Introduction
Comprehensive analysis
Per se violation
Compensation
Repeated litigation
Comment
This article is the last in a three-part series on how settlement agreements may constitute monopoly agreements. For parts one and two please see:
- "Why did the Supreme People's Court deem settlement agreements in a patent litigation case to be monopoly agreements?"; and
- "Case study of Supreme People's Court anti-monopoly review in AstraZeneca v Jiangsu Aosaikang Pharmaceutical".
Recently, a power equipment company (PEC) appealed to the Intellectual Property (IP) Court of the Supreme People's Court (SPC) regarding a horizontal monopoly agreement dispute in the transformers market.
The PEC successfully obtained a verdict in the second instance that reversed the first-instance judgment and invalidated the settlement agreement in question, which was considered to be in violation of the Anti-Monopoly Law (AML).
In light of the transformers market case, this article analyses the key legal issues that can emerge in horizontal monopoly cases and provides some guidance on antitrust compliance in patent settlements.
To determine whether an agreement constitutes a horizontal monopoly agreement that is explicitly listed in the AML, a comprehensive analysis of the agreement, rather than a mechanical comparison between the agreement and the law, will be adopted.
As to whether the settlement agreement in question constitutes a horizontal monopoly agreement, the IP Court of the SPC held in the transformers market case that, in determining whether the agreement in question conforms to the forms of horizontal monopoly agreements listed in article 13(1) of the AML, it is not appropriate to compare the content of the agreement with the five types of horizontal monopoly agreements listed in the same paragraph but to:
- analyse the content of the agreement as a whole from the perspective of market competition order;
- consider the content of the relevant provisions of the agreement and their relevance; and
- consider the actual or potential effects of excluding or restricting competition.
The agreement should be analysed as a whole from the perspective of:
- the market competition order;
- the content and relevance of the relevant provisions of the agreement; and
- the actual or potential effect of the exclusion or restriction of competition.
After a comprehensive analysis of the content of the settlement agreement in the transformers market case, the IP Court of the SPC held that the settlement agreement in question agreed on the terms of:
- stopping the production of specific varieties of goods;
- limiting the sales of specific varieties of goods;
- coordinating and fixing prices;
- reinforcing the effect of dividing the sales market;
- limiting the production and sales quantities of goods; and
- fixing the prices of goods by means of information liaison and penalties for breach of contract.
Therefore, the relevant provisions constituted horizontal monopoly agreements to restrict the quantity of commodity production, divide the sales market and fix commodity prices, which are expressly prohibited by article 13 of the AML, meaning that the settlement agreement in question was invalid in its entirety.
The "per se violation principle" applies to horizontal monopoly agreements that are explicitly listed in the AML, and the burden of proof should be on the defendant that the agreement in question does not have the effect of excluding or restricting competition. The first-instance judgment found that the settlement agreement in question, if performed, would not have the monopoly effect regulated by article 13 of the AML; therefore, the electric PEC should bear the burden of proof that the performance of the settlement agreement in question might lead to the monopoly effect. In this regard, the PEC appealed and claimed that the settlement agreement constituted a horizontal monopoly agreement under article 13(1) of the AML and that the "per se violation principle" applied and that the PEC did not need to provide evidence to prove its competitive effect. Instead, the TCC should have to bear the burden of proof that the agreement did not have the effect of excluding or restricting competition. Thus, the trial verdict was wrong in allocating the burden of proof.
The IP Court of the SPC pointed out that, according to article 7 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in Hearing Cases of Civil Disputes Arising from Monopoly Acts (the Judicial Interpretation of Civil Disputes on Monopoly), the five types of monopoly agreements(1) that are expressly listed in article 13(1) of the AML are typical horizontal monopoly agreements that have the effect of eliminating or restricting competition.
Once formed, such agreements generally have the actual or potential effect of harming market competition, unless the defendant can prove that the agreement has the effect of promoting competition and that the effect exceeds its effect of excluding or restricting competition.
Specifically in this case, the IP Court of the SPC held that the relevant burden of proof in the first instance judgment was improperly allocated and should be corrected. The PEC had proved that the settlement agreement in question constituted a horizontal monopoly agreement to limit the quantity of production of goods, divide the sales market and fix the price of goods as prohibited by article 13(1) of the AML. Therefore, the burden of proof should have been on the TCC to prove that the settlement agreement in question did not have the effect of excluding or restricting competition. As the TCC did not have sufficient evidence to prove that the settlement agreement in question had the effect of promoting competition and that the effect exceeded its effect of excluding or restricting competition, the settlement agreement in question should have been found to have the effect of excluding or restricting competition.
If a party to a monopoly agreement claims reasonable expenses from other parties to the agreement for investigating and ceasing the monopoly, the SPC will analyse each case individually. In this case, the PEC claimed that the settlement agreement was invalid and that the TCC should bear the compensation. The PEC, therefore, claimed that the TCC should compensate the PEC for economic losses and reasonable expenses for safeguarding rights. With respect to the economic losses claimed by the PEC, the IP Court of the SPC took the same view as the Brick and Tile Association monopoly dispute case,(2) in which a participant in a horizontal monopolistic agreement was determined to have no right to claim compensation. Therefore, the IP Court of the SPC did not support the economic losses claimed by the PEC.
The IP Court of the SPC, while rejecting the request of the electric equipment company regarding the compensation of economic losses, supported the request of the electric equipment company regarding the compensation of reasonable expenses for the maintenance of rights in this case, on the following explicit bases:
- Article 14(2) of the Judicial Interpretation of Civil Disputes on Monopolies provides that "upon the plaintiff's request, the people's court may include the reasonable expenses paid by the plaintiff for investigating and stopping the monopoly in the scope of compensation for damages".
- The reasonable expenses claimed by the PEC for the defence of its rights in this case are the expenses for hiring a lawyer for this lawsuit. The PEC filed a lawsuit requesting damages and to confirm that the settlement agreement in question was invalid due to the violation of the AML. Further, the attorney's fees that it claimed to have spent for this lawsuit were expenses paid to stop the monopoly.
- Although the request for damages was not supported, in view of the fact that horizontal monopoly agreements are usually hidden, the support for reasonable expenses was conducive to the initiative of the participants of the monopoly agreement to reveal the monopolistic behaviour. This aided its timely discovery and stopped the monopolistic behaviour, thereby protecting fair competition in the market and maintaining competition. The reasonable expenses claimed by the PEC in this case were justified.
- Considering the complexity of this case and the participation of the attorney representing the PEC in this litigation, the reasonable expenses claimed by the PEC were also reasonable.
The IP Court of the SPC's decision in this case makes it clear that, after a horizontal monopoly agreement is reached, although a party to the monopoly agreement has no right to claim damages from other participants of the agreement in accordance with AML, a party to the monopoly agreement may claim reasonable expenses paid to other participants of the agreement for investigating and stopping the monopoly, and the SPC may support it according to the situation.
In the case at hand, the parties filed a contract dispute lawsuit and a monopoly dispute lawsuit against the same agreement, which does not constitute repeated litigation. After the settlement agreement in question was reached, TCC filed contract dispute lawsuits in 2017 and 2018 on the ground that the PEC did not fulfil the settlement agreement by selling the transformer charger in question to a third party. In the two contract dispute lawsuits and the transformer charger horizontal monopoly agreement dispute cases, the parties filed lawsuits based on the settlement agreement in question. In the 2017 contract dispute case, the effective judgment determined that the settlement agreement in question was legal and valid, and the TCC obtained the liquidated damages through the execution procedure.
Therefore, for the transformer charger horizontal monopoly agreement dispute case, the question was whether the prior contract dispute case and the monopoly dispute case constituted "repeated litigation". According to the opinion of the IP Court of the SPC in another ruling, as the legal relationship and the subject matter of the lawsuit are different, the transformer charger horizontal monopoly agreement dispute did not constitute a duplication of litigation with the prior contract dispute case.
In the monopoly agreement dispute case of Shangqiu Longxing Pharmaceutical Co Ltd v Hubei Tuosi Medical Co Ltd(3) heard by the IP Court of the SPC on 19 August 2021, the focus of dispute between the parties was whether the monopoly agreement dispute case and the contract dispute case (with an effective ruling that the SPC had previously heard) constituted repeated lawsuits. The IP Court of the SPC ruled that, as the contract dispute case and monopoly agreement dispute case of the same contract involved a contractual legal relationship and anti-monopoly legal relationship, respectively, they had different subject matters. Even if the parties involved are the same or the claim of the latter case substantially negates the ruling of the former case, they do not constitute repeated lawsuits. However, it is appropriate in principle that these cases should be jointly tried by one court.
The SPC's adjudication in the transformers market case is well reasoned and logically clear, giving a clear judicial view on some key frontier issues. The determination of the monopoly agreement strictly follows the intent of the AML while incorporating domestic and international judicial and law enforcement practices, thus reflecting the level of adjudication by the highest judicial authority in Chinese civil anti-monopoly litigation. Antitrust and patents are a pair of long-standing entangled legal issues, and the antitrust risks faced in patent settlement agreements are enormous.
There are a number of steps that companies can take to meet antitrust requirements in patent settlements:
- In the process of negotiating with a competitor to settle a patent dispute, attention should be paid to the necessity and confidentiality of the scope of information exchange, especially in relation to competitively sensitive information such as the cost, price or customers of the product (or technology). This avoids potential violations of the AML when other evidence is combined (eg, having increased the price of the product at the same or similar time as the competitor).
- The restrictive clauses agreed in the settlement agreement should be examined to confirm whether the relevant content exceeds the scope of protection of the patent right in question and/or the scope of the dispute, especially for the content of the clauses involving restrictions on the use, production and sale of certain types of products by the parties to the agreement, such as whether the scope of products agreed to be produced by the infringing party fall within the patent's protections.
- It is important to analyse with the assistance of in-house professionals or external legal counsel whether the content agreed to in the settlement agreement constitutes a monopoly agreement and/or an abuse of dominant market position, especially whether the relevant content may go beyond the scope of protection of patent rights and/or the scope of the dispute.
- For the settlement agreement reached in the patent right litigation procedure, according to the specific circumstances of the case, companies may apply to the SPC to confirm the validity of the settlement agreement. The SPC will make a ruling to confirm the validity of the settlement agreement after examination.
For further information on this topic please contact Ying Song or Zhu Libo at AnJie Law Firm by telephone (+86 10 8567 5988) or email ([email protected] or [email protected]). The AnJie Law Firm website can be accessed at www.anjielaw.com.
Endnotes
- restrict the production quantity or sales volume of commodities;
- divide the sales market or the raw material supply market;
- fix or change the price of commodities.