China’s Supreme People’s Court: Patent Infringement Settlements Can Violate the Anti-Monopoly Law

In case (2021）最高法知民终1298号 recently highlighted by the Intellectual Property Tribunal of the Supreme People’s Court of China (SPC), the SPC ruled that a settlement agreement to a patent infringement lawsuit constituted a horizontal monopoly agreement as the scope the agreement was not substantially related to the scope of protection of the patent in question.

In October 2015, Wuhan Taipu Transformer Switch Co., Ltd. (Taipu Company) sued Shanghai Huaming Power Equipment Manufacturing Co., Ltd. (Huaming Company) for infringing its invention patent entitled “Off-circuit tap-changer with shielding device.” 

In January 2016, the two parties reached an agreement through negotiation and signed a settlement agreement. The agreed content includes: Huaming Company can only produce certain kinds of non-excitation tap-changers, and other kinds of non-excitation tap-changers could only be resold to downstream customers through Taipu Company, and the sales price should be determined according to the supply price of Taipu Company. In overseas markets, Huaming Company acts as a market agent for Taipu related entities, and shall not produce or act as an agent for the products of the same category of other enterprises on its own, and the sales price shall be consistent with the supply price of Taipu Company. In the same month, Taipu Company withdrew the lawsuit.

In June 2019, Huaming Company filed a lawsuit in this case with the Intermediate People’s Court of Wuhan City, Hubei Province, claiming that the settlement agreement involved violated the anti-monopoly law and should be deemed invalid.

The court of first instance held that the  agreement involved in the case was not a monopoly agreement, and ruled to reject all claims of Huaming Company.

Huaming Company then appealed to the Supreme People’s Court, which rendered this decision.

On appeal, the Supreme People’s Court held that to determine whether the  agreement involved in the case is invalid due to violation of the mandatory provisions of the Anti-Monopoly Law, it must first determine whether the  agreement involved in the case constitutes a horizontal monopoly agreement expressly prohibited by the Anti-Monopoly Law, and then determine whether the agreement should be be fully or partially invalidated.

First, as to whether the  agreement involved in the case constitutes a horizontal monopoly agreement expressly prohibited by Article 13, paragraph 1 of the Anti-Monopoly Law, the Supreme People’s Court held that Huaming Company and Taipu Company both produced and sold off-circuit tap-changers. Moreover, both parties have certain market influence, and there is a competitive relationship between the two parties in the sense of anti-monopoly law. The  agreement involved in the case, with Articles 1, 5 and 10 as the core, agreed to stop the production of specific varieties of commodities, restrict the sales of specific varieties of commodities, coordinate and fix prices, and supplemented by means of information contact and penalties for breach of contract. The effect of segmenting the sales market, restricting the production and sales volume of commodities, and fixing commodity prices has been strengthened, and it meets the formal requirements stipulated in Items 1 to 3 of Paragraph 1 of Article 13 of the Anti-Monopoly Law. Since the five types of monopoly agreements listed in the first paragraph of Article 13 of the Anti-Monopoly Law are common types of typical horizontal monopoly agreements with the effect of eliminating and restricting competition, once agreed upon, will generally eliminate and restrict competition and it can be presumed to have the effect of eliminating or restricting competition. Therefore, Taipu should bear the burden of proof that the  agreement involved in the case does not have the effect of excluding or restricting competition. Taipu did not provide sufficient evidence.

In addition, the evidence in the case also shows that after the agreement involved in the case was signed, the unit price of the off-circuit tap-changer in the price guide sent by Taipu to Huaming was much higher than Huaming’s own external sales price and the legal representatives of both parties  WeChat chat records also show that Taipu has repeatedly proposed to Huaming to maintain high prices. It can be seen that the implementation of the  agreement involved in the case will lead to an increase in the price of related products, which will harm the interests of downstream operators and end users.

Secondly, regarding the relationship between the agreement involved and the patent infringement dispute, the Supreme People’s Court held that in this case, the technical effect of the patent involved was mainly to reduce the cost of switch manufacturing, to enhance the stability and reliability of the switch and is not a fundamental patent that cannot be worked around.  However, Huaming’s restricted production and sales of certain types of off-circuit tap-changers  are not substantially related to the scope of protection of the patent in question.

As analyzed above, Huaming Company and Taipu Company have a competitive relationship in the off-circuit tap-changer market. The agreement involved in the case divides the off-circuit tap-changer market, and uses this to determine the sales price and production of the products involved in the agreement. Quantity, sales volume, sales type, sales area, etc. are restricted, which excludes and restricts the normal competition between market sellers. It can be seen that the agreement involved in the case lacks substantial correlation with the protection scope of the patent right in question. Its core is not to protect the patent right, but to use the exercise of the patent right as a cover, in fact, it pursues dividing the sales market and restricting the production and sales of goods with the effect of fixing prices, which is an abuse of patent rights, constitutes an act of excluding and restricting competition, and violates the provisions of the Anti-monopoly Law. Therefore, the fact that Taipu owns and exercises the patent right in the case does not rule out the illegality of the  agreement involved in the case.

Finally, regarding the legal effect of the  agreement, the Supreme People’s Court held that Articles 1, 5 and 10 of the  agreement involved violated the provisions of Article 13 of the Anti-Monopoly Law on prohibiting the conclusion of horizontal monopoly agreements. However, Taipu did not claim that the agreement has the exemptions stipulated in Article 15 of the Anti-Monopoly Law. Therefore, Articles 1, 5 and 10 of the agreement involved in the case should be deemed invalid. And the above three clauses are the core clauses of the agreement involved in the case, and the other clauses relate to the relevant rights and obligations of both parties around the three clauses. In order to achieve monopoly interests, the  agreement cannot survive severability after stripping out the three clauses, and so the entire agreement is invalid.

Text of the full decision dated February 22, 2022 is available here (Chinese only).