Clifford Chance

Despite its widely acknowledged efficiency, major players in German industry, particularly in the telecommunications and automotive sectors, have long complained about the German patent enforcement system. In particular, they are concerned that the current system creates severe risks of targeting by patent trolls.

This may, among other things, be addressed by upcoming legislative developments in patent law. However, whether and how the legislator will meet industry’s demands remains to be seen. 

Legal Framework

In general, Germany is praised for the efficiency of its patent enforcement system. In comparison to other jurisdictions, patent owners may seek injunctive relief in case of patent infringements rather easily. This is partly due to the fact that current German statutory patent law does not explicitly provide any general test to restrict injunctive relief such as a balance of interest test. Further efficiency is added by the availability of preliminary injunctions (“PIs”). PIs are not only a suitable option for swiftly enforcing patent rights, but they are also capable of bringing opposing parties to the negotiation table in the short term and, thereby, avoiding years of litigation in the long term.

However, for those same reasons, the system is also criticized as permitting “automatic injunctions”, a popular buzzword used by critics. The term “automatic injunctions”, however, neglects the facts that (i) the patent owner needs to present prima facie evidence supporting a patent infringement, (ii) due to unclear validity, pending validity proceedings prevent the courts from granting PIs as long as there is no first instance decision upholding the patent, (iii) the test of urgency includes some sort of balancing; and (iv) in case a PI is lifted at a later stage, the alleged infringer can claim damages.

Still, the bifurcation of the German patent law system may imply that the validity of the patent may not be considered sufficiently. In fact, main infringement proceedings and patent validity proceedings are separate and may only be connected by requesting to stay the main infringement proceedings until a final decision on the patent’s validity has been reached. Such requests are granted only on an exceptional basis if the court handling the infringement claim acknowledges a strong likelihood that the patent will be eventually revoked. Thus, if the patent owner provides sufficient evidence in support of an infringement, the court determining the infringement may issue an enforceable injunction rather quickly with the patent office still taking months to decide on the patent’s validity. Hence a second buzzword “injunction gap”.

Patent Trolls and the Industry’s Concerns

This legal landscape also causes risks for industry since companies active in sectors covered by a vast amount of patents may become a target of patent infringement claims and PIs quite easily. Due to constantly advancing digitalization, products like smartphones or cars are becoming more and more complex which may easily lead to one individual good being dependent on a fairly large number of patents. Companies can find it challenging to comprehensively check all suppliers and the entire production chain for compliance with third party patents and so ensure their freedom to operate. As a consequence of these complex products, the grant of injunctive relief in relation to just one given patent may easily bring entire production lines to a standstill. Companies facing such a threat are more likely to accept paying elevated royalties than they would be otherwise.

To make matters worse for such companies, this vulnerability encourages so-called patent trolls. “Patent troll” is the commonly-used name for non-practicing entities that strategically acquire a large number of patents in order to obtain high royalties from allegedly infringing companies. Patent trolls do not enforce their patents in order to protect their market position against competitors but rather to extract profits.

Current Discussions and Considerations

In the light of the above, discussions on how to reform German patent law in this regard are not simply academic in nature. As legislative amendments appear to be under way, this discussion may gain further traction. Some proposals are already on the table.

Arguably the most prominent one is the introduction of a balance of interest test, which appears to be favoured by parts of German industry. Proposals have already been made as to which factors should be taken into account, including whether the patent owner is a practicing entity (making use of the relevant patent in its business) or whether patents are only exploited for profit without being used practically. This way, the questionable business practices of patent trolls may be efficiently challenged. However, as there are inventors legitimately making inventions without exploiting them (e.g. universities or research institutes), a careful balance needs to be struck in any legislation. Other issues that could be considered in a balance of interest test include the importance of a patented invention which is only one of many inventions incorporated in a particular good and how that should be assessed in relation to the value of the allegedly infringing product as a whole, as well as the severity of effect that a granted injunction might have on the production chain.

To address the disproportionate hardship which would be imposed on an entity and its production line by the granting of an injunction, the introduction of a grace period could be a helpful change. The German Federal Court of Justice has already considered such a grace period in the obiter dictum of its infamous “Wärmetauscher” decision (decision of 10 May 2016, X ZR 114/13). However, the court applied a rather strict standard (the component in question must be necessary for the functioning of the product, which was not the case in “Wärmetauscher”). In general, a grace period may give infringing parties more time to replace the patent-infringing component of their product and avoid an immediate standstill of their entire production line. However as the consequences for infringement could become rather restricted (a cease and desist order with a grace period, and damages calculated on the basis of license analogy), this could incentivize parties to make use of patent-protected solutions in the first instance and adopt a wait and see approach.

One further idea originates from German copyright law: the option for a non-negligent infringer to avoid a cease and desist order and instead simply be required to compensate the owner of the infringed patent. However, such a right to compensate the patent owner would not significantly mitigate the practice of patent trolls, as fundamentally their only interest is to receive compensation.

To deal with the demands of industry in relation to the injunction gap, a further alignment in the timelines of the infringement proceedings and patent validity proceedings may become necessary. An obvious approach to bringing the length of patent validity proceedings into line with the duration of a first instance proceedings on patent infringement would be to employ more staff at the notoriously overloaded Federal Patent Court. As the Federal Patent Court is not the only public body lacking employees, that is of course easier said than done. Detailed guidelines and a fixed rule as to when a preliminary assessment on the patent’s validity has to be submitted could help to further align the proceedings. The latter may interplay with softening the standards for staying infringement proceedings when there are (serious) doubts (or an early preliminary assessment) about the validity of the patent.

Finally, even where an injunction has been granted by a court in infringement proceedings whilst the validity proceedings remain in full swing, restricting the enforcement of such an injunction may be a further option. For example, the value of the security deposit required for the enforcement of a provisionally enforceable decision may be increased.

Prospects

A spokesman of the ministry in charge has announced that patent law reform is under way. It is expected to be discussed in parliament soon. However, it is unclear whether this reform will be considered a big leap in relation to the two hot topics of “automatic” injunctions and the injunction gap.

At a major annual conference of Deutsche Vereinigung für gewerblichen Rechtsschutz und Urheberrecht, GRUR, in Frankfurt in September the government’s representative was noticeably quiet on the content of the envisaged reform. It remains to be seen whether industry’s calls for reform will be listened to by the legislator.

Key take-away points

• German industry’s demands for reform to German patent law are growing as the threat of targeting by so-called patent trolls increases.
• Several options to address these demands are being discussed.
• Apparently, German patent law reform is under way. However, the content and extent of any reforms is still unclear.

Laura Rayak, Trainee, contributed to the writing of this article.