On May 25, 2023, the Supreme People’s Court of China (SPC) issued its final judgment on an abuse of market dominance position dispute between Yangtze River Pharmaceutical Group with its affiliate (the Plaintiffs in the first instance trial) and HIPI Pharma Tech with its affiliates (the Defendants in the first instance trial).
The lawsuit was first brought to the Nanjing Intermediate People’s Court of Jiangsu Province (the First Instance Court) by the Plaintiffs against the Defendants regarding the loratadine citrate which has an annual sales over 1 billion yuan in May 2019.
As reported by the Zhichanli, the background of the first instance lawsuit is summarized as follow: “loratadine citrate is mainly used for the rapid relief of symptoms associated with allergic rhinitis. In May 2015, Haichen Pharmaceuticals (one of the Defendants) had transferred the new drug certificates and drug registration approvals for the raw materials and capsules of Loratadine citrate to HIPI Pharma Tech and its affiliate En Rui Te. The latter was mainly engaged in the production of Loratadine and the pilot test, whereas Hai Rui (one of the Plaintiffs and affiliate of Yangtze River Pharmaceutical Group), as a downstream formulation enterprise of Loratadine citrate needs to purchase raw materials from Enrette for production. In case the supply of the said raw materials is cut off, there will be no raw materials for production and Hai Rui has to cease the production and sales.”
Upon trial, the First Instance Court determined that the Defendants (HIPI and its affiliate) have a dominant market position in the involved raw material market and had abused its dominant market position which violated the Antimonopoly Law. Thus, the First Instance Court ordered HIPI and its affiliate to cease the monopoly action immediately and compensate the Plaintiffs economic loss amount to 68 million Yuan, plus with the attorney fee of 500 thousand yuan. Both Parties appealed the case to the SPC due to dissatisfaction of the first instance judgment. The SPC publicly tried the case on December 18, 2020, and issued the final judgment which revoked the said first instance judgment.
According to a summary attached to its final judgment, the SPC’s core judgment of the case can be summarized and translated as follows:
1. Revoking the (2019) Su 01 Min Chu No. 1271 Civil Judgment of the Nanjing Intermediate People’s Court of Jiangsu Province;2. Rejecting the litigation requests of Yangtze River Pharmaceutical Group Guangzhou Hai Rui Te Pharmaceutical Co., Ltd., Yangtze River Pharmaceutical Group.
Legal Provisions at issue
Article 17.1.(1), (4) and (5) of the PRC Anti-monopoly Law (2008) - Article 17 provides that "It is prohibited operators with a dominant market position from engaging in the following acts of abusing their dominant market position: (1) selling goods at unfairly high prices or buying goods at unfairly low prices; … (4) restricting the counterparty to trade only with itself or only with its designated operators to carry out transactions without justification; (5) selling goods with bundle sales without justification, or adding other unreasonable trading conditions; …For the purpose of this Law, a dominant market position refers to the market position of an operator in the relevant market that enables him to control the prices, quantities or other trading conditions of commodities, or that hinders or affects the ability of other operators to enter the relevant market.”
1. Considering the indirect competitive constraints from the downstream markets when determining the market dominance of an intermediate input operator;2. The relevance of the market-blocking effect of the challenged restrictive trade practices and the exercise of patent rights; 3. Basic considerations for the identification and regulation of unfair high prices; and4. Basic considerations for recognizing and regulating the act of attaching unreasonable trading conditions across markets.
Key points of the judgment
1. The actual competitive constraints faced by the operator may be both direct and indirect; if the indirect competitive constraints are able to have a sufficient impact on the operator's behavior, the indirect competitive constraints should also be taken into account when determining a dominant market position. APIs (active pharmaceutical ingredients) are intermediate inputs, and there is a correlation between the demand for intermediate inputs and the demand for downstream products that use the intermediate inputs. Generally speaking, the stronger the correlation, the more importance should be attached to the indirect competitive constraints imposed on the upstream operator by the downstream market for the intermediate input. When there is a lack of close substitutes for a particular intermediate input and it is used primarily in the production of a downstream product, then there is a strong correlation between the demand for the intermediate input and the demand for the downstream product in which it is used, it is necessary to consider the competitive constraints from the downstream market when assessing the market power of the operator of the intermediate input. In the case of a particular API, if the API lacks close substitutes and is used primarily in the production of a particular formulation, the operator of the particular API may face both direct competition from operators supplying the same API and indirect competitive constraints arising from competitive constraints on downstream formulation operators, that is, the competition in the downstream formulation market may be passed on to the upstream API market and impose competitive constraints on the operator of that API. Thus, even if a particular API is recognized as a separate relevant market when considering the strict correspondence and deep binding relationship between the API and its formulation, it shall make specific analysis and give full consideration of the competitive constraints faced by specific operators within the specific time frame on a case-by-case basis with the actual evidence, when it comes to determining the recognition of the market dominance position.
2. When the litigated monopoly action involves the exercise of intellectual property rights, the analysis on the excluding and restricting competition effect of the said monopoly action shall involve the consideration of the legal effect arising from the due exercise of the intellectual property rights. If the excluding and restricting competition effect arises from the due exercise of the intellectual property rights, and it does not exceed the legal effect thereof provided by law, then it does not have the excluding and restricting competition effect from the perspective of the Anti-Monopoly Law.
3. The basic premise of competition is the provision of products with good quality and good pricing, as much as possible. Under normal circumstances, simply taking the market power to increase prices will not increase an operator’s competitive advantage. Instead, it will make other competitors in the relevant market obtain comparative price advantages or encourage new market entries, which ultimately will encourage competition. Nevertheless, under certain circumstances, unfair high prices may lead to the excluding or restricting of competition. For instance, the operator with the market dominant position sells the intermediate inputs to the counterparty in the upstream market whilst selling the end product that is obtained from the intermediate input in the downstream market with a low price, such price squeezing will make the other downstream operators with the same efficiency hard to conduct substantial competition. The main purpose of the Anti-Monopoly Law is to regulate the unfair high price so as to maintain the market competition order, protect consumers’ benefits, and avoid damaging consumers’ benefits when the market continuously fails. If a high price behavior does not have the obvious excluding or restricting competition effect, nor the obviously damaging the consumers’ benefit, then it is not appropriate to simply recognize the constitution of the abuse of the market dominant position. The reason is that the obviously lacking of the excluding or restricting effect usually means that the market merely dysfunctions temporarily and the high price could be rectified by itself; the analysis of the unfair price is comparatively complicated. The legal analysis of high prices needs to consider its actual or potential anti-competitive effect, and avoid damaging of investment positivity of the current operators and potential entries in the market which can lead to a chilling effect, decreasing of innovation and ultimately damage consumers. Courts should first analyze the competition and innovation risk of the relevant market in which the high price exists, specify the considering factors and its key points; and then recognize whether the litigated prices are unfair prices or not, by economic analysis means (e.g. the earnings yield rate analysis, profit analysis, price compare analysis, etc.); at last, recheck the preliminary result from the perspectives of competition effect and consumers’ benefits and make the final conclusion. During the analysis of the market competition and innovation risk, the more competitive the market and the more active the entry are, or the greater the investment required to enter the market and the higher the risk of innovation is, the more cautious the analysis and judgment of the litigated monopolistic conduct should be, it needs to focus on the innovation factor and the long-term consumer benefit factors.
4. When determining if an operator uses its dominant position in one market to add unreasonable trading conditions in other relevant markets, two conditions need to be looked at. One is the behavioral pattern condition which requires the operator has the expressly or implied intention to forcefully add the unreasonable trade conditions. For instance, it requires a bundle trade that must tie certain trade with other trade, or requests the reach of a deal in other relevant market as a prerequisite of the relevant market deal where it has the market dominant position. The other is the result condition where the operator improperly obtains underserved benefits, or damages the counterparty’s benefits, by adding unreasonable trade conditions to exclude or restrict competition in the relevant market.
Based on the above key points, the SPC recognized in its Judgment that “the First Instance Court did not manifestly err in defining the relevant market in this case as the market for loratadine citrate API in China”, and “the Defendants were the sole operator in the production and sale of loratadine citrate API during the period in dispute, and it can be recognized that its market share was 100 per cent, on the basis of which it is presumed to have a dominant position in the market.”.
Nevertheless, the SPC analyzed that “since the loratadine citrate API falls into the protection scope of the No. ZL02128998.0 Patent (Dilotadine (Dicloretadine) polyacid alkali metal or alkaline earth metal salt complex salts and pharmaceutical compositions thereof, the Patent), and as the patentee of the Patent and the only legal implementer of the Patent in fact, the Defendant limited the trading counterparty the Plaintiffs to trade with it within the protection period of the Patent, which is a matter of course of the exclusionary effect of the Patent right, and the extent of its limitation did not exceed the scope of the legal exclusionary effect of the patent right, and it did not belong to the exclusionary effect of the anti-monopoly law in the sense of restricting competition. Therefore, it should not be concluded that the Defendants had abused its dominant position to limit transactions within the protection period of the Patent. The First Instance Judgment has applied the law incorrectly in determining that the Defendant had abused its dominant market position to limit transactions. The Court supports the relevant grounds of appeal of the Defendants.”
Further, the SPC recognized that “the analysis methods, such as the internal rate of return, the matching degree between price and economic value, and so on, are all not sufficient to support the Plaintiffs’ claim that the transaction price of RMB 48,000/kg for loratadine citrate API of the Defendants had constituted an unfairly high price. Although the increase in the price of loratadine citrate API was obviously disproportionate to the increase in its cost, it was more likely that the subsequent increase in price by the Defendants was a reasonable adjustment of its promotional price to the normal price, and the mere fact that the price increase was significantly higher than the cost increase was not sufficient to prove that the price increase constituted an unfairly high price. More importantly, from the analysis of the competitive effect and the consumer welfare re-test, the price of loratadine citrate API at RMB 48,000/kg did not cause the Plaintiffs to be in an unfavorable competitive position in the downstream market; instead, the market share of the Plaintffs’ loratadine citrate preparation "Beixue" has been gradually expanding and its price has been slightly reduced. Therefore, the evidence available in this case is insufficient to prove that the Defendants’ act of raising the price of loratadine citrate API to RMB 48,000/kg had constituted an unfairly high price. The appeal reason of the Defendants is basically valid which the is supported by the Court. The appeal claim of the Plaintiffs that the First Instance Judgment is wrong in determining the fair and reasonable price based on the long-term implementation of the price is valid which is supported by the Court, but its claim that the fair and reasonable price of the API in question should be RMB15,779/kg lacks reasonableness which is not supported by the Court.
Due to the similar reason, the SPC also recognized that “the current evidence are insufficient to prove that RMB 48,000 yuan/kg has constituted the unfair high price by the abuse of the market dominant position, thus, the charge of a commission by the Defendants is also in sufficient to be recognized as the abuse of the market dominant position; and “the Defendants’ claim that the First Instance Judgment wrongfully recognized that it had conducted the addition of unreasonable trade conditions is established, and the Court supports such claim.”
Since the SPC concluded that the evidence are insufficient to prove that the Defendant had abused its market dominant position, there is no need for the SPC to comment on its liability, and the SPC does not support the Plaintiffs’ appeal request to re-determine the compensation.
In a word, the SPC considered that “the First Instance Judgment found the facts basically clear and the trial procedure basically lawful, but applied the law improperly”, and therefore it revoked the First Instance Judgment and rejected the Plaintiffs’ requests. The Judgment is final.