The German patent system has repeatedly proven to provide reliable and effective means to enforce patent rights against infringers. There are three key reasons why the German patent system is so attractive for patentees when seeking to enforce their rights in Europe:
- Injunction gap: Infringement and validity are heard by different branches of the judiciary (bifurcation). The infringement courts only stay the proceedings pending parallel nullity actions if they have a strong indication that the patent-in-suit is invalid. That is, unless the patent is obviously invalid, first instance proceedings can be completed in about 1.5 years. Parallel nullity actions usually take much longer. Among other disadvantages for the defendants, this gap may result in unfavorable settlements based on potentially invalid patents.
- De facto automatic injunction: If infringement is found, the default remedy is an injunction. While infringement courts do have some discretion if and to what extent an injunction shall be granted, they almost never make use of it. This as well provides substantial leverage to patentees in settlement negotiations.
- Preliminary injunctions: Preliminary injunctions are available, even in complex cases.
All three areas are subject to recent developments:
- On June 10, 2021, the Second Act on the Simplification and Modernisation of the Patent Act (Zweites Gesetzes zur Vereinfachung und Modernisierung des Patentrechts) (“Bill”) passed the German Parliament (Bundestag). Among other things, the Bill introduced:
- A rule pursuant to which the nullity court (Bundespatentgericht [Federal Patent Court]) “shall” provide to the litigants a first indicative assessment of the case (qualifizierter Hinweis) within six months after the nullity action has been filed. The rationale is to inform the litigants (and the infringement court) prior to the first instance decision on the preliminary reasoning of the nullity court. However, this provision alone will only have little impact unless funding and staffing of the nullity court will be significantly improved, which is a separate topic currently discussed in Germany.
- A codification of a proportionality test providing courts an express basis for temporary or permanent suspension of the injunction against a fair compensation in addition to potential damages for past infringement. While it is unlikely that this rule will dramatically change the way injunctions are being granted in Germany, it may provide relief in certain edge cases as the case law evolves on this issue. Such edge cases may include unreasonably aggressive patent trolls, extreme cases of discrepancy between the value of the invention and the economic loss suffered by the defendant, or detriment to paramount interests of third parties like access to lifesaving medicines or access to vital infrastructure. It is unlikely, however, that the new law will have an impact on evolving case law on standard-essential patent (“SEP”) litigation.
The Bill will likely enter into law in the fall.
- With respect to preliminary injunctions, already in January of 2021, the Regional Court of Munich has challenged the long-standing practice of courts in Germany requiring the claimant of a preliminary injunctions to demonstrate sufficient prospects of validity of a patent-in-suit, e.g., by showing that the patent has survived inter partes opposition or revocation proceedings or is otherwise largely accepted by the industry as valid. (NB: there are exceptions from this rule, for instance, to protect pharma companies against generic entry, where no such “strength” of the patent has to be demonstrated.) Arguing that this practice discriminates against patentees of newly granted patents, the Munich court has asked the European Court of Justice (“CJEU”) to decide whether this is in line with European Law. The CJEU’s decision cannot be expected until the beginning of 2022.
While the changes introduced by the Bill will likely strengthen the defendants’ position in German patent litigation proceedings, the CJEU referral has the potential to significantly strengthen the patentee’s position. Below, we will shed more light on the proportionality test introduced by the Bill.
New § 139 para. 1 of the German Patent Act (Patentgesetz) now reads:
“The [injunction] claim may be excluded to the extent that the claim due to the special circumstances of the individual case and the requirements of good faith would lead to disproportionate hardship for the infringer or third parties, not justified by the exclusive right. In this case the infringed party shall receive a reasonable monetary compensation. The claim for damages [. . .] remains unaffected.”
The German legislator reiterates, in his explanatory statements underlying the Bill, that the new provision is a mere codification of what has been the law anyway. He stresses that the principle of proportionality is a cornerstone of the German Constitution and the German legal system in general and that judges must apply this principle regardless of whether it is expressly laid down in a statue or not. He also points to the European Directive 2004/48/EC on the Enforcement of Intellectual Property Rights that also clearly calls for all judicial decisions to be proportionate.
In addition, the legislator notes that the German Federal Court (Bundesgerichtshof – “GFC”) in its Heat Exchanger decision (Case No. X ZR 114/13) held that a grace period may be granted under exceptional circumstances in patent cases—but did not do so in the case at hand— namely, “if the economic consequences of immediate compliance with the injunction effect and disadvantage the infringer [. . .] beyond the disadvantages which would be caused by its grant as intended, to an extent which makes the unconditional injunction appear unreasonable.”
However, the legislator complains that the lower infringement courts did not sufficiently pick up on this proportionality assessment established by GFC, warranting express codification. As a result, it is likely that this issue will be more prominently discussed between litigants in the future and that the courts will have to provide more detailed reasoning on this issue than in the past. The reasoning and further specification provided by the legislator in its explanatory statement that will be relevant in these discussions can be summarized as follows:
- Delaying or suspending an injunction must be the absolute exception.
- The risk of being enjoined from the market, including all of its economic consequences, is inherent to the German patent system.
- The right to an injunction does not require the plaintiff to actually practice the invention or that the defendant use the invention intentionally.
- There is a presumption that the patentees’ interest prevails, and the burden on showing disproportionality is on the defendant. The plaintiff has the benefit of doubt.
- Facts that speak in favor of the defendant can be:
- If the unconditioned grant of an injunction would result in extraordinary high costs or losses on the part of the infringer that are in stark disproportion to the value of the patent-in-suit. This may be the case in complex products where the patent‑in‑suit only has a subordinate role.
- If the “design around” takes an unusually long time because of regulatory requirements, again in light of the actual value and relevance of the patent-in-suit.
- If the defendant infringes despite having conducted customary freedom-to-operate (“FTO”) searches.
- If the plaintiff has delayed bringing suit until a moment where defendant has made significant investments, but the plaintiff could have brought suit earlier.
- If substantial third-party interests would be affected, e.g., cut off from lifesaving medicaments or essential infrastructure.
- “Patent trolls”, i.e., patent accumulators with the sole purpose to generate royalty income for its shareholder, may not be entitled to an injunction (or even a compensation in addition to “regular” damages) if it can be shown that patents have been acquired specifically to use the threat of an injunction to extract unreasonably high license fees or any other type of bad faith. (NB: the explanatory statements are quite clear that non-practicing entities (“NPEs”) are not generally disapproved or “evil”, and that also for NPEs there is a presumption for an entitlement to an unconditioned injunction.)
- The impact of the patentee shall be as minimal as possible, and courts must carefully consider duration of the denial of an injunction (i.e., short grace period vs. permanent suspension).
- Baseline for the compensation for the suspension of the injunction to be awarded on top of damages for past infringement should be what reasonable parties would have agreed to for such use. The compensation can be higher if the defendants did not perform a customary FTO search. It can be lower, if the plaintiff is denied the injunction for reasons of bad faith.
Although the legislator’s explanatory statement addresses NPE and third-party interests, the statement is unlikely to override the evolving case law on FRAND (fair, reasonable, and non-discriminatory) licensing. Especially in the SEP context, FRAND case law seeks to balance all involved interests and thus inherently reflects a proportionality assessment.