German Parliament Adopts Patent Act Amendment

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I.      Limitation of Injunctive Relief

One of the most hotly debated topics in the German patent community in recent years has been if, and to what extent, the legislature should limit the availability of injunctive relief.

To date, it has been the invariable practice of German patent infringement courts to grant an injunction upon a finding of infringement. This practice was perceived as something of the holy grail of German patent law and never seriously challenged in principle for a long time.

This began to change when German automakers began facing patent infringement claims from nonpracticing entities like Broadcom and Nokian over patents covering connectivity features of their vehicles. The influential German automobile industry was now faced with serious threats of having to stop their entire production and sales because of (potentially) infringing patents covering only minor vehicle connectivity features.

From the automakers' perspective, the German bifurcated system made matters even worse. In the bifurcated system, infringement and validity are tried in different courts, which implies that invalidity cannot be raised as a direct defense against an infringement action. This can generally be a very efficient system. However, presently German invalidation proceedings take almost twice as long on average as infringement proceedings. This means that a first instance court might grant an—preliminarily enforceable—injunction based on a patent whose validity has not yet been thoroughly tested and that is invalidated in separate proceedings only a year later. This misalignment of the duration of infringement and invalidation proceedings is often referred to as the German "injunction gap."

Against this backdrop, German automakers—joined by other stakeholders from, in particular, highly integrated industries—began lobbying for making injunctive relief generally subject to proportionality.

Around 2019, the Federal Ministry of Justice and Consumer Protection began looking into the issue more closely. In the subsequent discussions and consultations, virtually everyone agreed that the injunction gap was a problem. However, the idea of limiting the availability of injunctive relief turned out to be highly controversial among stakeholders. Leading German industry players with R&D-reliant business models were concerned that weakening injunctive relief would hurt their business. Influential patent judges pointed to the fact that the existing law already provided enough flexibility to account for the rare cases in which unlimited injunctive relief might actually be considered grossly disproportionate – e.g., by granting the infringer time-limited sell-off periods.

The amendment of the Patent Act as adopted by parliament reflects this mixed feedback from stakeholders. The relevant provision now reads (our translation):

"The [claim for injunctive relief] is excluded to the extent that granting such relief would result in a disproportionate hardship for the infringer or a third party that is not justified by the exclusivity right, taking into account the special circumstances of the individual case and the principles of equity and good faith. In this case, the infringed party must be awarded reasonable monetary compensation. The claim for damages pursuant to sub-paragraph 2 remains unaffected."

So what will be the impact of the amendment in practice? Will injunctive relief become rarer or even an exception? The wording of the amendment and the legislature's explanatory memorandum indicate that this will not be the case.

The new provision's language makes clear that an exclusion of injunctive relief should be the exception to the rule that patent infringement justifies injunctive relief. Consistent with that, the legislature emphasized in its explanatory memorandum that the interests of the infringed patentee must generally prevail over any interest the infringer may have in limiting injunctive relief; an exclusion of injunctive relief should only be considered in truly exceptional cases. This is a very high threshold indeed, as the following examples of circumstances which may argue against injunctive relief demonstrate:

  • The claimant is a nonpracticing entity focused on monetizing its industrial property rights and (ab-)uses the claim for injunctive relief to force the infringer into accepting "clearly excessive license fees" in a manner contrary to good faith;
  • The injunction would result in exceptionally great damage for the infringer, and that damage is "completely out of proportion" when compared to the value of the infringed patent;
  • The infringed patent relates only to a minor, but essential, aspect of a complex product for which a design-around would take a long time to implement (e.g., because of necessary regulatory approval), and the consequences of a stop of production/sale in the meantime would be "completely out of proportion" when compared to the value of the infringed patent.

In addition, the legislature points out in the explanatory memorandum that subjective elements such as the infringer's level of fault, the infringer's diligence when deciding to enter the market with the infringing product (freedom to operate analyses) and/or the infringer's efforts to obtain a license at reasonable terms can be relevant aspects.

Even if injunctive relief is found to be disproportionate in a specific case, the explanatory memorandum indicates that, in general, the consequence should only be a temporary suspension of the injunctive relief, e.g., to give the infringer time for implementing a design-around. The explanatory memorandum also states that there may be cases where injunctive relief should be permanently excluded. However, it is difficult to come up with realistic examples where that could be the case, and the legislature does not mention any in the explanatory memorandum.

Incidentally, it is very unlikely that questions of proportionality in accordance with the amended law will come to bear in cases concerning standard essential patents. In those cases, patentees are required to grant licenses to any willing licensee on fair, reasonable and nondiscriminatory (FRAND) terms as a matter of antitrust law. Generally speaking, this means that injunctive relief against infringers of standard essential patents are available only if the infringer has refused the patentee's offer for a FRAND license. If that is the case, however, injunctive relief could hardly be seen as disproportionate.

Considering the high threshold for establishing disproportionality of injunctive relief, defendants wanting to rely on this defense should prepare their case diligently and be able to plead in detail on hardship and the balance of interest. This would include substantive pleading on the value of the patented invention relative to the overall accused product, the consequences of an injunction on the defendant or third parties, the (un-)availability of contingency plans/design-arounds and the time needed for any design-arounds and the like.

On the flip side, claimants will need to argue against the asserted hardship and set forth why they have an overweighing interest in (immediate) injunctive relief. Arguably, this will be much easier to demonstrate for claimants using the invention for their own (competing) business than for nonpracticing entities. The latter should be prepared to show that the defendant has a simple alternative to suffering damage from an injunction by accepting a reasonable license offer.

Finally, if a court wants to dismiss a claim for injunctive relief on the grounds of disproportionality, it will be faced with the question of how to determine the "adequate monetary compensation" to be awarded to the claimant as a matter of law. The challenge will be to make a reasonable determination without having to anticipate much of the quantification of damages, which is typically the subject of a separate and often complicated proceeding.

II.    Improved Alignment of Infringement and Invalidity Proceedings

As already mentioned, stakeholders were almost unanimously in favor of legislative action to bridge, or at least mitigate, the injunction gap. The Bill's second substantive amendment to the Patent Act addresses this.

Specifically, the Federal Patents Court will now have to issue a preliminary assessment on the merits of a nullity action within six months from the date on the defending patentee. The court may set deadlines to ensure that at least the first set of (counter)arguments have been exchanged in time to be considered for the preliminary assessment. Federal Patents Court will provide its preliminary assessment to the parties and, at the same time, also to the infringement court.

The aim of these changes to the law is to ensure that the infringement court will be aware of the Federal Patents Court's preliminary assessment before deciding on whether to hand down an infringement judgment or to stay the infringement case pending the final outcome of the nullity proceeding. Ultimately, this is meant to reduce the risk of an (enforceable) infringement judgment being handed down for a patent that is subsequently found invalid.

While promising in theory, it is not at all clear that the new six-month deadline for issuing a preliminary assessment will noticeably mitigate the negative consequences of the injunction gap.

First, the predominant reasons for the injunction gap is insufficient staffing at the Federal Patents Court and the consequential case backlog. With that in mind, it is not at all clear whether the Federal Patents Court will actually be able to issue high-quality preliminary assessments that provide clear guidance to the infringement courts within the six-month deadline prescribed by the legislature.

Second, the deadline only applies to German nullity proceedings, not to oppositions before the European Patent Office—which presently have an average duration of roughly 18 months in the first instance. Since a German nullity action cannot be brought while opposition proceedings against the same patent are pending with the European Patent Office, many infringement cases will not benefit from a swift preliminary assessment by the Federal Patents Court in the first place.

III.   Improved Protection of Confidential Information

Finally, the third substantive amendment to the Patent Act may well be the one with the greatest practical relevance. It introduces a new set of provisions aimed at protecting trade secrets disclosed in patent proceedings. These provisions are taken from the 2020 German Trade Secret Act and are incorporated into the Patent Act by way of reference. In a nutshell, they provide for the following:

  • Upon request of a party, the court can order the parties to keep specific information confidential and to not disclose or use the information outside the proceeding. In the event of a violation, the court can impose a fine can be up to EUR 100,000.
  • Upon request of a party, the court can limit the access to secret information to selected individuals involved in the proceedings. Among those must be the parties' attorneys as well as at least one (in-house) representative of each party.

These new tools will offer a significant improvement over the status quo in which the courts do not have any real means to restrict, even partially, one party's access to the confidential information submitted by the other party against the receiving party's will.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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