Thursday, June 3, 2021

Automotive, consumer electronics companies lose German patent reform battle: injunctions still near-automatic under deform-not-reform statute

One step forward, two steps back. That's how I would summarize the setbacks the German automotive industry (and its allies among smartphone and other consumer electronics companies) have suffered on the patent policy front in recent days:

  1. First, Daimler caved to Nokia, which will result in the withdrawal of the preliminary reference procedure over component-level licensing of standard-essential patents (SEPs) and the application of the Huawei v. ZTE guidance after the Federal Court of Justice of Germany vitiated the ECJ case law in two Sisvel v. Haier cases. Earlier this week I reported on the way courts now pressure implementers of standards to take a pool license lest they be considered unwilling licensees.

  2. Meanwhile it has become known that the parties of the German government coalition--who had hit a temporary impasse--agreed to adopt (at next week's legislative session) a patent bill that is more accurately described by the word "deform" than by "reform" as far as patent injunctions are concerned. The part meant to address the injunction gap is also fundamentally flawed, but in this post I'm just going to focus on the injunction statute itself.

The new statute is as unwieldy as it is unhelpful. It's nothing anyone can be proud of. And it confirms the prejudice--or maybe I should just call it a perception--that Germans are not particularly pragmatic. There's this German saying that translates as "why make it easy if you can make it complicated?" That one also applied to the Dusseldorf Regional Court's prolix questions to the ECJ, with one grammatical sentence spanning 13 lines in the English translation. No one at the ECJ will miss that preliminary reference for linguistic reasons...

More than seven months after the German federal government put foward its official proposal, all that changed in the first sentence of § 139 of the Patent Act since that governmental proposal is the redundant and ridiculous insertion of the universal principle of good faith (in bold-face letters):

"Der Anspruch ist ausgeschlossen, soweit die Inanspruchnahme aufgrund der besonderen Umstände des Einzelfalls und der Gebote von Treu und Glauben für den Verletzer oder Dritte zu einer unverhältnismäßigen, durch das Ausschließlichkeitsrecht nicht gerechtfertigten Härte führen würde."

My translation:

"The claim [to injunctive relief] is excluded to the extent that, under the special circumstances of a singular case and considering the principle of good faith, its enforcement would result in disproportionate hardship on the infringer or third parties beyond what is justified by the exclusionary right."

What is this good for? Absolutely nothing.

It's a too-many-cooks-in-the-kitchen situation where everyone threw their ingredients into a soup that is anything but tasty, much less healthy.

There's this saying that a camel is a horse designed by a committee because it's neither at a level with a horse when it comes to riding, nor can it "compete" with cows on milk production, nor with sheep on wool. But a camel is at least moderately useful in each of three respects. That's a lot more than the above deform statute can say. It has everything in there, but it's indigestible. A recipe for stomach pain.

Even the most implementer-friendly German patent judge, Judge Dr. Thomas Kuehnen (Presiding Judge of a patent-specialized senate of the Dusseldorf Higher Regional Court), clearly says that there won't be any proportionality defense on top of a FRAND defense. Presiding Judge Dr. Matthias Zigann (Munich I Regional Court, Seventh Civil Chamber) already told me the same when I asked him a question at the Munich court's celebration of the 10th anniversary of its Patent Local Rules.

Let's talk about non-SEPs and perform the "Keep It Simple, Stupid" ("KISS") test I already discussed last year and, again, in March. The short version is that we have a plaintiff (the patent holder) and a defendant (which for the sake of the argument is deemed by the court to be infringing the patent-in-suit). The patent holder asks for $2 per unit (sold of the infringing product), while a market rate would more likely be in the range from $0.05 to $0.10. What's going to happen if the defendant makes a proportionality argument? An injunction will issue, just that more time and money will be wasted to get there. Here's why:

First, the plaintiff will note that according to what lawmakers said throughout the process (press releases, parliamentary debates, hearings), they didn't want to change anything. The reasons stated by the government for this measure say the very same thing: it's just about codifying the case law by the Federal Court of Justice in Heat Exchanger.

Second, the statute itself makes it clear that injunctions shall continue to be the norm. The word "Einzelfall" could just mean "a given case", but then it would be meaningless as any law serves to adjudge individual cases. Its other meaning has a low-frequency connotation, which is why I translated it as "singular case". The combination of the term with "special circumstances" clearly suggests that meaning. The patent holder will argue that this case here is not that rare (like "one in a million") case where the court should deviate from the principle of near-automatic injunctions. It's just your average patent infringement case where an infringer doesn't want to pay the "inventor" (or the inventor's legal successor) a royalty. And an offer is on the table: the $2 per-unit royalty demand.

Third, no German regional court will want to be the first one to deny injunctive relief on proportionality grounds because it's a given that the first court to do so will immediately be skirted by many plaintiffs. The same applies to the regional appeals courts: if they make injunctions harder to obtain in their circuit, it won't take long before they'll run out of patent cases. A recent IAM survey showed that Germany is by far and away the world's most popular patent jurisdiction because of its near-automatic injunctions. German courts can't transfer cases between districts, unlike in the U.S., and cases can typically be brought in any one of the courts designated to hear patent cases, as the allegedly infringing products and services are usually offered nationwide. So there is fierce competition between the courts, and this injunction deform statute won't stop the race to the bottom.

Fourth, the principle of good faith doesn't help anyone as it doesn't have to be stated to apply to any creditor-debtor situation, including tort creditors and debtors like here.

Fifth, the defendant may have paid a fortune to an expert (which doesn't even count as a witness in German proceedings) to establish a major hardship, but the exclusionary right at issue (the patent) is considered so fundamental by German patent infringement judges that they don't have to read lengthy expert reports, much less would the court have to appoint an expert (court-apppointed experts would have the status of a witness). There is a licensing offer on the table. If the defendant is a car maker, it doesn't have to shut down a plant; if it's a telecommunications company, it doesn't have to switch off its network. The defendant simply has to take a license to avoid all of that.

Therefore, even the question of any hardship caused to third parties is irrelevant: third parties won't suffer if the infringer takes the damn license. Also, Judge Dr. Klaus Grabinski of the Federal Court of Justice already explained a few months ago that the reference to third-party hardship in the reform proposal wouldn't change a thing.

Now, the infringer will argue that the licensing offer shouldn't count because it's like 10 or 20 times higher than a market rate. The defendant can pay the same economic expert or another one to underpin that claim. It won't matter. Unless the court finds a rate absurd, it's not going to delay the decision by another year (to have more back and forth between party experts and a court-appointed expert). The injunction will issue. "Take the damn license, infringer." That's going to be the message.

For chemical and pharmaceutical companies, however, it's going to be an annoyance at best and a source of legal uncertainty at worst.

That's because in cases where they are not interested in a license deal--not even in the slightest--but want to get a plagiarist enjoined, there won't be a licensing offer on the table. They will then get into a debate over third-party interests, and with even the U.S. federal government recently talking about how COVID vaccine patents should be waived, that's not going to be pretty.

On the bottom line, this disastrous bill won't help the ones it's supposed to help, but it will hurt the ones who are not in any way responsible for the problems facing automotive and consumer electronics companies. What a mess. What a failure. And what a waste.

It isn't appreciably better than the very first draft by the Federal Ministry of Justice back in January 2020. The only significant change that theoretically could make an injunction less likely is the reference to third-party hardship, but again, that will play a role only in cases in which no licensing offer is on the table--and the most prominent patent judge of the Federal Court of Justice has already explained that the hurdle will be just as high as for a compulsory license. Only twice has a compulsory license been granted in the history of post-war Germany, and one of those decisions was overturned.

Just like with component-level licensing, net licensees have to start all over again. But it will be easier to get another preliminary reference to the ECJ over component-level SEP licensing than it will be to move the needle in patent licensing negotiations. For now, there is no reason why patent holders would ask for lower royalties. And there won't ever be (unless a better statute--a true reform--is enacted at some point further down the road).

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