UPC scenario 3: A standards case from the defendant’s perspective

01 April 2016

Our latest Unified Patent Court (UPC) scenario looks at a case involving a standard-essential patent. Michael Carter, Nick Cunningham and David Barron consider a defendant's options in the new court system.

One-minute read

Issues relating to SEPS, and what is meant by a FRAND commitment, have dominated courts in Europe and elsewhere in recent years. Last year, in the Huawei v ZTE case, the CJEU provided guidance on when owners of SEPs can seek injunctive relief, and the obligations on licensees to engage in good faith and prompt negotiations. When the UPC is up and running it is likely to have to engage in many of these issues and, while it is bound by CJEU decisions, the Court will have to determine how to apply the guidance available. This scenario imagines a Dutch manufacturer and a German-based patent owner, and addresses questions of jurisdiction, pre-emptive steps, revocation and DNI actions, evidential issues and competition concerns, including whether the Court could set a FRAND rate.

In recent years few issues have occupied more time before the national courts of Europe than those relating to patents which are notified to a standards-setting body as essential or potentially essential (SEPs) and the related issues of what is meant by a commitment from the patent owner to license the patent on fair reasonable and non-discriminatory (FRAND) terms. These issues were behind the guidance provided by the CJEU last year in Huawei Technologies Co Ltd v ZTE Corp, ZTE Deutschland GmbH (Case C-170/13), which examined the circumstances in which owners of declared SEPs can seek injunctive relief against a potential licensee and the obligations on such licensees to engage in good faith and prompt negotiations. Nevertheless, there remain many unresolved questions and the development of the law in this area shows no sign of slowing down.

As a new supra-national court with jurisdiction for existing and future European patents (subject to opt-out) and new Unitary Patents, the Unified Patent Court (UPC) will have to tackle many of these issues - and most likely sooner rather than later. Like the national courts it is bound by EU law and the decisions of the CJEU, but it will be for the court to determine how to apply this guidance when formulating its approach. We consider how the court may approach SEP litigation in the context of a hypothetical scenario involving a Dutch company facing proceedings for infringement of a telecoms patent before the UPC.

The scenario: a standard essential patent

A Dutch telecoms company, with a presence in multiple EU member states, is manufacturing devices which comply with a certain technical standard and selling the devices globally, including throughout the EU. The manufacturer has been contacted by a company whose European headquarters are located in Germany in relation to their portfolio of patents, many of which have been notified as essential/potentially essential to the standard in question.

The parties have been involved in protracted licensing discussions and the manufacturer has expressed a willingness to conclude a portfolio licence on FRAND terms. Both parties have also made offers which they consider to be FRAND. However, discussions between the manufacturer and patent owner have failed to lead to an agreement and the parties are at an impasse.

In the course of the licensing discussions, the patent owner identified a recently granted Unitary Patent and an identical European patent validated in Spain, Poland and Switzerland (which were designated in the patent application and are not within the geographical scope of a UP), as being infringed by the manufacturer. The manufacturer anticipates that the patent owner will bring an action for infringement of this Unitary Patent, seeking an injunction and/or damages.

However, the manufacturer doubts the validity and essentiality of the Unitary Patent, and does not believe it is infringing. The patent has not been subject to opposition proceedings before the EPO.

Can the defendant take any pre-emptive steps?

The guidance in Huawei v ZTE that the patent owner should alert the manufacturer of its alleged infringement provides the manufacturer with an opportunity to pre-empt the commencement of infringement proceedings by the patent owner. Short of commencing revocation proceedings there are a number of pre-emptive steps available to the manufacturer, ranging from those which are purely defensive to more aggressive steps intended to gain the procedural upper hand.

Protective letters

Once alerted to an alleged infringement it would usually be sensible to file a protective letter in accordance with Rule 207 of the Rules of Procedure, and to do so quickly. This is a defensive step intended to ensure that in an ex parte application for protective or provisional measures an alleged infringer's non-infringement and/or invalidity arguments are taken into account by the judge or panel (an urgent application may be heard by a single judge).

Where a protective letter has been filed the registry will forward a copy of it to the applicant and the panel of judges upon receipt of the application for provisional and protective measures. The panel will then decide whether to summon both parties to an oral hearing to decide the merits of the application. The protective letter therefore ensures that the defence arguments are taken into consideration at this early stage and makes it more likely that both parties will be summoned to an oral hearing. Note however that the rules allow a patent owner to confidentially withdraw its application for preliminary or protective measures if the judge is not prepared to grant it without hearing the alleged infringer.

Whilst it would probably be worthwhile the manufacturer filing a protective letter in any event, if the manufacturer has followed the guidance of the Court of Justice of the European Union (CJEU) in Huawei v ZTE (and the Court does likewise) then the manufacturer may consider itself to be in a safe harbour where it cannot be made subject to a provisional injunction. However, that guidance requires the manufacturer to provide adequate security for the alleged infringement (by way of deposit or bank guarantee) which, in the case of a telecoms patent, could be a very substantial sum. If the manufacturer fails to provide security the patent owner is very likely to seek an injunction from the UPC requiring it to do so, and it would then be important for the manufacturer to have filed a protective letter.

Oppositions

A longer term and relatively inexpensive step for the manufacturer would be to commence an opposition at the European Patent Office (EPO) against the recently granted patent. Such an action, at least at the outset, is likely to be cheaper than a UPC revocation action and, if successful, have the considerable benefit of revoking the EP designations in Spain, Poland and Switzerland in addition to the UP. Opposition proceedings may also be particularly attractive to the manufacturer for the following reasons:

  • They allow the manufacturer two bites at validity; one before the UPC and another before the EPO.
  • Oppositions commonly take several years before reaching a final decision. Rule 118.2 of the Rules of Procedure permits a local division to render a decision on infringement which is conditional on the outcome at the EPO, or to stay the infringement proceedings pending the outcome of the EPO proceedings. Indeed, a local division must stay the proceedings where there is a high likelihood the patent will be found invalid by the EPO. EPO proceedings may therefore delay the manufacturer having to pay a royalty or damages to the patent owner.

However, the EPO is not able to address issues of infringement or essentiality, which may be just as important to the manufacturer as validity. Further, and in any case, the manufacturer may simply respond to any such opposition proceedings by commencing an infringement claim in the UPC - so an opposition may not be a sufficient step on its own.

A Spanish torpedo?

The non-participation of other EU member states in the Unified Patent Court (Spain, Poland and Croatia) means parallel proceedings before member state national courts in relation to equivalent European patent designations are possible, even for a Unitary Patent. Based on the existing jurisprudence of the CJEU in relation to European patents, it seems unlikely that the existence of parallel national proceedings relating to the infringement or validity of a designation of the European patent will deprive the UPC of jurisdiction to determine similar issues in relation to that Unitary Patent under the recast Brussels Regulation.

However where matters relating to EU competition law are already pending before a national court the situation is less clear, because there may be a greater risk of the UPC giving an irreconcilable judgment. Even if it is ultimately found that no such risk exists, these issues are exactly the sort of questions which the UPC is likely to need to refer to the CJEU in the early years of the court. Where it does so, such references will inevitably lead to a delay in the substantive proceedings.

Should the manufacturer commence an action for revocation or for a DNI?

The manufacturer could, of course, also take the initiative and commence proceedings against the patent owner for revocation of the Unitary Patent, or in certain circumstances a declaration of non-infringement (DNI).

The Rules require all originating revocation and DNI proceedings to be commenced before the Central Division of the UPC unless the parties have agreed for actions to be heard before a particular local division, which is unlikely to be the case in the present scenario. There is no discretion as to which section of the Central Division the case would be allocated to - it will be dependent on the IPC class of the UP. The case will be heard by a panel of two legal judges of different nationalities and a single technical judge. The language of proceedings and all statements of case will be in the language in which the patent was granted, which in this case is likely to be German.

DNI proceedings

A DNI is only available where (i) the patent owner has asserted infringement of its Unitary Patent by the manufacturer; or (ii) the manufacturer has provided the patent owner with full particulars of the act and the patent owner has failed to acknowledge that the manufacturer's acts do not infringe within a period of one month. In the present scenario the UPC may regard the patent owner as already having asserted infringement of its Unitary Patent, on the basis that it has complied with the guidance in Huawei v ZTE. If the patent owner has taken sufficient steps to assert its patent (which may not always be clear and could be subject to a reference to the CJEU), the manufacturer would be able to bring a DNI claim without having to contact the patent owner.

The tactical advantage of commencing DNI proceedings is that the patent owner cannot prepare its infringement case at leisure, and has to respond within two months. However, while the patent owner has to lodge a defence in the DNI proceedings (Rule 67), it can ensure that the DNI proceedings are stayed altogether by bringing an infringement claim before a local or regional division within a period of three months (Article 33.6). This effectively renders the DNI proceedings moot.

A further disadvantage is that, unlike invalidity proceedings, the court fee for commencing DNI proceedings includes a value-based element. According to the Guidelines for the determination of Court fees, as recently published by the preparatory committee, the value of an action for a DNI should be calculated in accordance with the rules for assessing the value of an infringement action. This would require the manufacturer to calculate the damages it would be liable to pay by applying to its turnover a royalty rate, which could either be based on comparable licences or determined by the court. Not only could this be counterproductive for the manufacturer (given that any such determination of a royalty rate by the manufacturer or the court will probably be seized upon by the patent owner), but the overall figure could be substantial in relation to a telecoms SEP.

A more cost effective method of exerting real pressure on the patent owner would be to commence proceedings for revocation.

Revocation proceedings

By commencing revocation proceedings before the Central Division of the UPC the manufacturer can exert costs pressure on the patent owner and get it to put its money where its mouth is. This is because the court fee the patent owner has to pay to commence a claim for infringement of an SEP is likely to be significant (for the reasons described above), while the fee for the manufacturer commencing proceedings for revocation is capped at €20,000.

The patent owner can respond to the revocation action by either commencing a counterclaim for infringement before the Central Division within two months of being served with the revocation action, or commencing an infringement action before a local or regional division. In most cases it will be preferable for the patent owner to commence originating infringement proceedings before a local division because it will able to choose the one which is most favourable to it, in relation to issues of infringement and, particularly, bifurcation and/or validity. Whilst there should not be scope for the patent owner to forum shop between the local/regional divisions in this way, as they all share the same procedural rules and pool of judges, differences in language will exist and it is not inconceivable that certain divisions will begin to develop their own characteristics. This is particularly true in local divisions which have two local judges (such as the UK and Germany) where the characteristics of their national courts may be carried over into the UPC. Given that the patent owner is a German company, it will probably see an advantage in having infringement determined before one of its local courts (Mannheim, Hamburg, Dusseldorf or Munich). Provided that the Dutch manufacturer is selling the allegedly infringing articles in Germany, the patent owner will be able to bring infringement proceedings before one of the German local divisions, giving it home advantage and ensuring the case is heard in its native language (subject to the languages adopted by the German local divisions).

Under the UPC Rules of Procedure, where revocation proceedings are pending before the Central Division of the UPC and infringement proceedings are pending before a local/regional division, the local/regional division is able to choose how to proceed in accordance with Article 33(3). The choice is made at the close of the written procedure (i.e. at about 6 months from commencement). The local/regional division can choose to:

  • hear both the infringement and revocation claims (in which case it will request a technical judge be assigned to the panel); or
  • bifurcate the proceedings and allow the Central Division to hear the validity proceedings and suspend or continue to hear the infringement proceedings itself; or
  • with the agreement of all the parties, refer the entire case to the Central Division.

Again, this could be seen to neuter any advantage the manufacturer seeks in commencing proceedings first. However, while the local/regional division does have the ability to claw back revocation proceedings from the Central Division (usually to the patent owner's benefit), there are at least two reasons why the manufacturer may nevertheless choose to commence pre-emptory revocation proceedings.

First, it means the patent owner is under pressure to bring its infringement case. Second, when deciding how to proceed under Article 33(3) the local division must take account of how far advanced the revocation proceedings before the Central Division were before they were stayed because of the commencement of the infringement claim. When deciding how to proceed the local division is also required to stay the infringement proceedings if there is a high likelihood that the relevant claims of the patent will be held to be invalid on any ground by the final decision in the revocation proceedings. Therefore, where the manufacturer has a strong revocation claim, or the patent owner delays, the manufacturer may be able to keep the revocation claim in the Central Division and get the infringement proceedings stayed.

The disadvantage to the manufacturer of commencing pre-emptory proceedings is that the manufacturer will have to set out its arguments on construction before it has seen the patent owner's case on infringement. Particularly for companies used to proceedings before the English Patents Court, this will be a significant difference in approach which may persuade the manufacturer to wait for the patent owner to commence proceedings, at which point it can tailor any revocation counterclaim to respond to the patent owner's construction arguments. For this reason, and considering the manufacturer is likely to wish to delay any court determination of validity and/or infringement for as long as possible, the best course of action may be for the manufacturer to sit tight and wait for the patent owner to commence proceedings. Obviously if the patent owner were also asserting non-opted out European patents this will not always be the case; there may well be an advantage in commencing proceedings in order to lock the European patent into the jurisdiction of the UPC.

How to respond if the patent owner commences proceedings?

In the event the patent owner commences infringement proceedings or proceedings for provisional or protective measures, it will be before a local division which favours the patent owner (whether due to the language or speed of proceedings, or simply 'home advantage'), which in this scenario is likely to be one of the German local divisions.

In response to being served with the infringement claim, the manufacturer has to file a statement of defence within three months. There are a number of decisions the manufacturer has to make when filing its statement of defence in the UPC:

Whether to commence a counterclaim for invalidity?

Where the statement of defence includes a counterclaim for revocation, such an action has to be commenced before that local division, rather than in the Central Division. The local division will decide how to proceed in accordance with Article 33(3), as described above. However, in circumstances where the revocation action is commenced by way of counterclaim, it is more likely that the local/regional division will keep hold of the entire proceedings.

Whether to raise a FRAND defence?

Article 32(1)(a) of the UPCA grants the court exclusive competence to determine actual or threatened infringement of UPs and "related defences, including counterclaims concerning licences". It is understood that this refers to FRAND-type defences. This means that it would be open to the manufacturer to claim that it has a competition law defence on the basis that the Unitary Patent has been notified as a SEP and the patent owner's terms are not FRAND. Of course, the manufacturer would likely only embark on this route if it was confident that its own conduct stood up to proper examination, and in particular that it had engaged in licensing negotiations promptly and willingly. It is not yet clear how such issues would be addressed by the court in the context of an intended one-day hearing on the merits.

Whether to dispute the value of the case?

As stated above, the patent owner will have valued the case when it commenced infringement proceedings and is required to pay both the fixed court fee and the appropriate value based court fee on issue. The valuation of the claim is important for practical reasons because it will cap the costs the successful party is able to recover at trial. It is also important from a tactical perspective because the guidelines for determining the value of the claim require the patent owner to value the case according to comparable licences (among other things), which it is unlikely to be keen to do given the issues associated with protecting confidential information, which are considered in more detail below.

Evidential considerations

The UPC Rules of Procedure on evidence raise a number of issues for the manufacturer, particularly given its involvement in the telecommunications sector:

Front-loaded evidence: First, the proceedings in the UPC will be front-loaded; for instance each party is required to put forward its evidence in its statement of case, and identify what further evidence is necessary for its case. This means that the manufacturer will be aware of all the evidence which the patent owner relies on to establish infringement, which may include initial experiments or party-instructed expert evidence. The manufacturer, when filing its defence and revocation action, will also need to put forward its evidence but will only have had three months in which to obtain it. This is not a long time, particularly in relation to complex telecommunications patents. Where the manufacturer is unable to include this evidence in its statement of case, it will need to flag the matter in its statement of case and deal with it at the interim conference. This is not ideal for the party responding to the claim, and in the manufacturer's case may provide a further reason for commencing pre-emptory revocation or DNI proceedings so as to ensure it is the patent owner which is short on time to prepare its evidence.

Confidentiality: Another key issue for the manufacturer to be aware of is ensuring that confidential documents remain confidential. While the court does have powers to order that documents should only be disclosed to certain people, or on certain conditions, this protection is not absolute. Rule 262.2 permits third parties to apply to inspect such documents and the court is required to grant the applicant permission to inspect the documents "unless legitimate reasons given by the [disclosing party] outweigh the interest of the applicant to access such information". The manufacturer may be very reluctant to disclose details of its products or processes if it cannot guarantee that they will remain confidential. This is a tactic that the patent owner may seek to exploit although there is no reason the manufacturer could not seek to do the same, particularly in relation to confidential comparable agreements of which the patent owner is unlikely to risk disclosure without full confidence in the applicable protective regime. 

Will the court adjudicate on breaches of competition law?

It is clear that the court will adjudicate on issues of competition law. As set out above, the UPC has exclusive competence to determine counterclaims concerning licences, which is understood to refer to FRAND-type defences, and it is required to apply EU law, including EU competition law, when reaching its decisions. However, this is all in the context of the infringement and/or validity of patents. The court does not have any stand-alone jurisdiction in respect of breaches of competition law or actions for follow on damages.

Is the Court capable of setting a FRAND rate for a global portfolio or determining essentiality?

It is worth noting that in the commitments Samsung gave to the European Commission regarding its behaviour in relation to licensing SEPs on FRAND terms in Europe, its proposed alternative to arbitration was court adjudication by the UPC or the English Patents Court. However, unlike the English Patents Court, which has wide powers to grant declaratory relief, the UPC only has jurisdiction to grant declarations of non-infringement, and even then only in limited circumstances.

The ability of the UPC to make declarations as to essentiality, or whether a party's licensing terms are consistent with FRAND, is unclear. There is the further complication that it will be difficult if not impossible to consider all of these issues in a single day (compare, for example, the Unwired Planet proceedings which are now before the English Patents Court requiring multiple technical trials occupying many weeks of court time and a further discrete hearing dealing with non-technical FRAND matters). In any case it is difficult to see how the court could determine a rate for anything other than Unitary Patents and EPs within its competence.

While it does not seem likely that the court will be able to settle a global portfolio rate, there are circumstances in which it may consider FRAND-related questions:

  • If the patent owner has indicated that it is prepared to grant a licence of right in respect of the Unitary Patent under Article 8 of Regulation 1257/2012, the UPC has exclusive competence for determining what that rate should be (Article 32.1(h) UPCA). There is no reason why a patent owner could not choose to make such a declaration in respect of its UPs. However this would plainly be a significant step, since a FRAND commitment is manifestly not the same as endorsing a patent licence of right. It is also presently unclear how the UPC would settle such licences.
  • Second, as described above, when assessing the value of an action the court may consider what would be a likely royalty rate, taking into account the FRAND principle. Whilst this is not the same as determining a royalty rate, it may provide some indication of likely value which could be used in later stages of the proceedings or, of course, in proceedings elsewhere.
  • Finally, when considering whether an alleged infringer is a willing licensee in the context of claims for injunctive relief, in accordance with the CJEU's guidance in Huawei v ZTE, the court may need to consider whether a refusal to make a global counter offer in accordance with the established norms in the sector is in accordance with the FRAND principle.

This article was originally published in MIP Magazine in April 2016.


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