Major Tech Giants Concerned About The Coming Change On The Unified Patent Court's Rules of Procedure

After almost half a century of striving for unified patent protection throughout the European Union, one of the biggest single markets on the planet, the creation of a single EU patent system is within reach and should be a reality in 2017. However, the Unified Patent Court system still needs to be completed [1].

With less than a week to go before October 1, 2013 (deadline for the public, i.e. international companies, to submit their suggestions on the Unified Patent Court's Rules of Procedure [2]things are getting a little more interesting.

On Wednesday September 25, 2013 a group of 14 global innovators and users of the European patent system (among others, Google, Microsoft, HP, Intel, Yahoo, Apple, Samsung, and also non-IT companies such as Adidas and DHL), has sent an open letter [4] to European Officials and decision-makers outlining their concerns about the coming change of this new Unified Patent Court. As innovators, these tech companies depend on effective patent systems worldwide and, of course, on a ‘good’ battleground to defend patent-infringement lawsuits.

The key issues in the latest draft of the rules of procedure for the Unified Patent Court (UPC) that are still developing and are in particularly need of public comment include [5]:
  1. Standards for deciding when to grant injunctions (Rule 211)
  2. Standards for deciding when to bifurcate infringement and validity (Rules 37, 40, 118)
  3. Restrictions on a claimant’s ability to “forum shop” among different local divisions within the EU, and
  4. Costs for opting out and ongoing maintenance of patent portfolios in the new system

In this letter, the 14 corporations are concerned about two aspects of these rules, bifurcation and injunctions, that could create ‘significant opportunities for abuse’[6]:

1.    Bifurcation complaint.

What’s a bifurcation? As explained in the letter, patent cases often involve the related issues of whether a particular patent is valid (i.e. whether the patent meets the statutory requirements for patentability) and, if so, whether it has been infringed (i.e. unauthorized exploitation of the patented invention by a third party [7]). In some jurisdictions (such as patent litigation in Germany[8]), infringement and validity of a patent are handled separately. One court can therefore find a patent is infringed without determining whether that patent is even valid. ‘Defendants can therefore face the bizarre consequence where they are prohibited from selling their product on the basis it infringes a patent which may and is in fact invalid. Because in some jurisdictions infringement trials in a separate court can take a long time (if they happen at all), the period of time that a defendant could be off the market could kill the defendant's market’, said the IPKat[9].

In conclusion, the main concern in this first issue is the gap in the period of time between an infringement decision and decision on validity. The UPC Rules of Procedure [Rule 118(3)] provide for bifurcation. The diverse coalition of tech companies stated in their letter:

‘By enabling this unbalanced patent system, the proposed new patent system could undermine, rather than promote, innovation in Europe, as producing companies could develop strategies to avoid European jurisdictions in fear of an unfair litigation system being too advantageous for patent proprietors. Such strategies could include divesting resources from Europe, thus driving genuine innovation elsewhere.  And any significant increase in litigation costs would undoubtedly consume company resources which could be better spent on innovation and growth. Manufacturing companies in Europe should not be placed at a competitive disadvantage compared to companies that manufacture in other regions where patent jurisdiction is more balanced (emphasis added).

In order to mitigate the potential for such abuses before the UPC, procedural adjustments to the UPC rules of procedure are needed to provide clear guidance and predictability on how bifurcated proceedings where the validity of the patent is an issue should be handled and to permit defendants in bifurcated cases to more easily obtain a stay of infringement proceedings until a decision on patent validity has been reached’.

2.    Injunctions.

An injunction is a prohibition of the infringing act. In such a case, the court will issue an order directing the infringer to stop making copies or infringements of the patented invention; to bar unlicensed products containing patent holders’ technology from the market. The issue, in this second aspect, targets UPC Rule 211. This rule leaves a margin for Court’s discretion. More precisely, Rule 211(3) states that deciding whether to grant an interim injunction "the Court shall have the discretion [read ‘may’ or ‘may not’] to weight up the interests of the parties’[10].

In their letter, the coalition stated that:

A rule that does not offer sufficient guidelines on when to grant injunctions will create strong incentives for abusive behaviors and harm the innovation that the patent system is designed to promote.

This will be particularly true with injunctions under the UPC because the UPC injunction power will extend beyond a single country to most of Europe, and it could be used with the intended effect of impeding product sales across the region. This substantial bargaining power to force excessive settlements from companies would, in all likelihood, lead to a rise of abusive litigation before the UPC. Indeed, PAEs have already begun to set up shop in several European countries, drawn by the potential for siphoning more revenue from European companies.

The potential for these types of abuses is not only theoretical. In the United States, litigation brought by Patent Assertion Entities (PAEs)[11], entities whose business model is based solely on extracting settlements through the assertion of often low-quality patents, reportedly cost U.S. businesses $29 billion in 2011 alone and resulted in half a trillion dollars in lost wealth from 1990 to 2010. PAEs’ infringement claims are often spurious or based on invalid patents, as demonstrated by the fact that they prevail in less than 9% of the cases in which their claims are fully adjudicated on the merits. Despite the weakness of their legal claims, PAEs are often highly profitable due to their success in extracting settlements. The lucrative nature of PAEs has led to a rapid rise in U.S. patent litigation. Indeed, PAE litigation now accounts for the majority of all U.S. patent litigation. The diversion of revenues from R&D and patenting activities to pay for escalating litigation costs and excessive royalties is staggering, with no resulting gain to innovation.

To mitigate the potential for abuses of such power, courts should be guided by principles set forth in the rules of procedure to assess proportionality prior to granting injunctions. And PAEs should not be allowed to use injunctions for the sole purpose of extracting excessive royalties from operating companies that fear business disruption’ (emphasis added).

Now it’s time for EU decision-makers to increase legal certainty in the areas highlighted by these tech companies, to focus on innovation instead of litigation, thereby promoting economic growth and prosperity in Europe.

[1] Spain has refused to join and has even taken legal action to thwart the move toward pan-European patents, noting that Spanish is not one of the languages of the court system.
[3] Hereafter ‘UPC’
[7] For instance, the making of the invention and its development for industrial application, usually involve considerable expense for the applicant and for the future owner of the patent for invention. The patent owner this wishes to recover this expense through exploitation of the patented invention, in particular through the sale of products that incorporate the invention.
[8] In Germany, validity and infringement are handled separately in two court processes, both finalized by the X Senate of the Bundesgerichtshof. The infringement process is considerably quicker than the validity process. Only if the patent asserted is likely to become invalid due to lack of novelty in view of new facts will the infringement court stay proceedings until validity has been confirmed.
[11] Often referred to as ‘patent trolls’.

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