Klaus Haft, HOYNG ROKH MONEGIER
The 21st century is bringing its own challenges to the patent system. Complex products often implement thousands of different technologies, many of which are protected by patents held by numerous different patentees. Often, these patents only cover specific features of a module that is built into a highly complex product. While, at first, mobile phone manufacturers stood in the spotlight of the ever-increasing number of patents and the frequent infringement proceedings, these challenges are no longer limited to this group of market participants. The continuing digitalisation and the increasing complexity of products affect more and more companies. In the automotive industry, autonomous driving, as well as sophisticated connection and entertainment systems, are gaining ground. In the medical device industry, digitalisation is likely to change product development, and to improve and facilitate personalised treatments. The enormous opportunities that digitalisation offers to companies are coupled with the risk of getting entangled in patent infringement suits. The recent flood of suits against German automobile manufacturers, which traditionally have not often been involved in infringement suits, shows how this risk can materialise. The huge number of implemented technologies makes it increasingly difficult, if not impossible, for manufacturers and their suppliers to conduct exhaustive patent search before investing in a new product. A well-conducted freedom-to-operate analysis is no longer a secure hedge against infringement proceedings.
Under contemporary German law, injunctive relief is automatically granted upon a court’s finding that a patent is infringed irrespectively of the particular circumstances of the case and the technology involved. Likewise, injunctive relief does not require the patentee to practise the protected invention. The statutory basis for injunctive relief is laid out in Section 139(1) of the German Patent Act. It states:
Any person who uses a patented invention contrary to sections 9 to 13 may, in the event of the risk of recurrent infringement, be sued by the aggrieved party for cessation and desistance. This right may also be asserted in the event of the risk of a first-time infringement.
German courts understand Section 139(1) of the Patent Act in the way that an injunction must be granted if a patent is found infringed. Apart from the antitrust law’s prohibition of an abuse of market power, there are effectively no limitations to injunctive relief in Germany’s contemporaneous Patent Act.
In 2015, the European Court of Justice (ECJ) examined in its benchmark decision Huawei v ZTE the requirements for an abuse of market power by a patentee and laid out a roadmap for injunctive relief in the context of standard essential patents. Owners of patents that are essential for the use of a technical standard will only obtain an injunction under specific circumstances. Since the ECJ handed down its decision, it has been further developed and filled out by the national courts of the member states. Huawei v ZTE constitutes a shift for the benefit of standard implementers. Yet, not all patent infringement suits against complex products are based on standard essential patents. In cases where antitrust law does not provide a safeguard for technology implementers, patents can still provide substantial leverage for patentees.
In 2016, the German Federal Supreme Court held in its decision Wärmetauscher that in exceptional cases the infringer may be allowed a sunset period, meaning a temporary stay of the injunction to allow the infringer to either change the infringing product or to sell off already manufactured infringing products. However, given the strict requirements lower courts have so far refrained from making use of sunset periods in patent infringement proceedings.
In the past, there was little criticism by practitioners and academics regarding automatically granted injunctions once infringement is found by a court. Strong exclusive rights protected by injunctions were deemed as the basis for investments, inventive activity and, ultimately, innovation. However, with ever more complex products coming up, this belief appears no longer to be set in stone. Concerns are voiced that too-strong patents can curb innovations and thus injunctions should not be granted in every case. The University of Erlangen-Nuernberg and the Ludwig-Maximilians-University in Munich hosted international conferences in 2019 focusing on a more flexible approach towards injunctive relief in patent infringement cases. Although some academics have argued that even under current law injunctive relief is limited by the principle of proportionality, which finds its statutory basis in
article 3(2) of the Enforcement Directive and Section 242 of the German Civil Code, courts remain reluctant to loosen the standard for granting injunctive relief.
The courts’ hesitation has prompted demands for legislative change. Voices from industry representatives have become louder, favouring a statutory limitation of injunctive relief in Germany. In a recently published position paper, the German Association of the Automotive Industry (VDA) argued that the current German patent system poses a severe locational disadvantage for Germany. To overcome the detriments associated with automatic injunctions, the VDA supports legislative change and the introduction of a proportionality test.
The main argument against granting injunctions in the context of complex products is that patentees are given undue leverage against accused infringers, which allows the patentees to ask for excessive royalties or causes the infringer disproportionate harm. The threat of an injunction can cause the infringer to accept royalties in substantial excess of the true value of infringed patented technology. If an injunction is granted due to the infringement of a component of a complex product and the infringer must withdraw profitable products from the market, the patentee can take advantage of this situation and is vested with a very strong position in licensing negotiations. While it is the basic idea of an exclusive right to allow its owner to exclude others from using what’s protected by the right, if only minor features are infringed but an injunction de facto forces the infringer to take his entire product off the market, the question of proportionality arises.
The patentee’s leverage greatly depends on the infringer’s options to resort to a non-infringing alternative. If a design around is readily at hand and the costs of switching are bearable, the patentee will usually not be able to push through excessive royalties. If, however, a design around is either not available or associated with enormous costs, the infringer might accept royalty demands that are higher than the true value of the patented invention but less then the costs that would come along when switching to the next best non-infringing alternative.
While a more flexible approach towards injunctive relief may reduce the risk of undue leverage of the patentee, it also prompts the question of how patentees can be quickly compensated for the use by others. In other words: the justified interests of both sides need to be borne in mind. Consequently, if injunctive relief was to be replaced by financial compensation, then ensuring adequacy of a patentee’s compensation can be pivotal to preserve an incentivising patent system. Further, patents are private property and protected by article 14 of the German Constitution and thus stripping patentees of their right for an injunction may raise constitutional concerns if adequate compensation of the patentee was not warranted. For courts, the determination of adequate compensation for the use of an invention may turn out to be a very time-consuming and difficult task. In addition, departing from what can be called the traditional continental approach to injunctive relief, also bears the risk of strategic behaviour of implementing companies.
Correspondingly, the patent system needs to find answers to these challenges. In doing so, the justified interests of both patent owners and implementers must be kept in mind. In addition, clear rules are required, which are manageable in daily court practice.
Complex products and the infringement of minor components give reason to debate whether the current German approach is outdated and should give way to a more flexible standard. Vesting the courts with more flexibility might allow them to hinder patentees from using the threat of an injunction to demand excessive royalties and potentially causing disproportionate harm to the infringer. On the other hand, ensuring adequate and timely compensation of the patentee, if an injunction is denied, is crucial to maintain patent law’s incentive to innovate and to guard against constitutional law concerns.