29 April 2015

How German patent law cripples innovation and curbs consumer choice


Patent protection laws aim to incentivize innovation and to allow the inventor and investor to benefit financially from their invention.

Furthermore copycats that free ride someone else’s invention shall be legally prevented from doing this for a set amount of time.

But patent laws in many countries, Germany among these, have helped incentivize an entirely new industry that actually causes the opposite of what patent laws intended to do.

German patent law, and especially how German courts interpret it, disincentives innovation and most start-ups claim that it makes innovation harder.

Germany is the only country that applies so-called Orange Book Laws. Orange Book Laws bundle an entire set of patents into technology standard (e.g. the mobile phone data standard 3G) and obliges every company that uses such a standard in one of their products to compensate any holder of patents listed in that standard.

The problem lies in the nature of these bundles; even if the product does not use certain patents that are defined in that bundle, it still has to compensate owners of these patents.

Technology firms have to proactive proof in court that they explicitly don’t use these patents in order to get away without paying for license fees and potential fines. Prior to winning such an argument the company usually has to go through an injunction put on them by the patent holder.

In order to understand why some companies are actually focusing their business on merely holding patents and suing companies that use industry standards (bundles) it is important to understand what these ‘patent trolls’ are up to.

Patent trolls are usually companies that basically exist solely to sue other players for using patents or licenses. Most patent trolls are so-called non-practicing entities that don’t produce anything and don’t invest anything in research and development but merely consist out of patents and lawyers leveraging these patents by suing companies. Trolls don’t use their patents for products but merely own these in order to use them for legal confrontations with others.

These patents were originally not invented by the troll but usually acquired from a bankrupt technology company. It is more than common that various companies use the patents owned by one firm and pay licensing fees for using that patent. A normal smartphone usually uses more than 1,000 different patents and many of these are not actually owned by the smartphone producer, but instead licensed to them. Smartphone producers often even ‘rent’ patent licenses from their competitors.

Patent trolls usually work with injunctions that stop the innovating company from selling their product and thus making money. Since the innovating company is usually afraid that a court decision might take longer than a year and their competitors offer new and better products in the meantime, settlement to the benefit of the patent troll is the usual solution of such questionable patent violation cases.

Orange Book Laws curb the eagerness to innovate in the tech industry. They increase litigation costs and make it hard and even dangerous for startups (without large legal departments) to launch new products. The big winners of Orange Book Laws are patent trolls and intellectual property lawyers whose business models are reliant on patent troll suits and defending the targeted innovators.

These two groups were not supposed to primarily benefit from patent protection. If Germany wants to stay competitive on a global scale, it needs to rethink its rigid patent law and get rid of Orange Book Laws.

Consumers and technology companies would benefit from this by having access to new products and using standards without being afraid of having to deal with an injunction any time a company uses a standard.

Furthermore courts would be able to use their scarce time to focus on more important issues than home-made Orange Book violations.

Fred Roeder is Vice President at European Students For Liberty