This article is the first in a three-part series on how settlement agreements may constitute monopoly agreements. For parts two and three please see:
- "Case study of Supreme People's Court anti-monopoly review in AstraZeneca v Jiangsu Aosaikang Pharmaceutical"; and
- "Horizontal monopoly agreements: analysis of key legal issues"
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 this case, two parties had entered into a settlement agreement to settle a patent dispute in another case. During the hearing, the IP Court examined, among other things, whether a patent dispute settlement agreement qualifies as a monopoly agreement and the criteria for determining a monopoly agreement.
In an interview published on 28 February 2022, Zhu Li, the deputy chief judge of the IP Court, remarked on this case when reviewing the Court's work in the three years since its establishment:
In the case of a horizontal monopoly agreement dispute concerning tap changers, the Court determined the settlement agreement in question constituted a horizontal monopoly agreement and therefore the whole agreement was void. The Court has strictly regulated the acts of restricting the production quantity or sales volume of commodities, dividing the sales market or the raw material supply market, fixing or changing the price of commodities under the guise of a patent infringement settlement agreement.
The AML strictly regulates horizontal monopoly agreements in many jurisdictions, as they constitute a core violation of competition law. Under judicial and administrative enforcement practice in China, there have been a number of cases involving horizontal monopoly agreements. However, this case is the first in Chinese anti-monopoly litigation that questions:
- whether a settlement agreement in a civil litigation constitutes a monopoly agreement;
- how the elements of a horizontal monopoly agreement should be determined; and
- how to solve the conflict between the adjudicative documents of a previous patent dispute and that of the ensuing anti-monopoly civil litigation.
In this case, the PEC and a tap changer company (TCC), the defendant, were both engaged and competed in the production and sale of tap changers in the transformers market (a tap changer, within an electrical transformer, is a mechanism which regulates variable turn ratios). In 2015, the TCC filed a lawsuit with the People's Court on the ground that the technical features of a shielding cover for a certain type of tap changer, which the complainant produced and sold, fell within the scope of protection of some of the TCC's patent rights. The TCC requested the Court to order the PEC to cease the production of this product and provide compensation for its economic losses.
During the trial of the patent infringement dispute, the PEC applied to the National Intellectual Property Administration for a declaration of invalidity of the patent right in question and applied with the Court to stay the trial. In 2016, the TCC and the PEC entered into a settlement agreement. Later, the TCC applied for the withdrawal of the patent lawsuit, and the PEC applied for the withdrawal of the request for invalidation of the patent right.
The parties undertook the following in the settlement agreement:
- The tap changer in question was distinguished from other types, and it was agreed that in its manufacture of all types of transformers and related parts – with the exception of one type of tap changer – the PEC would not manufacture or commission, or purchase from, any third party other than the TCC. In addition, the PEC would be the overseas market agent for the TCC's shareholding company and undertook not to manufacture on its own in the overseas market or to act as an agent for similar products from other enterprises.
- When quoting the tap changers entrusted to the TCC, the PEC would first have to confirm the TCC's price for the main part of tap changer before determining the quotation itself. The TCC would then have to quote the TCC with the price for the main part of the tap changer. In addition, the parties agreed that, for substitutable imported changers and special changers, if one party informed the other party of the price information, the transaction price of the informed party could not be lower than that of the actively informed party.
- If the PEC breached the above agreement, it would have to compensate the TCC for all losses incurred and separately pay a high amount of liquidated damages.
However, the PEC did not fulfil this agreement and the TCC filed a lawsuit with the People's Court in January 2017 on the ground that the PEC had violated the settlement agreement by selling the transformer changer involved in the case to a third party. The TCC requested the Court to order the PEC to pay liquidated damages. In this contract dispute case, the court of first and second instance both found the settlement agreement in question to be legal and valid, without examining whether the settlement agreement violated the AML. After the above judgment came into effect, the court of the first instance initiated the enforcement of the effective judgment and enforced the execution money from the PEC.
In June 2018, the TCC again filed a lawsuit with the People's Court on the ground that the PEC had breached the settlement agreement by selling the relevant tap changers to a third party, and it requested that the PEC pay liquidated damages. The PEC applied to suspend the trial on the grounds that the validity of the settlement agreement was disputed and filed a separate lawsuit accordingly. In June 2019, the trial court suspended the trail.
In May 2019, the PEC filed a lawsuit with the People's Court seeking (at first-instance) a declaration that the settlement agreement in question was void due to its violation of the AML and that the TCC should provide compensation for economic losses and reasonable expenses for the litigation. After hearing the case, the Court issued a judgment in December 2020, holding that the settlement agreement did not violate the AML and dismissed all the PEC's claims.
The PEC appealed the trial court's judgment before the IP Court of the SPC, requesting that the first-instance judgment be reversed and that all its claims be upheld. After hearing the case, the SPC's IP Court issued a judgment in February 2022, holding that, under article 13(1) of the AML, the relevant provisions of the settlement agreement in question constituted a horizontal monopoly agreement by:
- restricting the production quantity or commodities' sales volume;
- dividing the sales market or the raw material supply market; and
- fixing or changing the price of commodities.
The IP Court, therefore, declared that the settlement agreement was void.
As mentioned above, the agreement which the PEC sought to declare void under the AML was a settlement agreement, entered between it and the PEC in another case to settle their patent dispute. During the trial of this case, the IP Court focused on the issues of whether:
- the context of the agreement signed affected the determination of the monopoly agreement;
- the settlement agreement reached in the patent dispute constituted a monopoly agreement; and
- the elements of a monopoly agreement.
Determining existence of monopoly agreement
The core criterion for determining a monopoly agreement is whether it has the effect of excluding or restricting competition, and the context in which the agreement was entered into is only one factor.
At first instance, the People's Court held that the purpose of the settlement agreement was to resolve the patent infringement dispute between the parties and to avoid the recurrence of that dispute, and that the settlement agreement did not aim to induce the parties to enter into an alliance to compete in the competitive market. On this basis, the Court analysed the terms of the agreement and the effect of its performance and held that the terms of the settlement agreement in question did not have the attributes of a monopoly agreement and should not be deemed as a monopoly agreement.
The PEC, therefore, appealed that the AML regulates acts that exclude or restrict competition in the market, and neither the circumstances that constitute horizontal monopoly agreement, which are explicitly prohibited by the law in the form of enumeration, nor the factors that should be considered in determining other circumstances that constitute horizontal monopoly agreement, mentioned the context or subjective purpose of the parties to reach the agreement. In this regard, it was an error in the application of the law to hold that the settlement agreement in question did not constitute a horizontal monopoly agreement based on the context in which it was concluded.
The IP Court held that, according to article 13(2) of the AML, a monopoly agreement is an agreement, decision or other concerted act to exclude or restrict competition. Therefore, the decision as to whether the agreement reached between parties is an AML-prohibited monopoly agreement should be based on the core criterion of whether the agreement has the effect of excluding or restricting competition. The context of the settlement agreement and the subjective motives of the parties in entering into the settlement agreement are only reference factors, and it was not sufficient to determine or deny the effect of the settlement agreement on market competition.
Scope of agreement violated AML
The scope of the patent settlement agreement exceeded the scope of the protection of patent rights and/or related disputes, which ultimately had the effect of excluding or restricting competition in violation of the AML.
In the first-instance decision, the People's Court held that the PEC's commitment to produce only one type of tap changer in the settlement agreement was established on the basis of patent rights; namely, due to the fact that other types of transformer changers might fall within the scope of protection of the patent right in question and, therefore, the terms of the relevant agreement.
The PEC appealed, claiming that the trial judgment had omitted facts, and that the scope of the agreement in the settlement agreement far exceeded the scope of protection of the rights of the patent in question and disputes in patent infringement cases. This had the cumulative effect of excluding and restricting market competition and constituted a horizontal monopoly agreement.
The SPC IP Court, in response, held that the settlement agreement lacked substantial relevance to the scope of protection of the patent right and did not primarily serve to protect the patent right but acted as a cover for the patent right. This has the effect of a horizontal monopoly agreement and, therefore, the settlement agreement was an abuse of patent rights and a violation of the provisions of the AML. The SPC IP Court considered the following factors in its analysis:
- The technical effect of the patent right mainly reduced the manufacturing costs of the tap changer and enhanced the stability and reliability of the use of the changer. This was a matter of improving the changer and was not a basic patent that could not be avoided. The scope of protection of the patent right in question did not involve the specific shape or type of tap changer; however, the settlement agreement differentiated tap changer's by type.
- In overseas markets, the settlement agreement in question divided the products into "changers produced by participating companies of the tap changer company's" and "changers produced by other companies", thus limiting the scope of changers produced by the PEC. However, this limitation was not substantially related to the scope of protection of the patent in question.
- The settlement agreement divided the market in which the tap changer was located, and in doing so, excluded and restricted competition among operators by restricting:
- sales prices;
- production quantities;
- sales quantities;
- sales types; and
- sales territories.
In addition, the IP Court pointed out that, as the settlement agreement was not substantially related to the scope of protection of the patent right, and the content of the settlement agreement exceeded the disputed content of the patent infringement dispute, the fact that the products involved in the settlement agreement included the products suspected of infringing the patent would not, in principle, affect the judgment of whether a monopoly agreement existed.
The SPC's decision is well reasoned and logically clear. It provides a clear judicial view on some key frontier issues, and the determination of the monopoly agreement strictly follows the intent of the AML, while also incorporating domestic and international judicial and law enforcement practices. This reflects the robust level of adjudication by China's highest judicial authority on 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 significant.
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@example.com). The AnJie Law Firm website can be accessed at www.anjielaw.com.