A Push to End Germany's Status as 'Paradise for Patent Trolls'

A Push to End Germany's Status as 'Paradise for Patent Trolls'

Apple and Nvidia have joined German companies pushing legislation to make the country a less attractive destination for patent suits.

This file photo shows customers queueing to enter the Apple Store in Munich. AFP
This file photo shows customers queueing to enter the Apple Store in Munich. AFP

Germany has long been a magnet for global patent litigation, ensnaring companies like Apple Inc., Samsung Electronics Co. and Alphabet Inc.'s Google.

Now a coalition of German blue-chip firms and foreign multinationals, including big U.S. tech firms, is pushing legislation that would lessen the country's appeal for those seeking to assert their intellectual property.

Germany's main patent courts, in Munich, Mannheim and Düsseldorf, systematically order injunctions, or temporary sales bans, for products subject to patent suits. That makes them attractive legal venues for patent holders.

Key targets of the legislation are so-called nonpracticing entities, or NPEs, which amass portfolios of patents that they license instead of using them in their own products. Critics call them patent trolls.

The proposed rules aim to make it harder for a plaintiff to win an injunction. The initiative has split Germany's typically unified business community, pitting some of the country's biggest patent users against its biggest patent holders.

Volkswagen AG , SAP SE, Deutsche Telekom AG and others are backing the bill. Bayer AG, Siemens AG and BASF SE have lined up against it.

Foreign companies have joined the fray. Apple, Samsung, Nvidia Corp. and Microsoft Corp., among others, have joined a European lobby group pushing the measure. On the other side are companies like 3M Co., Panasonic Corp., Ericsson AB and Nokia Corp., which through the years have accumulated large libraries of patents.

Multinationals often steer cases to favorable legal venues around the world using their far-flung subsidiaries. Patent litigators say the ability to obtain an injunction can be key for patent holders in choosing a jurisdiction for a suit.

"In the German legal tradition, if you are doing something you shouldn't be doing, then first you have to stop," said Florian Mueller, an independent intellectual property analyst. "Remedy is an afterthought."

Such injunctions are harder to invoke in the U.S., following legal changes and a string of Supreme Court decisions. That is especially the case when the plaintiff is an NPE.

Other friendly legal venues for patent holders have emerged outside the U.S., including China, Turkey and Russia, which have all established frameworks for intellectual property protection.

Germany's near-automatic injunctions, its large consumer market and the speedy pace at which its patent courts work compared with other European countries have made it the venue of choice for some of the West's biggest patent battles.

In December 2018, the court in Munich ordered Apple to stop selling several iPhone models after chip maker Qualcomm Inc. filed a suit, alleging that the fellow Californian company was infringing Qualcomm patents on iPhones' modem chips.

The injunction forced Apple to briefly ship custom-made phones to Germany. The two companies later settled.

The year before, chip maker Broadcom Inc. sued Volkswagen and subsidiary Audi, alleging the car maker infringed Broadcom patents in navigation and entertainment systems.

Rather than risk an injunction that would have halted production, Volkswagen settled for close to 500 million euros, equivalent to about $598 million, according to people familiar with the matter.

Volkswagen declined to comment on the settlement. Broadcom didn't respond to a request for comment.

Backers of the proposed legislation say German patent law, rooted in the 19th century, is out of date.

When Carl Benz received the patent for his car in 1886, "it was one patent for one product," said Ludwig von Reiche, managing director for Nvidia in Germany.

He chairs the German arm of IP2Innovate, a European lobby group pushing the bill.

Today's increasingly digitized vehicles may involve more than 100,000 patents on everything from internet connectivity, sensors and algorithms to individual microchip circuits, Mr. von Reiche said.

Supporters of the bill say the current system unduly pressures companies to opt for costly settlements. They also say the changes will rein in NPEs, which they accuse of preying on companies in German courts in order to boost licensing fees from sometimes-large portfolios of patents.

"Germany has undeniably become a paradise for patent trolls," said Stephan Altmeyer, vice president for patent strategy at Deutsche Telekom.

Suits in the European Union pursued by NPEs tripled between 2011 and 2017 -- the most recent year for which figures are available -- according to Clarivate, a data provider that tracks intellectual property litigation.

In Germany, a fifth of patent cases were brought by NPEs in the period, compared with 4% to 6% in other European countries.

The bill now making its way through the German parliament was drafted by Chancellor Angela Merkel's government last year but has undergone changes following pressure from lobbyists on both sides.

Supporters of the overhaul hope the legislation can be adopted before a general election in September. Failure to do so could force the next government to restart the project from scratch.

The legislation would require judges to conduct a proportionality check before granting an injunction, to ensure that the cost to the alleged infringer doesn't massively exceed the claimed lost revenue of the suing party.

It would also force courts to consider an injunction's impact on third parties--customers whose telephone service would be interrupted, for instance, or patients who may be denied a lifesaving drug.

It also promises to address a peculiarity of the German legal system. Patent-infringement cases are handled in regional courts that can make decisions in less than a year.

But patent invalidity suits -- which test whether the patent claimed by the plaintiff is indeed valid and are the preferred defense for companies being sued for infringement -- go through a special German patent court, which can take up to three times longer to render decisions.

NPEs say the planned changes are alarming. Court-imposed sales bans during litigation level the playing field, they argue.

"Injunctions can bring big companies to the negotiating table," said Pio Suh, managing director of IPCom GmbH, a German NPE owned by Fortress Investment Group LLC, a New York-based investment management firm.

The alarm is acute in the pharmaceutical industry, where investments to develop new drugs can run into the billions of euros and patent infringement can wipe out revenue on a specific drug within months, according to industry executives, creating a strong disincentive against innovation.

Critics of the bill also argue that since damages in Germany are lower than in the U.S., and punitive damages don't exist at all, removing the automatic injunction would leave the system lopsided and eliminate most deterrents against infringement.

"It's like making the fine for fare dodging the price of a ticket," said Beat Weibel, chief counsel for intellectual property at Siemens. "We need heavy consequences like the automatic injunction to balance the system."



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