Arnold J. provides guidance on the interaction between UK and EPO proceedings and the scope of cross-undertakings in damages required for injunctions

28 October 2014

In Actavis v Pharmacia, Arnold J. issued two important judgments regarding the interaction between UK patent actions and opposition proceedings at the European Patent Office (EPO), which are particularly relevant to any party seeking a stay of UK proceedings pending the outcome of an opposition at the EPO.

In particular, Arnold J. has:

  • stressed that if a patentee is seeking a stay, they will need to make sure that the stay does not have a "chilling effect on [the alleged infringer's] investment decisions" because of the possibility of a later injunction after the stay ends;
  • provided (potentially over-onerous) guidance as to what is required in order to make sure that there is no such "chilling effect";
  • provided guidance as to the kind of undertakings which should be given by a patentee if they wish to obtain a stay of UK proceedings;
  • confirmed that the guidance given by the Court of Appeal in IPCom v HTC in relation to stays of patent actions in the UK pending the outcome of opposition proceedings at the EPO is applicable regardless of whether it is the patentee or the alleged infringer which is seeking the stay;
  • provided some potential assistance to alleged infringers who might fall into a gap highlighted by Lord Sumption JSC in Virgin v Zodiac and be ordered to pay damages further to an enquiry into damages before opposition proceedings are finally concluded; but
  • potentially raised some issues regarding the costs of obtaining injunctions, particularly when considering the potential liability under cross-undertakings in damages.

Introduction

The question of stays of UK litigation pending the outcome of opposition proceedings at the EPO has a long and difficult history before the UK courts.

In Beloit v Valmet the patentee sought to argue (on appeal after Jacob J (as he then was) revoked two of their patents) that the Judge had no jurisdiction to order revocation of an EPC patent while there were pending opposition proceedings in the EPO.

The Court of Appeal disagreed with the patentee's contention that invalidation would be contrary to s.77(2) of the Patents Act 1977. In finding for the alleged infringer, it stated that: "Section 77(2) cannot have been meant to remove the right of the English courts under Section 72 to revoke invalid patents pending expiry of the opposition period and resolution of opposition proceedings which could last up to eight years".

The patentee accepted that it "could have sought amendment in this country, but wish[ed] to avail themselves of the indulgent approach of the EPO to amendment applications as opposed to the practice in this country which requires that the party seeking amendment should formulate the amendment he seeks at an early stage of the proceedings". The Court of Appeal was not willing to accept this attempt by the patentee to have two bites at the cherry.

Subsequently, in Glaxo v Genentech, the Court of Appeal provided guidance to the Patents Court regarding when a request for a stay should be refused or allowed. However, this guidance was given in light of the Court of Appeal's decision in Unilin v Berry Floor that a defendant is "estopped from challenging [a patentee's] entitlement to an account of profits, whatever the ultimate result in the EPO".

In Virgin v Zodiac the Supreme Court held that "Unilin was ... wrongly decided" and that the correct position was that "where judgment is given in an English court that a patent (whether English or European) is valid and infringed, and the patent is subsequently retrospectively revoked or amended (whether in England or at the EPO), the defendant is entitled to rely on the revocation or amendment on the enquiry as to damages".

In closing, Lord Sumption JSC noted that: "if I had concluded that the defendant was estopped from relying on the revocation or amendment of the patent once the court had adjudged it to be valid ... it would have been difficult to defend the guidance given by the Court of Appeal in Glaxo". He therefore suggested that the guidance should be re-examined by the Patents Court and the Court of Appeal.

That opportunity came up in IPCom v HTC. In that case the Court of Appeal set out the following principles:

  1. The discretion, which is very wide indeed, should be exercised to achieve the balance of justice between the parties, having regard to all the relevant circumstances of the particular case.
  2. The discretion is of the Patents Court, not of the Court of Appeal. The Court of Appeal would not be justified in interfering with a first instance decision that accords with legal principle and has been reached by taking into account all the relevant, and only the relevant, circumstances.
  3. Although neither the EPC nor the 1977 Act contains express provisions relating to automatic or discretionary stay of proceedings in national courts, they provide the context and condition the exercise of the discretion.
  4. It should thus be remembered that the possibility of concurrent proceedings contesting the validity of a patent granted by the EPO is inherent in the system established by the EPC. It should also be remembered that national courts exercise exclusive jurisdiction on infringement issues.
  5. If there are no other factors, a stay of the national proceedings is the default option. There is no purpose in pursuing two sets of proceedings simply because the Convention allows for it.
  6. It is for the party resisting the grant of the stay to show why it should not be granted. Ultimately it is a question of where the balance of justice lies.
  7. One important factor affecting the exercise of the discretion is the extent to which refusal of a stay will irrevocably deprive a party of any part of the benefit which the concurrent jurisdiction of the EPO and the national court is intended to confer. Thus, if allowing the national court to proceed might allow the patentee to obtain monetary compensation which is not repayable if the patent is subsequently revoked, this would be a weighty factor in favour of the grant of a stay. It may, however, be possible to mitigate the effect of this factor by the offer of suitable undertakings to repay.
  8. The Patents Court judge is entitled to refuse a stay of the national proceedings where the evidence is that some commercial certainty would be achieved at a considerably earlier date in the case of the UK proceedings than in the EPO. It is true that it will not be possible to attain certainty everywhere until the EPO proceedings are finally resolved, but some certainty, sooner rather than later, and somewhere, such as in the UK, rather than nowhere, is in general preferable to continuing uncertainty everywhere.
  9. It is permissible to take account of the fact that resolution of the national proceedings, while not finally resolving everything, may, by deciding some important issues, promote settlement.
  10. An important factor affecting the discretion will be the length of time that it will take for the respective proceedings in the national court and in the EPO to reach a conclusion. This is not an independent factor, but needs to be considered in conjunction with the prejudice which any party will suffer from the delay, and lack of certainty, and what the national proceedings can achieve in terms of certainty.
  11. The public interest in dispelling the uncertainty surrounding the validity of monopoly rights conferred by the grant of a patent is also a factor to be considered.
  12. In weighing the balance it is material to take into account the risk of wasted costs, but this factor will normally be outweighed by commercial factors concerned with early resolution.
  13. The hearing of an application for a stay is not to become a mini-trial of the various factors affecting its grant or refusal. The parties' assertions need to be examined critically, but at a relatively high level of generality.

Actavis v Pharmacia

In Actavis v Pharmacia Arnold J. stayed, at the patentee's request, court proceedings in the UK pending the outcome of opposition proceedings at the EPO. This decision was based on the specific undertakings given by the patentee.

Pharmacia is the proprietor of a patent relating to sustained release dosage forms of the drug pramipexole suitable for once-daily administration for the treatment of Parkinson's disease and restless leg syndrome.

Patent protection for pramipexole itself has expired. Actavis sought revocation of the patent covering sustained release dosage forms in the UK on the basis that it was not novel, and that it was obvious and insufficient. It then also opposed the patent centrally at the EPO.

Prior to commencing the UK proceedings, Actavis had sought marketing authorisation for a generic sustained release formulation of pramipexole. It expected to receive approval before the proposed trial date, and to launch its product immediately. Pharmacia sought a stay of UK proceedings (which, at the date of the hearings, only related to the validity, and not the infringement of the patent), pending the outcome of the opposition proceedings in the EPO.

In seeking the stay, Pharmacia offered to give undertakings:

  1. to seek expedition of the EPO opposition proceedings;
  2. not to seek an injunction against the alleged infringer, Actavis, or its customers until the determination of the EPO proceedings; and
  3. only to seek damages of 1% of Actavis' net sales taking place during the period from launch until the determination of the EPO proceedings, if the patent were to be held valid both by the EPO and by the English courts.

Judgment

Arnold J. considered these undertakings in his first judgment and refused to grant a stay based on those undertakings alone. His reason for doing so was that they did not address the "chilling effect on Actavis' investment decisions", which (1) the possibility of an injunction being imposed at some further date; and (2) full damages being sought for the period between EPO proceedings concluding and a potential finding of validity and infringement by the UK courts would have. That possibility would arise if the Pharmacia patent was not invalidated by the EPO, and then found valid and infringed by the UK courts.

After the first judgment was circulated, Pharmacia suggested that it might be willing to give the following additional undertakings:

  1. not to seek an injunction in the UK against Actavis or its customers in relation to Actavis' sustained release pramipexole product during the life of the patent; and
  2. only to seek damages of 1% of Actavis' net sales in the UK during the life of the patent if the patent is ultimately held valid by the EPO and valid and infringed by the English courts.

After a second hearing, Arnold J. decided that the addition of the fourth and fifth undertakings "substantially eliminate[d] the commercial uncertainty to which Actavis [would otherwise] be exposed in the United Kingdom as a result of a stay".

In reaching his judgment, Arnold J. made the following comments about the other undertakings offered by Pharmacia:

  1. While the UK proceedings alone might not be reason enough to expedite the opposition proceedings, the "strong likelihood of further proceedings elsewhere in Europe [the UK was the second largest market for the drug, Germany having a larger market] and, furthermore, a strong likelihood that those further proceedings will include infringement proceedings in one or more contracting states of the EPC" led Arnold J. to express "the hope" that the EPO would accelerate the opposition proceedings;
  2. That "damages assessed at 1% of Actavis' net sales would be relatively modest."

Commentary

The judgment therefore sets out guidelines as to how it might be possible as a patentee to persuade the court to grant a stay of UK proceedings. As always, commercial certainty is a key consideration; the judgment goes further in indicating how this might be achieved.

Commercial certainty

While it is possible to understand that, in principle, the potential of an injunction at some future point might give rise to some commercial uncertainty, on the facts of this case it is difficult to see why the first three undertakings did not grant sufficient certainty to justify a stay.

As Arnold J. notes, the UK market for the patented product is worth about £14m per annum; and Arnold J. assumed that Actavis would obtain a 50% market share, at 90% of Pharmacia's average price. This would make Actavis' market share worth £6.3m per year, or £3.15m if parallel imports are removed from the equation.

The stay would have delayed procedures for between three and five years, giving Actavis time to receive revenue of £9.45m to £15.75m. The stay potentially increases Actavis' costs by £63,000 a year (if the patent is valid and infringed at the end of proceedings). This means that Actavis' revenue might be reduced from between £9.45m and £15.75m to between £9.26m and £15.44m.

The potential for a future injunction is only really relevant if that £9.26m to £15.44m is not sufficient to allow Actavis to recoup its sunk costs and make a reasonable return on those sunk costs and its marginal costs of production.

Arnold J. did not discuss what the sunk or marginal costs of production were. However, it has been reported, (for example by Novartis), that such costs tend to be in the region of $2m to $3m, which would leave a substantial amount of revenue from which to reap some profit, even if an injunction were granted if and when, after conclusion of the EPO proceedings, the UK courts found that the patent was valid and infringed.

On this analysis it is therefore not clear why the further undertakings were required. It is true that Arnold J. did not discuss in his judgment the cost of bringing the generic to market - perhaps patentees should submit evidence of this (after first seeking disclosure) when seeking to obtain a stay, in order to avoid having to forego the right to an injunction.

Antitrust implications

The potential to obtain a stay with less onerous undertakings is not the only reason to consider bringing evidence regarding the cost the generic manufacturer will incur in bringing its product to market.

If you are the alleged infringer and are seeking a stay, then the Court of Appeal in IPCom v HTC has provided some guidance - mainly that it is difficult to obtain a stay because there is a "public interest in dispelling the uncertainty surrounding the validity of monopoly rights conferred by the grant of a patent", but that a stay might be obtainable if you "agree to be bound by the outcome in the EPO".

Indeed, because of this public interest, settlement agreements between patent holders and generic companies have been the subject of intense scrutiny by antitrust authorities recently, both in the EU and the US.

If Actavis and Pharmacia had agreed such a low licensing fee as part of settlement discussions, rather than as undertakings given to the court, it is possible that the settlement agreement would have been anti-competitive, as an (effectively) royalty-free licence which maintained a duopoly position for both companies (Pharmacia still having the ability to injunct other generics manufacturers).

Although this is not a classic pay-to-delay settlement agreement, it would appear to have a very similar effect from the consumer perspective - it was Arnold J.'s opinion that with two drug producers on the market the price for the drug would have been 90% of its monopoly price, while drugs which are out of patent (and hence subject to full competition) are generally sold for a fraction of that price.

Availability of injunctions post-Virgin v Zodiac

The judgments also go some way towards closing a lacuna noticed by Lord Sumption JSC in Virgin v Zodiac.

As a result of that judgment, an alleged infringer would be able to rely on revocation or amendment of the patent to prevent the conclusion of a damages enquiry which had not yet reached judgment. However, once the enquiry was concluded, and there was judgment for a liquidated sum, then Lord Sumption did not think that the decision in Virgin would assist the alleged infringer, even if the patent were subsequently rendered invalid.

In the usual course of events, when a patentee obtains an interim injunction to prevent infringement of a patent pending the outcome of a trial, a cross-undertaking is given by the patentee to the alleged infringer, to compensate the alleged infringer for any loss which is suffered if the patent is found invalid or not infringed.

Such an undertaking is usually discharged at the end of trial if the patent is found valid and infringed. However, Arnold J. stated that he believed that cross-undertakings should now be extended until the end of EPO proceedings. From the alleged infringer's perspective this could be a very useful form of undertaking - subject to the precise wording of the undertakings in a specific case, an alleged infringer would be able to recover loss from the patentee if the patent were found invalid by the EPO (or amended by it in such a way as to render it not infringed) even if the EPO result was reached long after the conclusion of UK proceedings.

Depending on the wording of the undertaking, this could include any loss caused by payment to the patentee at the end of an enquiry as to damages or account of profits.

From the patentee's perspective, such a cross-undertaking would greatly increase the length of time during which it is potentially liable to the alleged infringer, and therefore increase considerably its potential liability to the alleged infringer should the EPO, at some future date, decide that the patent is not valid.

The guidance in IPCom v HTC notes that a judge may refuse a stay "where the evidence is that some commercial certainty would be achieved at a considerably earlier date in the case of the UK proceedings than in the EPO", and that "an important factor affecting the discretion will be the length of time that it will take for the respective proceedings in the national court and in the EPO to reach a conclusion".

In his judgment Arnold J. notes that absent a stay, and absent expedition of the EPO opposition, any appeal in the UK proceedings would be heard by July 2016, and a judgment in the appeal given by October 2016 at the latest.

By contrast, Arnold J thought that an expedited opposition was likely to reach conclusion at the earliest in July 2017, and if it was not expedited would likely still be ongoing in 2019. Requiring such a cross-undertaking would therefore increase the length of time the patentee was subject to the cross-undertaking from two to five years.

Any potential liability under the cross-undertaking in damages might also be expected to increase, perhaps by a much greater multiple in a growth market. Therefore, regardless of whether a stay is granted or not, this kind of cross-undertaking, in circumstances where opposition proceedings are ongoing, may significantly increase commercial uncertainty, particularly to the patentee.

It is arguable, however, that Arnold J.'s suggested form of undertaking does not go as far as Lord Sumption JSC suggests it should. At paragraph 35 of Virgin, Lord Sumption states (emphasis added) that: "where judgment is given in an English court that a patent (whether English or European) is valid and infringed, and the patent is subsequently retrospectively revoked or amended (whether in England or at the EPO), the defendant is entitled to rely on the revocation or amendment on the enquiry as to damages".

He then goes on to note at paragraph 36 that this is not the ideal solution, since: "once the enquiry is concluded... there will then be a final judgment for a liquidated sum [and] at common law, that judgment could be challenged on the ground that the patent had later been revoked or amended only by way of appeal, and then only if an appeal is still open. I doubt whether an implied statutory right to reopen it could be derived from the scheme of the Patents Act 1977".

This passage, together with the references to "English" patents and subsequent revocation "in England", suggests that what Lord Sumption is intimating is that an unsuccessful defendant should be able to rely on the revocation of a patent in subsequent patent litigation (i.e. if a third party subsequently successfully attacks the validity of the patent).

Since, (as he admits), it is unlikely that an implied statutory right can be derived from the Act, it would seem that he might be arguing in favour of cross-undertakings in damages which extend until the expiry or lapse of the patent in the UK, or even six years beyond that (to cover any revocation actions brought in defence of infringement actions started after the expiry of the patent but before the relevant limitation period expires). That would be a radical departure from current practice.


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