On 27 January 2021, the German Parliament discussed a draft law that would limit a patent owner’s ability to stop the production and distribution of an infringing product. The new law would enable the infringer to rely on a defence of “disproportionate hardship” against an otherwise justified cease-and-desist claim. While the German Association of the Automotive Industry welcomes these changes, citing “unreasonable” royalty demands for standard essential patents for information and communications technology used in cars, the Association of the German Chemical Industry (VCI) and the Association of Research-Based Pharmaceutical Companies (VFA) have argued in a joint statement that the proposed changes go too far.

Scope of the Proposed Disproportionality Defence

The German Federal Government intends to amend several intellectual property laws by the “Second Act on the Simplification and Modernisation of Patent Law”. While the proposed amendments mostly relate to procedural and cost provisions, the draft would also modify the substantive law on a patent owner’s cease-and-desist claim against an infringer.

The proposed amendment to Section 139 Patent Act reads,

“The [cease-and-desist] claim is excluded insofar as due to the special circumstances of the individual case, the order would lead to disproportionate hardship for the infringer or third parties not justified by the intellectual property right. In such cases, the party whose rights were infringed may demand monetary compensation to the extent that this appears reasonable. The claim for damages according to paragraph 2 of this Section shall remain unaffected by this.”

Thus, to the extent that the infringer can prove that the effects of a cease-and-desist order would lead to a disproportionate hardship for him or for third parties, the claim is excluded. The Federal Government explained that an impairment of third parties’ fundamental rights could constitute such a hardship: “This may be relevant, for example, in cases in which an injunction leads to the result that the supply of patients with life-preserving products of the patent infringer can no longer be ensured, or important infrastructures are significantly impaired.” (p. 55 of the draft).

The injured party is entitled to adequate monetary compensation and can claim damages, and the patent infringement remains illegal. However, the infringer will not be subject to criminal law sanctions for intentional infringement according to a proposed amendment to Section 142 Patent Act.

The Utility Patents Act (Gebrauchsmustergesetz) will be amended accordingly. In contrast, a similar provision will not be included in the Semiconductor Protection Act (Halbleiterschutzgesetz) or any other intellectual property laws.

Background: Previous Case Law

It is undisputed that German courts may grant temporary grace periods for the continued distribution of products infringing trademark law or any of the numerous consumer protection laws that can trigger a cease-and-desist claim under unfair competition law. In such cases, the defendant may be allowed to continue distributing the offending product for a limited period of time if an immediate effect of the injunction would constitute an unreasonable hardship.

In 2016, the German Federal Civil Court (BGH) outlined under which circumstances this rule might apply also to cease-and-desist claims under patent law (BGH, decision dated 10 May 2016 – X ZR 114/13) – Wärmetauscher). The BGH started by pointing out that patent law and trademark law differed in important respects. In particular, a cease-and-desist order in a trademark case might affect a product only labelled incorrectly, but otherwise manufactured in conformity with all laws. In contrast, a patent infringement meant that the respective product itself was illegal. Therefore, the cease-and-desist order was the necessary consequence of an infringement, and the infringer generally had to bear the hardships associated with this. However, a temporary grace period could be justified in exceptional cases if the detrimental consequences of immediate compliance with the cease-and-desist order exceeded the hardships normally suffered by a patent infringer to an extent that the claim appeared unreasonable. If these requirements were met, neither the TRIPS agreement nor Article 3(2) of the Enforcement Directive 2004/48/EC would be violated by the granting of a grace period. The BGH also cited two decisions by English courts stating that cease-and-desist orders should be unconditional as long as they were not ”oppressive”, i.e., as long as their negative consequences for the infringer were not grossly disproportionate (High Court for England and Wales (Pumfrey J) in [2005] EWHC 282 (Ch) – Navitaire Inc v EasyJet Airline Co Ltd; Court of Appeal (Jacobs LJ) in Virgin Atlantic Airways Ltd v Premium Aircraft Interiorurs Group [2009] EWCA Civ 1513).

The BGH refused to grant the defendant a grace period in the case in question because the infringing product was only an optional piece of car equipment, and therefore, “the infringement [did not relate] to a small but functionally essential component of a technically complex device that cannot be replaced within a reasonable time by a patent-free or licensable product” (emphasis added).

The principles outlined by the BGH were not taken up in subsequent patent infringement cases brought before lower courts. The government’s explanatory statement to the draft law mentions (p. 56) that this was criticized by the automobile industry and parts of the telecommunications industry in the course of the legislative process for the proposed bill.

Status of the legislative process and next step

The German Federal Council (Bundesrat), which represents the federal states in the legislative process, but whose approval of the draft law is not required, commented on the draft in its resolution dated 18 December 2020. It pointed out that the draft law goes beyond the principles outlined by the BGH in the “Wärmetauscher” decision, inter alia because the infringer will be able to rely on the defence indefinitely, while the BGH only considered a temporary grace period, and because the defence can also be based on third parties’ interests. It asked Parliament to consider aligning the wording of the amendment to relevant wording in the BGH decision. The Federal Council also suggested to clarify the scope of the new rule by adding further criteria and examples. The Federal Government rejected these suggestions in its reply.

On 27 January 2021, the German Parliament discussed the draft in its first reading and submitted it to the competent parliamentary committees. Experts are to be consulted there in a public hearing on 24 February 2021.