Hague Court of Appeal stays enforcement of patent injunction

Earlier this month, the Court of Appeal (CoA) of the Hague stayed the enforcement of a patent decision under appeal where an injunction was granted [decision here, in Dutch]. The decision is of interest because it is exceptionally rare for Dutch courts to stay enforcement of decisions and the CoA's reasoning may contain some clues as to when an injunction would be considered a disproportionate remedy in patent infringement cases.

The case
Hanson holds a national Dutch patent [yes, those are still granted and can be the basis for successful infringement claims] to a "substance introduction method" for plants. Hanson's sister company, HE Licences, holds an exclusive licence to the patent. VG Colours applies artificial colouring to white orchids and sells the resulting plants. HE Licences claims that the patent is infringed by VG Colours.

After an unsuccessful infringement suit in 2015, HE Licences tried again and, on 19 June 2019, the district court of the Hague found its patent infringed and issued an injunction against VG Colours [decision here, in Dutch]. VG Colours appealed the decision and also started preliminary relief proceedings to obtain a stay of the enforcement, but its prayers for relief were rejected by the preliminary relief judge of the Hague district court [decision here, in Dutch].

The CoA's reasoning

As part of the appeal, VG Colours requested the CoA to stay enforcement of the decision pending the appeal. The CoA granted VG Colours' request for three reasons [par. 4.10]: (i) the district court had failed to consider some of VG Colours' arguments; (ii) the enforcement caused very significant damage to VG Colours; and (iii) there was a considerable risk that HE Licences would not be able to provide recourse for this damage if the district court's decision was overturned on appeal.

The district court's failure to take into account some of VG Colours' arguments. In first instance, Hanson/HE Licences had partially abandoned the patent, limiting its claim scope. VG Colours was allowed to respond to the limitation and it did, but the district court refused to hear some of its arguments because they did not relate to the limited claims per se and so should have been advanced at the beginning of the proceedings.

According to the CoA, this was unjustified. VG Colours advanced the arguments it felt were strongest against the original claims; it could not be expected to advance every imaginable argument in anticipation of a potential change in claim scope. What is more, the district court had not taken into account VG Colours' non-infringement defence because it was supposedly advanced too late. But the CoA found that VG Colours' first written submission clearly stated the defence so that the district court should have dealt with it.

The CoA considered that this did not mean the first instance decision is automatically incorrect; but it did mean that the assessment of the dispute had been incomplete. Consequently, the CoA could not assume the correctness of the first instance decision in the context of the request to stay its enforcement.

Damage to VG Colours as a result of enforcement. The CoA also established that the continued enforcement of the decision would cause "very significant" damage to VG Colours (par. 4.5). It mentioned the following circumstances: 

1. The injunction went to the core of VG Colours' business, since it wholly prevented it from further colouring orchids.
   
2. There were no realistic non-infringing alternatives that VG Colours could use. Alternative colouring methods exist, but they either yield insufficient quality or are usable only with certain types of orchids which are in short supply.
   
3. The CoA also pointed out that prior to being enjoined, VG Colours sold approximately 40 000 orchids a month which generated "very substantial turnovers and profits". VG Colours had shown that as a result of the injunction, two of its main clients had left. Thus, the CoA accepted that its turnover has dropped significantly since the entry into force of the injunction. 

All in all, the CoA considered that the injunction posed "a serious threat" to VG Colours' continued existence.

Inability of HE Licences to provide recourse for damages. The third ground on which the CoA based its decision was the apparent lack of recourse HE Licences would provide in case the first instance decision were overturned on appeal. This appeared from HE Licences' financial statements, which showed that it had been suffering losses for the last several years, and also from the fact that it had taken years to pay the cost order issued against it following its first unsuccessful attempt at enforcement of its patent in 2015. HE Licences argued that it did receive some revenue from licensing, but according to the CoA this revenue was "minimal", especially in relation to the potential damage suffered by VG Colours.

 

Everybody loves colorful orchids (Picture credit: 1zoom.me)

Analysis

This decision is very interesting in light of the ongoing discussion on the proportionality principle in Article 3(2) Enforcement Directive, especially in the context of injunctions in patent cases. The CoA does not mention this principle in its decision, but the circumstances it considers relevant are all arguments frequently relied on by those advocating a more flexible approach to patent injunctions. In particular, these arguments are often heard in the context of the upcoming reform of the German Patent Act [see Katpost here].

A particularly controversial aspect of Germany's patent law is the so-called "injunction gap", which results from its bifurcated system and means that patentees can sometimes be granted an injunction without the patent's validity having been properly assessed. The CoA's suggestion that an injunction may not be appropriate so long as the assessment of the patent dispute remains "incomplete" will resonate with critics of the injunction gap.

The CoA's suggestion that a "complete" assessment of the case is a prerequisite for an injunction is thought-provoking: would it also weigh against continued enforcement if, say, new prior art was found and submitted for the first time on appeal? This Kat's sense is that this would go too far and that the CoA's considerations in this respect result primarily from what it saw as an undue denial of VG Colours' opportunity to present its case in full before the district court. But the rather broad language it used to make the point is sure to invite speculation on what it means to have a "complete" assessment of a case.

From the perspective of proportionality, the detailed discussion of the impact of the injunction on VG Colours' business is also compelling. The decision characterizes VG Colours as a successful business that is hit hard by the injunction and even threatened with bankruptcy, on the basis of a decision that is procedurally sketchy and may not survive appeal. The CoA may well be implying that this is excessive, even in the case of infringement of a valid patent. Then again, the CoA also concedes to HE Licences that in principle VG Colours should face the consequences of its own infringement so here, too, the true impact of the CoA's decision remains to be seen.

It is remarkable that the decision makes no mention at all of a licence offer to VG Colours. As its name implies, HE Licences extends licences to third parties using Hanson's technology. One would expect it to offer one to VG Colours once infringement was established in first instance, and then VG Colours could have averted the harmful consequences of the injunction by accepting it. Had it done so, this could have taken away VG Colours' interest in a stay.

Lastly, the CoA's attention for the recourse provided for potential damages is also noteworthy. Liability for wrongful enforcement and procedural costs are considered important safeguards in Europe's system of patent remedies. However, if the other party provides no recourse, these safeguards are meaningless so that the decision to impose a particularly oppressive remedy deserves closer scrutiny. The practice of licensing litigation vessels which otherwise hold no assets seems to be widespread so closer scrutiny of their financial stability would be a welcome development.

All in all, this Kat applauds the CoA for the pragmatic approach it takes in its decision. There is certainly room for reasonable disagreement on the outcome: in the preliminary relief proceedings, VG Colours had put forward exactly the same arguments for a stay, but there the court denied them. Indeed, the absence of non-infringing alternatives and great damage to VG Colours' business may just as well be read as a confirmation of the patent's value. That's a call that only the court can make and it is probably impossible to convey all the underlying factual nuances in the decision.

The important thing, then, is to signal a willingness to consider the real-world consequences of injunctions and the circumstances of their grant. Parties and courts in future cases can build on such signals and so further develop the European acquis on the complex issue of patent injunctions. This decision represents an important step towards that goal.