In our June 2015 newsletter, we reported on the launch of the consultation on the fee regime for the Unified Patent Court (UPC). We have since had some time to review that consultation and while it will have closed for comment by the time this newsletter is published, we share some of our thoughts with our readers. We have been actively participating in the responses on behalf of several organisations, and although some views differ, overall there are large areas of agreement on the key aspects.

Value-based fees

As is well known, the UPC fee regime will have both fixed and substantial value-based fees. This is expressly provided for in the UPC Agreement and is said to be necessary in order for the UPC to be self funding. However, substantial value-based fees are an alien concept to EU jurisdictions save Germany, which has a well-established scheme. This scheme is understood to work reasonably well and it is our understanding that there are comparatively few disputes over valuation in Germany (although there are some).

That is not the same thing of course as saying it is popular with users, nor does it necessarily follow that there will similarly be few disputes over valuation in the UPC. We rather doubt that will be the case bearing in mind that most users and advisers come from jurisdictions without this sort of scheme. It is therefore somewhat disappointing that the Preparatory Committee was unable to issue draft valuation guidelines in the consultation, although it is clear that there will be some in due course. We understand this is because the draft could not be agreed in time for the consultation. It seems pretty clear to us that the basis upon which cases will be valued is fundamental to being able to comment on whether the fee regime is appropriate and it needs to be made clear as soon as possible what that basis will be. Reasonable people will differ over valuation.

We would also note that as currently presented, value-based fees will apply to infringement claims and counterclaims, declarations of non-infringement, damages actions and appeals. Values are also relevant for costs recovery (see below). It is unclear however whether the same value will apply in each case, nor whether so many value-based fees are actually necessary for the running of the court. We have been suggesting (a) a single valuation only and (b) no more value-based fees than absolutely necessary. A large case that goes to a damages enquiry and appeal could attract value-based fees in the region of €660,000 (or €880,000 if there is duplication of fees in a declaration of non-infringement/infringement action – which we think is a bad idea). These do indeed seem rather high, although we would note that they are rather lower than value-based fees in Germany in a similar case.

Fee reductions

The UPC has long been promoted as a cost-effective answer to patent enforcement difficulties across Europe. It has also been promoted as a forum in which SMEs may be able to enforce their rights effectively. It is recognized however that with a value-based fee regime, the UPC could in fact prove to be rather expensive for such entities, perhaps prohibitively so. To try to address this conflict, the fee proposal sets out two alternatives for fee reduction.

The first provides for a rebate of part of the value-based fee where the case is settled or withdrawn at an early stage. As drafted however, we don't see how this can work because the value-based fee is not in fact payable, under the Rules of Procedure, until a relatively late stage. We also think that there is a large enough incentive to settle early as it is, since this could avoid the value-based fee entirely and obviously reduce costs generally.

The second provides a targeted fee waiver regime, under which certain entities, including SMEs, would not pay any value-based fees. This is rather more in keeping with the principles of the UPC, which include access to justice for SMEs. However, many have expressed concerns with the proposal since it is not means tested and instead is 'entity based' – in essence, if you qualify as a certain kind of entity you get the benefit. This could be open to abuse through corporate or other structuring, which must be avoided. Perhaps a means tested relief system, with disclosure requirements, would be better.

Costs recovery ceilings

The other area of significance in the consultation is the notion of cost recovery caps, to reduce the risk to litigants of exposure to the uncontrolled costs of the other side. The Intellectual Property Enterprise Court (IPEC) in London has a very strict regime of cost recovery limitation, which applies a maximum overall recovery of £50,000, with individual stages also subject to their own caps. This is not value based as such. It was brought in to limit the exposure of litigants to the risk of having to reimburse the other side's costs, over which they have no control. That risk was a substantial deterrent to smaller entities commencing proceedings in the UK and the new IPEC regime has been very effective.

The UPC fees consultation proposes something similar, although on a sliding scale based on case value. This introduces a further valuation issue. Will the same value as that used for the action itself be used? This makes sense, although as there is no value-based fee for revocation actions somehow valuation in these circumstances needs to be dealt with. It also raises the tricky question of how to value an invalidity action, an area in relation to which we know there are substantial disagreements. This makes the guidelines on valuation even more important.

Update on the Rules of Procedure

The Preparatory Committee of the UPC met on 10 July 2015 and discussed the 18th draft of the Rules of Procedure. From the report of that meeting on the UPC website, it seems the expectation is to have finalised the rules by October 2015. It was noted that there are some items to finalise, and these must include consequential changes arising from the fees consultation. For example, the rules currently do not provide for a value-based fee for an appeal, although the fees consultation clearly contemplates this. It will also be interesting to see how the opt out for conventional European patents is proposed to be administered prior to the coming in to force of the UPC Agreement, since currently that remains somewhat unclear.