Wednesday, January 15, 2020

German ministry of justice outlines patent "reform" bill: thick but void smokescreen, designed only to cement the status quo on injunctions

Yesterday, many of my industry contacts obtained and discussed with me the "Eckpunktepapier" (outline memorandum) of a German patent reform bill. "Reform" is definitely a misnomer to anyone who expected a more balanced framework for patent injunctions. One could welcome the proposal only if one blissfully ignored

  • the long-standing legal meaning of the relevant terms,

  • the fact that there is precisely zero deviation from current case law on injunctions (which the paper not only acknowledges but even prides itself on), and

  • the spineless, if not mindless, obsequiousness to the patent hardliners at the Federal Court of Justice that the reasons given for the measure reflect.

It's a rehash of the Emperor's New Clothes. It's a smokescreen devoid of any substance. A Fata Morgana for those longing for relief from plaintiffs' unfettered access to injunctive relief. And a boon for those benefiting from a huge number of mostly meritless patent infringement actions being brought in Germany for leverage. The ministry officials don't even pretend to be concerned with economic policy, job creation and sustainment, innovation, consumer choice. They're the guardian angels of a patent litigation system that is out of control--and now gets the ministry officials to cheer ("Citius, Altius, Fortius" for the patent judiciary--not for the economy, not for society, just for patent judges, patent litigators, patent attorneys involved in litigation, patent trolls, and failed or failing businesses increasingly reliant upon a patent licensing revenue stream).

To be fair, one must make a distinction here between what constitutes a political achievement for the pro-reform movement and an assessment of suitability-to-task of the measure as it stands. This is like applauding a boxer for having been allowed to challenge his rival, for not getting knocked out in the first round, and for the winner quickly hugging the loser before walking away to cash in and celebrate with his supporters.

In that sense, it was no small feat to get the ball rolling at all. Originally, the German Federal Ministry of Justice envisioned a minor update to patent law with changes ranging from the cosmetic replacement of the term "Patent Office" with "German Patent and Trademark Office" to a more digital process at the German PTO (almost every patent-in-suit I ever saw in my industry was an EPO patent anyway...). They didn't go to the drawing board with an intention to redress the balance between plaintiffs and defendants. Then there were some dynamics that shifted the focus to injunctive relief and the injunction gap resulting from the German bifurcation system. Arguably, the pro-reform movement "hijacked" the process. But, so far, to no avail.

The fact that the ministry's draft meets a key reform demand by means of a token reference to proportionality in connection with patent injunctions (which is required by EU law anyway) is eclipsed by the way the term is then not clarified, but simply vitiated: they say that proportionality stands in the way of a patent injunction if, all things considered, there's a bona fide issue ("Treu und Glauben"), which is about the oldest and most obvious cornerstone of German civil law, and, especially, an "unjustified hardship" (ungerechtfertigte Härte), which is another concept that doesn't need to be restated--and doesn't improve a thing.

The standard of an unjustified/disproportionate hardship is about the highest one you can imagine. In dogmatic terms, it requires a case to be atypical. A plaintiff who can convince a court that it's "your average patent case" with a patent holder routinely seeking an injunction against an "infringer" won't be affected.

The paper states clearly that the ministry officials aren't willing to bring about any such thing as serious change. They're basically saying this: the infinite wisdom of the Federal Court of Justice extends to patent injunctions, but some complain that the lower courts haven't grasped that wisdom yet, so we'll just codify what the Federal Court of Justice has been saying all along. It apparently never crossed the ministry officials' mind that the Federal Court of Justice itself has never once denied access to injunctive relief over proportionality considerations, so the highest patent judges in the land may not have enjoyed the benefit of their own divine wisdom yet...

When I saw the statutory proposal, the intent was clear to me: much ado about nothing.

Even if one didn't agree with me based on the statute, the reasons given in the document don't leave room for any doubt about the ministry's approach.

With the greatest respect, but with the clarity required in political debates, the document comes down to a dereliction of duty. Policy-making is about defining policy goals first, then designing a strategy for how to achieve those goals. Quite often, the disagreement is more about the means than about the end. Here, there are no policy goals at all. There's nothing that would be commensurate with the enormous economic implications of this kind of regulation. Instead, the document reads like a cowtown's local court doing its best, in a ruling on a dispute between neighbors over the height of a fence, to be faithful to the guidance provided by the Federal Court of Justice.

The document even states that a factor such as the public interest is not an option because it's not part of current case law...

If the German legislature adopted the proposal, it would deal a blow to the centuries-old notion of the Separation of Powers. The legislative branch of government would reduce itself to the judiciary's secretariat. Instead of telling the judges what to do, it would merely restate what the judges have been saying all along. It's not a conspiracy theory, especially in light of what government insiders know, to presume that the patent judges of the Federal Court of Justice had a hand in this. Whether the ministry officials merely decided to stick to existing case law or whether the Federal Court of Justice simply authored the bill (in Germany, there's no written or unwritten rule preventing that from happening) is secondary. The result is nothing more than a smokescreen.

The ministry officials were standing at the drawing board. Instead of sketching a superior solution, they threw their pens away and contented themselves with being mere photographers. It's now a challenge--but also an opportunity--for the reform movement to appeal to the German Federal Parliament's institutional self-conception of a legislative institution that looks ahead, not back.

What I have already told some of my industry colleagues in private is that the litmus test for any German patent injunction reform is the following scenario, which is not the only but structurally the most common problem defendants face:

  • Someone prevails on a single patent infringement claim.

  • The accused product, however, embodies tens--if not hundreds--of thousands of potentially patentable inventions.

  • The patent holder demands a royalty of 1% of gross sales (which the defendant notes amounts to hundreds--if not thousands--of times the patent holder's share of the totality of patentable inventions in the product). Short of that demand being satisfied, the patent holder wants a good old German-style automatic injunction.

  • Is a given (actual, proposed, or envisioned) reform measure going to help the defendant as compared to the status quo or not?

If one reads the proposed statute, especially if one reads it in light of the stated reasons, the answer is a resounding NO:

The reasoning explicitly says that in most patent cases, proportionality isn't even relevant enough to be a topic of conversation. Only in a minority of cases does it come into play at all. In a minority of said minority of cases, some cautious deviation from an automatic injunction may be conceivable--but if that happened at all, it would have to be limited to a transitional (for workarounds) or "use-up" period in almost all cases. While the document says that hypothetically injunctive relief could be denied to a prevailing patent plaintiff on a permanent basis, it would be the next best thing to a paranormal phenomenon. With a whole lot of patent holders demanding royalties in the 1% range over a single patent asserted against a complex multifunctional product, there's nothing paranormal to see in our litmus test case.

Not only does the document dash any hopes of a non-negligible number of cases resulting in anything other than an automatic (albeit delayed, in a minority of a minority of cases) injunction. It also explains the "bona fide" approach in a way that would clearly resolve our litmus test case in the patent holder's favor:

  • The document concedes that maybe (but only maybe! lest we forget, just maybe!) it could be held against a patent holder in the "bona fide" context that a royalty demand is "undoubtedly excessive."

    The standard for "undoubtedly excessive" can be described like this: it's fine for the patent holder to demand too much. It's also OK to demand way too much. Only when a number becomes so exorbitant that no judge, in his wildest dreams, can think of any remaining doubts about its (un)reasonableness, then it may weigh against the plaintiff's prayer for injunctive relief. In other words, the number has to be downright insane.

    Prior to the CJEU's Huawei v. ZTE ruling, that kind of standard governed German SEP cases. I'm talking about the (now obsolete) Orange-Book-Standard ruling by the Federal Court of Justice and how the courts at al levels applied that one. As a patent holder you could almost literally complain about a missing comma in a defendant's licensing offer and the court would agree with you that it wasn't certain you lacked justification for rejecting the offer.

  • At the same time, the document makes it clear that the defendant has a duty to actively seek a license. That, too, is Orange-Book-Standard (except it's not limited to SEPs this time around). So the "bona fide" part of the proposed analysis could be the final nail in the coffin of a defendant's aspirations to avoid injunctive relief. Anything the defendant does or does not do in his quest for a license, including poor timing, could weigh in favor of an injunction.

The ministry officials have given stakeholders until March 10 to submit comments. Thereafter they will furnish their final proposal and start the legislative process.

The proposal also suggests shortening the timelines for nullity (patent invalidation) actions before the Federal Patent Court of Germany. I may or may not comment on that part some other time, but it's not going to solve the problem for various reasons. Engineers call this a "race condition": instead of truly synchronizing two processes based on what actually happens, one just hopes that one will reach a certain milestone A before another process reaches milestone B. The proper solution is for one process to wait for the other to get its job done (which, of course, should happen as fast as possible).

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