This article was originally published in MIP Magazine in February 2015, as an analysis of the implications of the unitary patent proposals for the non-contentious matters.
The Unified Patent Court (UPC) will change the face of patent litigation in Europe, and has understandably generated a great deal of comment. However, only a fraction of the 66,700 European Patents (EPs) granted by the European Patent Office (EPO) in 2013 will ever be litigated; for most patent owners the prospect of being involved in court proceedings is fairly remote. Patent owners could therefore be forgiven for thinking the proposals for the UPC and the establishment of a Unitary Patent (UP) are unlikely to affect their day to day business. This could not be further from the truth.
This article considers how the proposals will impact on companies' day-to-day patent dealings, and the actions they can take now to ensure that they are prepared for the changes to come.
Generating income by licensing patents is an important aspect of many companies' patenting strategy. The Unitary Patent presents an opportunity for patent owners to maximise revenue by expanding the territorial scope of their patents. However, the UPC scheme more generally has the potential to adversely impact licensing activities, particularly in respect of existing EPs. Owners may need to assess their existing licensing model and terms in light of the matters discussed below, to ensure that they maximise the advantages offered by the UPC scheme, and take account of the risks.
Presently, if an applicant wishes to protect an invention in multiple European states it can apply for national patents in selected states or apply for a European Patent at the EPO, resulting in a bundle of national patents in some or all of the 38 contracting states to the European Patent Convention (EPC), depending on where the applicant chooses to validate on grant.
Following implementation of the UPC scheme an applicant will also be able to obtain a single UP which will cover up to 25 participating EU member states (excluding Spain, Poland and Croatia). Additionally, the status of EPs (including existing EPs) will change. They will be subject to the UPC and will have unitary effect as between the validated states, unless the owner chooses to opt out of the competence of the UPC under Article 83 of the Agreement on a Unified Patents Court. The exact effect of such an opt-out is presently unclear and the subject of complex debate; opt-outs should be carefully considered, but should not be entirely relied upon.
When considering whether to opt out existing EPs upon the coming into force of the legislation and whether to apply for a UP in future, there are several countervailing aspects. On the one hand, a patent with unitary effect (whether UP or EP) is easier to enforce in multiple territories, and a UP in particular is likely to offer owners good value for money in terms of territorial scope when compared to the cost of a corresponding EP bundle or equivalent national patents. The average number of validated states for an EP is between 3 and 4, with Germany, the UK and France being the most common, whilst the UP will offer protection against all of the participating member states.
The potential licensing benefits for owners of the increased geographical scope of protection are perhaps indicated in the the conclusions drawn by Deloitte in the economic impact study it carried out for the Polish Government in 2012. Poland is a country in which less than 10% of the EPs granted by the EPO in 2011 were validated. The UP would have given most owners rights in Poland which they would probably not have previously applied for. The report therefore concluded that if Poland were to join the UPC scheme that would have a negative net impact on Polish businesses by exposing them to many more patents.
Deloitte estimated that the additional patent clearance searches, licence negotiations, royalties payable and potential court proceedings would cost the Polish economy approximately £10 billion over 20 years, compared to potential benefits of £125 million over the same period, and that a large proportion of the £10 billion would be paid in licensing fees to owners based outside Poland.
However, on the other hand, the opportunities for additional licensing income may come at a great cost. A patent with unitary effect (whether a UP or an EP) can be revoked in its entirety in a single court proceeding in any of the participating EU member states, irrespective of licensing activity.
For licensees of existing EPs the change may be significant. At present a licensee of an EP in a particular country only has to take account of the possibility that the patent may be invalidated in the context of a dispute and proceedings in that country. The licensee is therefore in a good position to make its own assessment of the value and risk involved.
Further, the licensee knows that if it has a licence in respect of multiple countries, it will continue to enjoy the benefit of the licence in each unless and until the licensed patent is invalidated in that country. A bundle of rights which cannot be revoked simultaneously may therefore be of greater value to a potential licensee than a unitary right, subject to the licensee's view on enforcement issues.
For a patent owner, the better route will depend upon the nature of its business and licensing structure, but given the impact on licensees, a owner may reasonably expect to hear from licensees on the question of whether the owner intends to exercise its opt-out in respect of its licensed EPs.
Potentially a owner may be able to secure both unitary and national rights which are of value for licensing. With care, and depending upon the nature of the invention, it may be possible to achieve protection by UPs, EPs, national patents and utility models in various combinations, achieving unitary effect for some claims whilst also obtaining similar national rights which do not incur the risk of unitary invalidation. For example, manufacturers of complex products with multiple patentable components may rely on a cross section of patent rights to retain flexibility, in the knowledge that infringement of any one would prevent the sale of the product.
For start-up businesses the perceived value of the portfolio mix may also be important when they come to license or sell the rights in future.
In respect of any non-opted out EPs it will be important for the patentee to regularly review the territories in which the patent is validated. There is little to be gained by retaining rights in countries which are not being exploited, but there could be much to lose.
Terms and conditions
In addition to reviewing their licensing model to maximise the benefits of the UPC scheme, owners should be reviewing their licence agreements to ensure that they minimise the risk of unitary invalidation. Arguably this risk can be avoided, at least for a period, by opting out the EP bundle from the UPC (under Article 83 of the UPC Agreement), although as noted above, the effect of an opt-out is far from clear.
Owners and licensees should discuss this issue to ensure that licensees are aware of the decision and the reasons for it, or have clarity regarding the circumstances in which the owner will exercise its right to opt out EPs. They might also sensibly consider the circumstances in which the patent can be opted back in again as necessary, for instance in the event that enforcement in the UPC appears necessary or desirable.
The management and control of disputes is also of particular significance. Under the UPC Agreement an exclusive licensee of a UP or EP is entitled to commence proceedings unless the licence provides otherwise, provided the owner is given prior notice (Article 47(2)). In many industries a single exclusive licensee for the EU is the norm, in which event they will have a high degree of control in any case; nevertheless the changes introduced by the UPC scheme should be discussed between owner and licensee at an early stage.
Where licensees co-exist in the EU (whether or not exclusive to certain geography or fields of use), the owner needs to address the terms of its licences to ensure that it can best manage circumstances in which the UP or EP bundle is at risk from a unitary validity attack. Licensees may also be concerned to achieve the same effect to ensure other licensees do not invalidate their licensed rights. Further, the notice the exclusive licensee is required to give the owner is not set out in the Agreement. The patentee and licensee should discuss the form and amount of notice to avoid confusion when proceedings are commenced.
This may involve the owner retaining as much control of disputes and any consequent litigation as possible. For instance, an early warning of a dispute may afford the opportunity to opt out an EP bundle in time to avoid a validity attack in the UPC, and licensees might be restricted to national proceedings where possible. Licensees might also be required to mediate any dispute in the first instance (the UPC will have mediation centres in Lisbon and Ljubljana). Whatever the solution, which is highly dependent on the industry concerned, these are matters which require discussion between the owner and licensee of their respective views on enforcement.
Dealings in the Unitary Patent
Licences of Right
Article 8 of Regulation (EU) 1257/12 permits a owner of a UP to file a statement with the EPO that it is prepared to allow any person to use the invention as a licensee in return for appropriate compensation. In return, the owner will benefit from lower renewal fees. The statement may be withdrawn at any time, provided the owner pays back any reduction it obtained in renewal fees. This may be an attractive option if the Select Committee sets high renewal fees in June this year and the reduction is significant.
Licensing commitments to standards bodies
The EPO will have the task of collecting licensing commitments made by owners of UPs to international standard setting organisations (SSOs) such as ETSI and ITU, although the owner is not obliged to provide this information. The stated purpose of this is to "facilitate the bilateral licensing negotiations necessary for the successful widespread adoption of a standard and to provide assurances to implementers of the standard that the patented technologies will be available to parties seeking to license them".
SSOs commonly maintain public databases of patents notified to them as potentially essential to a standard; it remains to be seen whether owners will see fit to make use of this facility.
National Law and Dealings in the UP
Article 3 of Regulation (EU) 1257/12 provides that a UP can only be transferred as a whole, but can be licensed separately in different countries. Article 7 states that, as an object of property, a UP should be treated as a national patent of the participating state in which the applicant is resident or has its place of business as recorded in the Register.
This means that dealings in the rights granted are subject to the law in that state, which can vary. This is a one-time effect and does not change during the life of the patent, no matter how it is assigned or licensed. In future one will therefore need to check the origination of a UP when assigning or licensing it.
For owners based in a participating member state this should hold no surprises. However, owners which are not, such as many American, Japanese and Chinese companies, may be surprised to find that by default their UPs will be subject to the German law of property (per Art.7(3) of the Regulation). Note this includes owners based in EU member states which do not participate (currently Spain, Poland and Croatia) and other non-EU EPC signatory countries.
This may be a small difference but a significant one, as more than half of all EP applications are made from outside the EU. If companies without a place of business in a participating member state want their UPs to be subject to a different law of property, they will need to establish a place of business in the relevant country.
German property law concerning patents is different from UK law in several significant respects. A patent may be validly assigned or licensed by oral agreement, patents are always acquired subject to existing licences irrespective of notice, and a recent decision has held that a sub-licence can survive termination of the head licence. Joint owners' rights also vary - they have divided shares and either owner can grant non-exclusive licences unilaterally.
Steps to take now
The majority of UPs and EPs will never be litigated. For many owners the UPC scheme will have a greater impact on their commercial activities than on general litigation strategy. There are steps that owners need to take in readiness for the UPC scheme coming into force. Some decisions will need to await the announcement of renewal fees, and perhaps court fees. However at this stage a owner could usefully begin to:
- Review the EPs in its current portfolio and consider (subject to renewal fees) which are candidates for opting out and which may be left as having unitary effect.
- Review the ownership of EP bundles in order to identify any for which it does not have complete ownership and may therefore need to seek agreement on any opt-out.
- Check that all its EPs are correctly registered.
- Ensure its licensing agreements contain appropriate provisions to deal with UPs and existing EPs. In particular, licenses should be reviewed to ensure there is appropriate agreement over the control of opt outs and any litigation.
- Review its licensing model and filing strategy to ensure these maximise the benefits of the UPC scheme to the business going forward. In particular, consider whether to look into the options to use more national rights or mix unitary and national rights.
- Check which law of property would apply in respect of UPs obtained by the company, and consider whether that needs to be changed.
- Review any existing development agreements to ensure they take account of the UPC scheme.
- Consider whether the UPC scheme will affect the value of any EPs charged as security and discuss matters with the lender if appropriate.