German move to limit injunctions in patent suits aligns with US law

Earlier this month, the German parliament adopted a new law designed to limit the availability of injunctions in patent infringement suits. The change, which will significantly reduce the leverage of patent trolls in German courts, is a move in the direction adopted in the U.S. following the U.S. Supreme Court's 2006 decision in eBay v. MercExchange, 547 U.S. 388 (2006).

Before eBay, courts in the U.S. tended to issue injunctions virtually automatically upon a finding of patent infringement. This threat of an automatic injunction, effectively taking the infringing product off the market, gave patent owners outsized power to extract license fees far greater than the value of the inventions claimed in their patents.

In 2006, however, before the patent troll business model fully proliferated in U.S. courtrooms, the Supreme Court held that injunctions in patent cases (as authorized by 35 U.S.C. Section 283, which states, "The several courts having jurisdiction of cases under this title may grant injunctions in accordance with the principles of equity to prevent the violation of any right secured by patent, on such terms as the court deems reasonable.") must also conform to the traditional equitable standard for issuance of injunctions. This traditional standard consists of a four-part test: (1) that the plaintiff (i.e., the patentee) has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction. eBay, 547 U.S. at 392. Justice Anthony Kennedy, concurring, alluded to the need to adopt the four-factor test to rein in the emerging patent troll industry: "An industry has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees. For these firms, an injunction, and the potentially serious sanctions arising from its violation, can be employed as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the patent." eBay, 547 U.S. at 396 (Kennedy, J., concurring).

A consequence of eBay and other U.S. legal reforms is that patent trolls have expanded their business model to other jurisdictions, including Germany. Like other European countries whose legal systems are based on the civil law system, Germany lacks the doctrine of equity that emerged in tandem with the English common law, and that forms part of the U.S. legal system. See, e.g., Adv. Comm. Notes foll. Fed. R. Civ. P. 2. At the same time, Germany has a robust and well-developed system for litigating patent issues, with specialized courts and separate adjudication of patent infringement and invalidity. The courts handling infringement issues have tended to resolve cases more quickly than the courts handling invalidity issues, leading to what has been called an "injunction gap" in Germany -- the period an injunction is in effect following a finding of infringement but before a finding of invalidity.

In this setting, the practice of automatically issuing injunctions upon a finding of infringement, as was also done in the U.S. before eBay, has proved particularly acute -- the infringement court may issue a finding of infringement and enjoin the defendant even while the nullity proceeding wends its way through the courts.

As the Wall Street Journal recently put it, German law had a "legislative quirk that made it a prime destination for globally active patent litigators." In other words, in Germany, patent plaintiffs have had even greater leverage to exact high license fees in settlements, even as to low-value patents and also as to infringed-but-ultimately-invalid patents.

The fix, which has been in the works for several years, and which has been characterized as more of a "clarification" than an "overhaul" of existing law, is to add a provision to section 139, para. 1 of the German Patent Act, the provision that authorizes injunctions. Previously, the section stated, "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." The amended provision would authorize courts to decline an injunction if that would lead to disproportionate and unjustified burdens on the accused infringer or third parties.

This tracks the U.S. Supreme Court's eBay factors, particularly consideration of the balance of hardships and the impact on the public interest. For patent trolls, whose primary (or sole) interest is monetization of the patent, the new law may lead courts to deny injunctions in cases where the threat of an injunction would otherwise enable the patent troll to demand excessive license fees.

Some have criticized the change as weakening Germany's patent system, and thereby undermining incentives to innovation. However, in view of the eBay standard in the U.S., this new law is a step in the direction of further harmonization of international patent laws, which will reduce the ability of patent trolls to engage in profit-oriented forum shopping. Further, although the elimination of automatic injunctions in the U.S. has diminished the existential risks to accused infringers, the American patent system has remained robust in the fifteen years since eBay. The same may fairly be expected in Germany following this amendment. 