Friday, March 5, 2021

German patent injunction reform bill fails "Keep It Simple, Stupid" efficacy test: automotive industry, smartphone makers won't save license fees

In any legislative context, a reform proposal will be described as overreaching by its opponents, while its supporters will typically ask for more. However, there's a wide corridor to which this applies. In a section of that corridor, there may be room for a reasonable compromise. At its margins, only one camp is happy and the other merely pretends to be not, and later one or even both sides may claim victory.

Sadly, there's also another possibility: the proposal may really suck to the extent that both sides, if the bill was adopted, would be worse off than before. This rarely happens, but the German patent injunction reform process has gone so wrong that this is precisely where things stand.

It's not specific to the German patent policy debate, but the same thing in other jurisdictions, that the pharmaceutical and chemical sector opposes any weakening of intellectual property enforcement. Even if a bill was carefully crafted so as not to affect that part of the economy, they'd use their influence to avert any legislative change that would move the front line closer to them.

Those seeking to preserve the status quo not only outnumbered but also outperformed the pro-reform camp at last week's parliamentary hearing. In late 2019 and early 2020 I met many of those begging the German government for patent injunction reform, and by and large I saw people who just didn't have what it takes to win in terms of skills, expertise, strategic thinking, and forcefulness. Worse still, there may even be saboteurs at work, which would serve to explain the "singularity" ("Einzelfall") non-starter.

The problem surfaces in patent policy all the time: different industries deal with patent enforcement under different parameters, but lawmakers seek to avoid sectorial rules.

Owing to those sector-specific parameters, the proposed patent injunction statute unnecessarily creates uncertainty and complications for the enforcement of pharmaceutical and chemical patents while automotive companies and smartphone makers won't save a single cent in license fees (they're just going to spend more on lawyers and experts).

That's why my advice is to shelve that part of the reform. It's counterproductive, so politicians should just adopt the package without it, then go on the campaign trail (this is an election year for the Federal Parliament), and look at patent injunctions again in a future legislative term.

Let's apply a Keep It Simple, Stupid type of test to the reform proposal in order to gauge its efficacy for the purposes of the information and communications technology industry (also including connected cars):

  • The patent is objectively worth a per-unit royalty somewhere between $.05 and $.10.

  • The patent holder is a troll, operates in a different industry (example: Nokia makes base stations, not cars, but sues Daimler anyway), or may even be a direct competitor but doesn't consider this patent to be key to product differentiation. In all those scenarios, it's just about money.

  • The patent holder demands $2.00 per unit and proposes a written license agreement, as a binding offer and for the court to see, in time for the trial.

  • The damages from the enforcement of a Germany-wide injunction would easily amount to several times that amount.

What would happen in that scenario?

  1. Under the U.S. eBay standard, the court would deny injunctive relief. The licensing offer would indicate that monetary relief isn't inadequate, so one of the eBay factors would simply not be met. It wouldn't even take that specific licensing offer for the court to arrive at that conclusion: prior offers to, or agreements with, third parties would also have that effect. The injunction is denied.

  2. Under the current German framework, the injunction would simply issue, and the licensing offer wouldn't be considered. The injunction is ordered.

  3. Under the proposed reform statute, the defendant would argue that the cost of shutting down a car factory or of stopping the sale of smartphones constitutes intolerable hardship.

    The court, however, would say that those doomsday scenarios miss the point: this is just another run-of-the-mill patent case in which an infringer doesn't want to pay, and there is a licensing offer on the table, so the alternative is not to shut down, but to sign the agreement.

    The defendant would say that $2.00 per unit is excessive. The actual value is a few cents per unit.

    The court would then say: look, we want to decide this case quickly, so we're not going to bring in a patent valuation expert. We don't know, and don't even want to know, what the right number is. Maybe $2.00 is too high, but without the expert we don't want to bring in we can't rule out that it's more or less a reasonable demand. The injunction is ordered.

The difference between the second scenario and the third is not the outcome: it's an injunction either way. In one case, they at least get there efficiently. In the other case, the defendant has probably paid more to lawyers and experts, but to no avail: the license offer that U.S. courts hold against plaintiffs would be held against the defendant in Germany if the proposed reform bill was adopted.

That Keep It Simple, Stupid test describes exactly the scenario that the automotive industry is complaining about. It is, however, not the one the pharmaceutical and chemical sector is concerned about.

Pharmaceutical and chemical companies are interested in exclusivity. They want to shut down counterfeiting operations.

Pharmaceutical and chemical companies typically won't make a license offer like a (software or semiconductor) patent troll.

They don't want to get into a debate over whether they're entitled to an injunction. They don't want to waste time and money on additional expert reports. And they criticize that the reference to third-party interests in the current proposal might hurt them the most, as even willful infringers would argue that there are ill people who need those (counterfeit) medications.

By contrast, even Deutsche Telekom wouldn't get mileage out of third-party interests. While telecommunications networks are obviously critical infrastructure, the Keep It Simple, Stupid test presupposes a plaintiff who is not stupid. Therefore, there will be a licensing offer on the table. It may be overpriced, even usurious, but unless the court can safely rule out that it might be remotely acceptable, the defendant's doomsday scenarios--and their impact on third parties--just won't matter.

It doesn't make sense to adopt a statute that will hurt some but won't help anyone, except in cases in which plaintiffs are so unsophisticated as to not make a formal licensing offer. I already explained this problem based on the original draft bill early last year (1, 2). Unfortunately, the current proposal has the same structural shortcoming, but pharmaceutical and chemical companies are now worried about the impact of the consideration of third-party interests on their cases. The draft injunction statute belongs into the dustbin of patent policy history.

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