Patently flawed?

United Kingdom

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

A new unitary patent system and unified patent court for Europe could reshape your world. Businesses large and small need to be prepared for the good… and the bad.

Innovation and strong mid-market companies are widely seen as Europe's saviours. These primary drivers of economic growth will make the region more globally competitive. So any regulation to encourage smart, ambitious businesses is surely welcome, whether you're in Brussels or Birmingham.

Benoît Battistelli, President of the European Patent Office (EPO), couldn't agree more. He is a key proponent behind proposals that would see the European Union adopt a unitary patent (UP) system and a unified patent court (UPC). "Cutting the costs of patenting inventions in Europe will strongly benefit European enterprises, especially research centres and SMEs," he says. "The vision of the founding fathers of the EPO to equip the European economy with a truly supranational patent system can now become a reality, strengthening Europe's competitiveness."

The proposals, which offer the prospect of reduced costs, greater certainty and easier administration, have been a long time coming - over 40 years, in fact - but Europe is now on the verge of adopting a unitary patent system.

Yet interested parties have been quick to point out the gaps between principles and practicalities. In a joint letter to MEPs in December 2012, Nokia and BAE Systems said that while "the concept of unitary patent protection is undoubtedly a desirable goal... the proposed regulation is seriously flawed. We are concerned that... it will harm innovation, competition and enterprise in Europe for years and decades to come."

Somewhere between these views is the likelihood that this system could well benefit some more than others. And until it has been in place for some time, no one can be entirely sure of how it will take effect. In the meantime, staying connected to advisers who can understand how the system could potentially play out in the UK, France and Germany makes business sense.

This was a contributing factor in Olswang reinforcing the strength of its pan-European team with the appointment of Jean-Frédéric Gaultier to its Paris office.

Supporters argue that the main benefit will be the reduction in costs. Currently, companies wanting to obtain a patent in Europe have to validate a patent granted by the European Patent Office in each European country in which they desire protection, paying fees and translation costs each time. This racks up significant expense, particularly when compared with the cost of filing a single patent in the US or China to cover a market of hundreds of millions of people.

Enforcement is another issue. Currently, litigation is conducted through national courts, meaning that a patentee could face several proceedings, on the same issue, ending in potentially different results. This inconsistency is expensive. The intention is that the UPC will ultimately have jurisdiction over all patents granted by the EPO in all EU member states that ratify the agreement.

Single court: risks and opportunities

To some, the very fact that a single court decision can have such far-reaching consequences is daunting. For example, one decision could lead to revocation of a patent in 28 countries.

The central division of the court is split between London, Paris and Munich, depending on technical subject matter. It is hoped that these arms of the court will be of high quality and consistent, as the judges will be experienced in intellectual property law. However, the UPC system also provides for national and regional courts across the EU that can decide upon infringement and the validity of a patent. There is a concern that these less experienced courts will now be handling patent cases on a pan-European basis.

The UPC also allows for a split system, in which an initial infringement action may be heard in a regional court but the counterclaim, on the validity of the patent, may be heard by the central division - months later and possibly in a different language. Technology companies are concerned that they may be exposed to a pan-European injunction on a patent that months (or even years) later is held invalid.

A further concern is the cost of maintaining granted patents. Currently, if a company (for example an SME) wishes to validate in only a few countries, it pay fees accordingly. Commonly, electronics companies proceed only in three countries - the UK, France and Germany, for example.

If the renewal fees for a unitary patent are higher than the existing fees for these countries (which seems likely since the renewal fee will cover all countries), then companies will be forced to pay more for protection in countries in which they are not interested. This additional cost will probably very quickly dwarf any savings from reduced translations. In this scenario parties may take an alternative approach, such as filing direct national applications.

On the other side of the coin, the single court option will appeal particularly to Non Practising Entity (NPE), companies whose business model is based on monetising patents either through licence fees or settlement payments following infringement actions, but which do not themselves manufacture products covered by the patents.

Some see NPE as good for the monetary value they have attached to patents, others as bad for the fact that by not using their patents to protect products they make, they contribute nothing. Either way, they have played their part in creating a more litigious environment for the high-tech sector. According to research from PwC US, patent litigation filings in 2012 rose by 29% over 2011, to 5,189 - the highest number ever recorded, while the trend for large corporations to buy up blocks of patent portfolios defensively is on an upward curve.

NPE are prevalent in the US, where unlike much of Europe, there is no "loser pays" system. They therefore face less risk in instigating lawsuits, while companies will choose to settle a dispute rather than face the cost of defending it. The costs and risks of bringing multiple lawsuits in Europe to achieve the same result have deterred much NPE activity. However, the UPC offers the prospect of higher damages awards (given the greater territory covered) and pan-European injunction (a real threat to defendants and disincentive to challenge) with lower risks (only one set of fees to pay if unsuccessful and significantly reduced costs recovery compared to many existing companies).

Winners and losers

As is inevitable with a "one size fits all" system, there will be some companies for whom the system works better than others, if used appropriately. The pharmaceutical industry could benefit. Under the current system, large pharmaceutical companies file patents in countries right across Europe. The expense of ensuring validation and protection has been justified by the return in sales. A single patent that covers all of the countries could seem very appealing; especially as part of a patent strategy in which key strategic patents are kept out of the unified patent/UPC system to avoid central attack, whereas other patents are kept in the system to try to reduce patenting costs.

In contrast, the high-tech sector may miss out. The nature of the industry is such that there is rarely as much value attached to one single patent as with pharmaceuticals and maintaining many more patents across the EU will be expensive. Again, companies in this sector tend to validate only in a few countries. However, the UPC exposes their patents to the risk of revocation actions brought in a wider range of locations in which they have little financial interest.

When it comes to winners and losers, it may also be that size matters. For SMEs, cost is a key factor. Regardless of industry, most validate patents in only a small number of countries and cost of the UP vs the cost of, for example, a limited national filing programme may dictate whether this system is attractive to SMEs or not.

Eyes wide open

The new system will come into effect four months after 13 EU member states ratify the agreement. The aim is for it to be in full swing by the end of 2015. However, companies with patent applications pending can opt not to be part of the centralised system for seven years, potentially 14. And this lasts for the lifetime of the patent. Current patent owners may also elect to opt out.

Companies will have to consider whether they use the unitary system or stick with the national route. It may be that companies take an 80:20 approach, with the unitary patent being adopted for more routine cases, where costs will play a bigger factor than the primary protection offered (provided renewal fees allow this), and individual national patents being used for more high value patents which the patentee does not wish to expose to central attack.

For the moment, it is a case of watching to see how the new system works. But with some companies, particularly NPE, soon able to bring infringement actions across Europe on the back of a single patent, all businesses will need to keep an eye on how things progress. Even companies that choose to opt out could find themselves on the receiving end of an infringement suit. Forewarned is forearmed.

This is an excerpt from Olswang's 2013/14 Annual Review. If you would like a copy, please email [email protected].