Recently, the Supreme People's Court concluded an appeal case involving a patent "settlement agreement" in a monopoly agreement dispute, in favor of the appellant, Shanghai Huaming Power Equipment Co.,Ltd. and ruled the agreement invalid, which saved Huaming from paying Wuhan Taipu Transformer Switch Co. RMB 5,100,000 yuan in liquidated damages.

The case should be traced back to the year of 2018, when Taipu started a lawsuit against  Huaming, alleging that Huaming, has violated a mediation agreement by selling 30 sets of drum-type off-circuit tap-changers (OCTC) to TBEA Xinjiang Transformer Factory after signing the settlement agreement. Consequently, Taipu requested to be awarded 5,100,000 yuan in liquidated damages. According to the complaint, both Taipu and Huaming are all sellers of OCTC.

The patent mediation agreement mentioned by Taipu, which is the focus in this case, should date back to 2015, when Taipu accused Huaming of having infringed its OCTC patent (hereinafter referred to as the 2015 Patent Dispute). The agreement was a solution to the 2015 Patent Dispute, and afterwards Taipu withdrew the lawsuit against Huaming.

The agreement includes a few terms restricting Huaming’s business over OCTC: Huaming can only manufacture certain types of OCTC, while other types (drum-type included) can only be supplied by Taipu, the sales price of which shall also be determined according to Taipu’s supply price; Huaming shall only be acting as a market agent selling with identical supply price for the Taipu-related companies in overseas market and cannot manufacture on its own or act as agent for the products of the same category of other companies simultaneously.

The first instance judgment was made by Wu Han Jiangxia District People’s Court. The first instance court found that the agreement was reached on the basis of true and consistent intention of both parties, and has not violated the mandatory provisions of laws or administrative regulations, thus it should be deemed as valid, based on which, combined with the background that Taipu is the patent holder of disputed patented products, the restrictions of manufacturing product-type and sales price are also valid, Consequently, Huaming should have performed its obligations in accordance with the relevant terms. Therefore, Huaming was ordered to pay Taipu 5,100,000 RMB for liquidated damages according to the agreement.

Huaming later appealed to a higher court.

After verifying the facts, Supreme People’s Court (SPC) overturned the first instance ruling by overruling the validity of the agreement in the final trial.

SPC found that the mediation agreement was involved in horizontal monopoly prohibited by the Anti-monopoly Law, as both parties are rivals in OCTC market, the several restrictions made in this agreement have reinforced the effects such as market division, limitation in manufacturing type, quantity of products and fixing sales price, in line with the stipulated formal characteristics of monopoly. And the disputed patent is only a technical improvement, not an inescapable fundamental patent in the relevant field. Moreover, the patent right protection has not designated specific type or shape, thus the scope of its right protection is not substantially related to the various restrictions in the agreement. Accordingly, it can be concluded that the core of the agreement is not for protecting patent, but abusing of the patent right, constituting a monopolistic act of excluding and restricting competition. As the agreement is found invalid, Shanghai Huaming is not liable for breach of contract accordingly.

Abstract:

Recently, Supreme People's Court of China concluded an appeal case involving a patent "settlement agreement" in a monopoly agreement dispute, in favor of the appellant，Shanghai Huaming Power Equipment Co.,Ltd. and ruled the agreement invalid, which saved Huaming from paying Wuhan Taipu Transformer Switch Co. RMB 5,100,000 yuan in liquidated damages. The disputed agreement, which was made in 2015, was a settlement of a patent dispute between two companies, in which several restrictions had been made on Huaming about manufacturing, selling of the off-circuit tap-changers, leading to recognition as monopolistic contract by SPC in the final trial.