Friday, January 17, 2020

Proportionality clause in draft German patent reform bill falls short of not only eBay v. MercExchange but also the EU's definition

The debate over a draft patent reform bill presented by the German Federal Ministry of Justice and Consumer Protection is raging. I outlined some fundamental issues on Wednesday. Meanwhile, the ministry has published its draft bill.

On his (strongly recommended) Comparative Patent Remedies blog, Professor Thomas Cotter indicated my reaction to the draft bill made more sense to him after reading the explanations provided by the ministry. The rationale provided for the measure, and the legislative intent expressed in the "Eckpunktepapier," are very clear that they don't mean to change anything about where the case law already stands under the current statutory framework. Yesterday, CIPLITEC hosted a speech by Presiding Judge Ulrike Voss ("Voß" in German) of the Dusseldorf Higher Regional Court (not to be confused for Andreas Voß of the Karlsruhe Higher Regional Court, formerly Mannheim Regional Court). The last question an attendee had for the appellate judge was about what the reform bill would change, and essentially she said this:

There's the statute, and there's the rationale given by the ministry. As a judge, she'll be sure to read the rationale part as well, but the statute will be the law to apply. The rationale says that there's no intent to change anything, and the language of the statute is consistent with existing case law. Yet the courts may ask themselves whether the fact that the law was amended means that some change of the situation was intended anyway, contrary to the official statement by the ministry. She certainly predicted that the statute would encourage defendants to argue proportionality more frequently than before.

The judge went on to say that there might be a bit more of an opening for exceptional cases in which the defendant would, on the basis of proportionality, be granted not only a transitional (workaround/"use-up") period as stated by the Federal Court of Justice in the Heat Exchanger decision, but in some cases might be able to elude injunctive relief on a permanent basis. She did, however, note that "it would take a lot" to get to that point, and in response to a follow-up question agreed that the standard for that would be clearly more demanding than the one for a transitional period. In my opinion, while Heat Exchanger addressed the hypothetical possibility of a use-up period and stopped short of suggesting a permanent denial of injunctive relief, it didn't preclude that from being the outcome in some extreme cases either. So the door was never closed, but the judge has a point that it may be slightly more open now.

What I really liked about the judge's presentation and her answers to various questions from the audience was that, unlike some of her colleagues whom I won't name here, she didn't come across as a judicial activist. She appeared open-minded to different approaches to patent remedies as opposed to favoring some potential measures or denouncing others.

As to what impact the proposed change to § 139 PatG (Art. 139 of the German Patent Act) would actually have, her position comes down to psychological rather than hard legal arguments. While the part of her presentation covering injunctive relief started out noting that Art. 139 presently doesn't contain an explicit reference to proportionality (which I initially thought was meant to pave the way for describing the proposed reform as a quantum leap), it became perfectly clear only a few slides later that there are--as I wrote on Wednesday--a couple of fundamental legal principles (good faith, unjustified hardship) that already exist under other German laws and apply universally, including patent law. That's all the proposed amendment to the statute would do: it wouldn't even import anything into patent law any more than you could import the Statue of Liberty into the United States: what's already there can't be imported. You can just remind people that something that's already there is still there. It's like putting up a webcam on or somewhere across Liberty Island to reassure everyone that the landmark statue hasn't been destroyed or abducted.

It's like no one would reference "due process" or First Amendment rights in each and every context where they apply. It's redundant.

So let's look at the statute because I disagree with those who say the statute is a great (or at least satisfactory) solution while the rationale is the source of various problems. Yes, the rationale is horrible, and interestingly, yesterday's presentation by the judge took a more holistic approach to the proportionality criteria under the current case law than the ministry's draft, though the ministry would have had the freedom to propose something going beyond existing case law. But the statute is just as bad (here's my translation):

"The claim [to injunctive relief] is precluded to the extent that its enforcement would be disproportionate because it would, due to special circumstances, taking into account the patent holder's interests against the infringer and the good-faith principle, constitute a hardship not justified by the exclusionary right."

The first thing to understand here is that this proposed amendment acts as its own dictionary for the term "disproportionate" by immediately defining it in the "because" subclause. That is a limiting definition as opposed to an open-ended one.

Now let's look at that amendment and especially its narrowing definition of proportionality from the perspective of how helpful it is to plaintiffs as compared to how much it helps defendants (I once again recommend the "litmus test" I stated on Wednesday). And you'll see it's optimized for patent holders' purposes:

  • It doesn't say that injunctive relief might be disproportionate. It merely states that its "enforcement" might be. That's a major difference because it places the emphasis on tailoring the remedy (with transitional periods) rather than denying injunctive relief.

  • The standard for "special circumstances" is very high, and it's also hazy. That language is, however, consistent with the rationale emphasizing that in most patent cases, proportionality is a total non-issue; where one needs to talk about it at all, it's only a minority of cases in which it affects the outcome; and when the outcome is affected, it's almost inconceivable that injunctive relief would be precluded as opposed to just being delayed.

  • The next pro-patentee bias is found in "taking into account the patent holder's interests against the infringer." That passage asymmetrically puts the patentee's rights first, as opposed to requiring an eBay-like balancing of the hardships.

  • As Judge Voss explained yesterday, the good-faith principle enshrined in § 242 German Civil Code applies universally, including to patent law, which is why the Heat Exchanger decision (in which the injunction came down anyway, by the way) was possible even prior to any reform. This is one of the "Statue of Liberty reminder" types of elements: you just reference something that's already applicable, which at best draws more attention to it, but doesn't change a thing. And, frankly, it's quite a hurdle to prove that a patent holder acts in bad faith. In the U.S., there's the concept of patent misuse. But that's not the standard for injunctions.

  • The unjustified-hardship standard is again nothing new. It's part and parcel of German law. And the language, "a hardship not justified by the exclusionary right," again places the emphasis on how important it is to let patent holders enforce their exclusionary rights, though the "patent holder's interests against the infringer" have already been stressed in the same sentence.

It's obvious that the German statute falls far short of eBay v. MercExchange. As I mentioned above, the emphasis is placed on enforcement rather than the right itself, and on the importance of the exclusionary function of a patent. While German law couldn't practically place the entire burden of proof on patent holders seeking injunctions (no discovery), a patent holder could reasonably be required to demonstrate an irreparable injury and the inadequacy of monetary compensation (the first two eBay factors). Instead of a holistic perspective, focusing on the entire set of remedies available to prevailing patentees, the German reform bill emphasizes the exclusionary function of patents, which simply doesn't reflect technical and commercial realities in today's technology industries.

But you don't have to look across the Atlantic to be disappointed by the German proposal. EU law, too, has a broader view of what it takes to be "proportionate" than what the German draft bill says.

As Wolf Sauter explained in a 2013 paper (and many others did before or after him):

"The application of proportionality in the EU differs based on whether EU legal acts or legal acts of the Member States are concerned. In the former case a manifestly disproportionate test is applied, in the latter case a least restrictive means test."

The test for the EU's own acts, including its competition enforcement, requires that "where there is a choice between several appropriate measures, recourse must be had to the least onerous." In the context of patent law, the Intellectual Property Rights Enforcement Directive (IPRED) is most relevant. At my recent Brussels conference, Cleary Gottlieb's Maurits Dolmans discussed EU proportionality rules in connection with German patent injunctions, and I recommend taking a look at his presentation (English-language slide deck; German-language slide deck). Art. 3 of the IPR Enforcement Directive says that "remedies shall be fair and equitable," which is much more eBay-like than saying, as the German proposal does, that something is disproportionate if, despite being viewed in the light most favorable to the patent holder's interest, there's a major bad-faith and/or unjustified-hardship issue. While the EU directive requires remedies to be "effective" and "dissuasive," they must be "proportionate" as opposed to just preventing the most extreme cases, at the high end of disproportionality.

The German government can argue that there are some "safeguards against [...] abuse" in the proposal. But that's all it can claim. What the draft proposal does, however, is to narrowingly redefine proportionality. It's a broader concept--even under current German case law the way Judge Ulrike Voss of the Dusseldorf Higher Regional Court described it yesterday.

I asked the judge whether she was aware of a single case in which a German court would have appointed an economic expert witness specifically to address proportionality-related arguments (while expert witnesses are typically provided by parties to U.S. proceedings, German courts appoint them all the time, even if you have a dispute over a few thousand euros under construction law). She wasn't aware of one, and that's the answer I expected, but I wanted to be sure. If the draft reform bill was adopted, that wouldn't really change. The standard is so high that all evidence-taking by German patent infringement courts related to proportionality would be limited to having the parties submit documents, and maybe in a few cases some limited testimony, but it would be so easy for the courts to grant an injunction anyway that they generally won't identify a need to appoint an expert witness on the economic question of proportionality.

All in all, it's merely wishful thinking to hope the ministry's proposal will result in a significantly more balanced application of the law. In order to expect much of a change, one must either resort to psychology (as I noted further above) or search for a hidden message in the proposal, as Judge Ulrike Voss suggested yesterday evening. The German legislature should go beyond psychology and symbolism. It should make it clear how serious the issue is and how to address it. Ambiguity can always come out of a legislative process, but the current draft is not even ambiguous. There's nothing good to say about it except for some far-fetched, almost esoteric attempts to explain away the ministry's intent to preserve, to the fullest extent possible, the status of Germany as a highly attractive patent litigation venue.

Germany's pro-patent litigation agenda has even drawn unprecedented public criticism from Switzerland's Federal Patent Court on Twitter, raising the question of whether German regional courts are engaging in "forum-selling" (in the closely related context of the injunction gap):

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