UPDATE 2-German court rules Nespresso mechanism patent invalid

Feb 24 (Reuters) – A Nestle patent for a mechanism in its Nespresso coffee machines has been ruled invalid by a German court, the latest blow to Nestle’s dominance of the fastest-growing part of the coffee market.

The ruling is a victory for Switzerland’s Ethical Coffee Company and others trying to grab a bigger piece of the single-serve coffee market. It follows other cases in recent months that have also gone against Nespresso.

The German case was brought by Ethical Coffee Company, which claimed a new mechanism in Nespresso machines stopped its capsules from working properly in the coffee machines.

“The patent was declared void,” the federal German patent court said in a statement on Tuesday, announcing a decision made on Feb. 12.

“This is just another nail in the coffin to legal barriers to entry the company has always had,” said Jon Cox, an analyst at Kepler Cheuvreux.

The disappearance of those barriers has prompted a proliferation of copy-cat capsules, some of which cost as little as half of their Nespresso-branded counterparts.

Cox estimates copy-cats account for one out of every five cups of Nespresso coffee and are largely responsible for a slowing of Nespresso’s sales growth to about 10 percent now from 20 to 30 percent in previous years.

Market research firm Euromonitor International estimates the retail market for single-serve pods at $13 billion and expects sales to rise 15 percent this year, outpacing a 7 percent increase for coffee overall.

In September, Nespresso, which has brought its own patent-infringement cases against rivals, bowed to pressure from French antitrust authorities and agreed to make it easier for rivals to produce coffee pods compatible with its machines.

“With this decision, the last patent that could allow Nestle to make annoyance lawsuits, the kind of lawsuits they know they can’t win but do to get the competition to waste time, has disappeared,” Ethical Coffee Chief Executive Jean-Paul Gaillard told Reuters.

Gaillard, a former Nespresso chief executive, said he plans to seek compensation in key markets across Europe, hopefully close to 1 billion euros, including for civil damages from Nestle’s legal action.

In an emailed statement, a Nespresso spokeswoman said the company was not surprised by the ruling as it was in line with previous decisions by the European Patent Office.

“The ruling does not have any impact on the current competitive situation and does not change the status quo.”

Other makers of Nespresso-compatible capsules include Mondelez International and D.E Master Blenders, which are trying to combine their coffee businesses in a joint venture that will be a No. 2 to Nestle.