Grunwald on the Recovery of Design-Around Costs Under German Law

Dr. Marc Grunwald has published an article titled Kosten für eine Ausweichtechnik als Vollstreckungsschaden? (“Design-around costs as enforcement damages?”) in 12/2013 Mitteilungen der deutschen Patentanwälte.  The topic relates to one I have touched on previously, namely the liability under some countries’ laws on the part of a patent owner when it enforces a patent judgment that is subsequently reversed on appeal or, even in a completely separate proceeding, invalidated.

By way of introduction, the general rule in federal courts in the United States is that a permanent injunction embodied in a district court’s final judgment is enforceable immediately, unless the district court or the Court of Appeals stays it.  The damages portion of the judgment is automatically stayed for 14 days, but any additional stay pending appeal is discretionary and is normally permitted only if the defendant posts a “supersedeas” bond in the amount of the damages judgment.  See Fed. R. Civ. P. 62; Fed. R. App. P. 8; 11 Charles Alan Wright et al., Federal Practice & Procedure §§ 2901-05 (3d ed. 2013).  Normally then if the judgment is reversed on appeal, the defendant hasn’t paid any damages yet; but it doesn’t get to recover any additional damages it suffered in the interim by having to comply with a non-stayed injunction.  If for whatever reason the damages judgment was not stayed pending appeal and the judgment is reversed, the defendant is entitled to get back the damages it paid, see 11 Wright et al., supra, § 2905, but, again, nothing in addition to that (absent fraud or something else that would give rise to further liability on the part of the plaintiff/appellee).

In Germany, unless a stay pending appeal is granted the judgment of the court of first instance becomes provisionally enforceable pending appeal if the prevailing plaintiff posts a bond.  See Thomas Kühnen, Patent Litigation Proceedings in Germany, paras. 1987-95, 2013-42 (Frank Peterreins tr., 6^th ed. 2013).  According to Kühnen (paras. 1995-96):

The security bond serves to protect the interest of the party against whom enforcement is to be carried out.  It is intended to compensate it for any disadvantages it may suffer in the event of any compulsory enforcement of the judgment which subsequently turns out to be unjustified.

Alongside the fees of the plaintiff’s attorney and the court costs, account must also be taken of a possible claim for damages by the obligor pursuant to Section 717(2) of the German Code of Civil Procedure.

Section 717 reads as follows, first in the original German and then in an English language translation available here:

§ 717:  Wirkungen eines aufhebenden oder abändernden Urteils

(1) Die vorläufige Vollstreckbarkeit tritt mit der Verkündung eines Urteils, das die Entscheidung in der Hauptsache oder die Vollstreckbarkeitserklärung aufhebt oder abändert, insoweit außer Kraft, als die Aufhebung oder Abänderung ergeht.

(2) Wird ein für vorläufig vollstreckbar erklärtes Urteil aufgehoben oder abgeändert, so ist der Kläger zum Ersatz des Schadens verpflichtet, der dem Beklagten durch die Vollstreckung des Urteils oder durch eine zur Abwendung der Vollstreckung gemachte Leistung entstanden ist. Der Beklagte kann den Anspruch auf Schadensersatz in dem anhängigen Rechtsstreit geltend machen; wird der Anspruch geltend gemacht, so ist er als zur Zeit der Zahlung oder Leistung rechtshängig geworden anzusehen.

(3) Die Vorschriften des Absatzes 2 sind auf die im § 708 Nr. 10 bezeichneten Berufungsurteile, mit Ausnahme der Versäumnisurteile, nicht anzuwenden. Soweit ein solches Urteil aufgehoben oder abgeändert wird, ist der Kläger auf Antrag des Beklagten zur Erstattung des von diesem auf Grund des Urteils Gezahlten oder Geleisteten zu verurteilen. Die Erstattungspflicht des Klägers bestimmt sich nach den Vorschriften über die Herausgabe einer ungerechtfertigten Bereicherung. Wird der Antrag gestellt, so ist der Anspruch auf Erstattung als zur Zeit der Zahlung oder Leistung rechtshängig geworden anzusehen; die mit der Rechtshängigkeit nach den Vorschriften des bürgerlichen Rechts verbundenen Wirkungen treten mit der Zahlung oder Leistung auch dann ein, wenn der Antrag nicht gestellt wird.

Section 717:  Effects of a judgment reversing or modifying the original judgment

(1) Upon a judgment being pronounced that reverses or modifies the decision in the main action, or the declaration of enforceability, the judgment shall cease to be provisionally enforceable to the extent to which it is reversed or modified.

(2) If a judgment declared provisionally enforceable is reversed or modified, the plaintiff shall be obligated to compensate the defendant for the damages he has suffered by the judgment being enforced, or by the payments he had to make, or any other actions he had to take in order to avert enforcement. The defendant may assert the claim to compensation of damages in the pending legal dispute; once this claim is asserted and filed, it is to be deemed as having become pending at the time at which the payment was made or other action was taken.

(3) The stipulations of subsection (2) are not to be applied to the appellate judgments designated in section 708 number 10, to the exception of default judgments. Insofar as such a judgment is reversed or modified, the plaintiff is to be sentenced, upon a corresponding petition having been filed by the defendant, to reimburse the latter for the payments made or other actions taken on the basis of that prior judgment. The obligation of the plaintiff to so reimburse the defendant is determined by the rules as to the surrender of the result of any unjust enrichment. Once the petition has been filed, the claim to reimbursement is to be deemed as having become pending at the time at which the payment was made or other action was taken; even where the petition is not filed, the effects tied to the pendency of the matter pursuant to the stipulations under civil law shall occur with the payment being made or other action being taken.

(The above-mentioned section 708(10) states that "The following are to be declared provisionally enforceable without any provision of security . . . Appellate judgments in disputes under property law. Where leave to appeal is denied by a judgment or court order pursuant to section 522(2), this is to mandate that the judgment is provisionally enforceable without any provision of security.")

Dr. Grunwald’s article discusses the types of damages the former defendant may recover under § 717, and argues that the damages recoverable when a first instance judgment is reversed (717 para. 2) include not only any damages the former defendant has paid and any profits it has lost as a result of having to pull its product from the market, but also the costs the defendant has incurred pending appeal as a result of having to design around by adopting a noninfringing alternative technology.  (As a matter of policy, this would appear to be correct if the goal is to ensure that the defendant is no worse off than it would have been if the trial court had gotten it right.  Under U.S. law, by contrast, as noted above the defendant is out of luck if the injunction wasn’t stayed pending appeal; there is no recourse for recovering these costs.)  On the other hand, if I'm understanding this correctly, under 717 para. 3 sentence 2, when a second instance (first appellate) judgment is reversed on further appeal, the defendant generally is entitled to recover only those expenses it incurred as a result of complying with the judgment (not ts own lost profits), and only to the extent this has benefited the plaintiff.  The defendant doesn't get his lost profits or design-around expenses, in Dr. Grunwald's view.

Note also that, under German law even when a judgment is affirmed on appeal and the case would appear to be over, if the patent is invalidated in a subsequent proceeding the former defendant in the infringement suit can sue to recover the damages it paid the patent owner.  See my post of July 4, 2013, here (noting that this may be the law now in the U.K. as well, but not in France); Kühnen, supra, paras. 1917-57.  In addition, based on discussions with Dr. Christopher Heath, my understanding as expressed in this post of November 7, 2013, is that the former defendant also can recover damages for having had to comply with the judgment in the interim.   According to Dr. Heath, however, in most cases the parties settle the matter and he is not aware of any German cases precisely on point.