License, exhaustion or patent infringement? How German case law on the territoriality principle influences licensing considerations

How do you deal with infringements that involve multiple activities and often a cross-border element? For patentees and patent users, this is an important issue which, though neither new nor unknown, will become increasingly relevant as a result of growing digitalisation and its effects. This question is also especially, important for licensing agreements providing for territorial restrictions on use – in the worst case, cross-border activities can entail significant conflict potential when determining whether or not the actions wholly or partially fall under the license or its effects, such as exhaustion.

Where multiple participants act collaboratively in different countries, the question will be increasingly whether and when this is still, or already, a domestic patent infringement, especially in the case of method patents involving a digital aspect.

In such a case, it may be difficult for the patentee to show a patent infringement in the protected territory. For “upstream” activities, such as the manufacturing of products in another country which are then (with the manufacturer’s knowledge) sold in the patent protected domestic territory, the courts have established liability criteria for holding the foreign (co-)participant responsible:

The German Federal Court of Justice in Abdichtsystem

Everyone concerned with technical IP rights should have the FCJ’s decision Abdichtsystem in the back of their mind when engaging in cross-border activities – or even when merely foreseeing the possibility of their products being placed on the German market.

In that ruling, the German Supreme Court specified the obligations incumbent on a supplier domiciled abroad and delivering infringing products to Germany, and significantly expanded the scope of the territoriality principle in that context: A supplier who is based abroad and delivers to a customer that is also domiciled abroad, must assess the customer’s behaviour if he has solid evidence to conclude that the products will subsequently be delivered to Germany (in a patent-infringing manner).

By way of example, the FCJ considers that this is the case as soon as the quantity purchased abroad is too large to be reasonably distributed only in off-patent markets, or if the purchasing practices are conspicuously associated with a perceivable, potentially patent-infringing activity of the buyer on the German market.

In any such case, the supplier based abroad is required to inquire with his customer, also based abroad, whether the customer delivers to the patent-protected German market. The FCJ considers that the supplier, if he does not receive a plausible answer to his inquiry, must seriously expect – even without having positive knowledge – that he will culpably contribute to a patent infringement committed by his customer if he proceeds with the delivery. In that case, the supplier is at least involved in a patent infringement and can be held liable, a decision that is comparable to the findings of the courts in the earlier and considerably more restrictive case law in Audiosignalcodierung (for intent) and Funkuhr I (for negligence).

What makes it difficult for the manufacturer and/or supplier of products or services potentially creating such a scenario, concerning particularly  the IoT sector and the infringement of method patents, is the fact that the FCJ did not provide an exhaustive, general definition of the cases where the above described obligation of investigation does or does not exist.

As similar scenarios are likely to occur with increasing frequency in our increasingly interconnected world, it will have to be closely monitored how the lower courts in particular will implement the FCJ’s “instructions” for the obligation of investigation. Until then, the decision of the Federal Court of Justice will probably cause significant legal uncertainty among companies based abroad.

Relevance for the IoT sector

Especially in the digital sector, it will not always be easy to apply the above principles: Some of the process steps of IT-related method patents are often processed on foreign servers or in cloud systems the geographical location of which is very difficult to determine. For example, the hosts of these cloud services in all likelihood are unaware of the possibly patent-infringing activities on their servers, and given the enormous data volumes, they could not  be realistically aware of them.

In any case, it appears likely that a major part of the process steps comprised by digital patents will not be implemented in Germany at all. Then, it must be determined whether or not the generally applicable territoriality principle precludes confirming a patent infringement. This question remains unanswered and should always be taken into consideration and resolved very thoroughly by anyone about to conclude a license agreement.

The issue will become increasingly relevant as the global integration of manufacturing, logistic, leisure and household systems continues to proceed and processes can be controlled from anywhere in the world.

The Düsseldorf Court of Appeals in Prepaid-Telefonkarten

 Apparently, there are not many court decisions on comparable scenarios. In its 2009 ruling in the Prepaid-Telefonkarten case, the Düsseldorf Court of Appeals (principles generally confirmed by the Praenatale Diagnostic decision of 2017) in particular considered issues that could generally be applicable to the cases discussed in this discussion. The patent underlying that decision was concerned with a method for processing prepaid telephone calls, comprising various steps (features) described in the patent claim, which, when implemented, should enable the user to make a call for an amount paid in advance. However, the alleged patent infringer set up only the sale and use of the prepaid phone cards in Germany, while the facilities and processes necessary to implement the further features of the patent claim (server, data processing centre, etc.) were situated outside of Germany. Thus, it was common knowledge that a major part of the claim features was not implemented in Germany.

The Düsseldorf Court of Appeals confirmed the patent infringement. The reason given by the court was that whenever the process is started in Germany, further steps of the process carried out outside of Germany are attributable to the participant in the same way as steps taken within Germany, if he adopts them as his own for the result of the infringement in Germany. The CoA noted that patent infringement can only be confirmed where the relevant act has a sufficient connection to the territorial reach of the patent. On that basis, neither infringing activities undertaken abroad nor the use of a protected method abroad are patent infringing. However, a patent having effect in Germany may still be infringed if the patent-infringing act is undertaken at least partly in Germany.

In the reasons for its decision, the Düsseldorf Court of Appeals referred to the FCJ ruling in Rohrschweißverfahren, where the FCJ held that a patented welding method, comprising in a first set of steps the production of a data storage medium carrying welding data, which in a second set of steps is used to control the welding process, is being used in a patent-infringing manner even where the user applies the welding method using the stored welding data. Although the case underlying that decision was concerned with an act of use performed exclusively within Germany, the Düsseldorf Court of Appeals found that it has to be irrelevant for the patent infringement whether the device required to implement the method (the production of the data storage medium carrying the welding data) is made in Germany or abroad, as otherwise the user could easily circumvent the patent protection.

Therefore, for an act to be classified as use of the patented method, it has been found sufficient if only one out of several necessary steps is undertaken within Germany while the further partial steps of the act, implemented abroad, are attributable to the party acting in Germany. The parts of the act committed abroad shall be treated as domestic acts if the participant accepts them as his own for an infringement result materialising in Germany. According to the court, the only corrective action to be applied is an “economic-normative approach”, in order to ensure that the practices in question, so as to be attributable in this way, are to a sufficient degree purposefully designed to achieve the effect in the domestic market.

Consequences for users

For manufacturers, suppliers, retailers and trade intermediaries as well as, of course, commercial buyers and users, this case law of the German courts involves significant uncertainties where acts of distribution and use come into contact with the German market.

On the other hand, licensors and licensees both should be aware that while patent protection is territorial, the boundaries drawn by the German courts are considerably more generous than the national borders. This is an aspect that should always be kept in mind in license contract negotiations, and be taken into consideration when formulating contract clauses and definitions.

Anyone living, working and offering products in the digital world that are traded across national borders should be aware that he runs a risk of patent infringement as soon as he merely considers a possible connection to the German market.