 2015 - Taipu filed a lawsuit against Huaming for alleged patent infringement.
• November 2015 - Huaming successfully lodged an application with the National Intellectual Property Administration to invalidate the patent in question.
• December 2015 - Huaming applied for the suspension of the suit brought by Taipu.
• January 2016 - the parties entered into a settlement agreement. Following this, Taipu applied for the withdrawal of the patent infringement litigation, while Huaming applied for withdrawal of the patent invalidation request.
• January 2017 - following an alleged violation of the settlement agreement by Huaming, Taipu filed a fresh law suit with the Jiangxia District People's Court of Wuhan City for breach of contract. The Jiangxia Court found in Taipu's favour.
• July 2017 - the Jiangxia Court's decision in favour of Taipu was upheld by the Wuhan Intermediate Court.
• June 2019 - the Wuhan Intermediate People’s Court in the province of Hubei agrees to hear Huaming's claim that the settlement agreement constituted a monopoly agreement contrary to Article 13 of AML. Huaming sought orders that the mediation agreement be declared invalid and that Taipu compensate it CNY 798,626 (∼USD 121,800) for economic losses and CNY 100,000 (∼USD 15,250) for reasonable expenses incurred in defending its rights and for the litigation fee.
• December 2020 - the Wuhan Court dismissed Huaming's claim.

Wuhan Court's decision

The Wuhan Intermediate People's Court held that the parties were competitors, as they both manufactured and distributed tap changer products to transformer manufacturers. However, the court concluded that the settlement agreement was not a "monopoly agreement" because: 

• the purpose of the agreement was settlement of the parties’ patent infringement dispute and was intended to restrain competition and cooperation between the parties, rather than constrain competition in a competitive market; and
• the agreement did not contain price-fixing or adjustment terms, limits on production and sales, or market division terms, which are the constituent features of a "monopoly agreement" under Article 13(1) of the AML.

Finally, the court found that Huaming had failed to prove that the settlement agreement would result in anti-competitive effects. 

Huaming sought to challenge the decision before the SPC. The SPC accepted the case on 13 July 2021 and held a hearing on 26 November 2021.

SPC's decision 

Consistent with the Wuhan Court's decision, the SPC held that there was a competitive relationship between the parties. However, contrary to the decision at first instance, the SPC considered the settlement agreement to constitute a horizontal monopoly agreement. The SPC pointed to three key clauses in the agreement which:

• placed restrictions on the sale of certain products by Huaming, including within China and in overseas markets with the effect of dividing sales markets between the parties;
• placed restrictions on the quantity of goods produced and sold by Huaming including by requesting Huaming discontinue production and limit the sale of certain off-load tap changer products; and
• had the likely effect of fixing commodity prices, including as a result of the restrictions placed on Huaming on the production of a certain type of off-load tap changer in China and restrictions placed on overseas sales. In addition, alignment on pricing was likely in the context of a clause whereby the parties agreed to share price information in respect of imported substitutes.

According to the SPC, the mediation agreement had the effect of excluding or restricting competition. The SPC acknowledged that once a monopoly agreement is formed it will generally be accepted as having a potential or actual effect of harming market competition, unless it can be established that the agreement has a pro-competitive effect that offsets any negative effect.  As the defendant, Taipu was required to, but had failed to, adduce sufficient evidence to prove that the settlement agreement had the effect of promoting competition. Among other facts, the SPC referred to WeChat evidence between the legal representatives which demonstrated Taipu repeated requests of Huaming to keep unit prices at rates much higher than previously sold by Huaming.  Based on this evidence, the implementation of the agreement would result in an increase in product prices with the clear effect of harming the interests of users in downstream markets.

As a party to the mediation agreement, Huaming participated in reaching the horizontal monopoly agreement and accordingly its own behaviour was illegal. The SPC therefore held that the claim for economic loss did not have a legal basis. On the reasonable expenses claim, however, the SPC decided to entertain this request on the basis that horizontal monopoly agreements can be hard to detect. The SPC considered that supporting a claim for reasonable expenses would encourage participants in such agreements to proactively report monopolistic conduct.

Concluding remarks

The SPC's decision demonstrates the top court's sophistication in applying the AML in the context of IP-related disputes.  The decision serves as a strong warning to IP advisors and parties caught up in IP litigation to be mindful of the overlay of competition law in their dealings. When engaging with a competitor, regardless of the context, it is advisable to be vigilant in all aspects of dealings and agreements reached, or else parties risk falling foul of competition law.