Germany Shuts Door on Patent Trolls

Under the legislation adopted by Parliament early on Friday, courts examining a patent claim will conduct a proportionality check to decide whether an injunction would cause “undue hardship” to the alleged infringer or any third party, such as patients who might be deprived of a certain drug or phone customers facing service disruptions.

If a court upholds the patent claims while rejecting an injunction, it would still have to order the alleged infringer to pay reasonable compensation to the patent holder.

Such compensation should be at least the amount that would have been paid as normal royalties for the patent. It could rise if the infringer failed to conduct appropriate due diligence or fall if, for example, the court deems the patents to have been acquired solely for the purpose of extorting excessive settlements under the threat of an injunction, a practice known as patent trolling.

Proponents of the reform say the new law will give judges more leeway to push back against companies seeking to abuse Germany’s patent law for profit. In the U.S., injunctions have become harder to invoke following legal changes and a string of Supreme Court decisions.

Germany in recent years has attracted a growing number of suits from so-called non-practicing entities, which amass portfolios of patents that they seek to license instead of using them in their own products. Critics have accused them of preying on big corporations in German courts.

“This [law] strengthens Germany’s standing as a place for innovation and protects our firms against abuses of patent legislation,” German Justice Minister

Christine Lambrecht

said after the bill was passed. The bill still has to pass through the upper house of Parliament before it becomes law.

The reform, the first in 10 years, comes after a two-year debate that split Germany’s business community.

German tech companies such as software giant SAP SE and telecom operator Deutsche Telekom AG, and those whose products have become tech-heavier over time, including German car maker

Volkswagen AG

, backed the reform together with international companies such as Google, Samsung and chip maker

Nvidia Corp.

They argued the old law was outdated given that a product such as a modern car contains technology that may rely on thousands of hard-to-track patents, putting manufacturers at a constant risk of receiving injunctions.

Critics also argued that the formidable threat of injunctions meant alleged infringers often had little choice but to buy exorbitantly priced licenses without the court ever deciding on the validity of a patent.

Ludwig von Reiche, managing director at Nvidia in Germany and chair of the German arm of IP2Innovate, a European lobby group that championed the bill, said the law was an important step toward creating a better balance between patent and innovation protection. Still, he said, it will remain to be seen how judges apply the new law.

Patent-rich companies such as chemical and pharmaceutical companies, including Bayer AG and BASF SE, had warned that the reform would lead to a weakening of patent-protected innovations.

Some critics of the reform said they felt somewhat reassured that the new law obliges courts to set financial compensation to a patent holder.

Others, however, fear it goes too far.

“We see a clear weakening of patent law and this can also bear risks in an innovation-driving country like Germany,” said Beat Weibel, head of intellectual property at industrial engineering company

Siemens AG

, one of the leading patent owners in Europe.

Write to Ruth Bender at Ruth.Bender@wsj.com