Sophie Rich and Jonathan Turnbull of Herbert Smith Freehills assess the risk and opportunities arising from the radically new patents system that will soon be adopted in all but four European member states.
The advent of the Unified Patent Court (UPC) and the Unitary Patent (UP) will bring about a seismic change to the way that patents are litigated in Europe. The UPC was created using an international agreement: the Agreement on a Unified Patent Court (UPCA), which was signed by all of the current member states of the European Union, except Spain, Poland and Croatia. The UPCA will, however, only become effective when ratified by 13 member states, including France, Germany and the UK. At the time of writing, six member states including France had ratified. Once effective, UPs will be enforceable in all of the member states except Italy, Croatia, Spain and Poland, as these member states either did not sign the UPCA or did not participate in the enhanced procedure used by the European Union to establish the UP. Although ratification of the UPCA is likely to be the last legal hurdle before formal implementation, there will be delays in order to put in place the necessary training and infrastructure for this new system and get the new courts up and running. This includes the provision of IT and new court facilities and the training of the new UPC judges. We do not expect the UPC to start operating before late 2016.
The main aim of the new UPC and UP system is to remove the fragmentation that arises from the current patent system in Europe and hence reduce both litigation cost and the cost of maintaining a portfolio of patents post grant. The existing system means that patents in Europe need to be enforced (or challenged) in proceedings in national courts. For commercially important patent disputes, this inevitably results in complex and costly multi-jurisdictional litigation, often in five or more different countries. Litigation risk is heightened by the different legal procedures and jurisprudence across Europe (bifurcation in Germany, different approaches to preliminary injunctions etc), the different timescales for obtaining a decision in each country and the potential for divergent decisions arising from national courts’ interpretation of the European Patent Convention. As a consequence, it can be difficult and expensive for a life sciences company to enforce its patent rights in Europe, particularly where infringement is threatened in a number of commercially important countries.
The new UP and UPC system will enable a patent holder to enforce its patent rights in a single UPC court and obtain pan-European relief (including both preliminary and final injunctions) against infringers, using a uniform set of procedural rules. The quid pro quo of this is that a successful revocation action brought in a single court will result in the revocation of the patent with pan-European effect.
The UPC will have a Court of First Instance (divided into local, regional and central divisions) and a Court of Appeal (based in Brussels). Actions can be brought in a particular division depending on where the act of infringement is, or can be brought in an alternative division based on the specific jurisdictional rules set out in the UPCA. The main seat of the central division will be Paris with sections in London and Munich. The work of the central division will be divided according to the subject matter of the patent in dispute based on IPC classifications. The central division in London will deal with matters relating to chemistry and pharmaceuticals, including revocation actions.
In the short term, there is likely to be considerable uncertainty arising from the grey areas and ambiguities in the (now almost-final) rules of procedure of the UPC and how they will be applied by a large pool of judges whose identity and quality remain unknown – and who will, in many cases, be learning on the job and applying the new rules without any existing decisions to guide them. It may take several years (and decisions of the appellate court of the UPC) to iron out these uncertainties, and for companies to develop confidence in the new system – particularly when it comes to high-value patents. The jurisdiction of the Courts of Justice of the European Union (CJEU), particularly on issues of infringement, is not yet fully resolved and this is a further cause for concern, given the opacity of some of the CJEU’s decisions in the field of supplementary protection certificates (SPCs) and the delays inherent in references to the CJEU. All of this means that life sciences companies must now spend time analysing the strategic options, and the opportunities and threats presented by the new system.
The most immediate decisions facing a patent holder are to what extent it exposes itself to the jurisdiction of the UPC and whether it wishes to make applications for UPs on implementation. Although the UPC will have exclusive jurisdiction over UPs and no jurisdiction over national patents, during a transitional period of seven years (extendable to 14 years) there will be dual jurisdiction between the UPC and the existing national courts in relation to European patents. In practice, this means that a patent holder will face the threat of a revocation action in relation to a European patent under the UPC from the date the new system comes into effect. A patent holder can oust the jurisdiction of the UPC in respect of all national designations of a particular European patent (or SPCs based on that European patent) by formal notification to the UPC registry of its decision to “opt out” that patent on payment of a (yet to be determined) fee. The national courts will have exclusive jurisdiction in respect of opted-out European patents, so no UPC revocation action can be brought. Opting out will apply to all of the national designations of that European patent.
A life sciences company must take steps now to determine its preferred forum for each of its European patents and applications. If the preferred forum is the national courts, then it should opt out the relevant patents at the earliest opportunity: a third party could exploit any delay following the implementation of the UPC and commence a revocation action against any of those European patents and seize the UPC with jurisdiction. The procedural rules include a “sunrise” provision under which patent holders can opt out European patents prior to the effective date (although the time period for which the sunrise provision will be in effect has yet to be announced). A patent holder who changes its assessment of the preferred forum for a European patent and wants to be able to litigate using the UPC system can withdraw the opt-out, provided the patent in question has not been the subject of an action before a national court. However, once the opt-out is withdrawn, the patent holder has no further right to opt-out again.
Life sciences companies therefore need to carry out a comprehensive and systematic audit of their patent and SPC portfolios, including any jointly owned rights. The key factors that would influence the company’s risk/reward analysis on whether to opt-out need to be considered for each European Patent in the portfolio. Some of these key factors will be common to all companies (eg, the cost of opting out and the geographic distribution of the designated countries of a particular European Patent) and others will be company and business area specific (eg, the corporate attitude to risk, how important the particular European patent is to the business, how likely litigation is). Any audit and analysis needs to be flexible and kept under review as the UPC develops, so that the analysis can be refined once it becomes clear how the UPC system is operating in practice. An effective risk/reward analysis will require a strong understanding of the commercial markets in which the company operates, how the UPC system is likely to operate, the pros and cons of the existing patent litigation system and the strength and breadth of the patent portfolio. This should be a collaborative effort involving in-house legal and business functions and external advisers. It is not something to do in a hurry.
Prior to the implementation of the UPC, a company should also consider the terms of any licence it has entered into for European patents, to assess what commercial opportunities or risks may arise from implementation of the UPC. Do the licensing terms provide for the implementation of the UPC and, if not, how could the UPC influence the value of that licence and what control do you have over the ability to opt out? How good is the relationship with the licensor/licensee? Do you know whether they intend to opt out? If so, who will bear the costs? How would the litigation provisions of the licence apply to actions brought in the UPC?
After years of uncertainty, there is now a very high likelihood that the UPC will come into effect in the near future. The new system is a radical departure from the existing one and the challenge of recruiting and training enough new judges of sufficient quality and experience in the time available should not be underestimated. This creates commercial risk, particularly while the system beds in and procedural and jurisdictional issues are clarified. The ability to opt-out allows companies to mitigate this risk (at a cost) and should be high on your agenda for the coming year.