Automatic injunctive relief in German patent law shifts bargaining power between a patentee (plaintiff) and a defendant to the patentee. This will impact both settlement behaviour and the settlement payment. However, the economic value of the defendant’s product and the financial damage due to injunction – as opposed to the economic value of the invention – will govern the settlement outcome. We examine one case study and find the estimated settlement payment exceeds the value of the invention by more than ten thousand.
As industries evolve, increasing integration and overlap is occurring, causing supply chains to become even more complex, such as in automotive. Instead of one vertical supply chain, newly integrating industries conduct business with and between various tiers of automotive suppliers.
Within the German patent litigation system, the defendant risks losing the right to use, make or sell its own end-product due to an automatic injunction, irrespective of where the infringement is occurring within its supply chain, as the patentee may select the place in a vertical where it wishes to litigate. Thus, a defendant risks the loss of the full value of its accused end-product, i.e. its entire revenue and profit from the sale of its end-product, irrespective of where in the supply chain the infringement occurs. The defendant also risks additional damage due to injunction, e.g. continuing reputational harm, for accused and non-accused products. Consequently, it is not the relative contribution of the allegedly infringed invention to the end-product that is considered, but the full value of the accused end-product as well as any additional damages related to an injunction.
We find that the automatic injunction has predictable economic implications for the parties’ settlement behaviour. Because both the plaintiff and the defendant are aware that the defendant bears this risk, the plaintiff does not need to constrain its settlement terms to the value of the patent, as would be considered in a typical negotiation. Unlike in litigation without automatic injunctive relief, re-design may be unavailable to the defendant due to time constraints. Thus the only practical way for a defendant to avoid an injunction is to settle.
We find that under these circumstances the expected settlement payment will be dependent on the value of the defendant’s accused product. As a result, the settlement payment may surpass the economic value of a patented invention by far, and may even approach the value of the defendant’s products and additional anticipated damage. Furthermore, the plaintiff receives significant leverage in bargaining over terms and conditions that deviate significantly from what would otherwise be expected.
We illustrate the economic implications of automatic injunctions and this distortion of bargaining power in detail, and also considering a dispute between Broadcom Inc. and Volkswagen AG and Audi AG. In the Broadcom case, we estimate a settlement payment range with an upper bound of no less than €876 million. We further estimate an expected settlement payment of approximately €533 million.
We then consider a chip-level “top-down” analysis to estimate the economic value of one of Broadcom’s asserted patents. Based on publicly available information and assumptions, we estimate a value per patented invention of less than €0.0013 per unit.
Based on our estimate of potentially infringing vehicles, this implies a total value of approximately €28,664.
The substantial magnitude of difference between the expected settlement payment range and the economic value of an invention illustrates our finding that, as a result of the threat of automatic injunction, the bargaining power significantly shifts to benefit the plaintiff. This increases the likelihood of settlement, as well as the price at which the parties will be expected to settle.
The study is commissioned by Volkswagen AG & Audi AG.
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