Traditionally, patent litigation initiated by non-practising entities (NPE) has focused predominantly on the US market. However, in view of recent changes in the US patent system (eg, inter partes reviews) and case law, the balance has shifted in favour of defendants and has made NPEs’ lives much harder, with many no longer having the deep pockets that they used to have. Therefore, many NPEs have started to change their strategy, and the German patent system – with its procedural and economic strengths – has emerged as a new hotspot on the map of NPE activity. Recent examples include Intellectual Ventures’ litigation against Deutsche Telekom, Vodafone, Telefonica and a German insurance company; and Tessera’s litigation against Broadcom. This development is further driven by the increasing willingness of operating companies to sell German and European patents to NPEs. Moreover, following the Brexit referendum, there is considerable uncertainty regarding the future of Europe’s new unitary patent system, which further strengthens Germany’s role as a leading venue for patent litigation.
This chapter outlines key aspects of the German patent litigation system before highlighting key trends and strategies of NPE-related patent litigation in Germany, from the perspectives of both the NPE plaintiff and the defendant. It also address a number of important value chain-related aspects, which in NPE scenarios frequently come into play in addition to the classical legal aspects and strategies.
What makes the German legal system so attractive?
Most NPEs put intense pressure on their targets in order to promote early settlements at low litigation cost. Accordingly, key factors for litigation venue selection typically include:
- the chances of getting permanent injunctions granted;
- the level of damages awarded;
- the average timeframes and risks of delay;
- the availability of preliminary injunctions; and
- the expected costs of litigation.
While some jurisdictions (eg, the United States) do not automatically grant permanent injunctions for patent infringement – and especially not for NPE plaintiffs – the German system does not differentiate between plaintiffs and grants permanent injunctions as standard if infringement is found. While damages awards do not reach the eye-watering figures that have been seen in some famous US cases, they can still be substantial and are set at least at the level of reasonable royalties.
Germany has a bifurcated system, with different courts for the infringement and validity sides of litigation. In most cases the first-instance infringement decision is issued within eight to 15 months, while on the validity side the average timeframe is 25 months. If an infringement court is convinced that the patent in suit will likely be nullified in the parallel invalidity proceedings, it may stay its proceedings until the validity decision has been rendered, although this does not occur very often. Even non-final infringement decisions are usually immediately enforceable if the requisite security is provided. Once the court has confirmed infringement, the period leading up to the (typically later) validity ruling is often the best time to negotiate a settlement.
The costs of patent litigation in Germany are usually much lower than those in the United States or the United Kingdom. In particular, there is no US-style pre-trial discovery or jury trials, and inspection proceedings are neither mandatory nor frequently used. Oral hearings (in comparison to trials) typically last only a few hours, rather than several days.
Further, the specialised German courts hearing patent cases handle more than 60% of all patent cases in Europe; they are thus very experienced and have generated a large body of patent case law.
Finally, economic aspects matter, which puts Germany – as the biggest market in Europe – in a leading position, as a high degree of economic leverage can be achieved in relation to target companies doing business in Europe.
NPE plaintiff’s perspective
Patent owners may enhance their leverage and prospects in patent litigation by optimising their patent portfolio before and even after filing suit. If an infringing embodiment is already known while the patent application is pending, divisional patent applications may be filed and quickly prosecuted with claims being optimised in view of the infringing embodiment. The closer the divisional patent’s claims resemble the infringing embodiment, the higher the likelihood of success, in particular in view of preliminary injunctions. In the same way, patent protection may harden in view of potential invalidity challenges – in particular, the remaining risk of a stay of proceedings can be mitigated.
Further, while a parent patent application is pending, German utility models (essentially, unexamined patent rights) may be branched off, whereby their scope may be optimised within the bounds of the original disclosure of the parent application. There is even a possibility to refine the claims further during a pending suit. Utility models are typically registered – and then immediately enforceable – within a few weeks of filing and are highly effective weapons.
In most cases venue selection within Germany is possible. As the courts’ procedures, timing, willingness to grant preliminary injunctions or find infringement under the doctrine of equivalents and methods of dealing with cost-related aspects differ to some extent, an informed choice of forum is advised.
If multiple patents or utility models are available in view of a given target embodiment, it usually makes sense to sue based on all of them to increase the pressure on the defendant, which may even be achieved within a single complaint. German cases are mainly ‘front loaded’, which means that – unlike in the United States – the complaint must provide complete reasoning and relevant evidence of infringement. Accordingly, detailed preparation, including collection of evidence, is crucial.
A further key question to consider is whom to select as a target if there is a whole value chain of independent entities delivering components or other technical contributions to a final product or service. This scenario applies in particular to complex products or services, such as automobiles or telecommunications services. Naturally, an NPE itself usually has neither a direct competitor nor suppliers and customers on a product or service level, and therefore is typically free to select targets from anywhere within the value chain – for example, on a chip level, a sub-system level (eg, wireless communication modules or batteries), a system integrator level (eg, base stations or automobiles) or a service level (eg, a telecoms operator or content provider). From the perspective of German patent law, targets from any level of the value chain may be selected, as long as the product or service provided at this level already infringes.
However, in most NPE cases, following the objective of creating maximum commercial leverage and despite this legal freedom, targets are intentionally selected from the higher part or even the top end of the value chain, even though frequently such targets do not own, develop or control the patented technology themselves. Rather, they only acquire components, sub-systems or other technical contributions (eg, software) from suppliers at the lower part of the value chain. As a consequence, much pressure is put on the targets, which not only have the greatest commercial exposure, but also often suffer from a lack of technical information and knowledge of the technology and specific implementation of the allegedly infringing technology received through the supply chain. Conversely, as many NPEs do not have strong technical skills themselves for each of their patents, selection of technically savvy patent attorneys and sometimes additional technical experts is critical.
Strategies against preliminary enforcement
A first-instance judgment can be preliminarily enforced with regard to some or all of the rulings. However, the plaintiff must provide security to secure potential damage claims of the defendant. Therefore, for rulings relating to injunction, recall and destruction, the defendant may establish the risk of significant damages and corresponding need for security. Thus, it not only secures potential damage claims, but may also hinder enforcement itself by forcing the plaintiff to provide (for example) a multimillion-euro security before enforcement.
In some cases it may even be possible to request the suspension of enforcement. In particular, a second-instance court held in an NPE scenario that if a defendant’s appeal may succeed and it has significant market presence while the NPE seeking enforcement of injunctive relief has none, enforcement may be suspended.
Increase financial exposure
Most defence strategies include measures to increase the plaintiff’s financial burden and exposure. If the plaintiff is located outside Europe, the defendant can regularly request security from the plaintiff to secure its claim for reimbursement of legal costs in case the infringement claim is ultimately dismissed. Since the amount of the security and the court fees to be paid upfront by the plaintiff are calculated based on the value of the dispute, the defendant may establish that the economic relevance is significantly higher than what was initially indicated in the complaint, thus increasing the court fees and the security.
Moreover, if co-defendants join the case as intervenors, the costs for the plaintiff may increase significantly. For example, the security to be provided may increase to hundreds of thousands of euros, even in the early stages of the litigation.
Push for court-appointed experts
In addition, a defendant may try to influence the outcome and timing of the infringement proceedings by pushing for a court-appointed expert – for example, by presenting the case in such a way that the technical complexity of the case becomes clear and the court is willing to order an expert opinion. In this scenario, the timing of the suit will usually be delayed significantly – often by more than a year – which may also help to shorten the timeframe until the validity ruling.
NPE litigation frequently involves standard-essential patents (SEPs) for which, as part of the standardisation process, the patent owner has declared to offer licences on fair, reasonable and non-discriminatory (FRAND) terms. In such a scenario, applicable case law defines an exception to the basic principle that injunctive relief is granted in case of a finding of infringement, provided that certain additional criteria are met. This may provide additional defences against claims for injunction, recall or destruction.
In 2015 the European Court of Justice (ECJ) held in Huawei Technologies v ZTE (a case referred to the ECJ by a German court) that the owner of an SEP to which a FRAND declaration applies is not prohibited from bringing an action seeking damages for past infringement. However, with regard to an injunction or the recall of products, the SEP owner must now comply with certain requirements. In particular, before bringing the action the SEP owner must alert the infringer of the infringement by designating the patent and specifying the infringement. After the infringer has expressed its willingness to conclude a licence agreement on FRAND terms, the SEP owner must present to the infringer a specific, written offer for a licence, specifying the royalty and how it is to be calculated.
The infringer must then diligently respond to the offer without delay. If the infringer does not accept the offer for a licence, it must respond with a counter-offer on FRAND terms. In addition, the ECJ held that the infringer must provide appropriate security from the point at which its counter-offer was rejected, including for past use of the SEP. If no agreement can be reached on FRAND terms, the parties may (and commonly do) request a determination by a third party. The ECJ also held that the infringer may challenge the validity or the essential nature of the SEP in parallel to the negotiations.
Following this ECJ decision, German courts have ruled on a number of further aspects of the FRAND defence, finding (among other things) that:
- the FRAND offer by the SEP owner is required only after the infringer’s request for a licence;
- a significantly delayed request for a licence is legally irrelevant and does not prohibit the grant of an injunction; and
- the FRAND offer by the SEP owner must comply with FRAND terms to oblige the defendant to respond.
Value chain management
If a value chain is involved, a common strategy is to push the pressure down the value chain on the basis of indemnity obligations defined in supply agreements or, if these are absent, under German law. The objective is to reduce the financial risk and force the relevant suppliers to proactively support the defence, particularly in view of relevant technical/product knowledge. In this way, the previously weak technical position of a defendant can turn into a superior position, because frequently the NPE has only limited knowledge of the technology underlying the asserted patents. This may apply in particular to cases in which the patent was previously acquired from a third party.
Against this background, some experienced defendants that frequently face NPE assertions are proactively managing the indemnity chain, even in advance of assertions. For example, this may include establishing reliable long-term relationships with the IP departments of key suppliers and optimising indemnity obligations in purchasing agreements to ensure that the supplier not only is involved in financial risks, but also finds itself highly motivated to use its best technical and IP experts to help to defend against an assertion hitting its customer.
In addition, German law allows suppliers to join a patent case as intervenors and co-defendants, and allows the defendant to put pressure on suppliers to do so. There have been cases where a defendant at the top end of the value chain has ‘motivated’ dozens of suppliers at the same time to join the defence. This has the additional effect of multiplying the cost risk for the plaintiff, because Germany has a fee-shifting system and if the plaintiff loses the case, it must also bear the co-defendants’ statutory costs of defence. As most NPEs no longer have the deep pockets that they used to have and the asserting entities are sometimes intentionally equipped with low amounts of capital, driving up the actual running cost of defence is often more important than fee shifting. In particular, often the various co-defendants hire their own attorneys, who also file individual briefs instead of a single common brief of all co-defendants in order to keep the plaintiff’s costs and efforts high. In such co-defence scenarios, effective coordination of the cross-value chain defence team is crucial to success and is frequently a challenge that the defendant’s outside counsel must manage.
Sometimes, such defence cooperation may also give rise to a defence based on the doctrine of patent exhaustion. This applies if the relevant supplier product has been sold in Europe under the direct or indirect authorisation of the patent owner or its predecessor in title (eg, through (sub)licensing) or if the supplier itself acquired the infringing widget from an authorised seller (eg, another licensee).
Michael Platzöder, Philipp Neels, Thomas Schachl
This article first appeared in IAM. For further information please visit www.iam-media.com.