First published in our Biotech Review of the year – issue 9.

Recap on the UPC

17 EU Member States, including key markets such as Germany, France and Italy, have agreed to the creation of a new “unitary patent” and Unified Patent Court (UPC), with further potential EU entrants waiting in the wings. A single unitary patent will provide protection for new inventions across all the jurisdictions which have subscribed to the new system. The new unitary patents will be enforced (and challenged) in the newly created UPC, which will also have jurisdiction over disputes concerning certain of the existing European patent rights. The new system is designed to be a more efficient and cost-effective alternative to the current system, where separate patent rights must be enforced in each Member State separately. The UPC will not, however, have jurisdiction over national patent rights. Nor will it cover two of the key markets in Europe, the UK and Spain, who have chosen not to participate.

The journey towards unitary patents and the UPC has been long and winding. The UK was originally a key driver in the process and London was going to host one of the three “Central Divisions” of the Court of First Instance, specifically the Central Division assigned to life sciences patents. The UK’s withdrawal from the EU and the subsequent decision of the UK Government not to participate in the UPC has meant that the UK is no longer part of the new system. This, along with constitutional challenges in Germany, has led to a substantial delay in the new system coming into effect. We briefly discuss the bumps in the road so far and then address the remaining hurdles to be jumped below.

What has happened so far?

Proposals for the current unified patent system have been underway since 2007, with the current UPC Agreement taking its current form in 2013. However, for the legislation to come into effect, the UPC Agreement, alongside a separate Protocol on Provisional Application, must be ratified by 13 of the signatories to the UPC Agreement. In the case of the UPC Agreement this must include the three Member States in which the highest number of European patents had effect in the preceding year. Germany, France and the UK initially fulfilled this criterion, however following Brexit and the UK’s withdrawal from the Agreement in July 2020 (due to the primacy of EU law and the ultimate jurisdiction of the CJEU), Italy will now take the UK’s place as one of the three required ratifying parties. As to the Protocol, the 13 ratifying countries must include Germany, France and the UK, which has led to suggestions that the Protocol cannot come into effect in its current form as the UK has indicated that it will not participate in the new system. However, the UPC Preparatory Committee is of the view that the Protocol does not need to be redrafted and can be ‘interpreted’ so as to come into line with the equivalent language of the UPC Agreement which provides a mechanism for substitution of the UK by Italy, a view which is supported by the delegations of the various participating Member States, even if this is a strain on the clear language of the Protocol.

France and Italy both took the necessary procedural steps to ratify the UPC Agreement as well as the Protocol. However, constitutional challenges were raised in Germany regarding the validity of the implementing legislation filed in 2017, and over concerns that ratifying the Agreement would transfer too much power to a supranational body and undermine the right to self-governance. These issues have now been addressed, with the Bundestag (Germany’s federal parliament) passing new legislation in November 2020, and Germany’s Federal Constitutional Court rejecting concerns over supranational governance in a decision in July 2021, clearing the way for Germany’s ratification of both the UPC Agreement and Protocol (although deposit of ratification of the UPC Agreement is being held back until all other necessary preparations are finalised).

What are the next steps?

On 18 January 2022, the final ratification of the Protocol on Provisional Application required to bring it into force was deposited (by Austria) and the provisional application phase started on 19 January 2022. The UPC has therefore come into existence, albeit that it will not be possible to commence actions in the UPC for the time being.

During the provisional phase, a number of important steps need to be taken before the system can become operational. These include:

  • Appointing judges – the UPC Advisory Committee will recommend appointments from a shortlist of the most suitable candidates, who must be nationals of a contracting Member State, have proven experience in patent litigation and speak one of the official languages of the EPO. It is expected that following those recommendations the Administrative Committee will appoint around 90 judges in total (not all full-time), with it predicted that the highest proportion will be from Germany.
  • Release of the first budget – it is anticipated that the UPC will eventually be self-funding from court fees, however whilst there is a shortfall in funding the costs will likely be covered by contributions from participating Member States.
  • Finalising the UPC’s case management system – the UPC will have an entirely electronic case management system. Whilst some steps towards implementation of the new system have taken place, it is understood that these were put on hold during the impasse created by the Constitutional Court challenges in Germany, and that further work needs to be completed before the full system can go live.

The Preparatory Committee had estimated that it would require at least 8 months to finalise these preparations, which remains the view of the Administrative Committee. Germany is expected to deposit its instrument of ratification of the UPC Agreement once the parties are confident that the UPC is functional, i.e. close to or at the end of this 8 month period. That will then start the final 4 month countdown to the UPC opening its doors to business. According to a press release from the UPC Preparatory Committee released shortly before commencement of the provisional phase, this means, that “[i]f everything runs smoothly, we can expect a functioning UPC late in 2022, or possibly early 2023”. The territorial scope of the new system will also increase as and when additional Member States ratify the UPC Agreement in the future.

What this means for Biotech?

There are a number of implications of the new unitary patent system on Biotech that will need careful consideration and which will also develop over time once the new system goes live. However, key points to have in mind now are:

  1. When it comes to negotiating contracts or licences covering patent rights, it should be borne in mind that unitary patents (not to be confused with the existing European patents that are also granted by the EPO) will soon come into existence. For the main patent actions (e.g. actions for infringement, revocation and declarations of non-infringement), the UPC will have exclusive jurisdiction to hear disputes covering those unitary patents. For all other actions, including contractual disputes concerning unitary patents, the national courts will retain jurisdiction. It is therefore advisable that choice of law and jurisdiction clauses be given careful consideration.
  2. It may become faster to enforce (and revoke) unitary patents, as this can be dealt with in a single ruling. Whilst there are benefits to this, it could mean a single court decision preventing sales and supply of potentially infringing products across all the Member States subscribed to the system, or equally a single court decision revoking patent rights across the same territory.
  3. During a 7 year transitional period (potentially extendable to 14 years), ‘classic’ European patents can be litigated both in the UPC and in national courts. An opt-out right exists for patentees to exclude these European patents from the remit of the UPC altogether during this period. This may be attractive in existing or future licensing agreements, where the same patent is licensed to different licensees in different European countries, in order to keep these rights separated. If an opt-out is appropriate, it may be advisable to include a clause in the licensing agreement expressly prohibiting an exclusive licensee from bringing actions for infringement before the UPC, as well as provisions on which party is responsible for registering the opt-out.
  4. Irrespective of licence agreements, patentees may also wish to opt out valuable IP rights from the UPC given the ability of third parties to apply to revoke, or seek declarations over, these patents throughout the UPC territory through a single claim in a single forum.
  5. It will be essential to know which national law applies to a unitary patent, as this can affect who the legal owner is where issues arise concerning the chain of legal title (i.e. whether the patent right has been legally assigned) or co-ownership. In the context of M&As, this may be an issue which requires substantive due diligence.
  6. Finally, the value of 17 European patents versus one unitary patent with effect in 17 EU Member States remains to be assessed (and this will number will grow towards 24 as additional Member States ratify the UPC Agreement), particularly as during the transitional period patentees will be able to elect between a bundle of ‘classical’ European patents and a unitary patent at the point of grant. This is again something to bear in mind, especially in the context of M&As and licensing agreements, where the value of patents as assets is important.