ALERT MEMORANDUM Germany: Revised Draft Law to Introduce Much Awaited Proportionality Requirement for Injunctions

September 15, 2020

On September 1, 2020, the German Federal Ministry of If you have any questions concerning this memorandum, please reach out to Justice and Consumer Protection (“BMJV”) published a your regular firm contact or the new draft amendment to the to simplify and following authors. modernize . Among other things, it COLOGNE Romina Polley substantially improves amendments to German law on +49 221 80040 257 [email protected] injunctive relief for patent infringements, introducing a Elisabeth Macher proportionality criterion. The development is particularly +49 221 80040 156 [email protected] important in light of the emerging debate on patent Nicolas Stilwell +49 221 80040 162 protection for standards for 5G and Internet of Things, [email protected] Theodor-Heuss-Ring 9 affecting manufacturers EU-wide. Deadline for comment 50668 Cologne, Germany T: +49 221 80040 0 is September 23, 2020. F: +49 221 80040 199

While questions remain, the current draft proposal is promising as it materially improves a previous draft, and offers the prospect of LONDON compensation for patentees in cases where an injunction is denied on Maurits Dolmans the basis of a proportionality defense, while mitigating the risk of +44 20 7614 2343 [email protected] hold-up by patent holders. Car manufacturers, for example, are increasingly under pressure and face claims for injunctions on small 2 London Wall Place London components which, if granted, could cause a production shutdown EC2Y 5AU T: for entire automobiles and thus threaten great losses. They are +44 20 7614 2200 therefore vulnerable to attempts at extorting excessive license fees. Germany is a particularly attractive jurisdiction for this approach. The right to an injunction under German patent law is currently not subject to requirements other than a (validity being reviewed in a separate court); in particular, there is no proportionality threshold that would prevent at least the most extreme cases. While German courts have recognized that such a proportionality requirement is inherent to German law and does not have to be written out to be acknowledged, they have so far been very reluctant to apply it, in spite of the requirement to do so under the EU IP . The new draft amendment now contains an explicit proportionality requirement for patent injunctions.

clearygottlieb.com

© Cleary Gottlieb Steen & Hamilton LLP, 2020. All rights reserved. This memorandum was prepared as a service to clients and other friends of Cleary Gottlieb to report on recent legal developments that may be of interest to them. The information in it is therefore general, and should not be considered or relied on as legal advice. ALERT MEMORANDUM

1. Current legal framework However, the German Federal Court of Justice (“FCJ”) has taken a rather conservative approach. In Under German law, a patent right is regarded as an a landmark 2016 ruling, it held that even a grace pe- absolute right, i.e., a right that allows its holder to ex- riod (i.e., time for the implementer to use up or sell clude any third party from using the patented inven- existing products) in patent infringement cases can tion. The right to an injunction pursuant to Section only be considered if the immediate enforcement of 139(1) German Patent Act therefore requires nothing the patentee’s right to injunctive relief would consti- more than a finding of use without permission. It has tute a disproportionate hardship for the infringer. accordingly become known as a “quasi-automatic in- Such hardship would need to be so severe as to be un- junction” – validity is not assessed sine that is the justified by the nature of the patent as an exclusive competence of the Munich . This holds right, to such an extent that imposition of an injunc- true even if the claim for injunction is based on a sin- tion would be contrary to good faith.3 In the case be- gle patent infringement for a negligible product com- fore it, the FCJ denied the requested grace period. ponent of a complex product, and if the injunction will This led observers to conclude that the proportionality have disproportionate effect on the infringer. Produc- criterion was irrelevant in practice. ers of complex products, such as car or mobile phone manufacturers, are a popular target for patent holders The BMJV draft provides a much-needed clarification – the prospect of a production standstill can force a on these issues while implementing the Enforcement manufacturer to pay even unreasonable royalties. Directive. German patent law has repeatedly been criticized for 2. Reform efforts of the BMJV not having introduced a proportionality requirement The first draft bill for amending the German Patent for the patent injunction claim. EU law in fact de- Act, published on January 14, 20204, contained a stip- mands such requirement: Article 3 and 10 of the En- ulation that injunctive relief can be denied on the forcement Directive1 require measures following a grounds of proportionality, but only in case of “special patent infringement to be proportionate.2 Article 3 (2) circumstances” and “unjustified hardship” for the in- of the Enforcement Directive requires that “remedies fringer. Third-party rights were not considered. shall be fair and equitable”, as well as “proportion- ate.” After industry voiced criticism5 that these restrictions would undermine the new proportionality criterion, However, the German legislator and the courts have the BMJV rephrased its proposal for Section 139 of so far taken the position that the characteristics of the German Patent Act as follows: German law render an explicit proportionality re- quirement superfluous – the proportionality principle “The claim is excluded to the extent, due to the special is an inherent element of German law and has to be circumstances of the individual case, enforcement observed by the courts in any event, whether written would lead to disproportionate disadvantages for the out or not. The concept of proportionality as stated in infringer or third parties that are not justified by the Article 19(4) and Article 14(2) of the German consti- exclusive right. In this case, the injured party can de- tution is an expression of a principle that also extends mand compensation in money if this appears appro- to civil and patent law. priate. The claim for damages according to para- graph 2 remains unaffected.”

1 Directive 2004/48/EC of April 29, 2004 on the enforcement of 3 FCJ, judgment of May 10, 2016 – X ZR 114/13 (Heat Ex- rights (OJ L 157, 30.4.2004). changer). See also, for example, Regional Court of Munich, judgment of June 13, 2019 – 7 O 10261/18. 2 While the German legislator failed to meet the deadline of April 29, 2006 to implement the principle of proportionality, 4 Available at https://www.bmjv.de/SharedDocs/Gesetzge- it is conceivable that Article 3 of the Enforcement Directive bungsverfahren/Dokumente/DiskE_2_Pat- is precise enough to have direct effect and thus be applied by MoG.pdf? blob=publicationFile&v=1. German courts. 5 See, for example, submissions by industry leaders following the BMJV’s first draft law.

2 ALERT MEMORANDUM

The BMJV refrains from listing criteria to determine c. Significance of the patent for complex prod- “disproportionate disadvantages” that would warrant ucts an exclusion of the injunction claim. However, in the The BMJV recognizes that complex products can con- accompanying materials to the draft bill, the BMJV tain a large number of patent-protected components. does provide a non-exhaustive list of criteria that The time and resources necessary for the implement- courts may consider when assessing the circum- 6 ers to avoid continued patent infringement (“design stances of the case: around”) may in exceptional cases be out of propor- a. Interests of the patent holder tion to the patent holder’s interest in enforcing its in- junction claim, especially where the product needs to In the context of proportionality, it can be relevant comply with special regulations. whether the patent holder is active on the same market as the infringer, or is a non-practicing entity (“NPE”). d. Subjective elements In the past, some NPEs have created a business model The court may also consider the nature and extent of out of purchasing for components in order to the infringement. The BMJV deemed relevant espe- monetize them through license agreements, pressur- cially whether the infringer has taken possible and ing infringers into accepting excessive licensing terms reasonable precautions to avoid patent infringement to avoid an injunction. Since they were themselves (e.g., a “Freedom to Operate Analysis”) or has made not active on the market, they did not have to fear adequate efforts to obtain a license. In this context, counterclaims. While the BMJV stresses that it shall the patent holder’s conduct can also become relevant: not per se be held against the patent holder if it is an 7 for example, it would be contrary to good faith for a NPE , it clarifies that the interest of a non-practicing patent holder deliberately to refrain from raising its entity may be more in monetizing its IP and less in claim until after the implementer has made consider- securing its own production and market position, and able investments. might therefore carry less weight than the interests of a practicing entity. e. Third-party interests b. Economic effects of the injunction German courts have so far not recognized third-party interests as relevant in the context of patent injunc- Granting a grace period to the infringer may be war- tions. Notably, the Regional Court of Düsseldorf re- ranted under special circumstances. According to the fused to grant a grace period to a producer of heart BMJV, special circumstances exist where the eco- valves, even though the immediate injunction posed a nomic consequences of immediate enforcement of the high risk to patients.8 In the accompanying material to injunction would negatively impact and disadvantage its first draw bill, the BMJV shared the court’s view the infringer in a particularly grave way (e.g., if the that a denial of an injunction based on third-party in- infringer has made sizeable investments in product 9 terests was not warranted. development and production that would be lost). The BMJV has moved away from this stance, men- tioning third-party rights in the proposed new word- ing of Section 139 Patent Act. In the accompanying

6 Second draft amendment to the German Patent Act to simplify heart valve, that hospital personnel had been trained for it, and and modernize German patent law that re-training would take months. Nevertheless, the court (https://www.bmjv.de/SharedDocs/Gesetzgebungsver- held that, following the criteria set out by the Federal Court of fahren/DE/Modernisierung_Patentrecht_2.html), p. 61- Justice in the Heat Exchanger case, a grace period was not 64. warranted, and that general proportionality considerations, third party (patient) interests or the public interest were not to 7 For example, the BMJV points out that the legitimate mone- be taken into consideration. tization interests of individual inventors, universities or SMEs 9 deserve to be protected. First draft amendment to the German Patent Act (https://www.bmjv.de/SharedDocs/Gesetzgebungsverfah- 8 Regional Court of Düsseldorf, cases 4a O 137/15 and ren/Dokumente/DiskE_2_PatMoG.pdf? blob=publication- 4a O 28/19. The defendant had argued that patients had al- File&v=1), p. 63. ready been prepared for implementation of that particular

3 ALERT MEMORANDUM

material to the current draft, the BMJV refers, inter free to claim damages in addition to the monetary alia, to the ’s Guidelines on the compensation if the implementer acted intentionally Enforcement Directive,10 which require consideration or negligently. It is not entirely clear how the “com- of the constitutional rights of all parties involved as pensation” would be calculated nor how far it would well as third parties that may be affected by injunctive go beyond a damages claim (which under German law measures. is also compensatory by nature, and not punitive). 3. Legal consequences of a successful proportion- 4. Remarks and Outlook ality defense With the current draft, the BMJV has taken a step to- In the draft, the BMJV deliberately refrains from out- wards ensuring implementation of the Enforcement lining specific legal consequences for cases in which Directive in German patent law. The next step is for an injunction is found to be disproportionate. It leaves the Government to confirm the proposal and lay it be- the decision which measures are proportional in each fore Parliament. However, even if the draft is intro- individual case to the courts. Measures could entail a duced into law without significant changes, it will still grace or transition period for the implementer, but be up to the courts to carefully balance the interests of also a long-time or permanent denial of the injunction patent holders and implementers. claim. It will depend on what is reasonable in the spe- In that regard, it remains unclear to which extent the cific circumstances of the case. At the same time, the German courts will make use of the proportionality court can grant a monetary compensation to the patent requirement. The impact of the amendment may in holder. practice be minor if the courts uphold their stance that a. Grace or transition period proportionality only warrants a limitation of the in- junction in highly exceptional cases. While including The court may grant the infringing party a reasonable proportionality in the statute, the BMJV expressly transition period to develop a non-infringing product stated that the disproportionality of an injunction or a grace period to use up or sell the infringing prod- 11 should still remain an exception. uct. While the BMJV does not rule out an indefinite exclusion of a patent injunction, it does consider this The instrument of “adequate compensation” to be to be possible in only few cases, in which proportion- paid by the implementer after a successful dispropor- ality cannot be achieved by granting a grace period. tionality defense may cause additional legal uncer- tainty. While it is reasonable to assume that courts b. Appropriate compensation will apply the methods normally used for royalty cal- If an injunction is denied, the court can award mone- culation to determine “adequate compensation”, the tary compensation to the patent holder. This award is draft proposal does not contain any guidance on this meant to compensate the patent holder for not being point. It should at least be clear that concepts of de- able to stop the implementer using its patent against terrence or a punitive nature should not enter into the its will; in contrast to a damages claim, it does not re- calculation, because (a) German law does not know quire fault on the part of the implementer. In a way, punitive damages; and (b) Article 12 of the Enforce- the monetary compensation is similar to a royalty; ment Directive specifically states that a pecuniary however, the BMJV stresses that the compensation compensation in lieu of an injunction shall be “rea- 12 does not entail a license and, therefore, does not legal- sonably satisfactory”, but not punitive. ize the use of the patent. The patent holder is therefore

10 Communication from the Commission to the European Par- (https://www.bmjv.de/SharedDocs/Gesetzgebungsverfah- liament, the Council and the European Economic and Social ren/DE/Modernisierung_Patentrecht_2.html), p. 35. Committee — Guidance on certain aspects of Directive 12 2004/48/EC of the and of the Council This is also confirmed in recital 26 of the Enforcement Di- on the enforcement of intellectual property rights rective which states that the Directive’s “aim is not to intro- (COM(2017) 708 final). duce an obligation to provide for punitive damages but to al- low for compensation based on an objective criterion while 11 Second draft amendment to the German Patent Act to simplify taking account of the expenses incurred by the rightholder, and modernize German patent law such as the costs of identification and research.”

4 ALERT MEMORANDUM

Finally, the draft law and the explanatory text do not mention FRAND cases.13 It will be interesting to see how courts deal with the “compensation” in a FRAND context. If the owner of a standard-essential patent has made a FRAND promise, it is fair to argue that an injunction is disproportionate if the imple- menter is willing at the time the injunction is up for decision, and that any compensation awarded by the court should not exceed a FRAND rate. Industry will have until September 23, 2020 to submit their response to the draft bill. ****

CLEARY GOTTLIEB

13 For more information on FRAND, please see our Alert Mem- federal-court-of-justice-publishes-frand-judgment-in- orandum of July 23, 2020 regarding the FCJ’s FRAND Judg- sisvel-v.-haier.pdf). ment in Sisvel v. Haier (https://client.cleary- gottlieb.com/77/1800/uploads/2020-07-23-german-

5