*AI-generated translation, for reference only.

[Case Number] the Supreme People's Court (2024) SPC IP Civil Final 350; the Wuhan Intermediate People's Court of Hubei Province (2023) E 01 Zhi Min Chu No. 335 [Hubei San[REDACTED] New Materials Co., Ltd. v. Hubei Xin[REDACTED] Chemical Co., Ltd. (Horizontal Monopoly Agreement Dispute)]

[Basic Facts] In November 2021, Hubei San[REDACTED] New Materials Co., Ltd. (hereinafter referred to as “San[REDACTED] New Materials Company”, the demand-side party) and Hubei Xin[REDACTED] Chemical Co., Ltd. (hereinafter referred to as “Xin[REDACTED] Chemical Company”, the supply-side party) entered into a purchase and sale contract, stipulating that Xin[REDACTED] Chemical Company would supply formaldehyde to San[REDACTED] New Materials Company. Article 8 thereof, the “non-compete clause”, provided: “The supplying party shall keep the demand-side party's customer enterprises confidential and shall not allow any goods diversion to occur; where the supplying party or its agent, without knowledge, enters a downstream enterprise of the demand-side party, the supplying party shall be ordered to cease supply within 7 working days……”. After the purchase and sale contract was signed, Xin[REDACTED] Chemical Company entered into a procurement contract and a framework agreement with a [REDACTED] energy-saving company, stipulating that Xin[REDACTED] Chemical Company would supply formaldehyde to that [REDACTED] energy-saving company. San[REDACTED] New Materials Company contended that Xin[REDACTED] Chemical Company, taking advantage of the convenience of delivering goods to San[REDACTED] New Materials Company's customers, directly transacted with San[REDACTED] New Materials Company's customers in violation of the “non-compete clause”, and accordingly filed a lawsuit with the court, requesting an order that Xin[REDACTED] Chemical Company pay San[REDACTED] New Materials Company a management fee of RMB 500,000. After trial, the Court of First Instance held that Article 8 of the purchase and sale contract was a clause protecting customer information, rather than a monopolistic clause dividing the market and restricting competition, and was not manifestly unfair, and should therefore be found lawful and valid; the facts in the case were insufficient to establish that Xin[REDACTED] Chemical Company had made use of San[REDACTED] New Materials Company's customer information, and Xin[REDACTED] Chemical Company did not constitute a breach of contract. On this basis, it dismissed San[REDACTED] New Materials Company's claims. Dissatisfied, San[REDACTED] New Materials Company appealed.

On second instance, the Supreme People's Court held that, in addition to the upstream-downstream relationship between a supplier and a distributor, Xin[REDACTED] Chemical Company and San[REDACTED] New Materials Company also had a competitive relationship in the formaldehyde sales market in a certain region of Hubei Province. Article 8 of the purchase and sale contract in effect divided the market into two: one was the market of San[REDACTED] New Materials Company's downstream end enterprises, in which Xin[REDACTED] Chemical Company was prohibited from conducting formaldehyde transactions; the other was the market of downstream enterprises that were not customers of San[REDACTED] New Materials Company, in which Xin[REDACTED] Chemical Company was not restricted. That is, San[REDACTED] New Materials Company and Xin[REDACTED] Chemical Company reached a horizontal monopoly agreement dividing the formaldehyde sales market in that region, which both restricted Xin[REDACTED] Chemical Company's lawful right to operate and deprived San[REDACTED] New Materials Company's downstream customers of their freedom to transact. The basis on which San[REDACTED] New Materials Company asserted in this case that Xin[REDACTED] Chemical Company constituted a breach of contract and should bear liability was Article 8 of the purchase and sale contract, and that article should be found to be a void clause; therefore, San[REDACTED] New Materials Company's assertion lacked a contractual basis. Although the reasoning of the first-instance judgment as to Xin[REDACTED] Chemical Company not constituting a breach of contract was improper, the conclusion was correct. Accordingly, the court of final instance rendered judgment dismissing the appeal and upholding the original judgment.

[Typical Significance] Although the dispute in this case arose between an upstream commodity manufacturer and a downstream intermediate distributor, the two parties, through the arrangement of a non-compete clause, achieved a division of the market with respect to downstream customers, producing an obvious anti-competitive effect. The adjudication of this case is of positive significance for the people's courts to actively give play to their anti-monopoly judicial function, to accurately identify horizontal monopoly agreement conduct, to safeguard fair market competition, and to realize the legislative purpose of the Anti-Monopoly Law of preventing and curbing monopolistic conduct.