Patent Licensing in the Cloud: Antitrust Issues

It is well established in the United States that a patent holder generally has broad discretion to determine how it uses or licenses it patents. The U.S. Supreme Court’s bottom-line principle expressed in Trinko—that companies are free to refuse to deal with anyone—applies to intellectual property as is does to other property rights.1 As the U.S. DOJ and FTC have expressed, “the unilateral right to refuse to grant a patent license is a core part of the patent grant.”2 And as patent holders generally are free to refuse to license their patents, they also generally are free to impose any restrictions they wish on licenses that they do grant.3

This general rule holds as well in the rapidly growing and changing cloud computing industry. Nevertheless, the antitrust laws do impose some limits on a patent holder’s rights, and as a result patent licensing and litigation have become significant competitive issues in the technology industry in recent years. Companies licensing patents in the cloud should be aware that certain licensing practices in the cloud might have anti-competitive effects that could trigger antitrust concerns. This article reviews, at a high level, whether the nature of cloud computing raises special antitrust risks, and if so, when a company should consider further review of its licensing practices.

A. An Overview of Cloud Computing
Cloud computing is the provision of data or applications on demand, over the web, to remote users. The cloud can best be viewed as a “stack” consisting of five layers—hardware, virtualization, infrastructure as a service (“IaaS”), platform as a service (“PaaS”), and software as a service (“SaaS”):

Cloud

Each layer depends on interface and protocol interoperability to those above and below it for the cloud to work properly. For example, when a user opens a photograph in her Facebook account on her smartphone, she is using a SaaS application (the Facebook app) to retrieve data (the digital photograph file) stored in remote hardware (the Facebook servers) that are collectively managed by virtualization software and an operating system. If the remote hardware fails, then neither the SaaS application nor the data can be retrieved, and the user experience collapses.

Within each broad layer is an abundance of potential product and technology markets that are similarly codependent: servers and mainframes with connected storage devices and networking gear; server, mainframe, and cloud operating systems; video compression and streaming software; search engines; webmail; online advertising; and others. Surrounding these is an overlapping series of products (and potential markets) such as smartphones, tablet computers, PCs, set-top boxes, and game consoles. Many, and likely most, of the underlying technologies in these markets are subject to intellectual property protections.

To recoup investments and obtain cost predictability, players at all levels in the cloud rely on patent licensing, frequently in the form of cross-licenses and portfolio licenses that provide a form of “patent peace” to the parties. The licensing practices are particularly important to the heavyweight patent holders that compete across multiple markets in the cloud. One player that competes in several cloud-related markets, IBM, perennially has been one of the top two patent holders in the world. Apple, Microsoft, Amazon, Hewlett-Packard, and Oracle/Sun also possess significant patent portfolios and compete with one another within the cloud industry. And recently, Google appears to be scrambling to catch up.

B. Antitrust Risks in the Cloud
Cloud computing represents a disruptive “paradigm shift” potentially comparable to the emergence of the Internet and the personal computer. As such, the cloud presents opportunities for companies to leverage rapid technology change to challenge previously dominant competitors in once-unassailable markets. And like the Internet and the PC before it, the cloud promises tremendous potential efficiency and innovation benefits for consumers and the economy. This virtually guarantees that competition authorities around the world will closely watch cloud-related markets for potential antitrust violations. For patent licensors, some of the most important antitrust risks include: (1) market power and tipping points; (2) tying and package licenses; and (3) standards setting and patent pools.

(1) Market Power and Tipping Points

As described above, the cloud consists of multiple intersecting and overlapping markets. As a result, cloud computing may present scenarios where a company that has market power in one cloud market can use that market power to foreclose competition in adjacent markets. This is especially the case because of the need for interoperability between technologies in the cloud. A company that holds patents covering protocols and other links between a monopoly product and products in another market can expect greater scrutiny of its licensing practices. This is especially the case in jurisdictions, such as the European Union, where monopoly leveraging is a more viable claim than in the United States).

Like other technology industries, the cloud also presents risks of tipping points, where one company’s product becomes an accepted standard. This potential for market tipping can be exacerbated by the presence of network effects or high barriers to entry, just as in more mature technology markets. Providers that operate across multiple cloud markets—and especially providers that are dominant in one or more markets—therefore should carefully review licensing practices to avoid being accused of leveraging market power in one area of the cloud into another area of the cloud.4

(2) Tying and Package Licenses

Another, related risk arising from the multiple layers of cloud markets is that of anti-competitive tying or bundling. Generally, a distinction exists between patent-to-product tying and patent-to-patent tying. In patent-to-product tying, the patent owner “uses the market power conferred by the patent to compel customers to purchase a product in a separate market that the customer might otherwise purchase from a competitor.” U.S. Philips Corp. v. Int’l Trade Comm’n, 424 F.3d 1179, 1189-90 (Fed. Cir. 2005). Courts have found such licenses to constitute antitrust violations or patent misuse, and companies should be wary of any such conditions in patent licenses. See, e.g., United States v. U.S. Gypsum Co., 333 U.S. 364, 400 (1948); Int’l Salt v. United States, 332 U.S. 392, 395 (1947); Virginia Panel Corp. v. MAC Panel Co., 133 F.3d 860, 868-69 (Fed. Cir. 1997).

By contrast, in most cases, companies may offer a license to a portfolio (or package) of patents without undue concern about potential antitrust risk. See Philips, 424 F.3d at 1190-91. However, package licenses can raise antitrust issues if a company that owns rights to essential patents forces licensees take a license to non-essential patents, and that coercion forecloses competition from commercially viable alternative technology. Id. at 1194. Therefore, patent holders who offer package licenses including both essential and non-essential patents should carefully review portfolio licenses, bundles, and package licenses to ensure that they do not present such risks.

(3) Standards Setting and Patent Pools

As with other technology industries, the need for interoperability in the cloud means that companies often must conform to industry standards to be serious providers of products or services providers. Where this is the case, special issues may arise. Most standards-setting organizations require participants whose patents read on an adopted industry standard to promise to license their patents on terms that are “reasonable and nondiscriminatory” (“RAND”). Any such promise places an immediate limitation on what is otherwise freedom to license on terms the patentee desires. Antitrust risks, as well as other contractual or tort law risks, may flow from undertaking a RAND obligation if those obligations are not fulfilled.5 In addition, similar issues may arise in the context of patent pools, where bundles of patents from different patent owners are collected in one pool for licensing subject to the kinds of commitments the DOJ has required in approving patent pools.6

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In sum, companies can expect that the licensing practices that are increasingly commonplace in cloud computing, as elsewhere, likely are pro-competitive and in line with well-settled legal principles. However, the importance of the cloud and its nature mean that antitrust authorities will closely watch any licensing conduct in the cloud. In addition, any licensing that implicates more than one potential product market—especially where a patent owner has a monopoly in one market—could prompt greater scrutiny. In such cases, patent owners in the cloud should carefully review licensing strategies for potential antitrust risks.
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1 See Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 407 (2004) (“[A]s a general matter, the Sherman Act ‘does not restrict the long recognized right of [a] trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal.’”) (citing United States v. Colgate & Co., 250 U.S. 300, 307 (1919)).

2 U.S. DEP’T OF JUSTICE AND FED. TRADE COMM’N, ANTITRUST ENFORCEMENT AND INTELLECTUAL PROPERTY RIGHTS: PROMOTING INNOVATION AND COMPETITION (2007) (“JOINT ANTITRUST/IP GUIDELINES”), at 6.

3 See General Talking Pictures Corp. v. Western Electric Co., 305 U.S. 124, 127 (1938) (“The practice of granting licenses for restricted use is an old one. So far as it appears, its legality has never been questioned.”); Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700, 706 (Fed. Cir. 1992) (“Restrictions on use are judged in terms of their relation to the patentee’s right to exclude from all of part of the patent grant.”).

4 Because companies in the cloud frequently acquire businesses in adjacent markets or decide later to enter previously uncontested adjacent markets, an “Aspen Skiing” scenario may arise in this context. For example, a company that licenses software to hardware providers, and then enters the hardware business itself, should be wary of changes to existing licensing practices that could be viewed as anti-competitive attempts to foreclose hardware competition. See JOINT ANTITRUST/IP GUIDELINES at 28 (liability could attach “when a patent owner refuses to continue to license under circumstances paralleling those in Aspen”); Aspen Skiing Co. v. Aspen Highlands Skiing Corp., 472 U.S. 585 (1985).

5 See, e.g., Broadcom Corp. v. Qualcomm Inc., 501 F. 3d 297 (3d Cir. 2007).

6 See, e.g., JOINT ANTITRUST/IP GUIDELINES at 65-85; Letter from Thomas Barnett to William Dolan and Geoffrey Oliver, Oct. 21, 2008 (RFID patent pool), available at http://www.justice.gov/atr/public/busreview/238429.htm.

Supreme Court Agrees to Hear Two Antitrust Cases Next Term

The United States Supreme Court has agreed to hear two antitrust cases during its next term,  which starts in October. In the first case, styled in the court of appeals as Behrend v. Comcast Corp., 655 F.3d 182 (3d Cir. 2011), Comcast challenged a decision certifying a class of cable TV subscribers. The Supreme Court has limited the question presented on appeal to: “Whether a district court may certify a class action without resolving whether the plaintiff class has introduced admissible evidence, including expert testimony, to show that the case is susceptible to awarding damages on a class-wide basis.” This is an important question. In the United States, in most antitrust class actions, plaintiffs must show that common questions predominate over individual questions. Behrend involves application of that basic rule to the issue of damages. A “no” answer could make it much more difficult for plaintiffs to persuade courts to certify antitrust class actions. (In the Supreme Court, the case is numbered 11-864.)

In the second case, styled in the court of appeals as FTC v. Phoebe Putney Health System, Inc., 663 F.3d 1369 (11th Cir. 2011), the Court will take up the question of whether a hospital acquisition is immunized from antitrust scrutiny by virtue of the state action doctrine. The Eleventh Circuit determined that the immunity attached, because the acquisition was authorized pursuant to a clearly articulated state policy to displace competition. The Federal Trade Commission is pressing ahead with the appeal against the background of its challenges to three hospital mergers since 2011. (In the Supreme Court, the case is numbered 11-1160.)

Third Circuit Rules That Reverse Patent Payment Agreements May Violate the Sherman Act, Creating Circuit Split

Last month, in In Re: K-Dur Antitrust Litigation, No. 10-2078 (3rd Cir. July 16, 2012), the Third Circuit ruled that reverse patent payments (where a pharmaceutical product patentee pays a generic manufacturer to stay off the market for some period of time) are prima facie evidence of an antitrust violation. Under the Third Circuit’s “quick look rule of reason” standard, parties to reverse payment agreements can then rebut the evidence by showing either that the payment is pro-competitive or is for something other than delayed market entry. The Third Circuit rejected the scope of the patent test endorsed by courts, including the Eleventh Circuit in FTC v. Watson Pharmaceuticals, Inc., 677 F.3d 1298 (11th Cir. 2012). (Under that test, if the settlement is even arguably within the scope of the patent, it is not subject to antitrust attack, absent sham litigation or fraud in obtaining the patent.) “The judicial preference for settlement, while generally laudable, should not displace countervailing public policy objectives or, in this case, Congress’s determination—which is evident from the structure of the Hatch-Waxman Act [governing approval of generic drugs] and the statements in the legislative record—that litigated patent challenges are necessary to protect consumers from unjustified monopolies by name-brand drug manufacturers,” the Third Circuit concluded.

The Third Circuit’s decision opens the door for possible review by the Supreme Court of a circuit split on the issue of reverse patent payments.

ATM Users Lack Standing to Challenge Bank ATM Fees

In In re: ATM Fee Antitrust Litigation, No. 10-17354 (9th Cir. July 12, 2012), the Ninth Circuit ruled that consumers (ATM cardholders) could not challenge ATM fees paid by ATM card issuing banks to the owner of the ATMs accessed by the cardholders. Those fees were allegedly fixed by the banks. However, the fees were not directly paid by cardholders, who instead may have paid higher charges passed on by the banks. The cardholders’ claims were, therefore, indirect price-fixing claims, for which the cardholders had no Sherman Act monetary remedy.

Seventh Circuit Allows Foreign Price-Fixing Claims to Proceed

In Minn-Chem, Inc. v. Agrium Inc., No. 10-1712 (June 27, 2012), the en banc Seventh Circuit addressed the Foreign Trade Commerce Antitrust Improvements Act (FTAIA) in the context of an alleged worldwide scheme to fix potash prices (including to buyers in the U.S.). The Court’s holding has two notable features. First, according to the Seventh Circuit, the FTAIA establishes an element of a plaintiff’s claim, but is not a subject matter jurisdictional bar. Second, as to the import commerce exception, the court held that the “direct” effect on import commerce required by the statute means “a reasonably proximate causal nexus.” The Minn-Chem court disagreed with the approach of the Ninth Circuit in United States v. LSL Biotechs., 379 F.3d 672 (9th Cir. 2004), where the court held that a “direct” effect is one that “follows as an immediate consequence” of the defendant’s activity.

The Seventh Circuit’s approach thus makes it easier for U.S. plaintiffs or importers to sue foreign entities on worldwide price-fixing claims. Applying that approach, the court affirmed the district court’s decision not to dismiss the complaint on FTAIA grounds.

European Commission Accepts Commitments from Areva and Siemens to Limit Non-compete Obligations

The European Commission (“Commission”) has accepted binding commitments from Areva SA and Siemens AG in connection with a joint venture non-compete obligation. In 2001, Areva and Siemens established a joint venture, Areva NP, which combined their activities in the field of nuclear technology. The agreement between Areva and Siemens included a non-compete clause with a maximum duration of 11 years from the termination of the joint venture. Areva acquired Siemens’s share of the joint venture in 2009.

The Commission subsequently opened an investigation into the scope of the non-compete clause. It took the view that the post-2009 scope of the clause was excessive, because (i) the clause prevented Siemens from competing in markets where Areva NP was only a re-seller of Siemens’ products; and (ii) a duration of three years would have been sufficient to protect the joint venture’s confidential business information. To address the Commission’s concerns, Areva and Siemens offered to limit the scope of the non-compete clause to Areva NP’s core products and services and to a period of three years following Siemens’ exit. In a statement dated June 18, 2012, the Commission confirmed that these commitments had allowed it to close its investigation. The investigation provides a reminder that non-compete clauses risk infringing competition law if their scope or duration extends further than necessary to protect the joint venture from competition from its parents. The case also illustrates the continuing relevance of the Commission’s Notice on Restrictions Directly Related and Necessary to Concentrations.

European Commission Brings “Reverse Payment” Cases Against Pharmaceutical Companies

On July 30, 2012, the Commission announced that it had issued formal charges (a “Statement of Objections”) against Servier, a pharmaceutical company, and several of its generic competitors. According to the Commission, Servier entered into various patent settlement agreements with the aim of delaying the market entry of cheap generic versions of perindopril, a cardiovascular medicine, and thus protecting Servier’s market exclusivity. In addition, the Commission alleges that Servier engaged in a strategy of acquiring key competing technologies, also with a view to delaying generic market entry. A few days earlier, the Commission revealed that it had issued similar charges against a Danish pharmaceutical company, Lundbeck, and several generic competitors. The Commission alleges that Lundbeck paid its competitors to delay the market entry of a generic version of the antidepressant citalopram. The charges against Servier and Lundbeck follow extensive investigation by the Commission into commercial practices in the pharmaceutical industry.

(The U.S. courts have also recently given consideration to the antitrust implications of payments made by patent holders to generic competitors to settle patent infringement litigation, particularly if the generic manufacturer agrees to postpone introduction of the generic drug. See the United States development section, discussing In Re: K-Dur Antitrust Litigation, No. 10-2078 (3rd Cir. July 16, 2012).)

UK Government Consults on Ways to Strengthen Private Antitrust Enforcement

The UK government’s Department for Business, Innovation and Skills (BIS) has concluded a public consultation aimed at strengthening private antitrust enforcement in the UK. Between  April 24, 2012, and July 24, 2012, BIS sought contributions from organizations and individuals as to how private damages actions might be encouraged. In particular, BIS sought views on how the current collective actions regime could be strengthened.

At present, collective damages actions in the UK can be brought only on an opt-in basis, i.e., each individual must actively elect to join the class of claimants. BIS asked respondents to consider whether an opt-out system should be introduced. Other issues raised in the consultation paper included whether the jurisdiction of the UK’s specialist antitrust forum, the Competition Appeal Tribunal (CAT), should be extended, and whether a fast-track system should be introduced to enable the swift handling of antitrust claims brought by small and medium enterprises.

The Government will publish its response in the near future, following an analysis of comments received.  At a minimum, the Government is expected to introduce legislation expanding the CAT’s mandate (currently limited to hearing damages actions following infringement decisions issued by the European Commission or UK competition authorities) to include claims brought without any underlying infringement decision (known as “stand-alone claims”).  Orrick’s response to BIS’s consultation can be found here.

China Issues Provisions on Several Issues Concerning Laws Applicable to the Trial of Civil Disputes Arising from Monopolistic Activities

On June 1, 2012, the Supreme Court Provisions on Several Issues Concerning Laws Applicable to the Trial of Civil Dispute Cases Arising from Monopolistic Activities (“Provisions”) came into effect. The Provisions are China’s first-ever judicial interpretations applicable to anti-monopoly related trials. The Provisions make some important changes to the usual rules regarding burden of proof and are likely to lead to an increase in private litigation.

According to the Provisions, any individual, legal person or other organization may file a lawsuit directly if it suffers losses due to monopolistic conduct or is involved in disputes over violations of the PRC Anti-Monopoly Law relating to contracts, articles of trade associations or other agreements. The existence of an investigation or decision by an enforcement body will not be a prerequisite to pursuing a private action in court against an individual or company. In cases relating to abuse of dominance or cartels, the defendant must prove that the alleged behavior did not have an anti-competitive effect. State-owned companies facing trial for abuse of dominance will be presumed to be dominant unless they can show otherwise. In addition, a plaintiff may rely on public statements made by a defendant as evidence of a dominant position. The parties may use industry or economic expert witnesses to provide market research or economic analysis reports on specific issues. If a contract or articles of a trade association are found to breach anti-monopoly related laws or regulations, they will be declared invalid. Finally, if a defendant is found to have acted in breach of the anti-monopoly related laws or regulations, the court may order it to stop the infringing activity and pay damages in compensation. The full Chinese text of the Provisions can be found here.

Korean Fair Trade Commission Imposes Fines for Failure to Notify

The KFTC has fined 21 companies nearly 200 million won (USD 177,160) for failure to provide notice of mergers. In May, the KFTC reviewed all deals completed in 2011 as publicized on the Korean Investor’s Network for Disclosure and fined the companies for failure to notify 22 transactions that should have been notified. The fines follow the KFTC’s announcement in June that it would be doubling penalties for non-notification and, according to a statement issued by the KFTC, are intended to raise the awareness of companies regarding regulations on reporting and to make the inspection system more effective. Companies that fail to provide notice of a merger before it is completed now risk a fine of between 15 million and 40 million won (USD 13,287 – 35,432). The KFTC is particularly active in penalizing failures to provide notice of mergers, and typically imposes 10 to 20 fines annually.  However, this is the first time the KFTC has actively initiated a search of the public disclosure system to uncover non-compliance with the merger control rules.

MOFCOM Issues Revised Template Form for Filing Merger Clearance Applications

On June 6, 2012, MOFCOM issued a revised template form for filing merger filing clearance applications in China.  The new form is to be used for all merger notifications filed after July 7, 2012.

The new form contains extensive footnotes that provide some welcome clarifications and explanations about the scope of MOFCOM’s information and documentary requirements. The footnotes clarify, for example, the concept of a “business operator participating in the concentration” and the meaning of “affiliates” and provide details of the exchange rate to be used for currency conversions. They also clarify some procedural aspects of the filing process. For example, although the revised form requires the submission of copies of the signed transaction documents such as the Sale and Purchase Agreement, it provides that a filing is possible, in exceptional cases, on the basis of preliminary documents such as a Memorandum of Understanding, draft SPA, or framework agreement. However, the form also contains sections  requiring the submission of research results, analyses and reports prepared by or for the board of directors and other senior management, including analyses and reports prepared by third parties. It also requires the merging parties to describe their products and services and to organize them in line with the categories of the National Bureau of Statistics.  Such requirements seem likely to lead to an increase in the information and document production obligations of the merger parties. The Chinese text of the form is available here.

MOFCOM Proposes to Fast-Track Anti-Monopoly Reviews

China’s MOFCOM has proposed to streamline anti-monopoly reviews by classifying M&A transactions on the basis of market shares. The draft proposal would create three separate categories of transactions with different timelines for review based on whether the deal qualifies as a simple, normal or major case.

For a horizontal concentration to be classified as a simple case, the companies’ combined market share must be less than 10% or have a score on the Herfindahl-Hirschman Index (HHI) of less than 1,000. For a vertical or mixed concentration, the market share must be below 20 percent. To be classified as a normal case, a horizontal concentration must give rise to a combined market share of less than 20 percent or an HHI of less than 1,500. For a vertical or mixed concentration, the market share must be less than 30 percent.

Any case above these thresholds, or which may have a major adverse impact on market entry, the development of China’s economy and public interests, or which involves the purchase of a major public brand or of a company in a restricted industry, will count as a major case. Under the draft proposal, a simple case would be completed within the 30-day preliminary review period except in special circumstances that MOFCOM would have to explain to the parties. A normal case also should be completed within the 30 days in principle, but in special circumstances normal cases can move on to the next stage of review, which can last up to 90 days, although the proposal calls for the review to be done within the first 45 days of the second stage. In major cases MOFCOM should in principle complete its review in the second 90-day stage but could move on to the final 60-day extension period permitted.

The proposal requires MOFCOM to set out its reasons for accepting or rejecting a case for fast-track treatment. It also would create a public registry of all deal notifications. The proposal may change before being finalized as law firms and other interested parties submit comments on the draft.

Hong Kong Passes Competition Ordinance

On June 14, 2012, Hong Kong’s Legislative Council (“LegCo”) passed the Competition Ordinance. The Ordinance prohibits anti-competitive agreements and abusive conduct in Hong Kong and is modeled largely on the EU regime. However, merger control initially will apply only to the telecommunications sector.

Agreements and concerted practices that have the object or effect of preventing, restricting or distorting competition in Hong Kong are prohibited (“First Conduct Rule”). For so-called “serious anti-competitive conduct” (price fixing, market sharing, output restrictions and bid-rigging) anti-competitive effects are presumed. Also prohibited is the abuse of market power in or outside Hong Kong that has the object or effect of preventing, restricting or distorting competition in Hong Kong (“Second Conduct Rule”). The prohibition does not apply only to dominant companies but also to companies with a “substantial degree of market power.”

There are exclusions for agreements that enhance overall efficiency, for compliance with other legal requirements and for the operation of services of general economic interest. Agreements and conduct of “lesser significance”—companies with a combined turnover (in or outside Hong Kong) of less than HKD 200 million (USD 25.8 million) (First Conduct Rule) and HKD 40 million (USD5.2 million) (Second Conduct Rule)—are excluded from the scope of the Ordinance provided they do not involve “serious anti-competitive conduct.” The main provisions of the Ordinance do not apply to most of Hong Kong’s more than 500 statutory bodies.

Penalties for breach of the Ordinance include fines of up to 10 percent of the Hong Kong turnover of the undertaking concerned for each year in which the contravention occurred (up to a maximum of 3 years). Penalties also may be imposed on the individuals involved. The Ordinance also provides for a leniency procedure that will allow the Competition Commission to grant immunity from fines in return for cooperation.

Follow-on claims will be possible. However, for the time being, it will not be possible to bring private stand-alone actions. No time frame has been set for the implementation of the Ordinance, but it is anticipated that the substantive provisions will not enter into force before mid-2013 at the earliest. The text of the Competition Ordinance can be found here.

First Court Decision in Resale Price Maintenance Case Since the Introduction of China’s Anti-Monopoly Law

On May 18, 2012, the Shanghai No. 1 Intermediate People’s Court issued a judgment dismissing all petitions of the Beijing Ruibang Yonghe Technology & Trade Co. (Ruibang) in its case against Johnson & Johnson Medical (Shanghai) Ltd. and Johnson & Johnson Medical (China) Ltd (Johnson).

Article 14 of the PRC Anti-Monopoly Law (AML) prohibits business operators from restricting the lowest prices for the resale of their products. Ruibang had been a distributor of Johnson’s surgical stapling products in Beijing for 15 years. According to the distribution agreement between Johnson and Ruibang, Ruibang was authorized to sell products to hospitals in allocated regions at prices above minimum prices set by Johnson. In March 2008, Johnson discovered that Ruibang had sold products outside its authorized regions and at prices lower than the minimum price agreed by the parties. Johnson suspended and then terminated Ruibang’s distribution rights in several locations and finally stopped supplying products to Ruibang. Ruibang filed a lawsuit against Johnson alleging that the provisions of the distribution agreement violated the PRC Anti-Monopoly Law and claiming RMB 14 million (USD 2.2 million) from Johnson for losses it had suffered as a result.

The court focused on whether a term in an agreement providing for fixed or restricted resale prices could constitute a monopoly agreement in breach of the AML per se, or whether it is only one essential factor in establishing the existence of an illegal monopoly agreement. According to Mr. Junhua Liu, the presiding judge, the existence of a monopoly agreement cannot be based solely on whether a contract contains a provision on fixed or restricted resale prices. Rather, it also should take into consideration whether such provision has resulted in the elimination or restriction of competition, by reference to Article 15 of the AML.

In this case, Ruibang failed to provide the court with sufficient evidence of elimination or restriction of competition (market shares, levels of competition and the influences on supply and price change of the products) as a result of the provisions of the distribution agreement and also failed to prove that it had suffered loss as a direct result of these provisions. Therefore, the court rejected Ruibang’s claims for lack of evidence.